When it comes to capacity constraints, the year of the rooster is shaping up to be the same as the year of the monkey: tight. According to Adrian Gonzalez, director of the Logistics Executive Council at ARC Advisory Group, Boston, shippers will need to reevaluate their transportation strategies and perhaps redesign their supply-chain networks as demand is outstripping supply for transportation services both nationally and globally.

"Transportation managers are between a rock and a hard place. Rates are going up, service levels are becoming more demanding, and there is no silver bullet that resolves these challenges," he says.

Last year's annual State of Logistics report, compiled by Rosalyn Wilson, found companies paying more money for the same services-and sometimes poorer services. The 15th annual report reported that total business logistics costs rose to $936bn in 2003, up from $910bn in 2002, a 2.9 percent increase. Trucking, which represents more than 50 percent of total logistics costs, rose by $20bn to $482bn (inter-city and local). At the same time freight movements continued to expand. In 2003 U.S. shippers moved 5 percent to 15 percent more product than they did in 2002 while business inventories were up over 5 percent in 2004, said Wilson.

Some shippers are already making changes to address these issues. Toys "R" Us altered its supply-chain network to ship through the Panama Canal instead of congested ports in Southern California. The $11bn retailer imports 90 percent of its merchandise to its 1,259 stores nationwide and an additional 574 stores globally.

"Delays and uncertainties when using West Coast ports would lead to higher inventory levels and earlier buying times," says Marie Robinson of Toys "R" Us. In fact, this Christmas season the company spent $15,000 to divert containers due to port delays in California. Average delay time at Southern California ports was seven days in 2004 while the Panama Canal's delay time was, at most, one day, she says.

The Toys "R" Us strategy is part of a growing trend: Panama Canal traffic is up 8 percent from last year. Dell recently said it will build a new production facility in North Carolina to better serve its U.S. East Coast customers while Wal-Mart, the world's largest retailer, is building a 2 million-square-foot distribution facility near the Port of Houston to avoid West Coast delays. Since 2002, Houston's container trade with Asia has increased from 22,984 tons to 41,584 tons.

	"Rates are up, service levels are more demanding, and there is no silver bullet resolving these challenges." - Adrian Gonzalez of ARC Advisory Group

Still, 40 percent of all goods coming into the United States enter through California, says Jerry Serventi, director of engineering for the Port of Oakland. Some large ships (those with the capacity for 7,000 TEUs) will continue to do so, because they are too big to go through the Panama Canal and can only call at a limited number of ports, Long Beach in particular. While the Panama Canal is involved in a billion-dollar initiative to attract larger vessels by widening and deepening its channels, today the majority of international freight continues to arrive at West Coast ports, creating a constant backlog at them.

These trends will continue in 2005. The United States was first in the world for merchandise imports and second for exports in 2003, the latest numbers available from the World Trade Organization. "The United States remains a consumer economy and manufacturing is becoming more and more global," says Pat Hiatte, general director, corporate communications for Burlington Northern Santa Fe Railway. "It's a fact of life."

Shippers should expect constraints and price increases in every mode this year. The biggest constraints, though, are in trucking. Many small trucking companies have gone out of business, notes John Fontanella, vice president of supply-chain services for advisory firm Yankee Group.

The Morgan Stanley Truckload Index (dry-van only) shows the ratio of U.S. truckload demand versus supply to be 10 to 1, double the ratio of 2003. But the biggest issue is the driver shortage, said Fontanella. "The average teamster is 57 years old. The pool to replenish drivers is dried up. There are not enough people in their 20s and 30s that want to be truck drivers," he says.

Part of the problem is wages, which may need to be increased to attract drivers. "I don't see any wholesale raise of pay in the industry. In a way [shortages] are self-induced, but it's still a big problem for everyone," he says.

Record Rail Traffic
Many shippers have turned to the rails to help move freight beyond what the trucking system can handle. In late December the Association of American Railroads reported record-breaking freight traffic for 2004. Total volumes for the year were estimated at 1.555 ton-miles, 4.9 percent more than 2003, breaking that year's record of 1.551 trillion. AAR also reported dramatic increases in intermodal volumes, up 10.1 percent from last year to approximately 10.7 million trailers or containers. This growth shows no signs of slowing. BNSF anticipates intermodal usage will continue to grow through 2005, "as a way for trucking companies to address some issues with insurance, fuel cost, recruiting and retention of drivers," says Hiatte.

The growth is more than the system can handle. The Surface Transportation Board reported rail speeds decreasing 20 percent in the past two years because of congestion and rail infrastructure problems. At the same time costs are going up. Fitch Ratings, a global ratings agency, predicts rail rates will increase between 2 and 4 percent this year. In addition, Class I railroads are looking at adding fuel surcharges into contracts that have not had them in the past, says the agency.

Hiatte says BNSF has hired an additional 2,300 conductor trainees and will hire an additional 1,700 in 2005 to address capacity issues. In addition the railway is looking at better utilizing its current resources. Its slot utilization on intermodal trains increased from 92 percent in 2003 to 93 percent in 2004, he says. But there's more work to be done. Today intermodal containers stack up at ramps because the ramps are not open continuously. The ports aren't operating on a 24/7 basis either. If the ports can't get the containers drayed to the intermodal ramps on the weekends then there is a big bottleneck on the rails by Monday. "Railroads are only one part of the equation," says Hiatte. "The other is ocean carriers, shippers and terminals. There are things we can do to move toward 24/7 operations," he said. As 95 percent of the United States total imports come by water, port delays and ocean shipping constraints are no laughing matter. Imports from Asia continue to increase, making this a problem that won't go away. New capacity is on order, but many ocean ships currently being constructed aren't scheduled to be completed until late 2005 or early 2006, says Fontanella.

Nowhere is this more evident than at the Port of Los Angeles, the busiest port in the United States and one of the top 10 ports in the world. Already at or near maximum capacity, the port's cargo volumes are forecasted to dramatically increase in the coming decades. Gill Hicks, chairman of the California Marine and Intermodal Transportation System Advisory Council, estimates that the ports of Los Angeles and Long Beach will handle 44.7 million TEUs by 2030, up from 11.8 million in 2003.

Nearby rail yards are operating at near capacity and by 2020 the shortage of intermodal yard capacity will be equivalent to 9 million lifts per year, he said. Some areas require triple and quadruple train tracks and grade separations. "The benefits of the Alameda Corridor will not be fully realized unless railroad main lines and yards are improved," he said. The association has gathered a variety of government and private groups to study how California's 11 maritime facilities can better be coordinated. The group plans to submit its findings to California's legislature by January 2006.

In response to increasing discord over delays, both ports have extended gate hours, added fees to discourage daytime use, made appointments mandatory, increased usage of on-dock yards and created an internet matching service for empty containers. The Port of Los Angeles is building an additional container terminal of nearly 500 acres to handle capacity constraints while the Port of Long Beach plans to build five "mega terminals," each with 500 acres or more, by 2010.

Possibly in response to increased ocean carrier delays, world air cargo growth is projected to expand at an average annual rate of 6.2 percent during the next two decades with overall traffic tripling from current levels, according to Boeing's World Air Cargo Forecast 2004/2005. Shifting freight to air comes at a higher cost, and may also become subject to capacity constraints. During the same period that airfreight traffic is expected to triple, fleet size will not quite double.

It isn't just 2005 that shippers should be concerned about. The Transportation Research Board estimated in a 2003 paper, Freight Capacity for the 21st Century, that by 2020 the nation's output of goods and services will increase by 70 percent, domestic freight traffic will increase by 40 percent and international container traffic will more than double.
Security requirements, which add to congestion and delays, are also increasing. Several companies have stated that Customs-Trade Partnership Against Terrorism certification is a condition for doing business with them.

Greg Aimi, research director, AMR Research predicts that the global and U.S. logistics infrastructure will get worse before it gets better. "Getting product to store shelves has never been harder," he says, even though companies are scrambling to mitigate the logistics delays, skyrocketing lead times and soaring costs caused by capacity problems.

AMR estimates that lead-time variability has increased between 25 and 75 percent, making it that much more difficult to plan ahead and dramatically changing "just-in-time" dynamics. Supply-chain changes are also in store as worldwide apparel and textile quotas are phased out.

In response some shippers are stockpiling inventory. According to the Institute for Supply Management, inventory levels were up 3.5 percent in December from November and order backlogs were up 2.5 percent the same period. Others are looking for domestic backup suppliers for things they usually source overseas. A third group is setting up distribution centers next to overseas factories that will ship goods directly to an end customer rather than storing them in a U.S. warehouse, shaving weeks off delivery schedules.

Network Redesign
Shippers are realizing they need to try a variety of methods to combat constraints, including redesigning their supply-chain networks to avoid bottlenecks. A good network design can bring freight to customers faster by reducing or eliminating some delays.

An increasing number are turning to third parties to help them develop these strategies. "Our business is growing through the Supply Chain Solutions business unit. Even with small packages, people are coming to us, using us in a consultative way," says Susan Rosenberg, public relations manager for UPS, describing how the company is helping shippers redesign their networks. "We may work on a plan that changes where they build their loads and how they work."

Others are simply looking for ways to ship their freight. Schneider Transportation Management Group, the brokerage and third-party arm of trucking company Schneider National, has been growing at close to 85 percent year-over-year, says Mark Rourke, vice president and general manager of the group. Most of the trucking capacity growth has been and will be with firms that have less than 25 trucks, he says. "That's what's fueled our growth."

While Schneider has had a brokerage offering since 1993, business didn't start booming until capacity dried up. Since 2002 the group has expanded from eight field offices to 18, he says.

In the past, even a few years ago, many companies prohibited the use of brokerage services, says Rourke. But with current capacity constraints that has changed. Shippers don't have the internal staffing to handle the 10 or 20 percent of their freight that needs to move on multiple carriers, which is why those needs are outsourced to a brokerage, he says.

Yet large trucking firms aren't adding capacity, due to pressure from Wall Street for large public transportation companies to improve their numbers. "With the economy rebounding, it was the perfect storm," says Rourke. "The retail vertical and consumer vertical are still shipping large quantities, getting beyond their core carrier base."

So while Schneider initially offered its brokerage business as a backup service-if Schneider didn't have enough space on its trucks-today its brokerage business is a stand-alone service offering that Fortune 500 companies are interested in "because it's giving the shipper options," he says.

The shipper that successfully navigates these challenges is the shipper that tries a variety of tactics, including in some cases "insourcing." Dedicated fleets are growing at a much higher rate than the trucking industry as a whole, Rourke says. Analysts are recommending that shippers consider purchasing fleets to help with capacity constraints.

Gonzalez anticipates more shippers purchasing transportation management systems to combat these issues. "Shippers must explore a variety of actions, including conducting a procurement engagement, shifting modes, converting to dedicated fleets, and automating execution processes. These activities can all be facilitated and enabled with a TMS solution," he says.

ARC is forecasting the TMS market to grow at a compound annual growth rate of 7.1 percent over the next five years, from $873m in 2003 to over $1.2bn in 2008.

Rosenberg believes shippers may need to add visibility tools and warehouse management systems to enable their goods to flow smoothly through the supply chain, especially as shippers want more frequent inventory turns, particularly those in the technology and textile industries. In 2005 "we anticipate more frequent moves of smaller shipments, not necessarily express shipments," she said.

AMR recommends a variety of actions for shippers, including forecasting higher costs and increased supply variability; improving logistics communications within the company, particularly lead times and integrating logistics data and intelligence into a company's planning processes. Shippers should also centralize their logistics operations, consolidate carrier relationships and reevaluate and potentially redesign supply-chain networks. Transportation requirements should be forecasted and shared with strategic carriers early.

AMR also recommended shippers consider private or dedicated fleets; creating a hybrid manufacturing center strategy that includes a combination of offshore and local manufacturing; insisting on shipment visibility from source to delivery to minimize overseas service variability; building a database to record in-transit performance and lane characteristics and using government security regulations on shipment information to advantage.

"Our current disparity between demand and supply is the worst we've seen," says Aimi. "At this pace, the U.S. logistics professional will need to be fluent in managing global trade and international logistics within the next 18 to 24 months."