May 2017 Comments and Letters
Freight policy must keep up with the times | Near sourcing isn’t a trend; it’s a strategy
Freight policy must keep up with the times
Over the last century, the logistics industry has seen its share of progress.
While the technology in today’s warehouses might seem like science fiction to some, there was a time when automation and forklifts were not a reality. During these early days, warehouse employees had to carry goods in hundred-pound sacks from the rail yard and assemble the pallets by hand.
Fast forward to 2017. While times may have changed since the advent of the Internet, the importance of this industry has not and its role remains the same—to support a well-designed supply chain by operating at the highest level of efficiency in today’s domestic and global markets.
Today, companies across the logistics industry are experts in securing maximum efficiencies in sourcing raw materials, designing supply chains, and managing distribution systems. To maintain American economic competitiveness, third-party warehouses rely on advanced technology to ensure efficiency.
Our industry would be rightly criticized if we still relied on decades-old technology or distribution methods, so why should Americans be content with 25-year-old freight transportation policy?
A modern transportation system has the power to supercharge the economy by fostering the more efficient flow of goods from manufacturers to warehouses, and IWLA is urging Congress to facilitate the creation of a system that better aligns the design of the nation’s infrastructure with the demands of today’s economy.
It’s no secret our infrastructure suffers from a chronic lack of funding. State and local spending on infrastructure dropped from 3 percent of GDP in 1960 to less than 2 percent in 2014, while GDP grew exponentially.
Years of congressional inaction has created a network of failing roads and bridges that greatly reduces our ability to service the modern consumer. Inefficient routing, congested traffic patterns, and other issues cause massive delays, which increase transportation costs that are eventually passed on to consumers.
The private sector continues to make investments in new technologies, including upgraded fleets and more, to unlock efficiencies in our transportation system. We need the same forward-looking effort from our federal and state government partners.
Many emerging technologies, such as the innovations behind vehicle-to-infrastructure communication systems, should be supported by state and federal policies. Once implemented, these advanced transportation systems promise incredible improvements to road safety, efficiency, and travel times thanks to reduced congestion.
It is crucial that policymakers support cutting edge innovation, rather than hinder these efforts with unnecessary red tape and over-regulation of the marketplace.
Twin 33s represent another source of untapped efficiency. The deployment of this trailer configuration would allow carriers to accommodate the rising number of lightweight, consumer-oriented, shipments without violating federal weight limits. Currently operating in 20 states, when used nationally, twin 33s would decrease the number of unnecessary trips by providing adequate truck space to accommodate the modern consumer’s purchasing habits and ultimately decrease the number of trucks on the road. Fewer trucks means fewer bottlenecks and increased efficiency across the system.
We cannot continue to ignore the institutional inefficiencies of our national freight transportation network. The logistics industry, their customers, and consumers refuse to sit idly while the nation’s economic growth is stifled. It’s time for freight policy to enter the 21st century.
Steve W. DeHaan
President and CEO, IWLA
Des Plaines, Ill.
Near sourcing isn’t a trend; it’s a strategy
Near sourcing, in-sourcing, and regional sourcing all mean the same thing: moving a business’ operations closer to where the end products are sold. Many refer to this practice as a trend, or a general change in direction.
But the term “trend” downplays the sincerity and thought behind this shift. Near-sourcing isn’t a trend, it’s part of an overall plan of action designed to streamline production and spur growth. In other words, it’s a strategy, and one that many supply chains have been taking a second glance at lately.
One reason for the growing popularity of this strategy is that near-sourcing creates a static spend line. Inventory carrying costs for a company that sources globally can be very high. Global sourcing requires companies to retain a certain amount of safety stock, 10-30 days available at all times, for example, in case of unpredictable disruptions in its supply chain. This adds to the cost of manufacturing and runs counter to the goal of shrinking product cycles.
In addition, near sourcing allows companies to manage how long they own a product before selling it. There was a time when prices overseas were so low that the total landed cost equation (including shipping and customs) made more sense. But now, CFOs are focused on managing spending patterns and leveling out their overall spend to smooth out the peaks and valleys. Near-sourcing shortens the supply chain, creating a more predictable, autonomous financial management system.
And we can’t underestimate just how much the “Amazon Effect” has changed the supply chain game. Amazon has made demand for consumer products immediate. Their shipping model has pushed traditional retailers to shrink their own supply chains in response to a growing “need it now” mentality.
Placing manufacturing closer to the customer base makes it easier to communicate and manage changes in the supply chain. It brings an added element of flexibility, allowing suppliers to “roll with punches” and adjust production schedules quickly and easily to meet the ever-changing demands of their customers.
All of this has contributed to a rapid closing of the gap between regional and global sourcing.
While everyone used to consider China “low-cost central,” that’s simply not the case anymore. The rapid expansion of China’s middle class has put them in a much stronger position to negotiate. Labor costs are going up in China, but U.S. manufacturing wages haven’t increased in 10 years. In fact, Chinese wages are expected to reach parity with the U.S. minimum wage this year.
Even those companies that have chosen to remain in Asia are moving out of China and into places like Vietnam. But more often than not, near-sourcing price per unit costs are prevailing over the old global model.
A shaky shipping market is only adding fuel to the near-sourcing fire.
In order to increase container freight rates and remain viable, carriers have been consolidating left and right through mergers and vessel sharing alliances, meaning that the already unpredictable schedules and rates have become increasingly more volatile.
Last-minute changes that force BCOs to make last-minute decisions have put everyone on edge, pushing companies to at least test the waters of near sourcing, if only to reduce their reliance on ocean carriers.
And make no mistake, the United States’ tough talk on tariffs sends a message.
Ongoing discussion surrounding a possible increase in tariffs on nations deemed to have an unfair advantage (e.g. China and Mexico) and U.S. companies that send jobs overseas represents more of a refocused perspective than an actual bite. As is the case with any negotiator, that perspective is often the most important factor in the outcome of the talks. Regardless of individual commodity tariffs becoming a reality, the message itself rings loud and clear: ignore the potential benefits of near sourcing at your own peril.
With that total cost of importing non-commodity products from Asia coming in line with what can be achieved in the U.S. or Mexico, near-sourcing keeps looking better and better, especially when customer expectations and cash impacts are added to the equation. But the choice to adopt a near sourcing strategy should not be taken lightly. It requires a close analysis of global vs. regional cost elements such as fuel, labor, and materials, a knack for market prediction, and, as always, a bit of luck.
President, TOC Logistics International