Riding the Wave of Globalization

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Barbara Christopher
Industrial and Systems Engineering
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Globalization is, without question, the single biggest influence on supply chains today. The effect of this trend on the transportation industry and supply chain management is shaping the way businesses address inventory and manufacturing processes.

International trade volumes are growing at an accelerating rate, roughly doubling every ten years from about $2 trillion in 1983, to $4 trillion in 1993, to nearly $8 trillion today. And international trade has grown faster than the global economy in all but one year (2001) over the past decade. Not only are we involved in more global trade, global trade is more of what we do. It constitutes a large and growing piece of the global economic pie. This growth has been overwhelmingly in the area of industrial goods. While trade in agricultural products has increased less than five-fold in the past 50 years, trade in industrial goods is up nearly 50-fold over the same period. Not surprisingly, one driving force behind this growth is industrial expansion in Asia - specifically in China.

What may be surprising is that although international trade is up, much of the movement of goods is intra-corporate. Roughly 40% of all U.S. imports are goods that companies bring in from their own overseas subsidiaries. One reason for this trend is that retail giants such as Home Depot and Wal-Mart are sourcing goods directly from international markets rather than relying on middlemen. From 2002 to 2003, Wal-Mart doubled the percentage of goods that it sources directly, from about 8% to 16% - an increase of between $15 and $16 billion in a single year! In addition, companies continue to move labor-intensive manufacturing to lower-wage markets, adding to the rise in intra-company imports.

Ocean container traffic is carrying the bulk of this trade increase. TEUs have increased from about 157 million in 1996 to nearly 200 million in 2002. But ocean borne trade is not the only place feeling the strain. Air cargo trade volumes are doubling nearly every ten years. And it's clear that some big players believe this trend in air transport will accelerate. UPS has agreed to purchase ten Airbus A-380 freighters - each with a capacity of 150 tons of freight - for delivery in 2009, with an option to purchase ten more.

The consequences of this growth are far-reaching, starting with the transportation industry and the infrastructure that supports it, with fallout all the way through the supply chain.

The first to feel the pain have been the cargo ports and airports that deal with increased traffic. Congestion, delays and strained capacity are commonplace today, and they are exacerbated by three imbalances. The most obvious disparity is between the high volume of goods moving from Asia to the West, versus goods moving in the other direction. This trade imbalance causes a serious backup in North American and European points of entry. At LA and Long Beach, for example, approximately three container loads are imported for every one load exported, leaving two containers to store or ship back empty. Since most U.S. and European ports are in heavily developed areas, storage space is limited - and expensive. So is the capacity consumed repositioning empties. It's estimated that industry spends $11 billion annually just moving empty containers.

The other two imbalances contributing to port congestion relate to investments (or lack of investments) in the transportation infrastructure. The transport industry in Asia is investing in cargo port and airport expansion at a much greater rate than in Europe and North America. This allows more goods to move out of Asia with greater efficiency. But the ports of entry in Europe and North America are not equipped to handle this increased traffic, so they are more clogged than ever.

Why the U.S. and Europe have not kept pace is due, in part, to the location of these ports. Because they are surrounded by development, expansion is extremely costly. Still, the same can be said of Hong Kong. Subtler reasons may include a greater concern about the environmental impact of expansion and recognition of the importance of global trade to economic growth and competitiveness.

Another factor contributing to port backups is the increasingly large size of transport vessels. To take advantage of growth in trade, steamships lines have been investing in larger vessels that can transport more goods in each crossing. Not only do these larger vessels take longer to load and unload, because of their size they can call on just a limited number of large, deepwater ports - the same ports that are already groaning under the strain.

The time vessels spend waiting at port is time not spent moving goods. According to a DHL-sponsored survey in the December 3, 2004 issue of Logistics Management, nearly half of all shippers say their goods experience delays of eight days or more at West Coast ports on transits that can be as short as eleven days. This increases a roundtrip Pacific crossing from between 25 and 30 days to between 30 and 40 days. And that reduces the number of roundtrips that a vessel can make each year by 25 - 30%.

Port congestion is just the starting point for delays. The roads and railways that carry goods to and from the ports are choked with traffic, and in the densely populated areas around many European ports, L.A., Chicago, and the Northeastern seaboard, there simply is no room to build more roads.

In short, the transportation infrastructure in the West has not kept up with the demands created by the growth of international trade. This has not only made transportation more costly, it's also made lead times longer and - even more problematic - less reliable.

In response, some shippers choose to bypass the traditional "land bridge" across the U.S. to reach East Coast customers (i.e., unloading at West Coast ports and using rail or truck connections to cross the continent) and move their goods to the East Coast via the all-water route through the Panama Canal to New York, Savannah and Charleston. Others are opting to unload in smaller, less frequented ports. But these two approaches fly in the face of the trend among shipping lines to invest in large vessels that cannot pass through the Panama Canal, and can only unload in deepwater ports. Switching to airfreight is another possibility. But that's an expensive proposition, and airfreight facilities in the West are becoming just as congested as coastal ports. Still another option is to shift sourcing closer to home.

Whatever the strategy, many shippers have realized that longer, less reliable lead times mean more inventory and more premium freight for expedited shipments. Following the 2002 West Coast lockout in the ports of Los Angeles and Long Beach, Wal-Mart, for example, reversed a long trend of decreasing its days of inventory. While the increase may seem small - less than two additional days of inventory, it represents a significant $850 million investment in protection against unreliable lead times. And if Wal-Mart is forced to take such measures, imagine the impacts on shippers with less clout.

Using alternative ports and increasing inventories are two examples of operational responses to the challenges created by port congestion. Since the problem shows little sign of abating, shippers must focus their efforts, and their investments, to reduce the impact of this problem over the longer term. The two areas where most shippers are focusing their efforts are forecasting and supply chain visibility.

Experience has shown that companies engaged in ocean borne shipping of goods with any appreciable demand volatility face forecasting errors in the range of 70 to 80%. And those poor forecasts are the scapegoat for all the excess inventories, stock outs and premium freight charges. But they simply don't deserve the blame.

We had the unusually good fortune to work with one company's history of orders and rolling forecasts. Using this information, we were able to artificially improve the forecast accuracy and evaluate its impact on inventory and premium freight. Our simulations showed that even significant improvements in forecast accuracy yielded only small improvements in inventory and expediting costs. In fact, our studies indicated that cutting the forecast errors in half from over 70% to about 35% reduced inventory and expediting costs by only 10%. The reason? Inaccurate forecasting is just one factor contributing to the problem. The other culprit is lead-time variability. Accurate demand forecasts can tell you how much you'll need, but if lead times are unreliable you are still left with the question of when to ship it so that it will arrive when you need it.

If improving forecast accuracy and supply chain visibility won't produce the kinds of improvements we're looking for, what will? The first answer is to increase the frequency of shipments. It's a tactic that has served Toyota well. They bring parts into their plants more than once an hour. Because of this frequency, shipments are smaller so plant inventory is lower. Perhaps even more important is that frequent shipments reduce the risk associated with unreliable lead times. Every truck carries lots of different part numbers, but only a small number of each part. If one shipment is delayed, they know that next is not far behind - and that all the different parts they may need will be there. Using this strategy, Toyota is able to maintain a high degree of protection against unreliable lead times with a lower level of inventory and fewer expedited shipments. Toyota is already recognized for launching several revolutions in quality and manufacturing and it may not be long until other companies follow their supply strategy as well.

One final trend bears watching: As a result of the tight capacity and congestion in ports today carriers are in a strong negotiating position. They are able to charge customers higher rates, but how they choose to invest the profits they are generating can make or break these companies in the future. The temptation is to invest in more and larger ships in order to cash in on the high demand. But that is a dangerous strategy. When global trade slows - as it inevitably will - even a small drop in traffic at the big ports will translate into a big reduction in congestion and wait times. And that will lead to an equally big increase in vessel capacity at the very moment that demand is shrinking. When demand and profits are high, the smart money should go to investments that increase reliability over those that simply increase capacity - especially if that capacity is not the bottleneck.

The transportation industry is feeling the greatest impact from the growth and imbalances in international trade today. But the fallout of the problem is felt at every level of international business. Developing effective strategies to address this growth - from shipping investments to inventory management - can make the difference between riding the wave of globalization and feeling it crashing down on top of you.

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H. Milton Stewart School of Industrial and Systems Engineering (ISYE)

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  • Created By: Barbara Christopher
  • Workflow Status: Published
  • Created On: Mar 31, 2005 - 8:00pm
  • Last Updated: Oct 7, 2016 - 11:06pm