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Supply chain professionals are at work fguring out how to keep the freight moving. What all shippers want today from their freight carriers is capacity, reliability, and rate stability. Companies are adding consolidation or deconsolidation centers to their global distribution networks.
Supply chain professionals are at work fguring out how to keep the freight moving. What all shippers want today from their freight carriers is capacity, reliability, and rate stability. Companies are adding consolidation or deconsolidation centers to their global distribution networks.
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Supply chain professionals are at work fguring out how to keep the freight moving. What all shippers want today from their freight carriers is capacity, reliability, and rate stability. Companies are adding consolidation or deconsolidation centers to their global distribution networks.
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Attribution Non-Commercial (BY-NC)
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Managing the New Normal ................ 2 Re-confguring Distribution Networks .... 3 Centralize Control-and-Command ......... 6 Collaborate with Carriers ....................... 7 Create Capacity .................................... 9 Concluding Remarks ........................... 11 From the Editor ................................... 12 About ProLogis .................................... 12 Moving Freight Today How Shippers Are Creating Greater Capacity, Reliability, and Rate Stability July 2006 While analysts, policy wonks, and government offcials talk about the dire need for more capacity in the nations rail system, ports, and highway infrastructure, supply chain professionals are at work fguring out how to keep the freight moving and getting it to its destination on time. Reliable freight transportation is the lynchpin of effcient distribution/ supply chain networks. Gone are the days when corporate executives could take effcient, low cost, and reliable freight transport for granted. Executives today must cope with such problems as port and rail congestion, highway congestion, rising oil and gasoline prices, a dearth of long-haul drivers, complex security issues, and crew and equipment shortages. These problems are likely to get worse before they improve. What all shippers want today from their freight carriers are capacity, reliability, and rate stability. Supply chain executives have devised a number of strategies designed to help them achieve these goals. Companies are adding consolidation or deconsolidation centers to their global distribution networks to ensure that product fows at full container loads and full truckloads. Companies are taking responsibility for their own freight bills creating effcient freight lanes, leveraging their aggregated transportation spending to negotiate better rates and capacity, and ensuring daily execution that realizes the best negotiated rates. Companies are striving (a) to forge close collaborative ties with their carriers and (b) to become the preferred customers of their carriers. Companies are looking for ways to extract greater capacity from their existing plant and equipment by improving cube utilization, eliminating empty trucks and dead-head miles, and extending hours of operation. These strategies are not mutually exclusive, and many companies are employing more than one to contain the rising costs of transportation, fnd offsetting savings, and ensure on-time deliveries. ProLogis Supply Chain Review Trends from the Worlds Supply Chain Leaders Paul Nuzum, Author Principal, Supply Chain Insights Adjunct Professor University of Denver Leonard Sahling, Editor First Vice President ProLogis Global Research 303-567-5766 lsahling@prologis.com www.prologisresearch.com 2 PrcIcgs SuppIy Chan Pevew The New Normal Supply chain executives have their hands full. Every day, they are expected to increase inventory turns, improve delivery times and accuracy, and reduce operating costs at the companies they serve. Meanwhile, distribu- tion networks have gotten more complicated. Todays supply chains stretch thousands of miles, span oceans, cross multiple borders, involve multiple handoffs, and utilize multiple modes of transport. The potential risk for glitches is high and growing. Reliable transportation is the lynchpin of effcient supply chain/distribution networks. Indeed, companies will be able to deliver product faster, on time, from farther away, and at reasonable cost if, and only if, their traffc managers can deliver fast, low cost, and reliable freight transportation. Gone, however, are the days when supply chain executives could take such effcient freight transportation for granted. Freight transportation has become the most volatile component of many frms supply chain/ logistics operations. Executives today must cope with port and rail congestion, highway congestion, rising oil and gasoline prices, a dearth of long-haul drivers, complex security issues, and crew and equipment shortages. (See Photo, page 2.) Each of these problems adds incremental risk to the supply chain, and the problems themselves are likely to get worse before they improve. Supply chain executives are spending more and more of their time handling freight transpor- tation glitches and crises. We recently inter- viewed a dozen senior executives in charge of global distribution networks to learn about how they are managing the challenges of the new transportation climate. One of them summed up the current predicament as follows: None of these transportation problems is going to get fxed overnight. This is the new normal. Lets just get used to it and fgure out what options are available for dealing with the problems. Managing the New Normal These executives concerns about freight transportation transcend costs. True, many of them have been hit with unforeseen 20% hikes in their transportation budgets within the past year. Yet they are all more concerned about ensuring that their companies products are on the shelf when their customers want to buy None of these transportation problems is going to get fxed overnight. This is the new normal. Lets just get used to it and fgure out what options are available for dealing with the problems. How Can the Freight Keep Moving When the Nations Highways and Freeways are Clogged? www.prcIcgsresearch.ccm them. When lead times lengthen or become erratic, inventory stock-outs become more frequent, resulting in lost sales and, worse still, lost customers. Rates still matter, but so do other concerns. Heres how the vice president of logistics at a large sporting goods retailer explained it: There has been a strategy shift. Years ago, our overriding goal was to beat down freight rates. Today, were successful if we can just hold rates fat and were partnering with the carriers. Were seeking capacity, reliability, and rate stability. This is exactly what all companies want today from their freight carriers capacity, reliability, and rate stability. In turn, they have devised a number of strategies to help them achieve these goals: 1. Re-confgure Distribution Networks: companies are reorganizing these networks to ensure that product fows at full container loads and full truckloads, from origin to fnal destination and with the fewest-possible handoffs. 2. Centralize Command and Control: companies are taking responsibility for their freight bills, creating effcient transportation lanes, leveraging their aggregated transportation spend during negotiations for rates and capacity, and ensuring daily execution that realizes the best negotiated rates. 3. Collaborate with Carriers: companies are striving (a) to forge close collaborative ties with their carriers and (b) to become their carriers preferred customers. 4. Create Incremental Capacity: companies are looking for ways to extract greater capacity from their existing plant and equipment by improving cube utilization, eliminating empty miles, and extending hours of operation. These strategies are not mutually exclusive, and some frms are employing more than one of them to contain the rising costs of transportation, fnd offsetting savings, and ensure on-time deliveries. Re-confguring Distribution Networks Just as the shortest distance between two points is a straight line, so the least cost method of freight transport is to move product at full-container or truckload rates. Cost disparities between full and partial loads are substantial. For example, the rate for par- tial container loads can be as much as three- times greater than the rate for full containers, and the less-than-truckload rate can be as much as four-times greater than the rate for truckloads. With freight rates climbing, transportation managers everywhere have gone back to the drawing boards to analyze product fows from every origin to every destination. Theyre searching for ways to aggregate product so that it can be moved in full containers or full truckloads, and theyre examining both pur- chasing and demand patterns. In many cases, companies are fnding that the best way to build full container loads and full truckloads is add a new link of distribution facilities into their supply chains. Adding new links to the supply chain, however, would ap- pear to be antithetical to the industrys long- standing quest for simpler, less costly, and more effcient supply chains. For years, compa- nies have dedicated themselves to streamlin- ing their supply chains removing redundant, extraneous links, consolidating their networks of distribution centers (D/C), and increasing inventory turns. But the new links added to companies supply chains are not D/Cs per se, but rather freight- pooling hubs. There are two kinds con- solidation centers, and deconsolidation centers (sometimes called mixing centers). One or more of these freight-pooling hubs will be added to the supply chain if the cost sav- ings resulting from shipping the full containers or truckloads that are created in these facili- ties exceed the incremental costs of operating the facilities. In practice, companies can create four differ- ent kinds of distribution networks, and which one they choose will depend on the shipping volumes. 4 PrcIcgs SuppIy Chan Pevew Direct-to-DC Network: This is the most effcient transportation network. In this case, the vendor or factory ships full container loads directly to each shippers D/C, with full-container load pricing and no handling of the product between the plant and each D/C. (See Network #1 in Exhibit 1.) Deconsolidation Network: A shipper will add a deconsolidation center to his network when each of his D/Cs handles a volume that is less than a full container load, whereas the combined volumes of several D/Cs do add up to a full container. Various suppliers or factories will then ship full containers to the deconsolidation or mixing center where they are split into separate shipments destined for a number of different D/Cs. These partial container loads are then aggregated into full truckloads destined for each of the shippers D/Cs. While a deconsolidation network adds a product-handling step, it also yields cost savings by moving product at full container and truckload rates. (See Network #2 in Exhibit 1.) Consolidation Network: A shipper will add a consolidation center to his network if he receives less-than-container volumes from his suppliers or manufacturers. In general, the shipper will locate the consolidation center abroad at the port of origin where less-than-container loads from multiple vendors or factories can be aggregated into full-container loads destined for each of the shippers D/Cs in the U.S. Although a consolidation network also adds a product-handling step, it too yields cost savings by moving product at full container and truckload rates, and the labor employed to handle the product is paid at lower Asian rates. (See Network #3 in Exhibit 1.) Exhibit 1: Consolidation and Deconsolidation Networks Facilitate Truckload and Full-Container Shipping eadcr/lactcries 5tcres &#,&ULL#ONTAINER,OAD 4,4RUCKLOAD Consol|Jot|on Centets 0econsol|Jot|on Centets 0econsol|Jot|on Centets 0C 0C 0C 0C 1 2 3 4 4 &#, &#, &#, &#, 4, 4, Altetnot|ve Netwotls: (1} 0|tect-to-0C. (2} 0econsol|Jot|on. (3} Consol|Jot|on. onJ (4} Consol|Jot|on-to-0econsol|Jot|on www.prcIcgsresearch.ccm o Consolidation-to-Deconsolidation Network: Once again, a shipper will add a consolidation center at the point of origin when he receives less-than- container volumes from his suppliers and manufacturers. This time, however, the shippers D/Cs do not have large enough inbound volumes to support full container loads from the consolidation center. Instead, the consolidation center ships the full container loads to the shippers state-side deconsolidation center, where products from other inbound vendors or factories can be mixed and aggregated into full truckloads destined for the shippers individual D/Cs. While this network does add two product-handling steps, one of which involves higher U.S. labor rates, it also ensures full container and truckload pricing. (See Network #4 in Exhibit 1.) In all of these cases, the justifcation for adding an extra step into the supply chain is the cost savings from full-container and truckload trans- portation. As the costs of freight transportation rise, those cost savings will escalate. Here are three examples of these new distribu- tion networks gleaned from our recent inter- views with supply chain executives. Case Study #1: A national distribution company maintains a network of 39 D/Cs to provide next-day delivery to customers scat- tered across the U.S. Its suppliers are located throughout North and South America and Asia. The distributor had rolled out an aggressive private-label program where the sourcing was shifted toward Asian factories. Transportation costs had become unwieldy. The company carefully scrutinized its distribution network to determine how its D/Cs orders could be aggre- gated into full-container or truckload shipments on a regional basis. The company established fve new regional mixing centers. One was located in central New Jersey to handle the Northeast; an- other in Atlanta, for the Southeast; a third in Chicago, for the Midwest; a fourth in Dallas, for the Southwest; and a ffth in Los Angeles, for the West. These mixing centers receive full containers or truckloads directly from sup- pliers. These containers and truckloads are unloaded, and the products are then mixed and re-shipped as full truckloads to each DC every 24-to-48 hours. At the same time, the distribution company also established consolidation centers at several Asian ports where shipments from its Asian suppliers could be aggregated into full container loads destined for its fve mixing cen- ters. The cost savings from full-container load pricing were substantial. Neither the consolidation centers nor the mixing centers maintain any inventory. Their mission is solely to ensure and facilitate full- container and truckload shipments between all points in the supply chain. Additionally, with the pre-planning involved in building these full-con- tainer and truckload shipments, the company was also able to collaborate with the carriers and ensure equipment availability and consis- tent delivery. Case Study #2: A major sporting goods retailer added a consolidation center in Asia to build full-container loads from its vendors Asian plants. Not only could the company then move prod- uct at full-container load rates, but it was also able to bypass its vendors U.S.-based D/Cs, reducing the delay between order and delivery substantially. It had been taking 21 days on average to move product through its vendors domestic distribution networks. Those 21 days included the time spent moving product from the port to the vendors D/C, the time required for the product to be processed through the vendors D/C, and the transit time spent mov- ing the product from the vendors D/C to the retailers D/C. Case Study #3: A leading large-format retailer of home furnishings was using regional carri- ers to move product from its fve D/Cs to its 500 retail outlets scattered across the U.S. and Canada. The retailer found that the carriers were providing erratic delivery service to those retail stores located more than 500 miles from the D/Cs. Upon investigation, it turned out that the car- riers experienced high turnover among their long-haul drivers for distances exceeding 500 miles. Traveling such long distances resulted o PrcIcgs SuppIy Chan Pevew in long absences from home. The challenge for the retailer was that many of their stores were located 600 miles or more from its D/Cs. The retailer went back to the drawing board and re-examined its distribution network. Even after reassigning stores and D/Cs, some stores still ended up farther than 500 miles from their assigned D/C. The retailer considered adding another D/C, but opted not to do so. Instead, it added several mixing centers where it received pooled truckloads destined for multiple stores and then arranged for local delivery to the indi- vidual stores. Centralize Control-and-Command One clear-cut trend emerging from our inter- views is that shippers are choosing to decouple their freight cost from their product cost. In other words, shippers are taking responsibil- ity for the freight bill, whereas previously the suppliers paid the freight and then added this expense into the materials invoice. Having taken responsibility for the freight cost, shippers then establish centralized command and control over the freight movement. They are hoping to use their frms total shipping volumes as leverage in negotiating incentive- based contracts with carriers and to oversee the execution. Often in the past, shippers succeeded in nego- tiating favorable carrier rates in specifc freight lanes based on commitments to the carriers to channel certain volumes through those lanes. Too often, however, those commitments failed to translate into tendered volumes because of snafus within the shippers decentralized opera- tions. Local traffc managers, for example, may have been unaware of the incentive contract and tendered the loads to other carriers. Whatever the cause, the result is always the same higher shipping rates. The disparity between the best contract shipping rates and those with alternative carriers can be as much as 7%. And worse still, a shippers failure to follow-through on his commitments also ends up sub-optimizing the carriers operations and weakens the shippers future bargaining posi- tion with the carriers. One senior supply chain executive at a major retailer has fully automated the tendering pro- cess at his company, thereby ensuring that the best contract shipping rates are fully realized. He went on to explain how the centralized and automated command-and-control system that he devised works. 1. In placing an order with a supplier, the retailer specifes a one-week shipment window, during which the supplier must ship the order. Additionally, the supplier must notify the retailer 48 hours prior to the actual shipment. Shippers are taking responsibility for the freight bill, whereas previously the suppliers paid the freight and then added this expense into the materials invoice. Heres an Example of Cube Sub-optimization. www.prcIcgsresearch.ccm 7 2. Suppose, for example, that the supplier wants to ship the order on the Wednesday of the one-week shipment window. In this case, the supplier must request a routing from the retailer via EDI [electronic data interchange] by 5 pm on the prior Monday. 3. Next, the retailer collects all of its routing requests from its entire network and runs them through its transportation optimization and routing software package to identify the most effcient routes and carriers for each shipment or combinations of shipments. 4. By 6 am on Tuesday morning, the retailer sends tender notifcations via EDI to its primary carriers i.e., the carriers who, after negotiations, have offered the best service and rates. 5. Carriers will accept the tenders within a few hours and then haul the freight within 24 hours at the best negotiated rates. As a general rule, centralizing transportation decisions also enables a shipper to move transportation planning closer to the point of order so that it ceases to be an end-of-the-line function. If a traffc manager fnds out about an order just when it is ready to be shipped, he or she wont have enough time to arrange for the best carrier and rates or to combine shipments into full truckloads. Alternatively, when given centralized visibility of the shipment at the time of order, traffc managers have a wider window within which to consolidate shipments and can then take advantage of truckload, continuous movement, and pooled distribution rates. For example, a senior supply chain executive at a manufactur- er of household cleaner products reported that early centralized visibility had enabled his company not only to reduce its off-contract or maverick carrier spending, but also bolstered the share of its orders shipped at truckload rates to 65% from 35%. The cost savings in the companys transportation spend worked out to a 1% increase in its bottom line. Several interviewees mentioned that their companies had integrated centralized freight transportation planning into the procurement of seasonal buying and production planning. One manufacturer, for example, routinely books freight with carriers in March for the shipment of goods scheduled for production in September and October. Similarly, a retailer routinely books ocean freight in March when it places its orders for seasonal buying from Asian manufacturers, for goods to be delivered and shipped next October. Both companies believe that their advance-planning is critical to lining up carrier capacity during the busy holiday seasons. Collaborate with Carriers Many companies are attempting to forge close ties with their transportation providers and, in the process, become a preferred customer of their carriers. At the same time, many carriers are tracking their operating ratios i.e., expenses divided by revenues by customer. Thus far this year, carriers have raised their freight rates by 5- to-17%, as compared with a year ago. Those shippers whose freight is diffcult to move or who are diffcult to deal with are seeing rate increases near the high end of the range. In contrast, carrier-friendly shippers are seeing rate increases nearer the low end. No wonder that many shippers are going out of their way to become a preferred customer of their carriers. Some shippers, for example, are providing their carriers with forecasts of expected freight movements. Some are active- ly working with their carriers to reduce dwell times. Some are performing two-way score cards. And others are taking positive steps de- signed to improve their carriers cash fows. Forecasting Expected Freight Movements. Many suppliers are taking a page from Wal- Marts playbook. Wal-Mart routinely shares its point-of-sale information and forecasts with its suppliers; and they in turn share it with their suppliers and carriers, thus ensuring that the right product will be available at the right time and in the right place. Many suppliers now provide their carriers with detailed transportation forecasts. First, they compile forecasts of their sales and manufac- turing schedules. Next, they convert those S PrcIcgs SuppIy Chan Pevew projected volumes into detailed forecasts of shipments by size, by week over the dura- tion of the planning horizon, by mode (rail, truckload, or less-than-truckload), and by lanes (origination and destination pairs). Suppliers update their shipment forecasts weekly or monthly. Given these forecasts, carriers can commit capacity in advance and, if needed, can contract for outside capacity. These updated forecasts are critical because they enable carriers to position capacity for promotions, seasonal peaks, and new business. Reducing Dwell Times. Carriers strive to keep their equipment moving as much as pos- sible, thereby fully utilizing their assets as well as enhancing the productivity of their drivers. Long-haul drivers waste a lot of time as much as 25% of their workweek, by some esti- mates waiting for equipment, dock availabil- ity, loading, and unloading. Carriers sometimes charge accessorial and detention fees and may even refuse to service locations where they have been detained excessively. Shippers are taking a close look at their ship- ping and receiving processes, searching for ways to lower their carriers costs. One senior executive described this new point of view as follows: We have adopted a pit-stop mentality, where we want to get drivers in and out of our facility as quickly as possible. Shippers efforts are succeeding in reducing drivers dwell times. Drop-and-hook pro- grams allow the carrier (a) to drop an empty trailer to be loaded and then picked-up later and (b) to pick up a loaded trailer that had been dropped off earlier. In one such program, the driver is never at the shippers D/C for more than 20 minutes. Additionally, some ship- pers are also increasing the size of the shipping and receiving areas within their D/Cs to facili- tate faster loading and unloading. Drivers dwell times are lengthened when they have to wait for an available dock door or for an appointment. As freight transportation volumes have increased, the number of dock doors has become a bottleneck. Many shippers require carriers to call ahead and reserve a deliv- ery time. But drivers then are stuck making multiple phone calls or faxes, involving tortu- ous telephonic menus and frustrating delays. Drivers generally prefer a web-based appoint- ment scheduling system, which allows them to schedule their own appointments on line. To eliminate those dock-door bottlenecks, some shippers have extended their hours of opera- tion, thereby doubling or tripling their dock door capacity. Shipping or receiving at night and on weekends smoothes the operations of both shippers and carriers. Improving Carriers Cash Flows: Carriers operate on thin margins, and cash fow is a paramount concern. Shippers who pay their carriers quickly and reliably will not only earn the carriers gratitude but also fare better dur- ing rate negotiations. Billing cycles often are nightmares for carriers and shippers alike. These cycles start with the carrier issuing an invoice to the shipper, based upon standard or contracted rates. In turn, the shipper usually audits the freight bill to verify the correct volumes and rates. When discrep- ancies are found in the audits, they are either deducted from the invoice or charged back to the carrier. Final settlement can take weeks or months, imposing large clerical costs on both the carrier and shipper and also impairing the carriers cash fow. To streamline the billing cycle, some shippers have turned to self-invoicing programs, where the carrier accepts both the load and the rate during the tendering process. Upon delivery of the shipment, the shipper pays the carrier directly without going through the older, unwieldy billing cycle. These programs are a win-win. Carriers get paid faster. One shipper, for example, pays his carriers daily via EDI on a shipment-by-ship- ment basis. In turn, shippers are rewarded with lower negotiated rates. Two-way Scorecards: Shippers have long used scorecards to evaluate carriers perfor- mances. Many shippers are now also using them to evaluate how well their own operations mesh with those of their carriers. Shippers have thus adopted a number of metrics designed to evaluate how well their own operations are helping or hindering those www.prcIcgsresearch.ccm 5 of their carriers. These metrics include dwell times, accuracy of count, quality of documen- tation, disparities between forecast and actual loads moved, and changed orders. Shippers meet with their carriers quarterly or even monthly to review these metrics. Both parties strive for collaborative collegiality. As with all collaborations, these reviews have be- come a two-way street. One brand-name manufacturer, for example, has formed a Logistics Council comprised of its largest carriers and 3PLs along with its internal transportation, warehousing, and supply chain planning groups. Once a quarter, the Council meets for two days to review the latest ship- ment forecasts and the latest readings of the scorecard metrics. But the Councils agenda also includes ideas and proposals for how the company can im- prove its operations for the good of its vendors. The companys Manager of Transportation was eloquent on this score: We ask them [the ven- dors] two things. First, what are the industrys best practices today from a shippers point of view? Second, what can we do to improve? Shippers hope that such collaborations will yield them consistent availability of carrier capacity along with minimal rate increases. Within the industry, a closely watched met- ric of availability of capacity is frst tender turndowns. For shippers, the best practice is to tender (offer) a load to the carrier that has offered the best price and service stipulations. Often, however, that carrier rejects the offer because it does not have suffcient capacity (driver or equipment) to accommodate the load on the designated day. In that case, the shipper then tenders the offer to another car- rier which has offered less favorable pricing or service than the frst carrier. Professor Chris Caplice of the MIT Center for Transportation and Logistics has studied this tendering process. One in four frst tenders, he found, got turned down. The price of the second tender, when accepted, was about 7% on average higher than the preferred carrier; and the second-tenders shipments were de- layed on average by two days or more. Those delays impaired shippers customer service, necessitated higher buffer stocks, and in- creased the shippers transportation costs. Create Capacity Analysts, policy wonks, and government offcials often talk about the dire need for more capacity in the nations rail system, its highway infra- structure, and its ports. While they are surely right, their policy recommendations generally entail ambitious, costly projects that may or may not get funded and that, even when they do get funded, will take many years to complete. Meanwhile, as supply chain practitioners con- stantly remind themselves, The freight must move today. From our interviews, we found that several companies are striving to extract more capacity from their existing plant and equipment. Toward this end, shippers and car- riers are improving their cube utilization, elimi- nating empty miles, and extending their hours of operations. Full, Half-full, or Empty? Many shippers have focused on how to fll those empty miles, thereby reducing their transportation costs while also bolstering capacity. U PrcIcgs SuppIy Chan Pevew Ineffciency #1: Better cube utilization sounds exotic, but simply involves packing more stuff into truckloads. (See Photo, page 6.) One retail- er of sporting goods embarked on a campaign to improve cube utilization of the truckload shipments from its D/Cs to its stores. Its broad product line included large bulky SKUs such as canoes as well as densely compact SKUs such as dumbbells. The retailer hired additional workers at the D/Cs to do more effcient pack- ing, but it also succeeded in improving the cube utilization of its truckloads by 14% for a net gain in capacity without having to buy any ad- ditional trucks. Its campaign has been a success. The cost sav- ings in the transportation budget were about twice as large as the incremental cost of the added loading labor. Evidently some truckloads are fuller than others. Ineffciency #2: Trucking experts estimate that as many as a third of all trucks on the road are empty. They have delivered their loads and are headed either back to home-base or to their next pickup. Empty trucks log dead- head miles and higher costs. Many shippers have focused on how to fll those empty miles, thereby reducing their transportation costs while also bolstering capacity. (See Photo, page 9.) One supply chain executive clearly outlined the problem and the solution. The whole indus- try is waking up to the fact that half the trucks running on the highways are half or totally empty. We use a dedicated feet to deliver to our stores, but 80% of the time theyre empty on the return trip. We have to get smarter about how to share resources. We have to identify synergies where another companys shipment will eliminate the empty miles. Its a win-win. We both gain capacity, and we both lower our costs. The question is: where or how to fnd the other parties with which to share resources or cre- ate synergies? Answer: networking. You have to talk to people until you fnd someone who knows someone or something that can fx your problem. One shipper found the synergies that he was looking for by talking to his companys vendors. He related this anecdote, Were an inbound to our D/Cs and an outbound to our stores, and we were looking for how to become the two legs of a carriers triangle. We have a D/C in Los Angeles that ships to our stores in California, Oregon, and Washington. We use a carrier out of Washington to handle this freight. The same carrier also ships paper products all over the country, but always ended up running empty trucks from Salt Lake City back to Los Angeles. Heres where the shipper found his synergy. My company has a supplier in Salt Lake City, so we could use him to fll the third leg of the triangle. The carrier now delivers shipments from our D/C in Los Angeles to stores in the Northwest. From there, the carrier delivers paper products to its customer in Salt Lake City. And we then schedule a shipment from our vendor in Salt Lake City to our D/C in Los Angeles. This third leg forms a complete tri- angle [or roundtrip] using dedicated equipment, avoiding costly dead-head miles, and getting the driver home for the weekend. Finding such synergies is seldom simple. A senior supply chain executive at a manufac- turer had to cast his net outside of his circle of customers, carriers, and suppliers. He found his synergy through one of his companys 3PLs. On behalf of a trading company client, the 3PL was operating a pair of fully loaded routes from Harrisburg PA to either Green Bay or St. Louis, with a stop at the trading companys facility in Chicago. The trading company also had con- sistent freight volume for shipments from St. Louis and Green Bay back to Chicago. What it didnt have were any shipments from Chicago to Harrisburg, so that its trucks were running empty when they traveled from Chicago to Harrisburg. The manufacturer in question was then running consistent, less-than-truckload (LTL) freight volume from Chicago to Harrisburg. By ar- ranging a pick-up schedule with the 3PL, the manufacturer was able to move product from Chicago to Harrisburg at less costly truck- load rates and got product into its Harrisburg customers hands a day sooner than it did with the LTL carriers. www.prcIcgsresearch.ccm Delighted with these cost savings, the execu- tive naturally wondered where else he could reduce his transportation spend. In his words: This type of matchmaking is usually done by freight brokers, freight forwarders, and for-hire carriers. But we decided to take the initiative. Weve used our transportation management software system to identify all of our freight patterns so that we can seek out synergis- tic opportunities such as [the one described above] with other frms. Were able to do a better job with faster service at a lower cost. Thats a recipe for success. Ineffciency #3: A D/C that limits its opera- tions to one eight-hour shift for fve days a week is operating at less than 25% of its full 24x7 capacity. Were seeing more and more companies expanding their workweeks. In some cases, suppliers have had to switch to a 24x7 schedule because their customers had previously done so and were insisting that their suppliers should be able to ship to their D/Cs at night and on weekends. After making the switch, the suppliers often fnd that these 24x7 operations are conducive to smoother fows of freight volumes to and from their D/Cs and those of their customers. In turn, the smooth- er, more predictable volumes lead to reduced overtime, improved inventory turns, and faster deliveries. Additionally, companies also fnd that 24x7 operations add signifcantly to their shipping capacity. The smoother volumes result in less dock congestion as well as quicker loading and unloading times. One of our interviewees fer- vently wished that his company had made the switch sooner: We can move a trailer in and out of our facilities in less than half the time on a weekend than we can during the week. Our carriers couldnt be happier; it took bumps out of their systems. We also found that equipment was more available on weekends than during the week. 24x7 is also a good ft with our drop- and-hook program, giving drivers more fex- ibility on pick-up times. And the rail and truck lines have told us that smoothing the fow of our shipments helps them provide capacity for the hauls. Concluding Remarks The mantra for supply chain professionals is still, The freight must move and get to its destination on time. Additionally, they are expected to increase inventory turns, improve delivery times and accuracy, reduce the oper- ating costs of their distribution networks, and leap tall buildings in a single bound. Moving the freight and getting it to its destina- tion on time were always challenging tasks. Lately, however, these tasks have become even more challenging. Supply chain professionals today must cope with port and rail congestion, highway congestion, rising oil and gasoline prices, complex security issues, acute short- ages of long-haul drivers, and rail crew and equipment shortages. One senior supply chain executive was quoted earlier as saying, None of these transport problems is going to get fxed overnight. This is the new normal. Lets just get used to it and fgure out what options are available for dealing with the problems. Hes right, and supply chain professionals worldwide have been busy doing exactly that fguring out how to deal with those prob- lems. In this report, we have described a num- ber of the strategies and tactics that they have devised to deal with the problems cited above. Theyre all aimed at fostering greater capacity, reliability, and rate stability. We hope that readers fnd these real-world strategies interesting and, better still, useful. What we fnd most striking about these exam- ples is the utter resourcefulness and ingenuity that supply chain professionals bring to bear in moving the freight and getting it to its destina- tion on time. The freight must move and get to its destination on time. ProLogis is a leading provider of distribution facilities and services with 377 million square feet (35 million square meters) in 2,340 distribution facilities owned, managed and under development in 77 markets in North America, Europe and Asia. ProLogis continues to expand the industrys frst and largest global network of distribution facilities with the objective of building shareholder value. The company expects to achieve this through the ProLogis Operating System and its commitment to be The Global Distribution Solution for its customers, providing exceptional facilities and services to meet their expansion and reconfguration needs. About ProLogis Copyright 2006 ProLogis. All rights reserved. This information should not be construed as an offer to sell or the solicitation of an offer to buy any security of ProLogis. We are not soliciting any action based on this material. It is for the general information of ProLogis customers and investors. This report is based, in part, on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. No representation is given with respect to the accuracy or completeness of the information herein. Opinions expressed are our current opinions as of the date appearing on this report only. ProLogis disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report. Any estimates, projections or predictions given in this report are intended to be forward-looking statements. Although we believe that the expectations in such forward-looking statements are reasonable, we can give no assurance that any forward-looking statements will prove to be correct. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein to refect any change in our expectations or any change in circumstances upon which such statement is based. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of ProLogis. 0706-3700 ProLogis Supply Chain Research Reports Additional supply chain research reports are available. To download PDFs of these additional reports, please go to www.prologisresearch.com. Youve read the same newspaper headlines and stories that I have. The nations freight transportation industry faces monumental challenges including port and rail congestion, highway congestion, rising oil and gasoline prices, crumbling infrastructure, a dearth of long-haul drivers, complex port security issues, and crew and equipment shortages. Policy-makers are talking about the problems and trying to build a consensus around particular solu- tions. But they are still years away from funding, blue prints, and actual construction. And by then, the problems will have gone from bad to worse. Supply chain professionals dont have the luxury of waiting for policy-makers to design and implement major overhauls to the nations freight transpor- tation system. These men and women are in the trenches having to make sure the freight keeps mov- ing and getting to its proper destination on time. From the Editor Leonard Sahling First Vice President ProLogis Global Research 303-576-2766 lsahling@prologis.com Paul Nuzum has talked with about a dozen senior execu- tives in charge of global distribution networks to learn about how they are managing the challenges of the new transportation climate. The interviewees are pragma- tists and doers, and they have dreamt up a number of ingenious ideas all practical, lots of nuts-and-bolts, and all aimed at dealing with, or circumventing, the industrys problems. My favorite is the one where more stuff gets packed into trucks, creating fuller full truck- loads.