Print this article | Return to Article | Return to CFO.com
Infrastructure woes aren't just a Third-World problem, they also pose a major "last-mile" headache for American businesses from coast to coast.
John Goff, CFO Magazine
September 1, 2006
Editor's Note (August 2, 2007): In the wake of yesterday's tragic collapse of the I-35W bridge in Minneapolis, CFO.com has decided to republish John Goff's article, which less than one year ago warned of increasingly serious problems with the nation's crumbling transport system.
June 2005. Things were starting to heat up. A wave of scorching, humid weather had settled over the Midwest. During one particularly oppressive stretch, temperatures in Chicago topped 90 degrees for eight straight days — an early summer blaze not seen in more than 50 years.
Tempers were flaring as well. Notably, executives at electric utilities in America's heartland were hopping mad at rail-cargo operators after a series of derailments in Wyoming's coal-rich Powder River Basin, combined with track-maintenance problems, triggered delays all down the line. Soon, power-plant stockpiles had dropped to dangerous levels. Some nonregulated power producers, many of which had embraced just-in-time (JIT) inventory concepts, had to ship in coal from Central America or buy natural gas on spot markets — costly alternatives. "They took chances with their safety stock," recalls Rick Navarre, CFO at coal company Peabody Energy, which operates three huge mines in the Powder River Basin: "I think they've changed their view now."
A lot of supply-chain managers have changed their view about safety stock. JIT manufacturing may be standard operating procedure among U.S. businesses, but the approach requires finely tuned, well-synchronized supply chains. And while managers have long worried about transportation snafus in less-developed countries, they're growing increasingly concerned about bottlenecks closer to home — on American highways, in rail yards, and at deepwater ports, the so-called "last mile" of the supply chain.
It's hard to assess the extent of the problem. Few executives are eager to talk about missed shipments. (Motorola, Best Buy, and Dell all declined interviews.) Moreover, finance departments typically do a poor job of calculating the hit to earnings from botched consignments. But in announcing a new infrastructure initiative in May, then-Secretary of Transportation Norman Mineta estimated that freight bottlenecks and delayed deliveries cost U.S. businesses $200 billion a year. Says AMR Research senior vice president of strategic research Kevin O' Marah: "Financial calculations go out the window if your goods are floating off the coast of California while your promo is being rolled out in stores."
The shipping news isn't likely to get much better, either. America's 50-year-old interstate highway system is in desperate need of repair. Plans for new port facilities are few and far between. Rail lines require double-tracking. And nobody seems to want to drive a truck anymore.
At the same time, U.S. businesses are sourcing more from Asia and Europe. All told, the World Shipping Council reckons cargo movement in the United States (both domestic and international) will increase by roughly 60 percent between now and 2020. And logistics experts predict that the mounting tide of cargo may overwhelm the nation's aging transportation network. If so, the last mile could become one gnarly stretch. "It's a tightly strung system," warns O'Marah. "A minor bump along the way can turn into a major problem."
|A Matter of Necessity
Top reasons why companies embark on supply-chain risk-management initiatives.*
|Reduced commodity and material cost volatility|
|Reliability/continuity of supply|
|Overall supply-network cost|
|*Companies with annual revenues of at least $15 billion
Source: AMR Research
These days, just getting a load on the road is an accomplishment. A wave of mergers and acquisitions in the trucking industry — including YRC Worldwide's $1.5 billion purchase of USF Corp. last year — has left customers with only a handful of national carriers to consider. "Over the past three years, demand has clearly outstripped supply," notes Tim Coats, vice president, supply-chain logistics, strategy and grain, at General Mills. "Many companies have been caught short."
Given the capacity constraints, trucking operators have become very choosy about the routes and customers they will service. Some operators have shut down marginally profitable routes or lines that no longer fit with their strategic goals. Last year, for example, YRC shuttered USF Dugan, a line it acquired when it purchased USF a few months earlier. USF had itself shut down Red Star, a Northeast-based carrier, following a union strike in 2004.
Most truck firms have also negotiated rate increases with customers. The rise in diesel-fuel prices has not slowed their momentum, either. Many have simply passed the costs on to customers in the form of fuel surcharges — a telling sign of the carriers' newfound leverage. "The situation has completely shifted," says Beth Enslow, supply-chain service director at the Aberdeen Group consultancy. "Manufacturers and distributors used to have the upper hand in setting prices."
Now carriers have the advantage, a situation that is not likely to change anytime soon. The volume of domestic truck freight will likely top 15 million tons in about three years (a nearly 50 percent increase from 1998), says the Department of Transportation (DoT). If that happens, competition to secure cargo containers could become downright fierce, particularly during the peak holiday shipping season from August to October. "It's definitely become a seller's market," says Tom Giovingo, executive vice president at third-party logistics provider Fidelitone.
To lock in cargo capacity, some businesses have started to strengthen their ties to national carriers. At General Mills, for example, the cereal maker's management has identified the company's busiest delivery routes (called lanes). On arteries where the volume is consistently high, the company attempts to negotiate dedicated service from cargo haulers. "We want trucks on those lanes available to General Mills 100 percent," says Coats, who points to lanes between Cedar Rapids, Iowa, and Palmyra, Pennsylvania, and from Buffalo to Chattanooga as particularly crucial.
Other businesses have started sharing sales data with carriers. The idea? To line up trucks as early as possible. Procter & Gamble not only discloses figures for actual customer demand, but also short-term forecasts for expected demand. Joe Duckworth, North American physical distribution purchasing group manager for the consumer-goods giant, adds that the company is also looking at providing longer-term forecasts to its carriers.
Carriers, too, have concocted some inventive ways to speed up delivery. Some have begun to embrace team driving — that is, hiring two drivers to operate a single rig. The approach can cut delivery time from five days to two.
Still, truck operators have to be careful not to go too far. In 2005, concerns about the growing number of truck-related accidents led the Federal Motor Carrier Safety Administration to alter rules governing shift lengths. Those changes have improved safety but hampered delivery. Notes Duckworth: "The hours-of-service legislation has affected the productivity of drivers."
When you can find drivers, that is. With trucking companies doggedly holding down wages, many younger drivers have opted out. Currently, the average age of a truck driver in the United States is 52. It's not overly surprising, then, that the American Trucking Association believes there will be a shortfall of 100,000 drivers in five years. If the economy rebounds — particularly the construction industry — the shortage could get even worse, predicts C. John Langley, professor of supply-chain management at the Georgia Institute of Technology. "When the economy is good," explains Langley, "it's tough to interest people in becoming truck drivers."
2005 report card for America's infrastructure
|Source: American Society of Civil Engineers|
Slow Boat from China
It's understandable. Driving a truck involves a lot of time spent far from home. It also involves a lot of time spent going nowhere. A study found that truck drivers in the United States lost more than 234 million hours in 2004 to road delays and bottlenecks. Not surprisingly, DoT officials have targeted roadway congestion in their strategic initiative. Among other things, the blueprint calls for large-scale deployment of operational technologies to ease traffic jams. It also champions tolls to discourage peak-hour driving.
Backers say such schemes can extract much-needed capacity from existing networks. Critics say the directive relies too heavily on private funding for capital improvements. Similar complaints were leveled at last year's congressional transportation bill, which authorized $286 billion in infrastructure spending through 2010. "When you take inflation into account, [the appropriation] in the new transportation bill is not that much money," says Ali Maher, chair of the civil and environmental engineering department at Rutgers University. "It will barely pay for maintaining and upgrading existing systems."
One place to start, though, might be the intermodal arteries near major ports. Stifling traffic jams around those routes — called choke points — often prevent goods from even leaving docked vessels.
The problem was overscored in 2004, when ship traffic got backed up at the Port of Long Beach, which handles 37 percent of the cargo coming from Asia. The delays, fueled mostly by a shortage of dockworkers, eventually pushed deliveries back by a week or more during the critical holiday shipping season. To help alleviate the traffic, major carriers imposed a congestion surcharge of $200 per 20-foot container.
Singed by the experience, some supply-chain managers have looked to hedge their bets. Giovingo reports that some Fidelitone clients now bring goods through several different West Coast ports, including Oakland, Seattle, and Long Beach.
Some businesses have gone farther north. Pete Riley, senior vice president of integrated supply chain and Six Sigma at Textron, says the Providence-based maker of Cessna airplanes and Bell helicopters ships a fair amount of its products through Vancouver. "That's helped us manage through the ports issue," says Riley, though he acknowledges that "ports are [still] strained."
Indeed, Aberdeen's Enslow says early data suggests that port delays may once again dog this year's holiday shipping season. To avoid congestion on the West Coast, a large number of businesses now route some of their goods from China through East Coast ports like Savannah and Virginia Beach.
The strategy makes sense on paper — until you look at a map. Ships bound for Savannah from Shanghai, for instance, must pass through the Suez or Panama canal, a journey that takes substantially longer than a trans-Pacific trip. The extra mileage means added uncertainty for supply-chain managers. "It requires carrying a little more inventory closer to home," says Georgia Tech's Langley. "And that defeats the purpose of a JIT plant."
Another complication: newer, larger cargo ships can't get through the Panama Canal. While the ships can hold 8,000 cargo containers or more, these behemoths are simply too large for a canal that was built to accommodate vessels from the Gilded Age. Greg Aimi, director of supply-chain research at AMR, says the ships are also too large for many of the channels on the East Coast. "It could take up to five years to remedy the problem."
Featherbeds and Nest Eggs
It will take much longer to fix the railroads. Although two train operators are investing $200 million to double, triple, and quadruple track lines in the Powder River Basin, more rail must be laid nationally. Likewise, signals and switches on some Western lines are more than 100 years old. A proposed 25 percent tax credit would help spur some investment. But, at the moment, the U.S. rail system is in such bad shape that the American Society of Civil Engineers gives the network a C- grade. Says P&G's Duckworth: "Consistency and reliability of rail service is a challenge."
The speed isn't so hot, either. It takes 10 days for a freight car to go cross-country. Tractor-trailers make the trip in 4 days. "Moving goods by train is a slow process," notes Aimi, "because cargo is moved rail yard to rail yard."
Labor featherbedding only serves to slow the works. Union rules dictate what hours rail hands can work, and generally prohibit overnight loading/unloading of trains. Moreover, the generous Railroad Workers pension plan has seen large numbers of train workers retire of late, leaving some railroads shorthanded.
To cope with the problem, Peabody Energy hired third-party facilitators to load and unload coal trains, which often comprise 140 cars and stretch out over a mile in length. And while CFO Navarre says rail service has improved this year, the company is looking at the possibility of BTU conversion — that is, turning coal into a diesel-like substance, then shipping it via pipeline. Peabody is also currently building two mine-mouth operations. As the phrase implies, such mining facilities are built in tandem with adjacent power plants. And the transportation system that will get the coal to the generators?
Conveyor belts. Says Navarre, in typical CFO understatement: "It takes the risk and the cost out of shipping."
John Goff is technology editor at CFO.
Straight to the Source
In the complaint department, there is no middle man — at least when it comes to delayed shipments.
In a bid to ditch noncore competencies, many companies sold off their truck fleets years ago. Instead, to guarantee overland shipping, many rely on trucking companies such as JB Hunt and YRC, or third-party logistics providers. But the use of outside shippers does not insulate the original manufacturer from liability. When there's a missed shipment, for example, retailers such as Wal-Mart and Home Depot don't generally go to cargo carriers to gripe — they go straight to the source. "Service providers have some risk," notes one supply-chain analyst. "But ultimately, companies have the risk of getting products to stores in time."
You don't have to tell that to Leif Holm-Andersen. The director of transportation at Arrow Electronics, Holm-Andersen deals with a number of third-party logistics and trucking companies. Those outsourcers move thousands of transactions a day for Arrow, which supplies components and computer products to manufacturers and commercial customers. Given the massive volume handled by outsourcers, Holm-Andersen says he's not surprised that problems arise. Still, he acknowledges that when troubles occur, all roads lead to Rome. "It could be a warehouse issue. It could be a transportation issue. But I become the complaint department."
Interestingly, some observers have suggested that companies design financial instruments to help parse delivery risks. One suggestion: a tiered pricing system. Under that setup, a shipper would reserve a percentage of its overland truck capacity in exchange for higher rates (based on advance notice from clients). But the recent spate of mergers in the industry has left some carriers scrambling to integrate their systems. Moreover, some industry watchers have real doubts whether a typical trucking operator has the IT chops to run a commodity-trading operation. "Carriers can barely send you an accurate bill," says AMR Research senior vice president Kevin O'Marah. "And you want them to set up sophisticated financial instruments?" — J.G.
The worst highway bottlenecks for trucks (2004)
|1. I-90 @ 1-290, Buffalo-Niagara Falls|
|2. I-285 @ I-85, Atlanta|
|3. I-17; I-10 Interchange, Phoenix|
|4. I-90/-94 @ I-290 Interchange, Chicago-Northwestern, IN|
|5. San Bernardino Freeway, Los Angeles|
|Source: Federal Highway Administration|