Atlanta-based The Colography Group, a research firm dedicated to the cargo market, recently celebrated its 20th anniversary. Although the company originally focused on domestic air express, today its research covers all modes of time-definite transportation worldwide. The company's analysts conduct detailed interviews with thousands of shippers and carriers to develop their findings.

Theodore R. "Ted" Scherck, the research firm's president, helped found The Colography Group in 1983. Prior to that, Scherck spent 12 years at airfreight forwarder Profit Freight Systems as vice president of transportation. He holds a bachelor's degree in Management and Business Administration from El Camino State College in California.

Executive Editor James Cooke interviewed Scherck late last year about the changes he has seen in the parcel, express, and trucking markets, as well as his predictions for the future.

LM The Colography Group is predicting that an economic turnaround next year will spur shipping activity. However, you've said that a rising tide won't lift all boats. Why do you believe that some carriers will benefit more than others?

SCHERCK It's really a function of the long-term trends in the marketplace. We began to see as early as 10 years ago a bifurcation of the U.S. market, whereby short-haul traffic was increasingly moving to the ground as the ground providers improved the reliability and predictability of their services.

We also began to see a significant investment in the ground market as far back as '97. We've seen the LTL (less-than-truckload) carriers move traffic on schedule rather than wait for full truckloads. The ground portion of the market has centered around moving goods on the ground as reliably as in the air.

Two-thirds of all goods in the U.S. move fewer than 600 miles to market. As a result, we'll continue to see explosive growth in the regional networks. The long-haul networks are basically tied to economic growth while intermediate-haul markets will continue to suffer.

LM How will the economic turnaround impact the parcel and express shipping sectors?

SCHERCK In this case, it will impact them more quickly than normally because inventories are so lean. The amount of goods in inventory is at historic lows for most industries. Any uptick in sales will result in shipments a lot more quickly than if we had a lot of excess inventory out in regional and finished-goods warehouses. If I sell a widget, I can't fill [that order] from a widget I produced six months ago that's sitting in a warehouse somewhere. I have to produce it right now.

We're already beginning to see this. We had a very robust third quarter and most carriers are reporting strong growth in their shipments. I don't expect the fourth quarter to be as good as the third quarter, but I still expect it to be substantially better than the first or second. The year 2003 will be okay. But growth in 2004 should be robust.

LM How will the merger of DHL and Airborne impact shippers?

SCHERCK First, it won't have much of an impact on international shippers in the short term because DHL was already a major presence in the international business. Of course, in the domestic business, Airborne had a major presence.

There's not a lot of overlap between those two companies. Airborne had a NAFTA presence but didn't have much international [business], whereas DHL was very strong in and out of North America, but didn't have much of a domestic footprint. When you get beyond the obvious issues like merging cultures and IT (information technology) platforms, they have the same opportunity for leveraging the merger that FedEx had when it acquired its ground operations. They'll be able go to the old Airborne customers and sell them world-class international service. And they'll be able to go to DHL customers and sell them world-class domestic service.

Basically, it will be good for the market and for the shipper. Competition is always good, particularly if it's world class. That will make everybody stronger, sharper, and more focused.

LM How will the implementation of security regulations, such as the 24-hour rule, impact cross-border parcel and express shipments?

SCHERCK Other than a plant-down situation, where I've got 400 employees sitting around doing nothing because a critical gear on the assembly line broke and I have to get it in from Germany—other than those rare situations, I don't see the problem.

The argument that all commerce will stop if they have to delay 24 hours is overblown. Yeah, it will cost money, but the more critical issue is who's going to pay for it. Ultimately, the shipper will pay for it either as a taxpayer if the government foots the bill, or as another cost in the transportation rate if the government makes the carriers pay for it.

At the end of the day, the consumer buying the goods will pay for it. But the marketplace will adjust to adding another time period. The market won't stop. It will add cost, but I don't see what all the fuss is about.

The question isn't what are the least amount of restrictions that we can apply to security. The issue is, what are the critical security steps we need to take? And then how do transportation companies that are moving the goods globally find an efficient way to get things done?

I'm not in favor of onerous regulations that give a false sense of security. But there are certain things we need to do before a bomb makes it into the country. If the 24-hour notice gives us time to identify those things before they get here, it's a small price to pay and it won't put anybody out of business. It will just cost us a little more.

LM The aftermath of 9/11 diverted some air and express cargo from planes to trucks. Will that mode diversion continue?

SCHERCK Yes, because 9/11 didn't cause [that diversion]; 9/11 just accelerated a trend that had been in place for a decade. In short-haul markets, in many cases, a truck is a better vehicle to provide the service than an airplane.…Unless the distance traveled is too great for a truck to do it, or you need time-definite versus day-definite, ground shipments are the better, more efficient method.

The point I'm making is, that trend was well underway before 9/11. Otherwise FedEx wouldn't have bought RPS. UPS or FedEx wouldn't have put the ground guarantee out. UPS wouldn't be spending a billion dollars to improve their line-haul system for ground service.

Those companies are investing those massive sums because that is what the marketplace wants. It won't go back to the air. Certain goods that used to be in the air can be accommodated every bit as efficiently in terms of reliability at a lower cost in these ground networks.

Sept. 11 took the trend toward migration [to ground service] that was bumping along at a certain conversion rate and it made everyone thinking about converting do it immediately.

LM Are shippers today more willing to trade inventory for delivery guarantees, or will they seek to hold more buffer stock due to concerns over security delays?

SCHERCK There is a trend toward rebuilding inventories, but it's different inventories for different purposes. For example, a lot of companies bought into the global sourcing strategy: We're going to hire one company in Malaysia to supply all our goods and we're going to carry virtually no inventory.

Companies that did that have had a number of interruptions to their supply chains that have occurred over the last several years, such as 9/11, labor strikes, typhoons in Asia, the war in Iraq, [and] the West Coast port strike.

They've discovered that their lean inventory model takes any disruption and magnifies its impact on their companies. They've realized that they've gone too far in this global sourcing in the face of disruptions of the supply chain, including security.

They're saying now, maybe I need to have manufacturing capacity and inventory on every continent of the globe. And then if the air goes down in North America, I can truck it. If the trucking goes down, I can go to rail. But I can still do business.

What we're beginning to see is a strategy that says, I will have the ability to react to any major disruption in my supply chain by putting inventory in places where I have options.

So the answer to your question is yes. But it has little to do with security, because security is just one of the possible disruptions. If you have a very lean supply chain that's extended, then the risk to you is magnified because you have no ability to react. Concern about security is just one of the reasons why that thinking is occurring.

LM You've said that new distribution platforms will remake shipping patterns. Can you expand on this?

SCHERCK We've already talked about one element and that's the redeployment of inventory into each continent. But the other part of this new distribution platform is e-commerce.

As more and more goods are bought on the Internet, that disperses traffic. Ten years ago, I could control where my goods were shipped and concentrate those goods according to where I deployed my salesmen or where I mailed my catalogs.…And I could get a full truckload or minimum order quantities to focus the traffic.

Today I put out a Web site. I have absolutely no control where those orders are going to come from. They could come from anywhere in the world, certainly North America. But those orders will be in smaller quantities and my shipping will be dispersed. So I won't have the concentration of goods I had before.

This change is creating tremendous problems for the carriers. They are getting smaller tenders for more dispersed locations. And that's another long-term trend that's been impacting transportation for quite some time.

LM What will the transportation landscape of the United States look like in five years? Which modes will be the winners and losers?

SCHERCK The whole concept of mode is on its way out. The market is rapidly moving to mode indifference. The customer is going to be focused on transit time and reliability and less focused on the type of vehicle used to provide a service that's needed tomorrow by the close of business.

All they want to know is that you can provide me with the service with 95-percent-plus on-time performance and give me the information that I need to manage that process electronically—and what price are you going to charge me. They're not going to be hung up on what tools the provider brings to the party to get the job done.

At the end of the day, why do you care whether it was put in an airplane or truck? As long as it's there when it's supposed to be. One reason you might care is if air is substantially more expensive. People don't ship things by air or ground parcel to file a refund. They purchase time-definite, guaranteed services so goods get there when promised.

The people who will benefit are transportation companies that provide reliable, cost-effective, information-rich service. That can be a ground package company, that can be a mailer, an LTL trucker, a truckload trucker, a railroad. The distinguishing characteristic won't be shipment size. It will be predictable delivery for a reasonable price in a niche you're choosing to fill.

Will we get there in five years? Probably not. But we're quite a way along that path.