Demand increases globally, but shippers remain cost-conscious
David Hannon, News and Transportation Editor -- Purchasing, 9/16/2004 2:00:00 AM
The air freight industry continues to ride the overseas manufacturing boom with volumes and rates flying higher, as capacity gets tighter internationally. Overall traffic in the domestic U.S. market grew 1.2% in 2003, according to figures from the Air Cargo Management Group, as the market continues to build back after a major drop in 2001.
Several domestic air freight providers emerged from bankruptcy in the past year, fueled by growth in the market, which added some capacity at the lower end, but increasing ocean rates pushed more demand for air freight in late 2003 and early 2004.
"There is a bit of a guessing game in ocean," says Skip Hansen, the Americas division vice president at Lynden Air Freight in Seattle. "When it looks like capacity is going to shrink, the ocean carriers begin bumping up the rates and add-on fees. That pushes some shippers to air because they are concerned about capacity and meeting their customers' demands and shipment times. Those shippers may put some of their freight in the air as insurance and keep the rest on the water."
Lynden has seen "peaks and valleys" in air freight demand both domestically and internationally, but Hansen says capacity is still strong. He says despite the increase in demand for air freight, forwarders and carriers are not seeing the expected increase in service levels requested from shippers, indicating that cost is still a major issue for air freight shippers.
"We're doing a lot more consolidation of shipments for shippers these days," Hansen says. "If they're shipping five days a week, more often we are working with them to consolidate to two or three bigger shipments a week to get better pricing."
Globalization increases
Telecom giant Lucent Technologies in Murray Hill, N.J. currently dedicates about 90% of its global transportation spend to air freight. Henry Rooke, director of logistics for Lucent's supply chain networks group, says Lucent, like many high-technology firms, is putting more of its manufacturing into the Far East, increasing its demand for reliable air freight capacity.
"We have to use air freight extensively to get our materials around within the timeframe our customers need," Rooke says. "In the telecom industry, we need to be very responsive to customers and have the flexibility to change to suit their needs. The rapid growth of shipments in and out of China has created capacity restrictions and we're watching that very closely and working with our partners to ensure we can get the capacity that we need." Rooke says telecom companies tend to ship smaller, more high-value items, so the inventory holding and carrying cost is high and the air freight is a smaller percentage of the overall cost of materials than in some industries. "So from an overall cost perspective, the transportation cost as a percent of total cost is lower than in other industries, and using the higher-priced air freight does not increase the total cost as much," says Rooke.
Lucent manages its air freight through two primary logistics outsourcing partners, but still keeps a close eye on market trends and costs through a small internal organization to ensure the company is being as efficient as possible.
"We are taking a much more global approach to air freight," says Rooke. "We now have a global freight management organization that is centralized organizationally but still has people in each region. We are managing the air freight using that single global organization to increase synergies in volumes and developing a single approach in terms of how we manage air freight through our outsourcing partners. We are seeing benefits in terms of costs, consistency and the service levels we can provide to customers."
Symbol Technologies, a Texas-based maker of mobile computing products, has about 80% of its tonnage and 50% of its logistics spend in air freight. The company's just-in-time manufacturing model combined with its increasing use of Asian manufacturing suppliers has made air freight its primary source of transportation. Like Lucent, Symbol is concerned with the capacity in and out of China today and the country's future plans for increasing infrastructure.
According to Mark Sweat, senior manager of global transportation at Symbol, ocean freight is still expensive in the Pacific and depending on a shipper's break point and weight rate, it may make more sense to use air freight in some lanes, even when ocean is available.
"For example, with smaller ocean shipments there may be minimum charges in the 100-kilogram range and it might make more sense to send them via air freight due to those increases in ocean rates," he says. "There have not been significant increases in air freight, so it may move the break point of where you might ship something that is a bit heavier by air instead of ocean."
Jim Aikman, senior director of worldwide logistics and distribution at Symbol, says his organization is consulted on the costs associated with moving manufacturing overseas, but the ultimate decision is made by higher-level executives.
Fuel and fees
Fuel costs are an increasing issue in air freight, both domestically and internationally. Hansen says the domestic market tends to see sporadic increases that vary by carrier, while the international market sees across-the-board surcharges from all carriers in the same time frame.
"Too many carriers are not benchmarking the fuel rates to provide shippers with the data behind the surcharges," Hansen says. "We benchmark against the federal fuel price index and we show the customer so they see what we are experiencing and schedule shipments based on what we expect. But the carriers tend to be more arbitrary about it, which makes it frustrating for the shipper and forwarder. More shippers are asking questions of carriers and forwarders about the surcharges, which they should be."
Symbol manages its fuel costs and surcharges by working with forwarders and providers to provide details about increased costs.
"It's difficult for carriers to avoid fuel cost increases," Aikman says. "But we try to make sure that is not a profit center for the carrier. We look at the actual fuel cost and compare it to the increase the forwarder may be charging us to make sure it is not a profit-maker. We sometimes ask the forwarder to show us the documents from the airlines to document their increased costs before accepting an increase from them."
Symbol has also taken that strategy more recently with forwarders looking to charge a fee for advanced reporting requirements. Symbol has asked the forwarders to provide proof of the increased costs before agreeing to pay any fees. "We want to make sure we get something for that fee or at least that the forwarders are incurring a cost that needs to be passed on."
Security, visibility priorities
Security and the increased regulatory efforts continue to be a big concern for air freight shippers and providers. Hansen says most shippers are doing a good job of keeping up to speed on what's required of them, but some are still not educating themselves on the issue or still argue the increased costs or requirements with carriers or forwarders.
Rooke says Lucent's air freight shipments have not been impacted much by the increased security concerns in the supply chain today. If delays do occur, they are more likely caused by capacity restraints and not by security issues. Sweat says the increased emphasis on security does play a role in selecting which carriers or forwarders Symbol works with.
"We have not parted ways with anyone over it, but we work closely with some forwarders and carriers on it," he says. "We want to make sure [carriers and forwarders Symbol works with] are applying for C-TPAT and we ask for the acknowledgement letter from Customs that they applied for it to make sure they are doing what they need to do. It is one of the first things I ask any new forwarders I consider. The financial impact comes into play if the shipments are delayed because the forwarders are not C-TPAT certified."
All shippers are working to gain more visibility into their supply chains. Hansen says forwarders are doing a better job of providing that visibility, but shippers can make it easier by providing more accurate and detailed information on their shipments up front. While some shippers want container-level visibility, others want item-level tracking, which makes a difference in how a forwarder will approach the tracking.
Rooke says while air freight as an industry is better at providing shipment visibility than some other modes, it still has a long way to go before it meets shippers' requirements. Despite its reliance on outsourcing partners for logistics management, Lucent is connecting directly with air freight forwarders to receive shipment data real-time.
"We tend to deal with the bigger freight forwarders and in the past five years we have seen a lot of consolidations in the forwarder industry and expect that to continue in the market," says Rooke, adding that, as the players in that industry get bigger, they are increasing their capacity and geographic reach.
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