Insurance is a must throughout the supply chain. Warehousing, transportation, manufacturing sites and more have different policies protecting them from risk. Now there’s another form of insurance that doesn’t require an insurance agent or lengthy, complex contracts, just an internal decision.
Companies are setting aside large sums of money to cover themselves in the case of unplanned or expedited freight management issues.
“There’s so much money on unplanned spend that people are blowing their budgets in the first quarter,” Greg Scheevel, director of global development at TOC Logistics, told Supply Chain Dive. “The global supply chain manages business using strategies that don’t fit today’s market. To protect themselves, they need to set aside money.”
Some of the biggest risk, he said, is in the automotive industry. “OEMs like Ford, GM and Daimler, can’t shut down the product line or [suppliers] will pay massive penalties. That’s why they’re doing unplanned spends—ad hoc air freight or charters—to protect against the fines.”
According to a report by Cambridge Property & Casualty, one automotive company has established a $500 per minute penalty if a late delivery shuts down their assembly line. That translates to $30,000 an hour. A five-day shutdown would reach $3.6 million in penalties. It might also result in the loss of the business for the supplier. A large enough fine, of course, could put the supplier completely out of business.
It becomes a choice, Scheevel, said. “Typically, you don’t budget to shut down a customer’s line. You have to decide: Half-million-dollar fine versus a charter that can cost $30,000-$100,000 or hand carry, which can be $6,000-$12,000.”
A perfect storm
A number of issues have converged to bring unplanned spend to the forefront of freight operations, Shijith Ajithkumar, senior analyst, Freight and Transportation at Beroe Inc., told Supply Chain Dive via email.
“As trade growth has outpaced the availability of transport services, serious issues of congestion and capacity constraints in major countries have driven up transportation costs and led to a demand-supply imbalance of freight transport services,” he said. In addition, the last decade of rapid growth in e-commerce, consumer demand, omni-channel retail strategy and international trade has brought about rapid growth of transit traffic volumes in major developing countries, he added.
“International trade growth places pressure not just on the major gateway ports, but also on inland transportation systems and service ability,” Ajithkumar said. “The increase in imports has translated to greater domestic freight activities as those goods are delivered to their destinations.”
Shipping goods internationally is not a simple, straightforward operation. For example, just look at the pallet market. According to market research firm, Freedonia Group, there will be 2.6 billion pallets in the United States alone by the end of this year.
“There are so many touches in the supply chain,” Scheevel said. “To move one pallet from Europe to the interior of the United States there might be 5 to 10 companies involved in the transaction and 200 people to move it.” Of these 200, he said, only 10 are related to the shipper or OEM, meaning another 190 have to do their jobs for the products to be handled properly and delivered on time. “It works if there’s enough capacity and the economy is growing and everybody does their jobs.”
A luxury no longer
Ajithkumar said his procurement and supplier consulting company has seen that the major spend pool across all categories is road freight management. “Several factors, including the supply of trucks, shortage of truckers, technological advancements, government regulations and environmental concerns impact road freight services across all the major developing countries.”
He noted that in major markets, many shippers are setting aside some percentage of their transportation spend, 10-20%, for unplanned scenarios, including expedited transportation, “which once was considered either a luxury or a high-cost service reserved only for the most urgent shipments. But today, companies of all sizes and across industries are utilizing time-critical transportation for ongoing, planned and unplanned shipments every day for a variety of reasons and a broad range of products.”
For example, Ajithkumar mentioned a global manufacturing firm in Connecticut “that spends an average of 20% extra on road freight services to help customers avoid the expense of shutting down production lines. Another farm equipment manufacturer in Iowa relies on time-critical shipments, [so] it’s becoming a common occurrence to ship products such as row crop planters and grain auger carts as rush shipments.”
What if just-in-time isn’t on time?
The Toyota-created system of just-in-time inventory was designed to cut waste and increase efficiency. Basically, it means when a vehicle is ordered, the assembly line must be stocked with the required number of parts. After they’re used, they must be replaced in exact numbers from inventory, which then must be restocked. It can be a tricky dance.
“Under standard inventory-based models, businesses place large orders for materials from wholesalers, and many items can be moved in one shipment,” Ajithkumar explained. “As production depletes the first shipment of raw materials, another order is shipped, creating a convenient time buffer for transportation planning. With just-in-time inventory, companies must find capable suppliers that are willing to fulfill small, frequent orders on very short notice, which is quite challenging for small- and medium-sized companies.”
TOC’s Scheevel said that on-time performance in 2018 was “less than 70% for the whole year collectively. The global supply chain is where CFOs, boards and investors drive the value of money, which drives how supply chain and logistics people operate. Having a ‘slush fund’ might be better spent than having days 10-14 days of safety stock.”
It’s time for a change, he said. “The industry has been operating the same way for 70 years under certain purchasing guidelines that are not rooted in reality.”