Peak Season Strategies: Managing a longer tail, and a flatter peak

Last year, the anticipated peak season congestion and delays simply didn't occur. What are we in for this season?

Brooks A. Bentz, Accenture -- Logistics Management, 6/1/2007

While the answer is far from a dead certainty, the slowing economy and the willingness of retailers to buy earlier has led savvy shippers to make fundamental changes in their transportation buying habits. Here’s what they’re doing.

• A confluence of factors
• New tips to add to planning
• What to expect this year
• Preparing for the future

This time last year we were gearing up for another surge of container volume flooding U. S. ports that would certainly overwhelm air, motor carrier and rail capacity, and produce inevitable delays, frustration, and poorer service—all at increasing cost. Much to our surprise, we experienced the first “Peak ‘No Peak’ Season” in memory. So, what happened?

There are a number of reasons postulated for this. Even though volume has been growing over the past decade or so, the surge has become progressively more problematic, culminating in the “intermodal perfect storm” of 2004-2005. Last year, though, we didn’t suffer nearly as much, even though volume was still rising—the anticipated congestion and attendant delays simply did not occur in any meaningful way. While it’s a bit of an oversimplification, in general, there was a morphing of the curve, so that the tails got longer and the peak lower and flatter.

There isn’t a single, simple reason for this—instead, a confluence of several factors that, to varying degrees, all had an impact:

There are also some fundamental changes in the way buyers of freight services, particularly retailers, view transportation. Historically, the vast majority of freight moved via ocean carrier, with limited air freight for very high-value or very service-sensitive freight. In some instances, however, certain retailers are moving to an all-air model, simply because the revenue lift from getting the product on the shelves faster is worth the added transportation expense.

Other shippers have continued expanding their trans-loading operations, stripping freight from low-cube 40-foot ocean boxes and reloading it into 53-foot domestic containers for movement from the West Coast to eastern markets. Others are experimenting with DC by-pass operations, where shipments are pre-allocated and pre-loaded, moving directly from Asia-Pacific origins to stores in the U.S.

And finally, there has been a gradual shift of certain freight to less well-known ports in hopes of improving service and through-put time. New West Coast facilities have opened, or will shortly, in Lazlo Cardenas, Mexico, and Prince Rupert, Canada, and volumes have risen at other less mainstream ports like Halifax, Houston, Savannah, and Charleston.

New tips to add to planning

Okay, so things have changed a bit since last year. Then we were advising shippers to focus on securing capacity without breaking the piggybank. At that time we made several key points designed to help ameliorate operating and service problems, principally relating to capacity issues, while simultaneously not having costs spiral out of control:

When we look in the rearview mirror, we realize it’s always easier to see where we’ve been than to peer over the horizon and see where we’re going. The strategies put forth last year still hold water, and also require time and sustained commitment to produce lasting benefits. But what else should savvy shippers be thinking about doing this year? First, it would serve shippers well to sit down with your carriers to discuss how they view the future and what their action plans are:

If you go through a similar exercise with your air, ocean, rail, intermodal, and motor carrier providers, it will begin to provide a clearer picture of what the capacity landscape is going to look like for the coming peak season and beyond.

The next step is to meet with those in your organization who actually need the freight delivered. Whether it’s the category manager in retailing or the procurement guys in manufacturing, someone within the organization is actively working to figure out how much stuff to buy. For the logistics professional, this is what you will have to move. Knowing what products are coming in what quantities as early in the game as possible allows for better planning, better execution, and better economics.

You can then sit down with your internal teams and build forecasts of volume and sort out what lanes and what modes would be most efficient. Sharing that information with your serving carriers helps them figure out how to serve you better.

Too often there is a significant “disconnect” between the merchant buying community sourcing the products and the logistics and supply chain guys in the back room. The logistics and supply chain folks are often left to figure out how to get the goods moved long after the trading commitments have been made, the order quantities determined, and the scheduling decided. They spend their time being reactive, often in the fire-fighting or panic mode, in a heroic effort to try and get product where it belongs. This is generally counterproductive and more costly than being able to plan ahead. It won’t forestall emergencies, but it will minimize the impact they have, both on service and cost.

So, what is to be done? There’s no “silver bullet” answer, or it would have been done long ago. Changing the order management cycle sounds simple, but never is. But, it doesn’t mean we give up. There’s a saying “How many chances do you give a baby to walk?” The answer is “As many as it takes.” We never say “We tried that before and it didn’t work” in this example. We just keep at it until the little guy toddles off. We have to have the same outlook here.

In almost every company there are better ways for all who impact the Supply Chain to work more closely and more collaboratively together. No one has yet come forward and said “That’s it! I’ve solved all the problems and taken out all the extraneous Supply Chain Costs and everything is now perfect.” So, there’s room to acidulously, tenaciously, and continuously work to improve Supply Chain performance. This means starting with a thorough and intellectually honest audit of current Supply Chain functions and performance to see where the “disconnects” reside.

What to expect this season

Reading the tea leaves is a delicate art, but there are some distinct and disturbing trends that are becoming progressively more evident. All you have to do is watch the transportation indicators and you’ve got to question the strength of the economy.

Rail carloadings are off significantly, roughly 6 percent. Even intermodal loadings, heretofore practically unstoppable in terms of rapid growth, have begun to fall off to about 8 percent. Both the LTL and Truckload carriers are reporting softer demand. This has also affected heavy-duty truck sales (Class-8 down 22 percent in the 1st Quarter and 38 percent in March v. 2006).

Meanwhile, ocean carriers are taking relatively significant steps in changing their vessel rotations and inland services. So, no sooner do we struggle and do our best to figure out how to cope with surging demand, than it stops surging. Does this mean we’re out of the woods and life will be easy from here on out or was it an anomaly and things will migrate back to where they were headed, as growth in international trade continues unabated? This begs the question: What are we in for this season? While the answer is far from a dead certainty, the pervasive gloom surrounding freight handling and carrier positions in the market would lead one to the conclusion that it will be a softer version of last year, driven in part by a slowing economy and in part by the willingness of those selling the merchandise to simply buy it earlier.

The historical conundrum has always been, “If I buy too soon, my inventory gets out of control and my costs spike upward in terms of carrying cost and even things like temporary storage.” But the subtle change we seem to be seeing is not only the willingness to buy product earlier in the cycle, but also beginning to sell it earlier, as well.

For example, in the past, it went without saying that the pre-Christmas shopping season began on “Black Friday,” the day after Thanksgiving. Now you can find Christmas merchandise in stores as early as October. The old bromide about “Christmas in July” may not actually be so farfetched in a few years.

If this theorem holds water, then the strategies of the recent past will need to shift once again to meet a different reality. Capacity guarantees won’t be quite the driver they were two years ago. Service will still count for a lot, but cost-to-serve will get a much harder look. And, as the major railroads continue adding capacity, in terms of additional trackage and hauling capacity (locomotives, crews, and cars), and as intermodal service continues improving, from a service and information management standpoint, look to this business to be jumping back on the growth path shortly.

Ocean carrier capacity, likewise, is still in the expansion mode, which probably means rates won’t ratchet up very quickly, if at all, other than for the increasing price of fuel.

Preparing for the future

So, as a buyer of transportation service, how do I view the world and what steps do I take to make life more livable in the new peak environment? Focus on acquiring or upgrading supply chain information technology and management processes, because no matter what the economy is doing, the pressure will still be on to take cost out of the supply chain to improve key elements such as inventory positions and SKU-level visibility across increasingly more complex supply networks.

The second major focus ought to be on building more robust relationships with serving carriers. This includes sharing growth plans, forecast data and service needs, as well as building a reasonable set of performance metrics to enable continuous improvement—and then having regular dialogue so that everyone is well-informed and on the same page. Accomplish those two things in 2007 and you will have accomplished quite a bit.