Small-package volume drop could cause JIT ripple

Higher rates may spur trend to truckload quantities.

By -- Purchasing, 3/22/2001

Shippers are facing an increase in rates when they turn to the small-package-express industry this year. And the rate increases are coming at a time when demand for the service in the United States is on the wane.

Analysts are saying that manufacturers are starting to get savvy and change shipping schedules so costly rate increases don't have as much of an impact.

"If they are seeing rate increases for Federal Express and UPS, companies are going to start using good management techniques to do what they can to minimize those rate increases," says Bernard Hale, principal for Hale Logistics, San Juan Capistrano, Calif.

The major players in this industry raised their rates for 2001. A quick breakdown shows that:

• United Parcel Service raised air express rates 3.7%, while its ground service rates went up 3.1%,

• Federal Express raised its air express rates 4.9% and raised its ground service rates 3.1%.

• Airborne Express implemented an average rate increase of 5.5% on March 5.

Overall, the rate increases were similar to those imposed by carriers last year. And shippers that require small-package carriers to deliver their goods are paying them, since they still have relatively few choices to turn to.

Until this year, manufacturers have depended heavily on the service. Manufacturers pushed the need for small-package shipments. Just-in-time manufacturing practices, which depend upon precisely timed, small shipments of supplies to manufacturing assembly lines, make small-package express imperative.

"There is often some sort of small-package deliveries to keep you in JIT stock," says Hale. "Sometimes these are small items that can run low in a manufacturing line."

Because of this, small-package express has proven to be a vital link in the supply chain. It has remained so since the need for regional distribution and smaller shipments grew during the past 10 years. Inventories shrank as businesses looked for ways to increase efficiency in the supply chain. The Colography Group reports that the under-700-mile segment-typical for small-package express-was the fastest growing transportation market in 2000.

Volume demand on the wane

But the rate increases are now coming at a time when volume demand is going down. Growth in transportation demand is slower for all modes. Robert Delaney, vice president of Cass Information Systems, St. Louis, Mo., says transportation demand is expected to grow in the range of 2.5% this year after exceeding 4% the past few years. Small-package-express demand is expected to decrease as part of this overall trend.

Small-package-express carrier companies say they are experiencing this drop in demand now. Companies that enjoyed growth in the low- to mid-teens during the past two years are seeing growth in the single digits now. UPS, for example, reports that growth in next-day-air revenue dropped from 11.7% in 1999 to 8.1% by the end of 2000. Volume growth for next-day air, meanwhile, sank from 10.8% in 1999 to 8% by the end of 2000.

The manufacturers that they serve are also reporting inventory backlogs. Delaney reports that inventory levels remain a wild card. In a report looking at inventory levels for 1999, Cass reports that the inventory-to-sales ratio for American manufacturers was stuck in a band between 1.38 and 1.40 months of supply since 1996.

"We did not appear to be taking inventory out of the system," Delaney says.

Delaney is compiling information for his June update on inventory levels, but he says the slowing economy will probably take its toll.

"People had forecast demand, but were caught with much weaker sales in December than forecast," says Delaney. "All we've got now is speculation."

Small-package-express carriers are countering these dire reports and justifying the rate increases by saying manufacturers are making impressive demands when it comes to information technology. This means carriers must offer a broader range of online tools that provide information on shipments. Customers now regularly expect order tracking.

"They have to have it when they want it," says Rick Campana, vice president corporate marketing for UPS, Atlanta, Ga. "This is where customers are going. They are looking for these sorts of solutions, and we have to get more and more ways to use information to manage costs."

International market

They also point to the international market as a reason for rising costs. This market is expected to see a surge in demand. Carriers are now enjoying farther reach than ever before, thanks mainly to the dissolving of trade barriers. Both NAFTA and the European Union have allowed for more trade overseas and in Mexico and Canada, and helped manufacturers in America use small-package carriers to deliver parts from foreign countries. Major carriers are pumping billions of dollars into their foreign operations, putting much of their efforts into getting into global markets. Mergers here are geared toward giving carriers greater reach so they can reach into foreign markets.

UPS, for example, recently merged with Challenge Air Cargo in Miami.

"There's a lot of speculation on why they were interested in it," says William Goodwin, former professor of logistics for Florida International University. "The theory is that they want their landing rights so they can take small parcels into Latin America."

UPS does indeed expect the international market to be an area of potential double-digit growth this year. The company now services more than 200 countries. UPS is attempting to build up a worldwide footprint with 90 more jet aircraft on order this year.

But despite international growth, rate hikes in the face of sinking demand are going to have an impact on manufacturers' shipping habits here, analysts say. Goodwin says JIT practices are expected to start to mutate this year as manufacturers deal with the increases.

Goodwin says if the carriers continue to push the rate increases, manufacturers will counter this year by consolidating their shipments into truckload rather than less-than-truckload (LTL) shipments. Such a change would go counter to JIT practices. Less-than-truckload is typically popular with JIT schedules. LTL carriers cover small territories and handle frequent shipments.

Hale also says rate increases are bound to have their impact, convincing manufacturers that they might be better off consolidating multiple shipments into one truckload shipment to the assembly line.

Hale says "zone skipping" techniques can get manufacturers through this problem. Through this technique, manufacturers can lengthen the time between inventory shipments by short periods. They could, for example, order a slightly larger shipment of parts in a 72-hour turnaround period, instead of 48 hours. This larger shipment could be shipped in truckload, as opposed to LTL.

"If small-package carriers continue to push rate increases, there can be more consolidation of these shipments," Hale says. "And there's no reason they can't take truckload."

Small-package-express rates heading up