With fuel prices on the rise and logistics costs under intense scrutiny, some shippers are rethinking how they get their orders from the proverbial point A to point B. Most notable, perhaps, is a trend that's bringing shipments that traditionally have moved by air back down to earth—or more accurately, down to sea level.
The idea that shippers would shift cargo from air to ocean transportation might seem surprising, given the difference in service speed. But a number of companies are finding that new, enhanced ocean shipping services—including time-definite services—can save them money while still meeting their delivery needs.
For evidence of this trend, you need only compare the respective growth rates for ocean shipping and air freight, says David Hoppin of the consulting firm MergeGlobal. Worldwide ocean import tonnage has grown faster than air import tonnage since 2004, he notes. And in Asia, ocean import tonnage has grown faster than air import tonnage since 2003.
Bill Villalon, vice president of global contract logistics and product development for APL Logistics, reports that over the last several years, ocean freight capacity has risen two to three times faster than air-freight capacity has. "That alone indicates some kind of modal shift," he says.
That shift hasn't gone unnoticed by the airlines. In an address to the International Air Transport Association (IATA) 2007 Cargo Symposium in Mexico, IATA Director General and CEO Giovanni Bisignani identified the loss of business to ocean shipping as one of three trends that the air-cargo industry should watch closely. "Ocean container shipping is becoming more competitive and taking business away," he said.
Bisignani reported that containerized ocean freight grew by 9.5 percent from 2000 to 2005, more than double the growth rate for air cargo. IATA believes that this trend will continue, he added. The group forecasts that air-freight volumes will grow by 5.3 percent annually until 2010, while ocean freight will increase by 7.2 percent per year. "New containerships are faster and cheaper to operate," Bisignani said, "and 2006 ocean container freight rates were 20 percent in real terms below 2000 levels. Air-freight rates were only 8 percent lower. And ocean freight capacity is growing at 12 percent a year, so we can expect more intense price competition."
The most obvious cause for this shift is rising fuel costs. As fuel prices soared, the traditional gap between ocean and air rates—quite pronounced to begin with—widened even further, says Villalon. That's when some companies that were shipping by air started to take a serious look at ocean. Fujitsu Computer Systems Corp., for example, is now shipping portions of its large orders by ocean instead of air—a move that has led to significant savings. (For more on Fujitsu's strategy, see "fast, furious, and flexible" on page 49.)
The pendulum swings
But fuel costs aren't the only factor behind the modal shift. Another appears to be the emergence of new, enhanced ocean services that are getting a warm reception from shippers eager for an alternative that's cheaper than air and faster than standard ocean service.
One such service is Matson Navigation Co.'s China-Long Beach Express program, in which Matson has teamed up with truckload specialist J.B. Hunt Transport Services to offer time-definite inland delivery of full containerload shipments from Shanghai and Ningbo, China, to the United States. Another is the OceanGuaranteed service launched last year by APL Logistics and lessthan-truckload carrier Con-way Freight. OceanGuaranteed provides day-definite, guaranteed service for less-than-containerload shipments from seven points in Asia to the United States. These shipments are the last ones loaded at the ports of origin in Hong Kong, China, Japan, South Korea, Singapore, and Taiwan, and they are the first unloaded when the vessels arrive at Los Angeles. The shipments then move via Con-way's timedefinite trucking service to their final destinations.
APL decided to offer time-definite services because it saw a market among shippers who were using air cargo more for reliability than for speed, Villalon says. "Customers told us, 'I could probably live with shipments arriving within 18 to 20 days, but there's nothing out there that can deliver in [exactly] 18 days. … If I need something date-certain and time-definite, I have to ship it by air, and then it gets there in five to six days, and I have to hold it for two weeks in storage,'" he says.
Time-definite ocean services are most likely to appeal to companies that import products like apparel, electronics, and toys that have a high unit value and a short shelf life. One such shipper is Urban Outfitters, a retailer of clothes, accessories, and housewares for the young urban crowd. The company is using the OceanGuaranteed service, particularly to move shipments headed for its Trenton, S.C., distribution center, which supports both its wholesale and its direct-to-consumer online businesses. The company tested the waters with Web-direct purchase orders for shoes last Christmas. Shoes were chosen for the pilot because they are bulky but relatively light, and the cost to ship them by air would have been prohibitive. The savings in both time and money were considerable: The shoes arrived at the DC from the Far East in 18 days instead of four weeks, at a quarter of the price of air freight. Urban Outfitters has since stepped up its use of OceanGuaranteed for other products. To date, it has used it for about 100 purchase orders.
But cost is only part of the story. Hoppin believes that the modal shift may be partly a matter of shippers' returning to a mode they temporarily abandoned a few years ago. "As the ocean industry recovered somewhat from the delays and congestion that emerged in 2004," he says, "many of the companies that had upgraded to air moved back down to ocean."
But one lesson shippers learned in 2004 could send the pendulum swinging back toward air. Shippers realized how vulnerable they were to supply chain disruptions, says Hoppin. As a result, some decided to become less "lean" and returned to the practice of holding safety stocks. The competitive pressures that caused companies to go lean still exist, however, and they could well decide to start cutting back on inventory. That will increase the risk of inventory emergencies, such as stock-outs—forcing shippers to use a premium mode of transport like air freight.