For logistics operations, change has become a constant. The COVID-19 pandemic created major disruptions that still linger today, with 72% of businesses reporting negative effects due to the pandemic. And the global impact of the current regional conflict between Russia and Ukraine sheds light on just how vulnerable all economies are when globally interconnected.
Whether inconsistent inventory availability or a lack of transportation capacity, the results of disruptive forces are easy to spot. Stories about container backups at ports, empty shelves in grocery stores, and empty automotive dealer lots have become common fixtures in local and national news.
For modern logistics networks highly dependent on precision and reliability, unplanned shocks can leave businesses facing uncertainty, scrambling to secure critical transportation capacity and inventory.
Freight networks are struggling to find enough capacity to go around, which causes backups, delays, extended wait times, and in some cases, rejection of cargo. Just turn on the news and you’ll see that the US container shipping network is backed up, bottlenecked, and maxed out. The imbalance starts at ports and ripples through entire logistics networks. To keep up with demand and avoid being slowed down by port backups, companies are shifting goods that would normally be shipped in containers onto trucks, increasing freight demand exponentially.
What about parcel? LTL is not the only mode facing overwhelming demand. With parcel moving more business-to-consumer goods, business-to-business freight is getting pushed back to LTL. But LTL carriers are not waiting with excess capacity to pick up the slack.
Instead, faced with overwhelming demand, LTL carriers are forced to be selective when choosing what orders to fulfill. Similar to railroads metering intermodal freight last fall and parcel companies implementing higher rates and placing increasingly tighter constraints on which packages they will receive and ship, LTL carriers are taking action, too. They continue to be aggressive with pricing, opting to reject what they perceive to be inefficient freight and levying hefty accessorial charges that go beyond normal pick-up and delivery requirements.
Manufacturers need raw materials and components to make their goods. Just-in-time approaches have guided them to keep inventories lean and hold minimal excess stock in order to maximize efficiency. Even in calmer times, inventory availability can be disrupted due to flawed forecasting, unreliable suppliers that deliver shipments late, shelf-life limitations, product loss, and damage during delivery. But add unprecedented disruption from pandemic shutdowns and other recent shocks, and major manufacturers have had to slash production due to insufficient inventory.
While manufacturers are experiencing the pain of limited production, trading just-in-time strategies for piles of excess inventory is not an option. Profit margins that are often less than 10 cents on the dollar mean manufacturers cannot afford to abandon the just-in-time philosophy’s extreme cost-consciousness. Not only must businesses take steps to secure supply in a challenging market, they must also do so within strict financial guidelines.
Redundancy, Diversification, and Optionality
Redundancy, diversification, and optionality are key principles that can equip businesses to navigate transportation and inventory risks.
For transportation management, redundancy means building a roster of multiple carriers for LTL, truckload, and parcel, while diversification means equipping yourself with the ability to switch between modes and customize shipping cadence. For inventory management, redundancy comes from securing multiple suppliers across multiple geographies for the same materials, and diversification means adding greater variety in sourcing and management options, including both in-house and outsourced approaches. Together, redundancy and diversification give businesses optionality – the ability to adjust and pivot to different options to keep business moving in the face of changing circumstances.
Adapting to Capacity Challenges and Record Pricing
In practice, optionality in transportation management can help control costs and maintain business continuity in the face of capacity constraints. Having a strong lineup of carriers across modes can enable shippers to quickly pivot to another carrier and maintain business continuity in the event a load gets rejected – which can happen on very short notice. To find relief from growing LTL rates, shippers can work with their customers to adjust shipping mode and cadence, such as consolidating several LTL deliveries per week into a single weekly truckload shipment.
Contract negotiations are another important tool for managing exposure to high costs. Rates have been driven steadily upward over the past year and a half, but with some reports indicating softening freight demand, consider shortening transportation spend cycles. Rather than a year, going for a three- or six-month duration can avoid locking in a high rate for an extended period and allow shippers to take advantage of more favorable market conditions.
Securing Inventory Supply
Rethinking inventory sourcing and management with a 4PL can help strike the balance of maintaining critical supplies without overwhelming balance sheets with higher costs. Thin margins can make carrying high levels of safety stock prohibitively expensive for some businesses, but a 4PL can take control and financial ownership of inventory while in transit and storage. Financial ownership is key, because the shipper secures access to safety stock, but avoids the burden of excess stock on their balance sheet. The 4PL provider holds stock at a low interest rate in a strategically located warehouse, then releases it once inventory is required for availability that matches production needs.
This type of approach is meant to address issues with suppliers that have long lead times or who are unable to deliver reliably to a just-in-time production model. But not all inventory is a good fit. Something with a limited shelf life, such as fresh produce, or that frequently changes, like seasonal clothing, would not be the right type of inventory for a 4PL program. However, items that do not frequently and fill a lasting need – like semiconductors, fasteners, or other components in the automotive industry – are well-suited for outsourced inventory management through a 4PL.
Shift Away from Zero-Sum Thinking
A common label that shippers aspire to is to be a “shipper of choice.” A major step shippers can take to deliver on that promise is to address internal inefficiencies before they become external issues that their trading partners must also work to resolve.
For example, if a shipper’s WMS inventory list has errors, that can then result in erroneous bills of lading. While the WMS might say products weigh 700 pounds, the carrier’s scale may prove otherwise, leading to administrative back-and-forth to fix the error and creating unnecessary friction between shipper and carrier.
In a market of myriad shocks, disruptions, and tight capacity, shippers must do what they can to be reliable and efficient consumers of transportation services. As a shipper, work with — not against — your carrier.
Andy Dyer is President, Transportation Management, AFS.
This article originally appeared in the July/August, 2022 issue of PARCEL.