For most of the nine years that we have conducted the Giants of Shipping study, the United States enjoyed an unprecedented period of prosperity. During that time, the relationship between shippers and their logistics providers began to evolve away from the adversarial model common in the past toward collaborative partnerships. Now that the business cycle has hit a trough and corporations are focusing on cost cutting, however, some of those relationships may be at risk.

Granted, real collaborative relationships and true supply chain management may not have taken hold as solidly as the business theory behind those concepts has. And the current downturn will likely provide an important test of how committed businesses are to process changes that promise long-term cost advantage. But if the results of the 10th annual Giants of Shipping survey are any indication, many shippers will indeed persevere.

The Giants of Shipping is a comprehensive effort to track trends in the spending and logistics management practices of shippers throughout the United States—and the nation's largest shippers (the Giants), in particular. The study is conducted jointly each year by the University of Tennessee (UT), Cap Gemini Ernst & Young's global supply chain consulting practice, and Logistics Management & Distribution Report. This year, Georgia Southern University has become a partner in the study as well.

Not surprisingly, the results of this year's study demonstrate an intense focus on cost, says Richard Thompson, vice president with Cap Gemini Ernst & Young's global supply chain consulting practice and a partner in the study. "Companies are seeking any and all means by which they can take cost out, and one major focus is on reducing inventory. Innovative companies are working to develop ... supply chains that can adapt to true demand in close to real time," he says. In other words, efforts to reduce costs and implement supply chain management may be inseparable.

Over the years, the researchers have detected a dual focus among shippers, who want to make their supply chains both more efficient and more effective. Mary Collins Holcomb, associate professor in UT's marketing, logistics, and transportation department and a partner in the study, believes that the two are opposite sides of the same coin, only the emphasis may change. "You play the song you want to hear," she says.

Although leading-edge shippers have made significant progress in developing processes that promote both efficiency and effectiveness, the Giants study also demonstrates that this progress has not been universal—or anything close to it. For instance, inventory and accounts receivable levels remain stubbornly high, despite shippers' best efforts to bring those numbers down. (See Figure 1.)

"It seems odd to me that we've not achieved more success with inventory," says Karl Manrodt, assistant professor of logistics in the Department of Information Systems and Logistics at Georgia Southern University and leader of the study. "In part, this could be because of the time it takes to actually receive an order. According to our study, a majority of orders are placed at least weekly; yet the average time it takes to receive the order is slightly over 30 days. The minimum expected time it takes to get an order is around 18 days. Reducing the differences between the time an order is placed and the time it is received will obviously help reduce some of the inventory in the system."

A slight majority of respondents—52.9 percent—report that they are decreasing the amount of inventory they carry, compared with 39.8 percent last year. And the average amount of inventory held at several stages throughout the supply chain has declined. Average days' worth of supply on hand at manufacturing facilities dropped to 18.3 from 19.4 in 2000, and at central warehouses to 42.9 from 55.3. Inventory carried by customers dropped to an average of 20.5 days' worth of supply from 22.7 last year.

Yet that still represents a great deal of inventory in the pipeline. And inventory actually increased at some other supply chain stages to an average of 37.8 days' worth of supply at regional warehouses, up from 33.3 last year, and 23.5 days' worth of supply in vendor-managed inventory, up from 20.4. Retail inventories barely moved, inching up only a tenth of 1 percentage point to an average 33.5 days' worth of supply from 33.4 in 2000.

"Higher levels of inventory, especially in a slower market, cause a lot of points of pain," comments Holcomb. "[Companies] are less able to be responsive, as they are carrying inventory; shifts in market demand come at a high cost. This is compounded by a product life cycle that is getting increasingly short. Finally, inventory-carrying costs are hitting the bottom line at a time when analysts are nervous about any increase in costs at the expense of profits."

Unfortunately, no easy solution has emerged. "There is no 'silver bullet' when it comes to reducing inventory," Thompson adds. "Companies continue to struggle with this challenge and the survey results reflect this."

In their quest to reduce inventory and manage their operations more efficiently, the survey respondents are turning increasingly to technology. Thompson notes that in this year's survey, 68 percent of the respondents say they are using software for transportation management, compared with 55 percent the previous year. "That's an incredible jump," he says, "one that's quite significant to see in the survey results."

Why the increase? "You need sophisticated warehouse management systems and transportation management systems to coordinate shipments to the same distribution center released by different buyers," answers Holcomb.

Only a small part of the growth can be traced to the wave of Internet-based exchanges that emerged last year, Thompson believes. "We've not seen a big jump to new providers," he says. In fact, shippers appear to be taking a "wait and see" attitude toward Internet-based exchanges—many of which have disappeared in the interim.

Shippers use a variety of software tools to manage their business, including spreadsheets and other manual processes. The number using these manual processes, however, is declining. (See Figure 2.)

The level to which shippers have integrated different types of software likewise varies widely. Although half or more of the respondents who use these technologies report a high degree of integration between order fulfillment and their ERP, TMS, or WMS systems, half or more also report that their ERP and TMS systems are not integrated, nor are their TMS and their WMS systems.

Clearly, this represents a great opportunity for software providers. Integration of traditional client server software packages, especially TMS and WMS packages that are installed within a client's facility, has historically been an expensive and time-consuming process.

"This is one of the key value propositions that ASPs (application service providers) are touting," notes Manrodt. "Newer Web-native XML-based application architectures are making it easier and quicker to achieve seamless integration of these disparate systems. With the new XML integration technologies, it is getting easier to integrate systems within the four walls of companies to those hosted externally, thereby freeing up the scarce internal IT resources to focus on more strategic corporate objectives."

The lack of integration between crucial software elements is quite surprising considering that most shippers believe the integration of transportation and distribution to be critically important to their companies' overall strategies. Most say their companies consider that integration important, if not very important. (See Figure 3.) In fact, a full 58 percent of the respondents report that transportation and distribution in their operations are very integrated, and another third say the two are somewhat integrated.

Interestingly, a large proportion of shippers report that their company strategy is based on customer service—presumably something that would require tight links between the various information technologies that affect customers. (See Figure 4.) Yet there appears to be a serious misalignment between companies' strategy and the way they are organized. Though nearly half of the respondents say their strategy is based on customer service, a full 42 percent say their companies view logistics as a cost center, rather than as a service center or a strategic component of the business. Worse, that number is up sharply from last year. (See Figure 5.)  "It appears the focus is shifting to cost," Thompson says.

That makes sense for companies that are competing as the lowest-cost provider, Manrodt says, but not for companies whose business strategy centers on leadership through customer service. "You would assume that among those companies whose strategies focus on leadership through customer service, you would find a high percentage saying they view logistics as a service center," he says. "But even more say they [view it] as a cost center. If you look to match business strategy and logistics strategy, there's a disconnect except for those focusing on cost."

Overall, this lack of integration within the company becomes obvious when it comes to how well aligned performance measures are to employee compensation.  As Figure 6 illustrates, only 17 percent of the respondents believe that compensation and performance measures are well integrated in their companies. Integrating and improving processes will require companies to develop new measures and compensation plans—something Manrodt sees as an extremely difficult yet necessary step. Rewarding people for "business as usual," he warns, will not realistically improve processes.

In one area, at least, many shippers have gone beyond simply conducting business as usual, making significant strides in the way they are treating their best customers. According to our survey results, shippers are differentiating to some extent the service they provide to their best customers compared to their average customers. In key measures—on-time delivery; orders without over, short, or damage claims; correct invoices; and percentage of shipments that result in a complaint—shippers reported doing better for their best customers than for those rated as average. (See Figure 7.)

What's more, they are filling their best customers' orders more often: 38.87 percent report that their best customers are placing orders every day, while only 10.9 percent say their average customers order that often. "This is a nice trend to see," says Thompson, "as it implies that companies have worked on customer segmentation strategies and have adopted logistics programs to support them."

At least some of the evidence suggests that shippers are focusing harder on controlling costs this year than they have in the past. For example, in a continuation of a trend seen in earlier surveys, shippers appear to be consolidating more shipments: Expenditures on truckload shipping continue to rise as a percentage of overall transportation costs.

This year, the railroads gained ground too, although they are still capturing a relatively small percentage of the overall dollars spent on transportation. By contrast, regional less-than-truckload (LTL) shipping showed a slight decline, dropping to 11.5 percent of overall domestic transportation spending from 14.3 percent last year. (See Figure 8.) When it comes to service, incidentally, truckers outshone the rails. The railroads' performance remains well below that of the truckers in the critical measures of on-time performance and equipment availability. (See Figure 9.)

In the meantime, overall spending on domestic transportation is rising; a full 82.1 percent of the survey respondents report that spending is going up. That's a sharp increase from the 68.3 percent who reported increased spending last year. Interestingly, the percentage reporting decreasing spending also rose, to 14.9 percent from 10.2 percent. 

The increase in spending reflects higher costs for transportation—not just higher volumes. Some 64.6 percent of the survey respondents report that domestic transportation spending is increasing as a percentage of sales. By contrast, only 18.5 percent said that was the case last year. One explanation may lie in the surcharges that carriers in all major modes have instituted in order to offset the high cost of fuel.

The rising costs have frustrated shippers' efforts to reduce spending at a time when they are coming under intense pressure to do so. If the price of transportation services rises, the cost-control focus has to be elsewhere. Inventory seems to be the logical target, given the amount still residing in supply chain pipelines. That again suggests a need to refocus efforts on supply chain efficiency and effectiveness.

So, what should you do when the bear comes calling? Thompson warns companies to resist the temptation to bolt the doors and halt all spending initiatives. The leaders, he points out, are forging ahead with innovative programs. "I believe it was Jack Welch, CEO of General Electric," he says, "who indicated recently that he would continue to drive efficiencies through Internet applications and that the time was right to continue to adopt the Internet as a means to strengthen the lead over those who have taken a 'wait and see' attitude."

"In times like these," adds Manrodt, "some companies will stop investing in technology or other solutions that will make them more competitive and efficient. The leaders, however, will continue to look for ways to improve their processes and strengthen their position in the market. Falling behind when the market is down may keep you down when the market turns."