DC Velocity - August 2010

both companies, along with positive comments from other transportation firms, supports the idea that freight demand will stay strong beyond the upcoming 2010 peak shipping season.

In an unwelcome but expected development for shippers, carrier pricing has lagged behind the recovery, according to Langenfeld. This implies that higher prices lie ahead for shippers as they negotiate contract renewals in the second half of 2010.

FedEx and UPS continue to enjoy a favorable pricing climate as a result of DHL Express’s withdrawal from the domestic market. While the incumbents have long since absorbed DHL’s daily U.S. package count of between 1 and 1. 5 million, the absence of a third shipping option—and the departure of the low-price leader—has emboldened them to take tougher lines on rates, according to Jerry Hempstead, a former sales executive for DHL Express and its predecessor Airborne Express, and now head of a consultancy that bears his name.

Hempstead said UPS and FedEx have been using such code phrases as “ rational pricing” and “intelligent discounting” to describe their rate strategies in the current market environment. Whereas 18 months ago, the companies would have tried to retain accounts at almost any cost, today they are increasingly walking away from business they believe offers slim profit margins.

An improving economy has also been a tailwind for the carriers. DHL, which continues to offer international service to and from the United States, has said it is shooting for a 10- to 15- percent growth rate for those volumes by early 2011.

Hempstead said a growing economy, combined with the prospect of significant rate increases by the U.S. Postal Service for its parcel services, will give UPS and FedEx the confidence to propose their own substantial price hikes when they hit the street early next year.

“This is not great news for shippers,” he said.

—Mark Solomon

downturn leads to network shifts

A redesign of a company’s distribution network might not seem like a high priority during a severe recession. But recent research by Saddle Creek Corp., a third-party logistics service provider (3PL), and DC VELOCITY, found that many companies modified their networks as a result of the downturn.

The research showed that two-thirds of the survey’s 265 respondents had made changes to their distribution network design due to the recession. Transportation-related changes topped the list, followed by shifts in warehouse size or configuration and consolidation of shipments from suppliers. One-quar-ter of the respondents said they began or accelerated consolidation efforts in their networks during the downturn.

Slightly more than 30 percent of the respondents said they made no significant changes to their networks in response to economic conditions. That includes slightly more than half of the retailers polled in the survey, who said they essentially stood pat.

The biggest companies in the sample—those with more than $2.5 billion in annual sales—were most likely to move distribution nodes ( 22. 6 percent) or make changes to warehouse size or configuration ( 45. 2 percent).

While half of the mid-sized companies—those with between $500 million and $1 billion in revenue—said they made changes to their existing facilities, 62. 5 percent of that group said they made shifts related to transportation—a far larger percentage than any other segment in the survey. Changes in transportation management, which does not involve fixed assets, may be the easiest and quickest to implement and bear fruit.

As for DC-related initiatives, common responses included tightening inventory control and more effective lease renegotiations. Several respondents said they took advantage of low real estate costs to expand operations.

One respondent from the manufacturing sector told Saddle Creek, “We have worked to better manage our inventory levels and have been able to reduce the amount of inventory we carry and still meet customer needs. As a result, we have been able to reduce DC space, which has been a cost savings to the company.” Managers are demanding more from their 3PLs as well. Saddle Creek reports that more than half of all companies that outsource say they have asked for new things from their warehousing service providers, including cost reductions, real-time tracking, statistical data, and advance shipment notices.

Changes in distribution networks are likely to continue as the economy recovers: 44. 8 percent of the respondents expect to make further changes to their networks over the next 12 to 18 months, with cost controls the main objective.