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Research & Surveys

Transportation's "New Normal"

Author(s):

RaeAnn Slaybaugh


May/June 2011, eSide Supply Management Vol. 4, No. 3

An A.T. Kearney report zeroes in on four forces shaping the transportation industry today.

A new A.T. Kearney report drills down on the "new normal" transportation companies are now facing, following the past few years' economic turmoil — a shift that is requiring them to rethink their fundamental business models and investment priorities, as well as reevaluate their capacity for change.

"Rather than making tactical moves, it's time to look past the next quarter or two and develop a smart, forward-looking strategic response," recommend report authors Laurent Guerard and Jeff Ward, partners in the A.T. Kearney's Chicago-based transportation, travel and infrastructure practice; and Martin Walker, senior director of A.T. Kearney's Global Business Policy Council in Washington.

In their report, The "New Normal" in the Transportation Industry, Guerard, Ward and Walker assert that four forces are most aggressively shaping the transportation marketplace right now.

1) Going Green/Sustainability

Guerard, Ward and Walker cite on-the-rise fuel costs, emissions regulations and carbon taxes as the biggest imperatives for logistics executives to rethink their supply chains these days — especially in energy-intensive industries (refining, steel and chemicals), where the effects of rising fuel and emissions costs could have a ripple effect throughout the entire supply chain.

Additionally, governments around the world are launching green initiatives logistics executives can't afford to ignore. In China, Japan and Europe, measures that include emissions standards, emissions restriction laws and carbon-emissions taxes are already in place or on the immediate horizon. "And, the United States has implemented various initiatives, including the Clean Trucks program at the port of Los Angeles and tier-4 engine emissions standards," the authors point out.

Moreover, fast-moving consumer-goods companies — including Sony, Del Monte and Wal-Mart — are investing in aggressive sustainability initiatives.

As the report explains, all these shifts herald significant challenges (and opportunities) for the transportation industry:

  • Continued modal shift — In other words, the authors expect a continuing shift to cheaper and more fuel-efficient forms of transportation (especially railways).

  • Demand for greener vehicles. Although this demand represents a significant capital cost for transportation providers, some — UPS and FedEx among them — have been working with auto manufacturers for years to test alternative fuel-powered delivery vehicles.

  • Lower volumes. As Guerard, Ward and Walker explain, lower-value bulk commodities (steel, coal and chemicals) are particularly sensitive to increased fuel and emissions costs. "And, less output will cause fewer total ton-miles transported," they add.

  • Increased complexity. Driven by consumer demand, the authors expect more — and different — regulations around the world. "Yet, as compliance costs increase, so will the opportunities for differentiation as customers will favor transportation companies that stay ahead of the compliance curve," they point out.
2) Reshoring, Nearshoring and Localization

Whereas the world "has been chasing the 'China Price'" for the past two decades, Guerard, Ward and Walker contend that increasing compliance issues and rising labor costs in that country have forced companies to look elsewhere for low-cost locations in recent years — in Vietnam, India and Thailand, for example.

This, of course, translates to changing trade routes. "The inevitable confluence of re-shoring and nearshoring will alter the face of present day trade routes," the authors explain. "Nearshoring is reinvigorating NAFTA and CAFTA trade and revitalizing North-South lanes. This will require transport companies to redesign their networks and redeploy their assets to high-growth regions."

Increased infrastructure needs are another byproduct of reshoring, nearshoring and localization. For example, the Panama Canal is spurring the expansion or development of logistics facilities and services in the southeastern United States, and Russian Railways' Trans-Eurasian Express is expected to encourage more freight rail transport and cut total shipping times.

Green Shipping: Green globe surrounded by green boxes.
3) Transformation of Consumer Goods

In the consumer electronics realm, manufacturers are now focusing on "miniaturization" — making products thinner, smaller and lighter. However, transporting these goods actually costs more because they must be handled with greater care. On top of this, the added value per shipment increases supply chain risk, and more security is required because more products can fit into a single container.

The elimination of physical goods — as evidenced by digitized content (e-books, mp3s and online video) — is reducing the need for transportation altogether, Guerard, Ward and Walker point out. "Within the next year or two, music distribution will be primarily digital."

For the transportation industry, the bright side of this transformation of goods is an increased demand for value-added services, including track-and-trace options and specialized handling. "In addition, the current pricing model by weight and lane may no longer be relevant to the market," they add.

4) Last-Mile Delivery

As Guerard, Ward and Walker point out, online shopping has grown roughly 25 percent every year for the past decade, which increases demand for last-mile deliveries. As online sales grow faster than in-store sales, major retailers (Best Buy, Target and Macy's among them) are offering online ordering with in-store pickup, which requires more frequent warehouse replenishment and store deliveries to keep products in stock.

Other services — in-home installation, for example — require more specialized last-mile delivery options.

To this end, last-mile delivery presents two distinct challenges, according to Guerard, Ward and Walker: 1) managing the fixed costs of a fleet of delivery, and 2) controlling the variable costs of irregular delivery patterns. "Shorter routes can result in lower overall ton-miles transported per trip, further increasing costs," they explain.

Again, though, an increased need for last-mile delivery gives transportation providers a chance to offer more value-added services. "It's an opportunity to gain a competitive advantage by providing an array of customer-focused services, such as weekend, night or time-sensitive delivery schedules," the authors assert. "Providing additional value-added, fee-based services — such as custom installation and pickup of returns — could also improve revenues."

Embracing Change Is Critical for Survival

Overall, these four forces are driving down volumes, driving up costs and increasing complexity. "The cumulative potential of these forces to impose unprecedented change on the transportation industry means no company can afford to be without a new strategic roadmap," the authors state. "A fresh, high-level 'clean-sheet' approach to long-term strategic planning will incorporate both macro-level drivers of the global business environment — the forces shaping the transportation industry — and industry dynamics.

"Thriving in this new environment requires not only understanding the shifting market dynamics, but also rethinking strategies and executing the moves to best position your company for the future," they conclude.

Download the full report on the A.T. Kearney website.



RaeAnn Slaybaugh is a writer for the Institute for Supply Management™. To contact this author, please send an e-mail to author@ism.ws.

For more research and survey findings, visit the ISM articles database.

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