Miss Hilary

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Logistics in North America

Garland Chow and Trevor Heaver, University of British Columbia

Introduction

There is increasing similarity in logistics strategies and practices among the developed industrial regions of the world. The geographical spread of manu- facturing by global companies and the development of global supply chains are bringing competitive pressures and global competencies to bear on logistics systems. The rapid growth of sourcing products in Asia, Eastern Europe and Mexico has been associated with comparable issues for buyers in all developed regions. The increasing application of communication and information systems across supply chain members is also facilitating the rapid evolution of similar practices and standards. Nevertheless, important differ- ences in logistics conditions exist among regions.

Table 25.1 shows estimates of logistics costs as a percentage of GDP for 1997 and 2002. These estimates suggest that outside of North America improvement in logistics performance since 1997 has at best been patchy. It has generally not improved in developing countries, where logistics costs also tend to be highest because of the average of lower-valued and denser products. Performance in North America has continued to improve. In general, logistics costs are affected by the contrasted geographic, economic and institutional circumstances of countries and regions.

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C o p y r i g h t 2 0 0 7 . K o g a n P a g e .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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This chapter deals first with the distinctive characteristics of North America that affect logistics, followed by the trends, challenges and opportunities for logistics in the region. Dominant logistics strategies in the region are described prior to some concluding comments.

Special features of North America for logistics

Three aspects of North America warrant highlighting as background to the logistics conditions. These are: the size of the region and the characteristics of its transport system, the North American Free Trade Agreement; and the roles of international trade and globalization.

The size of the region and the characteristics of its transport system The geographic size of the region and the size of the economy have implica- tions for the structure and growth of transport and logistics services. Major features of scale are shown in Table 25.2.

Table 25.1 Estimated logistics costs as a percentage of GDP, 1997 and 2002, by region

Region 1997 2002 % %

Europe 12.2 13.3 France 12.0 11.6 Germany 13.1 16.7 UK 10.1 11.3 Pacific Rim 14.5 15.7 China 16.9 17.9 India 15.4 17.4 Japan 11.4 11.4 South America 14.3 15.7 Brazil 15.0 15.0 North America 11.0 9.9 Canada 12.1 11.9 Mexico 15.3 15.0 United States 10.5 9.3

Source: Rodrigues, Bowersox and Calantone, 2005

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The United States is not only the largest national economy in the world, but it is also a large country from which have flowed two characteristics relevant to logistics. First, the country has enjoyed a high level of economic self-suffi- ciency, which has resulted in a limited role for freight forwarding in comparison with Europe. On the other hand, the size of the economy gives rise to large national corporations – for example, Wal-Mart – that have been important in the evolution of global supply chain management. Second, the size of the United States and Canada necessitated efficient rail freight transport, which has facilitated the development of intermodal transport services. The ownership of the Class I railways in North America is in nine companies; in 2004, they had a combined operating revenue of US $47.4 billion, of which US $8.0 billion was from Canadian railways and US $1.3 billion from Mexican (Association of American Railroads, 2005). Major revenue traffic is in bulk commodities, especially coal, but intermodal traffic has had sustained growth over the last decade. Overseas traffic has been the major contributor to this growth. Intermodal traffic accounts for approximately 20 per cent of the revenue of US Class I railroads. However, in spite of the substantial role of rail freight about 80 per cent of transportation freight revenue in the United States is earned by trucking. As elsewhere, this is the result of the convenience and reliability of truck service and its lower cost for short-haul and low-volume movements.

North American Free Trade Agreement Canada, Mexico and the United States entered into the North American Free Trade Agreement (NAFTA) in 1993. The adoption of NAFTA reflects the prior success of trade liberalization between Canada and the United States under the Auto Pact of 1965 and the Canada–US Free Trade Agreement (FTA) of 1989. When Mexico and the United States were to enter free trade discussions, it was in Canada’s interest to participate, to ensure that its interests were protected and that improvements might be made relative to the FTA. The interest of Mexico was part of a changing policy to integrate more fully into the global economy.

NAFTA effects were most significant for Mexico because of the previous relative isolation of its economy. The only closely integrated businesses

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Table 25.2 The scale of North America

Canada Mexico United States

Population estimate (millions) for July 2005 32.8 106.2 295.7 Gross domestic product (purchasing power 1.08 1.07 12.37 parity) (trillion US$) Area (millions of square kilometres) 9.9 2.0 9.6

Source: US Central Intelligence Agency, 2006

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between Mexico and the United States were the maquiladora, established in border communities after the agreement with the United States in 1989, that imported goods duty-free for processing and exported them without tariffs.

NAFTA is a rules-based agreement that facilitates trade. It does not seek to impose the harmonization of industrial and government practices required for a single market. Similar transport regulation policies have been followed in Canada and the United States and later were adopted by Mexico. Encouraging open and competitive markets in transport (and generally) have required and enabled more efficient and, therefore, better-integrated services within and between countries. At the insistence of the United States, NAFTA does not apply to water transport. Only specialized air services came under NAFTA. Other air services fell under bilateral agreements that have been gradually liberalized separately. Under NAFTA, foreign-owned trucking and rail companies may be established in the United States to provide transport and logistics services domestically, employing persons with the right to live and work in the country. Cabotage is reserved for national companies.

Because of the numerous simultaneous factors affecting the North American economy since 1994, quantification of the effects of NAFTA with aggregate data is difficult. While in aggregate NAFTA merely accelerated the integration of the three economies – particularly the US and Mexican – its effects were differentiated among commodities. Romalis (2005) shows a significant sensi- tivity of trade on a commodity basis to differences in tariff levels between NAFTA partners and other countries. There has been a diversion of trade to within NAFTA for certain sectors of the economy. The growth in trade was largely in commodities groups in the trade mix prior to NAFTA (Hillberry and McDaniel, 2002). NAFTA encouraged businesses to pursue North American strategies that led to the promotion of north–south commerce, thereby shifting the pattern of demands for transport and logistics services. The efficiency of border crossings as stricture points in the flow of traffic has become an important issue, especially with the escalated concern for security from terrorism. (Significant congestion at seaports is a more recent phenomenon.)

The effects of NAFTA on logistics have been felt mainly through the encour- agement to the rationalization of industrial location and the greater – but not free and complete – integration of transport and logistics services. NAFTA advances three strategies in the redesign of continental supply chains. The first is strategy to close certain plants. This strategy applies especially to companies with branch plants – for example, in Canada – to avoid duties. Companies that closed plants for this reason included Bilt-Rite Upholstery, Florsheim Shoes and Gillette. The second strategy is to have plants that specialize in products for continental or global markets, as had been done in the automotive industry between Canada and the United States for a number of years. For example, prior to NAFTA, Upjohn operated a multi-product pharmaceutical plant in Ontario to serve the Canadian market. After NAFTA, that plant specialized in medium-volume sterile products for the Canadian

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and US markets. US plants specialized in high-volume sterile products, and Puerto Rican plants specialized in non-sterile products destined for both Canadian and US markets. Campbell’s Soup, General Electric, Whirlpool, Avon and Dupont followed an almost identical strategy. The third strategy is to consolidate manufacturing or distribution, often close to the border. The product will now flow from one central stocking or manufacturing point instead of from two, and cross-border traffic increases (Taylor and Closs, 1993). The balance of cost and service considerations affects location deci- sions. Industries in which customer service is important are likely to maintain a local market presence. The low value of the Canadian dollar favoured Canadian locations, but this advantage is now diminishing.

The roles of international trade and globalization Foreign trade has always been important to Canada, as a relatively small economy. In 1971, foreign trade and services accounted for just over 40 per cent of gross domestic product. It exceeded 80 per cent for the years 1998–2001 and was over 70 per cent in 2004. However, a high proportion of this trade is with the United States: in 2004, over 80 per cent of exports went to, and just under 70 per cent of imports came from, the United States (Antweiler, 2006).

Foreign trade has played a much lesser role in the US economy. The rapid growth of trade is now one of the important pressures on logistics in the United States. In the period 1970–2004, the average annual growth in US trade was nearly double the pace of GDP growth, 6.2 per cent versus 3.2 per cent (Office of the US Trade Representative, 2005). The value of goods and services as a percentage of GDP has increased from 11 per cent in 1970 to 22 per cent in 1994 and to 25 per cent in 2004.

Table 25.3 shows the faster growth of US imports over exports. This has important consequences not only for the balance of payments but also for the balance of freight in international transport. Canada is still the major national trading partner of the United States, leading in imports and exports. Mexico has increased to second place in US exports but, after rising to second place in US imports, it has slipped to third place because of the rapid growth of imports from China. Trade with China grew rapidly in anticipation of, and then subse- quent to, China’s accession to the World Trade Organization in 2001. The size of the trade imbalance with China and the presence of imbalances with other Asian countries are reflected strongly in the freight imbalance faced by trans- Pacific container services. There has also been more than a doubling of US imports from the EU. The small change in the trade with Japan is remarkable, a reflection of the stalled Japanese economy and the manufacture of Japanese- brand cars in North America. The NAFTA countries accounted for 29 per cent of the increase in US imports between 1994 and 2004. China accounted for 20 per cent (but much of it since 2000) and the EU 19 per cent.

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Thirteen per cent of total US imports were sourced from China in 2004, up from 6 per cent in 1994. However, when imports from China, Japan and the other Asian–Pacific Rim countries are considered together, the region’s share of US imports has actually declined from 39 per cent in 1994 to 33 per cent in 2004. Much of the US imports from China are low-value-added consumer goods; they made up 54 per cent of the imports in 2004 (Office of the US Trade Representative, 2005). The potential continued high rate of growth of imports, particularly from China, is a major concern for the adequacy of transport infrastructure and, therefore, the functioning of the logistics system in the future.

The increased role of foreign trade in a country’s economy is just one aspect of the international nature of the economy. The growth in the size and in the number of multinational corporations and the extent of foreign direct investment (FDI) are also significant. In transport and logistics (and some other businesses), the global expansion of companies is linked to the desire of shippers to deal with fewer companies in their logistics network. Transport and logistics firms often see international growth as a means to achieve system-wide cost reductions and to participate more fully in the growth of international transport and logistics.

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Table 25.3 US trade in goods for selected countries, 1994 and 2004

1994 2004 Change $ billion $ billion %

US exports to Total 502.9 818.8 62.8 Canada 114.4 189.9 66.0 European Union (EU15) 107.8 168.6 56.4 Japan 53.5 54.2 1.3 Mexico 50.8 110.8 118.1 China 9.3 34.7 273.1 Asia Pacific, excluding Japan and China 85.0 121.0 42.3

US imports from: Total 668.7 1,469.7 119.8 Canada 128.4 ,256.4 99.6 European Union (EU15) 119.5 ,272.4 127.9 Japan 119.2 ,129.8 8.9 Mexico 49.5 ,155.9 214.9 China 38.8 ,196.7 407.0 Asia Pacific, excluding Japan and China 103.2 ,166.7 61.6

Sources: Office of the US Trade Representative, 2005; US Census Bureau, 2004

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Trends, opportunities and challenges for logistics in North America

Logistics performance in North America has continued to improve, although affected annually by specific factors such as the effects of interest rates on inventory costs. Table 25.4 shows the latest estimate of logistics costs in the United States. The evolution of logistics practices accounts for the excellent performance, with important trends – and associated challenges and oppor- tunities – discussed in the following sections.

Supply chain management vision The supply chain management vision has led to improved strategic coordi- nation across traditional business functions within companies and across businesses that share the goal of meeting consumer expectations. Supply chain management is thus a corporate philosophy that has considerable implications for logistics (Mentzer, 2001).

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Table 25.4 US business logistics costs in 2004

Carrying costs $1.493 trillion $ billion %

Interest 23 2 Taxes, obsolescence, depreciation, insurance 227 22 Warehousing 82 8

Subtotal 332 33

Transportation costs Motor carriers: Intercity 335 33 Local 174 17

Subtotal 509 50

Other carriers: Railroads 42 4 Water (international 22, domestic 5) 27 3 Oil pipelines 9 1 Air (international 9, domestic 22) 31 3 Forwarders 18 2

Subtotal 127 12 Shipper-related costs 8 1 Logistics administration 39 4

Total logistics costs 1015 100

Source: Wilson, 2005

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The management of a supply chain has moved from relationships that are separate, sequential and transaction-based to ones that emphasize collaboration- based strategies that link cross-enterprise business operations under a shared vision (Bowersox, 1997). The efficient management of a supply chain does not preclude the existence of certain transaction-based relationships as conditions warrant – but, in general, the management of supply chains has resulted in greater reliance on long-term relationships among fewer participants.

At the same time, global sourcing has become more important, driven initially by opportunities for cost reduction. US firms were faster to adopt global sourcing strategies in Asia than Japanese firms (McCann, 1998; McKendrick, Doner and Haggard, 2000). However, firms must follow flexible global supply chain strategies. As the skill and wage levels of workers in locations change and as the logistics needs of products change as they move through their devel- opment cycle, so shifts occur in supply chains. Proximity and short lead times are important during periods of product innovation, but reliable, low-cost logistics is appropriate during a mass-production phase. The need to save time to reduce costs is important in industries such as fashion clothing (Abernathy, 2001) and fad toys (Johnson, 2001) that are characterized by highly uncertain demands and high product seasonality. Abernathy finds strong evidence that the growth of Mexican and Caribbean apparel exports to the United States can be attributed to the increasing importance of shorter and more reliable times for logistics functions. This accounted for the greatest growth being in apparel items requiring frequent replenishment. (The same phenomenon works to the benefit of ex-communist Europe serving Western Europe (Economist, 2005)).

Logistics outsourcing and third-party logistics

Fuelled by pressures to decrease cost and maximize return on assets, many firms have reduced their activities to those processes that they regard as strategic and as giving them a competitive advantage. This focus on core processes or strengths has resulted in increased outsourcing of non-core logistics processes. However, the characteristics of outsourcing logistics have changed over time. Up to the deregulation era in transportation, most outsourcing involved a single logistics service, such as transportation or ware- housing, and was primarily for the physical performance of the service. Today, third-party logistics companies (TPLs, 3PLs) offer an array of bundled logistics services, including operational and strategic planning as well as monitoring and control of the logistics processes.

The attractiveness of outsourcing is evidenced by the rapid growth of the third-party logistics industry. This sector was a $10 billion industry in 1992, more than doubling to $25 billion by 1996. Since 2000, the North American TPL sector has grown 83 per cent, with a 16 per cent increase to $103.7 billion in 2005 (Armstrong & Associates, 2005). Total logistics expenditures increased

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much less, for example only 1 per cent from 2000 to 2004 in the United States (Wilson, 2005). By 2004, the North American TPL market was earning $89.4 billion or 7 per cent of total logistics expenditures in North America.

Armstrong & Associates (2005) report that 64 per cent of domestic Fortune 500 companies use 3PLs for logistics and supply chain functions. Lieb and Bentz’s (2005: 5–15) survey of manufacturers shows that at least 80 per cent used 3PL services and it was the eighth consecutive year that two-thirds or more of the respondents were 3PL users. The 2005 Third-Party Logistics Annual Study (Langley et al, 2005) found that 78, 79 and 80 per cent of the North American respondents reported using 3PL services in 2003, 2004 and 2005 respectively. The largest 3PL expenditures by industry are for auto- motive, retailing and technology (Armstrong & Associates, 2005).

Recent surveys continue to find transportation and warehousing as the most frequently outsourced logistics processes (Armstrong & Associates, 2005; Langley et al, 2005; Lieb and Bentz, 2005: 5–15). Other logistics processes that are frequently outsourced or for which outsourcing is growing are value- added services, international 3PL services, customs clearance and brokerage, freight forwarding, cross-docking and shipment consolidation, order fulfilment and distribution.

In spite of only marginal increases in the percentage of firms outsourcing logistics, logistics outsourcing expenditures have risen significantly as firms outsourcing logistics increased their expenditures significantly. For example, BMW Manufacturing initially outsourced the basic delivery of parts to the production line. In 2002, it used TNT to provide inbound supply chain management, including inbound material control and transportation from suppliers to plant. In 2004, the management of finished parts from its supplier network to its parts distribution centres was also turned over to TNT (Harps, 2004). Similarly, what began as a basic pallet-in/pallet-out warehousing arrangement between the Robert Bosch Corporation and Standard Corporation grew into a full-service logistics outsourcing relationship.

Companies that have outsourced successfully have gained more confi- dence in their relationships with third-party providers. Their experience has led them to expand the scope of the logistics services outsourced and shift from tactical to strategic relationships with more value-added managerial and information technology services provided. Langley et al (2005) note that, although users are generally satisfied with their 3PL providers, the providers are continually pressured to expand their service offerings. Finally, as firms expanded into global markets, a market was created for comprehensive, global TPL services, which further fuelled the growth of the TPL sector.

Shippers traditionally outsourced transportation because of economies of scale, utilization and specialization. However, the value of a knowledge base is seen as increasingly important as information technology plays an ever greater role in supply chain integration. Langley et al (2005) find that 89 per cent of North American respondents agreed that IT capabilities are necessary for 3PL

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providers, 80 per cent indicate that having the right software is a major competitive advantage and 34 per cent of the North American respondents rely on 3PL providers for IT leadership. This is particularly true in the provision of transportation management systems (TMS) and warehouse management systems (WMS) information technology. The 3PL can leverage its expertise and spread out fixed costs of utilizing such technology over multiple clients. However, the Langley et al (2005) survey reveals that only 53 per cent of North American companies use TPL-provided transportation management systems, compared with 80 per cent in Europe.

Flexibility and responsiveness are another reason why North American firms have increased their outsourcing of logistics. In 2002, Canadian apparel manufacturer and retailer Roots was handling licensed USA-logo Olympic wear during the Winter Games in Salt Lake City. With patriotism in those post-11 September days spurring on demand for Team USA apparel, expecta- tions of 100 calls per day into the Roots customer service centre were well below the actual 1,500 per day peak. The company was forced to open a separate web-based ordering channel and revamp its entire distribution strategy on the fly. With the help of a third-party call centre and fulfilment provider, it added two US-based call centres, moved distribution to Memphis and changed delivery carriers (Logistics Today, 2004).

During the initial development of third-party services, successful North American firms developed the business from an asset base, such as trucking fleets and warehousing facilities. Non-asset third-party logistics services dominate the market today. Armstrong & Associates (2005) segment the TPL sector into four main groups, as shown in Table 25.5.

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Table 25.5 Revenues and profitability by segment, 2005

3PL segment Gross revenue Net revenue Net revenue Net income $ billion $ billion % growth % margin

Domestic transportation 30.3 4.8 18.3 12.1 management International transportation 38.2 14.0 13.6 6.3 management Dedicated contract carriage 9.9 9.9 10.2 4.6 Value-added warehouse/ 22.3 18.6 9.5 4.0 distribution Total 100.7 47.3 11.7 5.6

Note: Total gross revenue for the 3PL industry in the United States is estimated at $103.7 billion; $3 billion is included for the logistics software segment.

Source: Armstrong & Associates, 2005

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The largest segment by gross revenues is international transportation management, composed of North American firms that have expanded into international 3PL services and international firms, some of which were tradi- tional freight forwarders. This business and that of the domestic trans- portation management sector are largely no-asset-based. They pass on the costs incurred for purchasing and managing transport and logistics services on behalf of their clients. Large firms with significant transportation volumes may have 3PLs manage their transportation at a tactical level but may directly identify, select and negotiate their own transportation contracts with carriers. This is the dominant pattern for international shipping. The dedicated contract carriage sector supplies tractors, drivers and management as a direct alternative to the client operating its own fleet. Value-added warehouse/ distribution is provided by 3PLs normally providing long-term contract ware- housing or distribution centre operations with a host of value-added services.

Of course, not all outsourced service arrangements work out as hoped. However, the growth of outsourced logistics services will continue, as 3PLs provide the expertise and responsiveness needed for firms to compete in rapidly shifting and increasingly competitive markets. As the 3PL industry matures and more experience is gained, and existing relationships grow into true partnerships, outsourcing will become an even more viable and less risky option to more firms.

Large firms can afford to diversify their base of logistics services. Armstrong & Associates (2005) report that General Motors, Daimler Chrysler and Wal-Mart each use 30 or more 3PLs, and at least 30 other firms were found to use eight or more TPLs. Langley et al (2005) report that 64 to 82 per cent of the respondents to their survey use one to five 3PL providers, and smaller percentages used larger numbers, in some instances over 50 providers. However, there has been a trend to reduce the number of 3PLs used. Langley et al observe that approxi- mately half of their respondents agreed that they were ‘moving to rationalize or reduce the number of third parties we use’. Lead logistics providers (LLPs) and fourth-party logistics providers (4PLs) are another alternative. They have broad supply chain expertise with deep industry and consultative skills, advanced technology capability and integration, and are recognized for innovation and continual improvement. For example, Nortel Networks selected Kuehne & Nagel to be its 4PL in 2002 to manage its global logistics operations including 3PLs, carriers and parcel movers (Inbound Logistics, 2003). In 2001, General Motors and Menlo Logistics formed Vector SCM to act as the LLP managing and coordinating the activities of approximately 20 core 3PLs in North America as well as redesigning GM’s global supply chain (Armstrong, 2004). Despite these high-profile examples, there are very few true LLP or 4PL partnerships, as the concept still needs to be proven and only the largest firms have the complexity problem of multiple 3PLs.

Foreign-owned freight forwarders once dominated international logistics services in North America. Foreign 3PLs such as Tibbett and Britten, and Exel

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have also been significant. This has changed slowly with the expansion of domestic firms. Some of the best-known examples have been carriers that have developed logistics services.

US shipping companies were among the leaders of carriers developing logistics services. They commenced by providing freight consolidation services to meet the needs of US retail stores buying in Asia. Sea-Land and APL developed separ- ately branded and run consolidation services in Asia: American Consolidation Services of APL, and Buyers of Sea-Land. Subsequently, these services have grown and been rebranded to the names of the shipping lines, APL Logistics and Maersk Logistics, of which they are now a part (see Heaver, 2002.)

UPS is another example. UPS started out as a company specializing in small shipment services in the United States. Geographic growth was inhibited by regulations: UPS only obtained authority to serve the contiguous 48 states in 1975. It started limited services in Canada in 1975 and in Germany in 1976. International air service with Europe was not commenced until 1985. UPS then expanded rapidly internationally. UPS branched out into related logistics services with the formation in 1995 of the UPS Logistics Group. An even wider range of services is provided by the formation of UPS Supply Chain Solutions in 2002. Acquisitions of firms in the logistics sector have been a vital part of the service expansion strategy. UPS now has courier services to over 200 countries. In 2004, 26 per cent of package revenue came from inter- national services, up from 17 per cent in 2000 (UPS, 2006).

The management of global logistics has become a much greater part of logistics management. This is reflected in the orientation of the logistics service industry. A survey in 2005 of 3PL executives shows that in North America the increased pressure to internationalize service offerings was perceived as the most important industry dynamic. In Europe, this pressure was ranked behind downward pressure on pricing and the recent expansion of EU membership (Lieb and Bentz, 2005, 2006).

Supply chain integration through collaboration, strategic alliances and partnerships

To realize a supply chain’s full competitive and market potential, companies need to link their organization with other participants in the supply chain, creating an extended team or ‘interprise’. These ‘partners’ include suppliers, vendors, distributors and customers, where suppliers can be suppliers of logistics services as well as products.

Sharing of risks and gains, long-term commitments, and co-mingling of operations and information characterize cooperative relationships. These actions can result in customer service enhancement and cost reduction from redesigning processes across the whole supply chain instead of one part of it,

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from specialization building on each partner ’s strengths, and from better planning resulting from increased information flow among the partners. Communication and information sharing characterize successful partner- ships, allowing all participants to plan and coordinate their operations more effectively.

A number of collaborative strategies and tactics have been developed and applied, including information sharing, vendor-managed inventory, just-in- time II, collaborative production and forecasting replenishment, and collab- orative transportation management to name a few. Many of these techniques were pioneered in the 1990s, but their use has continued to accelerate. In 2002, Capital Consulting & Management concluded that only 1 to 5 per cent of US manufacturing companies had reached the stage of optimized planning where the most substantial supply chain benefits existed (CCMI, 2002). Similarly, a survey of 150 senior executives of Fortune 1000 companies by Accenture indicated that many companies are lagging in terms of true collab- oration – despite a compelling business case for achieving it (Bowman, 2002). The 2002 Ohio State University Survey of Career Patterns in Logistics study found substantial increases in the percentage of the respondents using strategic partnerships with key suppliers and key consumers. This finding was confirmed by a 2005 Accenture survey, which found that ‘Collaboration levels have increased dramatically in the past three years’ (Matchette and Seikel, 2004).

Vendor-managed inventory (VMI) is a tactic where the supplier rather than the customer generates orders based on stocking information, typically accessed using EDI. It is often considered a first step towards more advanced supply chain collaboration, and has been used for many years in North America in a variety of industry sectors, but it rose to prominence in the effi- cient consumer response (ECR) era because it achieved results. Labelled continuous replenishment, it enjoyed one of its most successful applications with Campbell’s Soup, where 31 participating grocery chains obtained signifi- cant improvement in inventory turns and a reduction in stock-outs (Lee, Clark and Tam, 1999). Similar successes across North America are reported in a variety of industry sectors. VMI Projects at Dillard Department Stores, JC Penney and Wal-Mart have shown sales increases of 20 to 25 per cent, and 30 per cent inventory turnover improvements.

Of course, there have been failures. After 12 months of their VMI programme, Spartan Stores decided to halt the programme. Inventories did fall, but it was because small orders were being placed at more frequent intervals. A root problem was that Spartan and their VMI vendors did not come up with an effective way to deal with promotions planning and pricing. As a result, the vendor ’s decision makers could not all do as effective a job as Spartan’s own buyers.

One mechanism for communication is just-in-time II. JIT II has vendor- managed operations taking place within a customer ’s facility, and was popu-

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larized by the Bose Corporation. Supplier representatives – called ‘in-plants’ – place orders to their own companies, relieving the customer ’s buyers of this task. Many also become involved at a deeper level, such as participating in new product development projects and manufacturing planning.

Collaborative production and forecasting replenishment (CPFR) uses available internet and EDI-based technologies to collaborate from operational planning through to execution. CPFR is recognized as a breakthrough business model for planning, forecasting and replenishment, and was origi- nally developed by Wal-Mart and Warner-Lambert in 1995. It has been formalized into a nine-step process that is adjusted to fit specific trading partner relationships and capabilities. Numerous pilot and full implementa- tions have proven the benefits, but this has been generally confined to the retail and consumer package goods industry (Suleski, 2001). In 1998, Wegmans Food Markets and Nabisco, Inc began a CPFR project on Planters Nuts items and gained service level increases and an 18 per cent inventory reduction. In 1999, Canadian Tire shared with 10 suppliers information such as statistical forecasts, promotional life forecasts, dealer order holdings, purchase orders, planned orders and on-hand inventory levels, resulting in service increases, DC stock reduction, increased stock turnover and reduced supplier delivery cycle. A CPFR survey conducted in 2000 found that 70 per cent of the respondents were actively researching, undergoing pilots or preparing to roll out CPFR programmes (Saha, undated), but ‘its adoption however remains sluggish’. To date, most CPFR implementations have been limited to near-exclusive relationships between a single large manufacturer and a single retailer for a specific set of products (Fraser, 2003).

Collaborative transportation management (CTM) is an extension of CPFR that involves converting order forecasts developed via CPFR into shipment forecasts and collaboratively ensuring their accurate fulfilment (Esper and Williams, 2003). For example, the dense network efficiency model of Transplace improves vehicle utilization through the development of continuous movement routeings that minimize empty miles, circuitry and dwell time for truckers. Similarly, the NISTEVO alliance illustrates collaboration across competitors. Under the NISTEVO programme, the transportation needs of each participant are sent in advance to a neutral third party (NISTEVO), which utilizes advanced routeing software to optimize routeing and vehicle utilization across the shippers and the carriers. The matching process improves asset utilization. Its effectiveness is increased by the large volume of traffic aggre- gated from high-volume shippers and because the matching process begins before vehicles are dispatched rather than after they have been put on the road. Dollar savings are estimated to be in the range of 5 to 18 per cent.

The 3PLs are often enablers for collaboration. For example, in Ontario, Canada, Excel Logistics operates distribution centres for a cereal manufac- turer and a soup manufacturer delivering products to the same or closely located grocery stores. As canned soup products have a high density and

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cereal products have low density, Excel is able to fully utilize vehicles’ weight and cubic capacity by combining the freight of both clients, reducing the total number of vehicle trips that would have been required if the products had been shipped separately. Lieb and Bentz observe that increasingly the 3PL users in their surveys report that their major vendors and customers are also served by their primary 3PL provider (Lieb and Bentz, 2004). ‘Clearly, one would expect this development to facilitate further supply chain integration.’

While many success stories can be cited, there are also many failures. Nix et al (2004) found that approximately 29 per cent of 477 respondents indicated their collaboration was unsuccessful. Collaboration requires a relationship often characterized as a partnership or alliance to be successfully imple- mented. While many surveys may indicate that firms are participating in part- nerships, deeper inquiry often finds that ‘truly synergistic relationships are very rare’. These relationships ‘represent only a small fraction of supply chain management relationships – typically 5 per cent or less’ (Fawcett, Magnan and McCarter, 2005). Fawcett, Magnan and McCarter (2005) sum up the situ- ation in North America well when they conclude:

Companies today are much more aware of opportunities to improve organizational competitiveness through closer, partnership relationships and have moved away from the adversarial model that dominated buy/seller relations for much of the 1900s. However few managers have completely abandoned the notion that channel power can and should be used to advance their companies’ positions. The result is that more collaboration is taking place in modern supply-chain relationships but is taking place in a very selective basis.

By remaining opportunistic, most managers are ‘limiting their ability to build truly cohesive, mutually advantageous supply chain teams’.

In summary, the supply chain concept recognizes that, for optimum effi- ciency, logistics needs to be designed and managed in the context of the whole supply chain, including internal and external aspects. Collaborative decision making among partners in a supply chain is a new business model charac- terized by the building of relationships, shared knowledge, more certainty, less guessing and ultimately better planning. The 3PLs are facilitating collabo- ration and integration among their clients, and information technology is improving communication linkages. However, to collaborate effectively, supply chain management requires partnerships and alliances. North American firms recognize the benefits of collaboration and have selectively embraced the concept, but there is a long way to go with respect to devel- oping the relationships that make collaboration successful.

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Evolving supply chain process design – from push to pull

Reducing inventory investment and associated costs through cycle time reduction has become a primary thrust for many firms. This has led to a movement from ‘push’ to ‘pull’ systems where the ultimate objective is to ‘make what the company has sold’ rather than ‘sell what the company has made’. ‘Demand driven’, ‘just-in-time’, ‘quick response’, ‘build or assemble to order ’ and ‘continuous replenishment’ are some of the labels used to describe various applications and types of pull systems. Suppliers and logistics service providers are required to be more responsive as demand drives logistics trans- actions and products can bypass traditional storage and holding processes and go directly to the retail store or customer. These products are often mixed with other freight for immediate delivery in cross-dock facilities by truck. Dell is considered the defining demand-driven business and is well described else- where (Magretta, 1998). However, there are numerous examples of firms and supply chains successfully re-engineering their processes from push to pull in North America. Pilot implementation is usually not an option as the transfor- mation required is both systems-wide and strategic.

Pull systems are desirable for goods with high inventory costs. This applies not only to high-value and high-obsolescence products but also to high-cubic items, such as beds. Bedford Furniture Industries and Sears Canada developed a quick response partnership after Bedford re-engineered its production process from make to stock to assemble beds within days (Chow, 1995). The result was a virtual elimination of inventory and subsequent reduction in warehouse space required the substitution of substantially less cross-docking space for the storage space, reduced handling and more effi- cient transportation delivery patterns. Similar pull systems have been estab- lished for bed supply chains in the United States and for appliance manufacturers. Arntzen and Shumway (2002) describe the changes in demand planning, material supply, manufacturing scheduling and order management introduced by NMS Communications and its manufacturing subcontractor, STMC Manufacturing, to create a high-speed, demand-driven supply chain. Despite the many high-profile examples of successful pull supply chain strategies, most observers still view the migration from manu- facturing-based ‘push’ logistics systems to ‘pull’ networks as an emerging trend. Ross, Holcomb and Mandrodt (2004) indicate that much work remains to be done to develop adaptive supply chains. Much of the current logistics environment appears to be a ‘blended model’: one that incorporates elements of both push and pull systems. Industries where the economics of large production batches is overwhelming, such as in the chemical industry, have seen only limited application of pull logistics systems for their line of indus- trial and consumer products. For example, in Dupont’s industrial chemicals

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and compounds supply chain, the overwhelming economics of large production batches has led the company to forward-place product inven- tories (generally in multiple railcar quantities) at customer sites. Similar batch economies exist for many of Dupont’s industrial chemical customers. This field inventory allows Dupont to provide its customers with consistent and timely replenishment.

The development of pull systems has increased the utilization of a number of best practices, including vendor-managed inventory (discussed above), cross-docking, just-in-time supply, supplier hubs and merge in transit. Strategies to reduce inventory have also encouraged the location of supplier factories close to manufacturing facilities. This is not new, particularly in the automobile and other mass-production industries. In industries where re- location of production is not possible, vendor or supplier hubs have been developed to improve the efficiency of local just-in-time delivery. Supplier hubs are quite common in the PC and electronics manufacturing sector (Dell calls them ‘logistics supply centres’). In 2003, about 30 suppliers provided 75 per cent of Dell’s direct material purchase spend, and most of them main- tained 8 to 10 days of inventory in the nearby logistics supply centre (Blanchard, 2003). The supplier hub operation maximizes vehicle load factors by consolidating components for delivery, which also reduces dock congestion at plants by reducing the number of vehicles making daily deliv- eries. Toyota has consolidated the majority of inventory in the Toyota supply chain into regional parts distribution centres, reducing inventory across the system. However, frequent small deliveries of parts to the dealers and overnight courier deliveries are increased. The cost trade-off is judged to favour this inventory centralization.

The JIT concept has been adapted to serve the retail, grocery and health care sectors in the form of quick response, continuous replenishment and stockless inventory respectively. The tools used to implement these approaches include bar-coding of product, point-of-sale capture of sales infor- mation, electronic data interchange and vendor-managed inventory. Pioneers like Procter & Gamble (P&G) and Wal-Mart lead the way with systems geared to quick response and continuous replenishment. The firms use real-time sales data available through robust information systems to take time and, therefore, inventory out of the supply chain. Quick response emphasizes the speed of delivery while continuous replenishment focuses on the small but frequent lot size dimension. Most of these inbound logistics networks still utilize the retailer ’s distribution centre, and the impact on inbound truck trips is typically minimal. For example, P&G supplies multiple products at a time instead of sending large batches of single commodities infrequently. Suppliers and customers alike benefit from levelled production and delivery of product, which reduces inventory requirements at both ends of the supply chain.

The next step involves bypassing the retailer ’s distribution centre (DC) either by direct store delivery or by cross-docking. Direct delivery to retail

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stores from manufacturers is frequently uneconomical for major suppliers unless full loads can be built. One way to build full loads is to use cross- docking. Cross-docking is a process that prevents products from coming to rest as static inventory at the retailer ’s DC. The manufacturer makes up indi- vidual store orders and delivers this store-ready merchandise to the retailer, which simply offloads it at the DC and cross-docks it to awaiting delivery trucks already scheduled for delivery to stores. Retailers like Wal-Mart, which are able to ‘pull’ their products, are able to cross-dock a larger percentage of their product directly to their stores. However, few retailers have been able to achieve anything close to true cross-docking, as it requires incredibly complex planning and coordination. Perhaps its greatest weakness is that few manu- facturers are equipped to create store order quantities efficiently. Dell and Cisco utilize a variation of cross-docking, merge in transit, where the cross- docked components from different suppliers are merged with stored goods. Blanchard (2003) reports that Maytag maintained 41 cross-dock facilities, which store no inventory. Maytag covers 70 per cent of the US population from a cross-dock facility no more than 125 miles away, enabling high fill rates and short lead times.

In summary, many North American firms seek to become more demand- driven and move towards pull supply chains, but this is still an emerging practice despite the high-profile examples. To be sure, there are many industry sectors and specific businesses where supply lead times and production economies will more than justify the traditional forecast-driven supply chain, but just as certain is the need to be responsive to declining product life cycles and customer order lead times. The trend by many North American retailers and manufacturers to source offshore makes it more difficult to develop fast and reliable supply chains necessary for a pull strategy. This requires mixed strategies with a combination of the two systems and, often, a relocation of distribution centres.

Information technology and visibility Information technology is a key enabler in the North American logistics and supply chain management practices highlighted in this chapter. It is crucial to the upstream visibility of supply and the downstream visibility of demand essential to effective logistics and supply chain management. Information technology plays an ever greater role in supply chain integration because it is the availability of the right information at the right place at the right time at the right level of granularity and detail that enables decisions across supply chain partners to be coordinated and integrated.

The need to achieve visibility has been spurred by many factors, some unique to the United States, others relevant worldwide (Abbot, Mandrodt and Moore, 2005). The terrorist attack of 11 September 2001 has made infor- mation systems an important tool in security initiatives. Measures have been

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led by the United States and have global consequences. The US Customs Service introduced the Container Security Initiative to screen for high-risk containers at overseas ports, and the Customs–Trade Partnership against Terrorism (C–TPAT) under which companies can reduce the likelihood of their containers being inspected by participating in the C–TPAT programme. Advance notice requirements for goods being shipped to the United States have advanced the application of information processes to facilitate security, but to the benefit of logistics, as it requires collecting information farther back (upstream) in the supply chain. There are some benefits to offset the costs that security measures impose. To facilitate trade within NAFTA, the three coun- tries have an interest in compatibility of security measures.

The United States has introduced new requirements in business practices as a result of the fraud scandals of Enron, WorldCom and others. The Sarbanes–Oxley Act (SOA) was passed to make sure that there are internal controls in businesses that govern the information related to financial state- ments. This has implications for contractual relationships including outsourced supplies and logistics services. The need to report the financial implications of contracts, including the consequences of breaches of contracts, adds new dimensions to the logistics manager ’s tasks and further links with the financial processes of companies. The logistics job is more complicated.

Installing an enterprise resource planning (ERP) system is an important driver for companies of a centralized data repository to collect, store, organize and cross-reference data across applications, processes and functions. This is a major corporate undertaking, so that for logistics many firms utilize the infor- mation system capabilities of 3PLs. Shippers and carriers are now looking to adopt new technologies to track assets and products, such as radio frequency identification devices (RFID) and mobile or satellite communications.

Abbot, Mandrodt and Moore (2005) found that RFID was the most frequently added software capability in 2004. RFID has the potential not only to automate manual processes but to provide cost-effective visibility in the supply chain down to the item level. Wal-Mart, which drove the adoption of bar codes throughout retail nearly 20 years ago, is the leader in adopting RFID by requiring its suppliers, numbering into the tens of thousands, to implement RFID tagging on all pallets and cases. It also required the 100 biggest suppliers to have implementation plans in place by February 2004. Only a few years earlier, the retail giant endorsed the EDI-INT AS2 standard and directed 10,000 mid-size suppliers to adopt those communication protocols as a way of sending and receiving transactional data. Its adoption of the UCCnet standard in 2001 provided much-needed momentum throughout the consumer packaged goods industry to embrace data synchronization. This has spurred other sectors in the supply chain community to act as well. Suppliers to Wal-Mart will have the same RFID capabilities to offer to their other customers. Lieb and Bentz found that two- thirds of the manufacturing companies identified as 3PL users in their 2004

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survey are either currently committed to the use of RFID technology in their logistics operations or are actively considering its use (Lieb and Bentz, 2005: 5–15). The 3PLs and other logistics service providers will have to respond with their own ability to read and utilize RFID tags, which could eventually supplant many bar-coding applications.

Growing challenges to the logistics system

The growth and globalization of commerce rely on efficient transport and logistics services – and this poses two substantial challenges for the future. The first is to ensure that sufficient capacity exists in the infrastructure system, and the second is to develop and operate with a greater consideration for environmental consequences.

Capacity constraints The rapid growth of international trade means that congestion pressures arise because this traffic moves through a limited number of gateways at border crossings, airports and seaports. However, two conditions have pushed capacities to their limits. The first is the need for heightened security measures that effectively reduce capacity, especially at trans-border locations. In spite of increased spending on staff and facilities, including information technology, major congestion exists at busy crossings such as the crossing of the Detroit River, which sees heavy traffic serving the integrated auto industry. Delays in border crossing and uncertainties about the continuity of reliable service now make trans-border logistics a less attractive strategy than previously.

The second condition has been the unexpectedly high rates of growth in trade, especially with China. The efficiency of the overseas container logistics system has been of concern for some time; in the United States, the ability of ports to serve larger vessels, the adequacy of terminal capacity, and the quality of the land-side access have been of concern. In 2000, shippers and carriers on the West Coast formed a West Coast Waterfront Coalition to help address challenges there. In February 2003, the group became a national organization and dropped ‘West Coast’ from its name. Its existence could not prevent the severe congestion of 2004. The congestion threatened the ability of firms to meet their business plans and brought home the importance of seaports in the North American economy.

In 2005, the Waterfront Coalition (2005b) issued a call to action, which reflected that the level of congestion experienced in 2004 was the result of many factors, including the failures of shippers and carriers ‘collaboratively to share information concerning expected cargo volumes’ and the inadequacy of many operating practices. (See also Damas, 2005; Damas and Kulisch, 2005.) The problems for shippers and expectations of continuing high rates of trade

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growth have resulted in revisions to perceptions and strategies, some of which were evident during 2005. They include immediate and long-term initiatives:

� Spreading the peak by shipping earlier and using more ports, including shipping from South Asia to the Atlantic coast.

� The development of more inland terminals to receive goods directly from ports by rail, for example in Kansas City (KC Smartport, 2005).

� Increased efforts to improve the integration of port terminals and inland carriers, for example the launch of PierPass in Los Angeles and Long Beach as a means to reduce the congestion of drayage trucks (Waterfront Coalition, 2005a; PierPass Inc, 2006). The working of PierPass may also have contributed to the 25 per cent increase in rail moves off the terminals in Los Angeles in 2005 (Seaports Press Review, 2006).

� The interest of major shippers and major terminal management companies in the development of new container terminals, including those in Mexico, for example at Lazaro Cardenas and, possibly, Punto Colonet, and in Canada at Prince Rupert.

Two important dimensions of the transport capacity problem in North America are the need for more infrastructure capacity and the need for better methods of integration among all participants in supply chains. The ability of infrastructure to serve the growth of international traffic is tight. The rail industry, in particular, has progressed through 25 years of capacity rational- ization and service improvement under the pressures of market competition. It is faced with more urgent needs for capacity expansion than formerly. Ports and highways serving international trade require expansion to meet trade growth. However, a part of the capacity problem arises from the ways in which logistics has been managed. Capacity has been assumed to be available. Strategies to reduce peak demands have been given too little attention in logistics and supply chain decisions. The port–inland interface provided by drayage services has not been managed effectively as a part of the logistics system. It has too often been ignored or fallen through the gap at the transfer of responsibility between shipping lines and shippers or their representatives. The result is that the Waterfront Coalition now recognizes the need to ensure a system that provides drayage services with adequate financial returns.

Unfortunately, ideas on paper take a long time in their acceptance for action and then their implementation. Traffic forecasts based on expected rates of growth in China (and then India, Brazil and other developing countries) and the rate of expansion of Chinese (and other) port facilities cast serious doubts on the adequacy of the North American infrastructure. The capacities of port terminals, of city highways and of the rail system are all potential real bottlenecks. The rate at which capacities may be expanded are constrained by many factors: institu- tional factors when public and private participation is necessary or appropriate; the availability of resources; and the environmental considerations.

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Environmental considerations There is now heightened awareness of the consequences of economic growth for the environment. Transport and, therefore, logistics services are affected because of the effects of fuel consumption on air quality and economic growth generally on land uses. Recognition of the need to address environmental concerns has led to environmental approval processes that can be lengthy and are often large parts of critical paths for new facilities, such as port terminals. Ports face particular problems because of sensitivity of the marine as well as the land environments and because ships, generally an energy- efficient way to move goods, are a major source of urban air pollution. Further, the concentration of trucks on routes to and from terminals, often already heavy with urban traffic, can be problematic. In general, congestion is a major source of environmental damage.

Providing increased logistics capacity to meet the growing needs of commerce and, particularly, of international trade faces new challenges because of the need for greater attention to the environmental consequences of economic growth. Proactive approaches are increasingly common, welcomed by many environmentalists but treated cynically by others.

Concluding comments

The development of logistics strategies in North America over the last decade has followed well-established paths. Logistics has become a more important and better-integrated part of corporate strategy, and supply chain management has been associated with increased outsourcing globally. The success of North American enterprises in improving logistics performance is evident in the low level of logistics costs compared with other regions.

Developments in information technology have played an important role in improved performance in the past and hold new opportunities for improve- ments in the future. However, success brings challenges. Traffic growth is putting pressure on the capacity of transport infrastructure. Transport and logistics services face new challenges in the design and operation of their systems in the light of capacity conditions. Security requirements place new demands on procedures and facilities. Greater awareness of the effects of economic activities on the environment is placing new constraints and requirements on transport and logistics infrastructure and services.

The success of logistics in North America in the past has been its ability to facilitate domestic and international trade with improved service levels and lower costs. To achieve these results in the future will require further inno- vation in technologies and strategies.

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