Container ships are going slower, the cost of fuel is rising, and maintaining security in extended supply chains is becoming increasingly critical. Malory Davies and Johanna Parsons examine the impact.
Changes in markets for air and sea freight are increasingly playing a role in shaping supply chains. Rising fuel prices, slow steaming, and security issues are just some of the factors affecting decisions on where to source products, as well as the best way to move them.
Some of these issues were highlighted by Mick Jones, vice president global logistics at computer maker Lenovo, when he delivered the keynote address at the 121 Supply Chain Excellence conference in London last month.
Lenovo manufactures in China and sells in 160 countries around the world. Some 52 per cent of its supply chain costs are accounted for by physical logistics – particularly air freight.
Jones pointed out that it is no longer a case of one supply chain fitting all. “We need multiple supply chains – grouping together products with similar needs. It’s easy in concept, difficult to achieve.”
For example, he said, products that were high volume and low cost needed a low cost efficient supply chain. The aim was to build to stock and move mainly by ocean. But high volume products with high demand variability needed a responsive supply chain – so build to order and air transport might be most appropriate.
Modal issues have a massive impact on the supply chain. Air is five times the cost of ocean, he said pointing out that Lenovo would like to move more goods by ocean but issues such as slow steaming and available capacity meant it was not straightforward. In addition, said Jones, rising costs in China mean that it is worth looking at other manufacturing locations.
Tim Scharwath, Kuehne + Nagel’s regional director North West Europe, says he has seen some change in sourcing behaviour with eastern Europe and the Mediterranean rising against Asia.
And SBS Group chairman Steve Walker says: “As emerging economies mature, areas such as China are finding themselves having to compete with South America, India, Eastern Europe and The Middle East – in many instances these locations are more cost effective on labour, land and government subsidies, as well as being closer to the final consumption markets.”
There is an argument that goods made closer to home – Eastern Europe, Turkey, North Africa – can be in the shops far faster, and supply adjusted to demand more flexibly. The case is put by Bernard Molloy, industrial logistics director at Unipart Logistics, who points out that if managed properly this can have a huge impact on margins. “Of course, with commodity goods, with more predictable demand, longer lead-times can be planned in and therefore, distant sourcing can make great sense – but then, rising prices in China still need watching.”
However Graham Riches, managing director, DSV Air and Sea UK, warns that while it is tempting to place orders later and source closer to home, “the current manufacturing bases are sufficiently well established that any significant change to the current model would take many years to achieve and be subject to several factors”.
Some sectors of the market are particularly sensitive to fuel price fluctuations. And Scharwath warns that it would be naive not to see fuel prices rising.
However, he says it is the total cost that is most important. “We see a trend to go into different markets, as well as for shorter lead times.”
Ultimately, he says, “freight will always find the cheapest way”.
Francois Bertreau, chief executive of Norbert Dentressangle, agrees that high oil prices make moving goods from the Far East into Europe less attractive. However, he says: “It needs a very strong increase in the oil price to get a rethink of the supply chain.”
He points out that when the oil price started heading for $150 (£94) a barrel there was a lot of interest in rethinking the supply chain but the idea did not last for long once oil prices started coming down again.
Oil is currently $120 (£75) a barrel but there have been warnings that it could reach $150 (£94) a barrel next year, in which case companies might start looking at the potential to move some production into Eastern and Central Europe.
But Bertreau points out that in this situation, there is also a logic in redesigning distribution networks with more small warehouses closer to the customer.
However, despite rising costs, all the predictions are that air cargo is set for growth. Aircraft manufacturer Boeing is predicting that traffic, measured by revenue tonne kilometres, will rise at an annual rate of 5.6 per cent over the next 20 years.
And in its Current Market Outlook 2011-2030, it predicts the world freighter fleet will increase from 1,760 to 3,500 aeroplanes.
“Growing world trade, increasing demand for transport of perishable and time-sensitive commodities, and the need to replace aging aeroplanes will create a requirement for 2,960 freighter deliveries over the next 20 years.”
Of course, security is a critical issue in air cargo and it is easy to get bitten as UPS found last month when a Department for Transport scheduled review identified areas of concern. In a statement, UPS said: “Some facilities in the UK have been temporarily taken offline, which in some cases has led to delays in the movement of packages.”
“In co-operation with the Department for Transport, UPS continues to assess the operation of its UK network to ensure full compliance with EU and UK security requirements, leading to a higher level of service to its customers.”
Clearly, there is always going to be a balance between effective security and disruption to the supply chain. The International Air Cargo Association, at its conference in April, highlighted the potential disruption if the US Transport Security Administration enforces a proposed deadline of 31st December 2011 for 100 per cent screening of all international inbound cargo on passenger aircraft.
Nevertheless few would argue against the need for stringent security measures. Tim Scharwath says: “Security is important – we don’t want to be responsible for a security failure and we train our people to operate security equipment. The overall climate means we have to think about these things.”
Riches points out that aircraft, ocean going vessels of all sizes and all other forms of transport are likely to face security threats for many years to come. “New security measures will continue to be introduced to meet the ever-changing threats and the freight industry will follow the regulations diligently, or face the consequences. The effect of these measures will be increased costs which will eventually be passed on to the consumers.” Stability in the supply chain is the key to delivering reductions… not the speed of ships.
Steve WalkerThe vulnerability of air cargo to natural phenomena was highlighted last year when the eruption of the Eyjafjallajökull volcano resulted in a total shutdown of air traffic over much of Europe amid dire warnings that the slightest trace of ash would clog up the turbines and stop the engines. It appears though, that the lessons have been learnt. The eruption of another Icelandic volcano, Grimsvotn, resulted in much less disruption. Scharwath says: “The authorities were much better prepared this year and the information has been better. As a forwarder, we can’t make the judgement about whether to fly or not to fly – but we can always assist our customers by finding other ways to move goods from A to B.”
Technology has been a key enabler in the development of international logistics networks providing the essential visibility and integration. Ritu Rooney of Kewill, points out that any enterprise that trades across borders and deals with customs authorities faces a mounting barrage of compliance requirements that are continually changing – adding to the complexity of the global landscape.
shippers – Expanded role for shippers’ forum
The Freight Transport Association’s Chris Welsh has been appointed secretary general of the Global Shippers’ Forum (GSF), and the FTA is also providing the forum’s secretariat.
The plan is to transform the GSF from an informal alliance of shippers into a better organised, co-ordinated and consistent global voice for shippers on key issues impacting global transport. Welsh said: “Our first order of business will be to seek recognition and accreditation as a ‘nongovernmental’ organisation.”
Founding board members of the GSF are: James Hookham, managing director of policy and communications at the FTA, Bob Ballantyne, president of the Canadian Industrial Transportation Association; John Lu, chairman of the Asian Shippers’ Council, and Bruce Carlton, president and CEO of The National Industrial Transportation League.
multi-modal – Modal shift under the spotlight
With the European Union working on plans to create a more transparent and competitive rail market, there is plenty of political pressure to expand multi-modal freight movement in Europe.
Bernard Molloy, industrial logistics director, Unipart Logistics, points out that: “Rising fuel costs, combined with a desire to reduce carbon footprints, is driving a move towards a greater use of trains, particularly for products like wine and spirits. Rail’s rising influence has been helped by the dramatic improvements in rail networks.” Between 2000 and 2007 the amount of freight moved by rail rose 12 per cent to 453.1 billion tonne-kilometres. In freight transport, rail continues to account for more than 17 per cent of all intra-EU inland transport activity.
And on some rail corridors, its modal share can in fact reach up to 35 per cent (such as for freight transport on the Rotterdam- Genoa rail line).
However rail freight experienced a bigger drop in activity than other modes during the deepening economic crisis in 2009.
Within the logistics community there is certainly a willingness to embrace multimodal operations, but some degree of wariness about the operational realities and the total costs.
François Bertreau, chief executive of Norbert Dentressangle says: “We use the best means of transport for a particular movement. If the best were a balloon, we would use that.”
He points out that Dentressangle is a leading user of rail freight in France. Nevertheless, he says, road dominates because of the flexibility of the truck. Greater use could be made of rail if the infrastructure was put in place and the rail companies could provide the right level of service, he says.
Kuehne + Nagel’s Tim Scharwath takes a similar view pointing out that multi-modal operations are often more expensive than regular trucking services. In the 1970s Kuehne + Nagel invested in rail-linked terminals but rail had proved expensive and there were handling issues meaning that often multi-modal operations would take too long. Nevertheless, where there are high
volumes and long distances, multi-modalism can make sense, he says.
A key element of the European Union’s strategy to boost rail freight is the Marco Polo scheme of grants. In total 32 projects have received Marco Polo grants totalling 57m euros in this round. Within their project lifespan, these 32 projects are expected to either shift off Europe’s roads or remove at source more than 15 billion t/km in total, which is the equivalent of 450,000 trucks
travelling between Hamburg and Vienna. Stobart Rail was awarded a grant of 2.7m euros under the European Union’s 2011 Marco Polo scheme to support the movement of its rail freight service from Spain to the UK.
Stobart Rail launched its first international rail freight service operating between Valencia, Spain, and the UK in 2009 under the name FRESH (Fast, Reliable, European Sustainable Haulage).
The project seeks to achieve a commercially-viable intermodal service for movement of time-sensitive, temperaturecontrolled perishable products in containers between Spain and the United Kingdom, and other general merchandise traffic on the southbound leg, which will offer a competitive alternative to road transport in terms of transit time, reliability and environmental sustainability.
The project will combine a core longdistance rail service operating up to three round trips per week, with an online customer information portal, enabling users to track container position, temperature and status in real-time throughout the road and rail transit. In addition the project is seeking to address current train pathing and border crossing procedures to seek further reductions in transit time.
The “modally-shifted” route runs from Valencia to Barking via Narbonne, Toulouse, Limoges, Vierzon, Valenton, Amiens, Calais Frethun, Channel Tunnel. The total modal shift is calculated to be 682m tonne kilometres with a saving of 13.4m euros.
When it was launched in 2009 the Valencia to London service was the longest train journey in Europe by a single operator and the first fully refrigerated train service to go through the Channel Tunnel. As well as reducing road mileage and CO2, the journey time is faster than road to give a longer shelf life to fresh produce. The train returns to Spain full of pallets being carried for CHEP, ensuring there is not an empty journey.
Stobart chief Andrew Tinkler said at the launch: “For the first time, supermarkets and consumers have a quicker and much lower carbon alternative to importing fresh fruit and veg from Spain by road. In conjunction with our partner DB Schenker, we will start the new service with one train per week but we believe that when our
customers see the benefits we will soon be able to develop this into a daily service, increasing the efficiencies and environmental benefits by a factor of five.”
Another project, SpanBrit Fresh, organised by Transportes Ferroviarios Especiales and Solstor received a Marco Polo grant of 1.2m euros. This is a rail-based freight transport service for fresh produce (northbound) and a variety of commodities (southbound) between Almussafes in Spain and Barking. Foreseen modal shift is 298m t/km.
The Marco Polo projects include: 26 modal shift actions, which take freight off the roads and transfer it to alternative modes of transport such as railways, shortsea shipping and inland waterways; four common learning actions, which aim at sharing knowledge in the transport and logistics sector; one motorways of the sea action, which combines short-sea shipping
with other modes of transport; and one traffic avoidance action, which reduces the amount of freight to be transported on road while making the entire supply chain more efficient.
Among the 32 projects, 19 target railway transport, four focus on inland waterways and four address maritime transport (with three short-sea shipping projects and one motorways of the sea project).
Patrick Lambert, director of the Executive Agency for Competitiveness and Innovation (EACI) in charge of managing the programme, said: “I congratulate the leaders of these 32 projects for their resourcefulness and initiative. We count on their achievements on the ground to show the way to new, more sustainable ways of transporting goods across Europe.”
With 101 proposals received by the call deadline, this third Marco Polo scheme attracted a record number of submissions in 2010, with a total funding request of 235m euros, against an annual programme budget of 64m euros.
More steamy nights – and days – at sea
Slow steaming shocked the market when it was foisted onto unsuspecting shippers a year and a half ago, but it seems that there will be no going back. Reducing speeds by 20 per cent can
reduce fuel consumption by as much as 40 per cent, and with fuel representing a huge factor in the costs of running a shipping line, a saving of 40 per cent is pretty persuasive.
Jacob Sterling, head of climate and environment for Maersk Line says: “The slower you go, the more you save… The last knot is significantly more expensive than the first. Lifting your foot off the throttle just a little makes a huge saving.”
There is also the fact that slower scheduled services allow a buffer. A slow steaming ship can make up lost time by speeding up a little – obviously not an option when top speed is the standard.
Graham Riches, managing director at DSV Air and Sea UK, says: “Vessels are better able to meet their schedules… Warehousing costs are expensive and delays affect planning. Clients need to consider the benefit of knowing a container will arrive at 08:00 hours on Friday, as opposed to hoping it might arrive at some point a couple of days earlier.”
Along with less fuel, the corresponding reduction of CO2 emissions is another incentive. Some ocean carriers have suggested that as well as helping to reach their own targets for CO2 reductions, slow steaming also offers an added bonus for their customers who may be considering the whole supply chain in assessing their carbon footprint. However this does raise the question of how the speeds affect costs and emissions across the supply chain.
The FTA’s Chris Welsh, who has just become secretary general of the Global Shippers’ Forum, says that on some routes “extending the supply chain by four to seven days there are additional costs incurred by the need for additional stocks… more stocks need more energy and heat to maintain storage conditions”.
The initial adjustment to the new pace also sent bumps up the supply chain, with the swift manner of its introduction a particular bone of contention. Welsh says: “It was introduced without any consultation of customers, or anyone else for that matter, and as such it rather took the industry by surprise… Shippers had no chance to mitigate against the lengthened journey time to market.”
Suddenly customers needed extra stocks, and extra storage to cover the gaps between services. Coupled with the fact that this happened at the peak of the financial crisis, just finding space
aboard vessels became a problem. K+N’s Tim Scharwath says: “It hurt a lot of customers – and us.”
In response, the shipping lines simply made use of their idle fleet to plug the gaps. Sterling says that, at Maersk, “typically we bring in one extra ship which allows us to spend one extra week on a route… today we don’t have idle ships as such”.
This shift to demand outstripping supply, and the opportune reduction of idle ships have been seen by some as the underlying motivations for the change to slow steaming. Cynics could say that the shift has acted as a rather tidy capacity management tool, with little benefit for customers. And with all these extra ships in use, the overall carbon reduction is a moot point.
Eivind Kolding, chief executive of the Maersk liner business, recognised some of these issues in his keynote speech at the TOC conference in Antwerp in June. He said that the business is too complicated for customers and transparency of its environmental performance and record needs to be improved. “We have to rethink our business focusing on the tremendous value we could add to our customers’ supply chains.”
Sterling says that even now only about half of container ships arrive on time. In line with Kolding, he says that Maersk sees this as a major challenge, and that slow steaming will be a key to
improving accuracy as well as accountability to customers.
NYK agrees that slow steaming is the way forward, and that any negatives are outweighed by the positives. A spokesperson said: “Customers now accept slow steaming, because they can
plan for it – what they need is punctuality and accuracy.”
And SBS Group chairman Steve Walker says: “Speed for the most part has always been a misnomer… Stability in supply chain is the key to delivering reductions in supply chain costs – not speed of ships.”
And the lines are putting their money on slow steaming. Sterling says: “This is not something that’s going to go away.
We are now designing ships around this paradigm.” In fact earlier this year Maersk bought ten of the giant “Triple E” container vessels which have been designed specifically to go slow and
have been recorded as using 50 per cent less CO2 per container moved than the industry average.
Scharwath agrees: “It’s here to stay – ship gearboxes are now being made for slow steaming and it keeps the costs down.”