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Commentary: The five miles of uncertainty

American shippers need to look at their supply chains through the lens of the five-mile framework and plan for different scenarios during these uncertain times in the economy and trade.

Editor’s note: The opinions expressed in this commentary are those of Walter Kemmsies and not American Shipper or FreightWaves.

There is no such thing as an average day in the logistics industry. Logistics managers are specialists at managing the so-called “known unknowns,” such as weather events that force cargo reroutes or supply and quality control issues that require sourcing new manufacturers. However, it’s the ‘unknown unknowns’ that now keep logistics managers up at night. The factors they can’t control — trade agreements, changes in fuel requirements for ships and labor shortages — are disrupting the industry.

Logistics managers who succeed will adopt a “dynamic” supply chain strategy — one in which they can minimize the impact of these “unknown unknowns.” They will develop a framework similar to the “five miles of uncertainty,” which is described here at a high level to help anticipate potential threats across their entire supply chains and adjust their strategies accordingly.

Why focus on five miles and not just the first and last? U.S. supply chain infrastructure is predicated on imports, meaning shippers’ transportation costs typically include both head-haul and back-haul routes. In a nutshell, this means service providers’ return trip costs for importers are baked into current transportation and delivery rates.

Mile zero: What’s the optimal sourcing strategy? Both international and domestic sourcing strategies involve trade-offs. Given that half of U.S. goods are currently imported from China, uncertainty around trade agreements is creating a significant impact. Logistics managers fear a potential increase in costs to the bottom line due to tariffs if the U.S. and China cannot come to an agreement. U.S. exporters are also feeling the pain as China retaliates and turns to competitors like Brazil to purchase agricultural goods.

There are other risks to international sourcing of imports. The International Maritime Organization (IMO), which sets rules for seagoing vessels globally, has mandated a reduction in fuel emissions, specifically sulfur content. Starting Jan. 1, ocean vessels will be required to use low-sulfur fuel (0.5% sulfur content). Low-sulfur fuel currently costs 35% to 40% more than high-sulfur fuel (3.5% content). With the mandate going into effect, demand for the higher-quality fuel will likely drive this cost up significantly. Given the thin profit margins of ocean carriers, shippers are likely to bear the burden of the higher cost to move freight. Some may decide to source domestically and stop importing.

For importers, reshoring to the U.S. isn’t necessarily the solution. It would entail a massive overhaul of current operations and supply chains, leading to higher prices and fewer choices for American consumers. Depending on the product, importers are increasingly looking to other countries, such as Mexico and Vietnam, to manage the risk associated with uncertain trade policies. Furniture companies, for example, realize that it is cheaper for Mexican manufacturing operations to import wood from the U.S. than it is for Chinese manufacturers. With a similar cost of labor between Mexico and China and lower transportation costs to and from Mexico, some of these companies have started to shift their sourcing to Mexico.

Overall, to manage sourcing risk effectively, it may be necessary to diversify geographically.

Mile one: Which port gateways are affordable, fastest and the most reliable? What are shippers’ options for moving products through the freight movement network of highways and railways? For importers of low-value goods, such as toys and clothing, ocean transport is the most cost-effective mode. However, many U.S. seaports are extremely congested and delays can cost shippers thousands of dollars per day. And you don’t ascertain the best seaport to move goods through by simply looking at a snapshot of TEU volumes. While shippers will by default prefer seaports based on proximity to the goods’ origin, other considerations include:

· Seaport capacity to handle increasing cargo volumes.

· Availability and cost of industrial warehouse space — and corresponding labor talent — to process incoming cargo.

· Availability of transportation modes near the seaport to move product to the final destination.

· And the total costs and time to destination associated with each seaport.

A strong economy means that all inputs — from raw goods to labor — are more expensive, so all scenarios must be analyzed.

Middle miles (miles two and three): How to develop a balanced and integrated intermodal strategy? Intermodal facilities are a cost-effective and reliable solution for the long-haul movement of goods, especially as rising fuel costs and a driver shortage continue to plague the trucking industry. This is a second-mile decision. When determining optimal domestic transportation routes, shippers should not only analyze the total costs of truck versus rail but also look at reliability — the infrastructure supporting connections from seaports to inland ports in major cities.

Value-added inland hubs, such as Atlanta, Chicago, Dallas and Kansas City, benefit from direct express rail service from major U.S. seaports. Nonstop “unit trains” typically have fewer delays for the end user since containers may only be handled or “touched” two or three times before arriving at the cargo owner’s loading dock. The inland port markets of Atlanta, Chicago and Dallas have benefited significantly from their freight transportation connections and have seen warehouse inventory growth between 3 and 12% over the past five years. New inland port developments on the horizon include Chatsworth, Ga.; Salt Lake City; Denver and Reno, Nev.

The use of intermodal can create access to additional urban areas where labor and industrial real estate is more available at desired cost levels. This is a third-mile decision.

Supply chain managers need to consider expanding their use of intermodal in their distribution network strategies.

Last mile (mile four): How do you maintain share of increasingly fragmented consumers? Whether customers are rural, urban or suburban, they expect goods purchased online to arrive at their doorsteps within one or two days of placing an order. In crowded urban areas, traffic and congestion make these delivery commitments particularly tricky. Shippers have turned to Europe for innovative approaches to last-mile deliveries. For example, European delivery companies are experimenting with dropping purchased goods right into the trunk of customers’ cars while parked at work.

Obviously, the convenience of last-mile industrial space comes at a premium, so shippers need to factor real estate costs into their final location decisions. Retailers also shouldn’t take a “one-size-fits-all” approach when it comes to their last-mile strategy. Specifically, a demographic analysis in each market should drive the identification of optimal last-mile facilities, and this will vary according to each city’s urban and suburban profile.

Next mile (mile five): What about returns and exports? Receiving and processing returned goods profitably remain conundrums for shippers, and the optimal “reverse supply chain” is still a work in progress. In fact, some retailers tell customers to keep or throw out the flawed product because it’s simply too expensive to transport and restock returns. Similarly, the U.S. export infrastructure is woefully outdated. In theory, exporters should be able to use the back haul of the supply chain to send goods back to ports for exporting. The reality is that the imports’ destination and the exports’ origin rarely match.

As the U.S. begins to develop export infrastructure, the hope is that importers will one day only pay for the head haul, and exporters will pay for the back haul as they send their goods on return transportation. Inland ports in locations like Kansas City and Chatsworth, mentioned above, may help with this problem. The urgent need for export infrastructure is only going to grow as a burgeoning global middle class demands premium goods from the U.S.

While technology — from warehouse automation to self-driving trucks — has the potential to radically improve the efficiency of supply chains, full adoption is still years away. Therefore, shippers need to look at their supply chains through the lens of the “five-mile” framework and plan for different scenarios in what remains a very uncertain economic and trade environment.

Walter Kemmsies is the managing director in JLL’s Port Advisory Group. He may be reached by email at [email protected]