Forthcoming changes in the area of Customs this year serve to remind transportation managers of the importance of including Customs issues when planning supply chain strategy.
Since joining the World Customs Organization (WCO) in 1971, Canada has subscribed to the Harmonized Commodity Description and Coding System (HS), a multipurpose international product nomenclature developed by the WCO. The HS system comprises about 5,000 commodity groups, each identified by a six digit code, with a set of rules to determine product classification for Customs purposes (in layman's terms, the HS forms the basis of the system used to determine rates of Customs duty). According to the WCO, the HS system is used by more than 200 countries and affects more than 98% of products in international trade.
In 2011, the WCO announced a number of modifications to the HS system as a result of changes in technology and international trade patterns. These modifications resulted in a number of changes to the Canadian Customs Tariff effective January 1, 2012, prompting importers to review products whose tariff classifications may have changed, which in turn may require revisions to Certificates of Origin pertaining to Free Trade Agreements, and Customs rulings for various product classifications.
Based on trade statistics reported by Foreign Affairs and International Trade Canada in 2010, the HS system determines rates of duty on merchandise imports from virtually all of Canada's Top 10 import-trade partners: 1) the United States, 2) China, 3) Mexico, 4) Japan, 5) Germany, 6) United Kingdom, 7) Korea, 8) France, 9) Italy and 10) Taiwan.
The impact of these changes for transportation managers is (potentially) twofold. First, they may result in company-supplier changes within origin countries based on lower negotiated product costs to compensate for increased duty rates, and/or changes in suppliers to between origin countries. For transportation managers this can be a troublesome scenario as purchasing departments scramble to find alternate sources of supply. New supplier locations may not coincide with existing carrier rate agreements, necessitating new carrier rate negotiations, or proximity to origin ports, resulting in increased transportation handling and freight costs. Both of these scenarios reinforce the importance of Customs for transportation managers in terms of awareness of Customs issues, changes in world trade that can affect Canadian importers, and the need to integrate transportation and purchasing operations to support flexible, cost-effective supply chain processes.
Another Customs issue of concern for Canadian importers is Phase 3 of the Advance Commercial Information (ACI) program, more commonly known as “eManifest”. ACI is designed to provide the Canada Border Services Agency (CBSA) with electronic pre-arrival information regarding cargo shipments destined for Canada.
ACI Phase 1 was implemented in 2004, requiring marine transportation carriers to electronically transmit pre-arrival information to CBSA 24-hours before loading cargo at a foreign port. ACI Phase2 was implemented in 2006, requiring air carriers and freight forwarders to electronically transmit cargo data to CBSA 4-hours before arrival in Canada, as well as expanding the marine requirements in Phase 1 to shipments loaded in the United States.
ACI Phase 3, or “eManifest”, will require electronic transmission of cargo data from carriers for all highway and rail shipments, the majority of import shipments to Canada originating from, or transiting through, the United States by surface modes transport. ACI Phase 3 will impact the largest number of shipments destined for Canadian importers, with highway carriers required to send shipment details electronically to CBSA at least one hour before reaching the Canadian border.
The requirement for surface carriers to electronically transmit information to CBSA before shipments arrive in Canada has tremendous significance in terms of the possibility for delay, or potential inadmissibility, of shipments. Transportation managers who control inbound freight movements for example, may wish to verify eManifest transmission capabilities with their existing carriers. This may also be reason to reexamine supplier agreements where freight costs are prepaid (included in the product price), or freight collect where the supplier is responsible for carrier selection.
CBSA commenced eManifest implementation for highway carriers on November 1, 2011. Based on a rolling 0-12-18 month schedule, highway carriers that do not comply with the requirement to electronically transmit cargo data prior to arrival at the border by November 1, 2012 will be denied entry and may incur zero-rated penalties. Highway carriers that do not comply with eManifest requirements by May 1, 2013 may be denied entry to Canada and face monetary penalties.
The United States has implemented similar eManifest requirements under its Automated Commercial Environment (ACE) program. It is also worth noting that the data required under eManifest is harmonized where possible with the WCO in order to streamline the administrative burdens.
As a result, for importers concerned about timely cross-border delivery, control of the cargo movement, ensuring that eManifest requirements are adhered to, may form the basis of Shipper/Receiver/Carrier/Customs broker partnerships in future.

If recent comments are any indication, Maersk Line CEO Eivind Kolding seems intent on pushing his company, and the ocean carrier industry, in a bold new direction. Mr. Kolding's “call for change” has been widely quoted in the international trade press this year, and he has delivered his message personally at industry conferences as a keynote speaker.
The message may sound familiar to some, i.e. the industry has to change, performance has to improve, we're on the brink of a new era, etc. But there are some crucial differences this time. To begin with, Mr. Kolding is CEO of Maersk Line, the world's largest ocean carrier, so when he speaks on industry matters, people tend to listen.
Furthermore, his message is not what you might expect. Rather than simply issue another corporate blandishment about challenging times and how Maersk intends to weather the storms on the horizon, Mr. Kolding has decided to address substantive issues head on. He's not pulling any punches either, inferring, if not stating outright, that the industry is in danger of being overtaken by technology, carrier performance is terrible, the booking process is difficult, and customers are not being serviced. Not at all what one might expect from the CEO of the world's largest ocean carrier.
In essence, Mr. Kolding is warning that the industry is in danger of being left behind by a customer base that needs something his industry is no longer providing: consistency, reliability and convenience. But rather than simply sounding alarm bells, he is wisely couching his message as one of opportunity, one that is attainable, not lost. A large part of what Maersk is trying to achieve involves the services it provides to customers, specifically looking at various service offerings and deciding which are essential to its core competency, and which are simply “custom of the trade”, and therefore costly and burdensome. “Costly” in the sense that they erode profits from other service offerings, and “burdensome” in that they tie up resources that could be put to better use satisfying real customer needs.
Mr. Kolding undoubtedly knows that any message resulting in service changes will be criticized by some as an excuse to reduce services. Nonetheless, he has taken his message to the industry with determination. One need only look at recent changes to appreciate Maersk's attempts to reshape its marketplace.
The issue of truck chassis in the U.S. is a prime example. Unlike most countries around the world, ocean carriers in the U.S. developed a practice of supplying trucks chassis to their customers for container moves. This has a been a routine practice for almost 50 years, and while convenient for shippers, it placed ocean carriers in the land transportation business, adding significant cost and administrative burden to their marine operations.
Whether due to the cost factor alone, or influenced by the 2009 decision by the FMCSA (Federal Motor Carrier Safety Administration) to require additional inspections of ocean carrier chassis transporting containers on public highways, Maersk announced its intention to stop providing truck chassis, implying the service should more appropriately be administered by shippers and land carriers. It may be several years before a final industry business model is in place for handling container chassis in the U.S., but many other ocean carriers have followed Maersk's lead on this issue. (A list of ocean carrier announcements regarding chassis operations in the U.S. can be found on the OCEMA web site (Ocean Carrier Equipment Management Association, a U.S. based association of twenty major ocean common carriers).
This year Maersk took another step towards change by announcing its intention to charge shippers a “load protection fee” for failing to deliver booked containers. Unlike many carrier surcharge implementations however, Maersk is an active partner in this one, promising to pay the same charges to a shipper if it fails to load a container on a scheduled ship. That’s the difference between being a stakeholder (someone who stands to gain) in your customer’s business operations, and being a partner (someone committed to improving operations for all concerned).
To further demonstrate how serious it is about finding a new approach to the way ocean transportation is conducted, Maersk has set up a web site (changingthewaywethinkaboutshipping.com) to invite dialogue from the industry. Readers are treated to a candid assessment of the ocean transportation industry, and it’s not very flattering. There’s more than enough blame to go around, and Mr. Kolding isn’t afraid to point out where customers and shippers can do a better job.
Some of the more revealing facts on the Maersk web site include:
• The industry only delivers one out of two containers on time
• Three out of ten confirmed containers don't turn up when the ship is ready to sail
• Only 56% of customers live up to the volume commitments they make to Maersk
• One-third of container delays are caused by vessel operations and weather conditions at sea and two-thirds are the result of terminal operations
So the stage is set for a frank discussion. Based on the above, there seems little doubt of the “need” for change, the real question is how, and when, can it be accomplished?
Mr. Kolding’s message for the marine industry, and perhaps for all of us in the transportation business, is that we need to rethink the way we construct our business models, the method in which we connect with our customers, by anticipating their needs and being proactive, rather than reactive.
The Maersk web site features a downloadable “manifesto” that outlines its rationale for this initiative, and describes some compelling examples of how other companies have successfully anticipated customer needs. For example:
• Ryanair launched a website in 2000 enabling it to sell directly to customers. At the time, many industry insiders thought passengers would shun the online approach in favour of the traditional travel agent connection. But Ryanair astutely predicted that what passengers really wanted was a new business model that provided a fast and reliable booking process. Today, Ryanair is Europe’s second-largest airline, and passengers can only book seats online, or through the company’s call centre.
• Apple revolutionized the mobile phone market by forecasting that customers would “need” greater access to online services. Convenience and ease of use became essential parameters, far outweighing price considerations.
The importance of dialogue regarding these issues cannot be overestimated. Shippers traditionally shun volume commitments, and carriers are reticent to commit vessels and/or vehicles following the 2008-2009 recession. These aren’t popular topics in transportation circles, but at some point shippers and carriers have to come to terms with volume/capacity commitments if they ever expect to see significant improvement in on-time performance metrics.
The message may not be entirely new, but Mr. Kolding should be commended for pushing the envelope and prodding industry participants by highlighting faults on both sides of the desk. His central theme, one that should be heeded not only by marine carriers but all transportation service providers, is that the industry is lagging in providing adequate services to shippers in today's global business environment. And shippers also have a critical role to play in improving industry performance, as they often have unrealistic expectations in terms of carrier resources, especially in uncertain economic times.
We have an opportunity to change it, and if we don’t do it together, we may find it changed for us. Or as Maersk states in its manifesto: “We really could be so much more; we must make the industry of tomorrow, today.”

Mexican President Calderon’s trip to Washington in early March seems to have produced significant progress regarding the ongoing dispute between Mexico and the U.S. over cross-border trucking. The refusal of the U.S. to enact the southern cross-border trucking provisions of NAFTA due to safety concerns with Mexican carriers has been a sore point with Mexico since the trilateral free-trade agreement took effect in 1994.
The current U.S. position on cross-border trucking with Mexico did not begin with NAFTA however. In fact, the origins of the present-day standoff date back more than twenty-five years. President Reagan voiced similar concerns when he signed the U.S. Bus Regulatory Reform Act (BRRA) in 1982. Section 6 of the BRRA imposed a moratorium on the issuance of licenses to Canadian and Mexican trucking firms seeking access to U.S. markets, not because of safety concerns, but rather the alleged failure of Canada and Mexico to extend the same degree of reciprocal market access to U.S. carriers. In other words, the U.S. claimed its carriers faced restrictions entering Canadian and Mexican markets that carriers from those countries did not encounter entering the U.S.
The 1982 legislation also authorized the President to lift the moratorium however, which President Reagan immediately did in the case of Canada, stating that U.S. carriers were not, in fact, precluded from entering the Canadian market, and declaring open and fair competition between U.S. and Canadian trucking companies as being in the U.S. national interest. Not so in the case of Mexico however; President Reagan refused to lift the moratorium on Mexican trucking firms, pointing to the limited market-access afforded U.S. carriers trying to enter Mexico.
President G.H. Bush renewed the moratorium on cross-border trucking with Mexico, notwithstanding his signing of the NAFTA Agreement in 1992. NAFTA addressed the U.S./Mexico cross-border trucking issue in two phases: first, each country was to allow carrier-access to each other’s border states within one year, by 1995, and, second, both countries were to allow complete cross-border trucking by the year 2000.
President Clinton, however, was not inclined to overturn the moratorium during his term in office either, as evidenced by the U.S. Department of Transportation (DOT) announcement in December 1995 that scheduled access to U.S. border states by Mexican carriers would be postponed, this time due to safety concerns. Mexico subsequently filed a NAFTA challenge, claiming the U.S. was in breach of its obligations under NAFTA and, in 2001, a NAFTA Arbitration Panel agreed, ruling in Mexico’s favour. Nonetheless, the U.S. maintained the moratorium, with continued support from the Teamsters Union and special interest groups who alleged that safety concerns trumped U.S. NAFTA obligations.
In an attempt to comply with the NAFTA Arbitration Panels’ ruling, President G.W. Bush, a supporter of cross-border trucking, launched a pilot project in 2007 that would allow 100 Mexican carriers to deliver shipments throughout the U.S. Congress disagreed however and moved to prohibit any government spending on the project. Citing renewed safety concerns, President Obama officially ended the proposition on March 11, 2009 when he signed the Omnibus Appropriations Act containing a provision that prevented any funding of the pilot program by the U.S. DOT.
One week later, on March 18, 2009, clearly frustrated after fifteen years without a resolution to the cross-border trucking dispute, Mexico retaliated by imposing approximately $2.4 billion in import tariffs on ninety industrial and agricultural American products, affecting exports from more than thirty-five U.S. states. With that single move, Mexico accomplished more than it had in the previous fifteen years of negotiation. The impact on U.S. exporters was guaranteed to get the Administration’s attention, succeeding in focusing attention on the need to negotiate a resolution to the long-standing dispute.
Of particular interest to NAFTA-watchers was the process Mexico utilized in reaching its objective this time around. Stepping outside of the NAFTA dispute-resolution process altogether, Mexico employed a strategy similar to that used by the U.S. in its dispute with Canada when the U.S. imposed tariffs on imports of Canadian softwood lumber. In effect, Mexico astutely leveraged its position on cross-border trucking against the current economic climate in the U.S. and its focus on domestic jobs.
On March 3, 2011, President Obama and President Calderon announced they had agreed, in principle, to finally implement the cross-border trucking provisions of NAFTA. Mexico agreed to drop 50% of its tariffs on U.S. imports once Mexican truckers begin U.S. safety and driver training, and the remaining tariffs will terminate when the first Mexican trucking company receives its U.S. operating authority.
The U.S. DOT has issued a “concept document” as the first step in illustrating the renewed commitment to achieve open-border access, although at this stage it is little more than a statement of expression. Consisting of only two pages, it outlines the general direction DOT will take in certifying Mexican carriers. The main difference this time around however is the depth of the Administration’s commitment – the authorizations granted to Mexican carriers will be permanent. Nonetheless, in a move presumably designed to appease critics of the program for safety reasons, the requirements that Mexican carriers will have to meet are fairly stringent, reportedly exceeding those already contained in the original NAFTA Agreement.
Although this latest initiative seems promising to those in favour of cross-border trucking, its future is by no means guaranteed. There is still much opposition to the program from the Teamsters Union, claiming the move will result in lost jobs for the American trucking industry, and final legislation still has to be drafted which will then have to to be passed by the U.S. Congress.
The road ahead will undoubtedly contain more twists and turns, and the odd speed bump, but at least its running in the right direction.

News regarding contract disputes often catches my eye, for two reasons. First, there are often lessons to be learned, and second, they can be “easy” lessons when the dispute is happening to someone else and we get to stand on the sidelines and watch other companies duke it out. Sort of like watching a fight in the schoolyard, between the parents.

It was with more than a passing interest then that I noticed the November 2010 newsletter of Toronto-based law firm Fernandes Hearn LLP, and its headline “Warehousers Beware! B.C. Court Disallows Standard Terms and Conditions”. And with good reason since any time industry-approved “standard terms and conditions”, be it for bills of lading, warehousing agreements, etc., become the subject of legal disputes, people in our industry (should) take notice.

The case referenced in Fernandes Hearn’s newsletter involved a recent BC court decision regarding a dispute between Kruger Products Limited (formerly Scott Paper Limited) (the “storer”) and First Choice Logistics Inc (the “warehouser”). Kruger stored paper products in a 200,000 sq ft warehouse in New Westminster, BC operated by First Choice. A fire, originating in a forklift, destroyed the building along with Kruger’s stored inventory, resulting in a claim against the warehouse operator for $16,000,000.00 (yes, that’s $16 million dollars!).

At this point you might think that a claim based on a warehouse fire, that all parties acknowledged originated in a forklift operating in the building, resulting in total loss of the facility and the customer’s inventory, would be settled in a fairly straightforward fashion (i.e. as an insurance claim). In fact, what followed is an insightful exercise in litigation for supply chain practitioners involving warehousing issues at (common) law, contracting standards, insurance/indemnification, standard industry liability terms and conditions, and relationships (actual and perceived) between storers, warehousers, contractors and sub-contractors.

These details are explained at length in The Honourable Mr. Justice Burnyeat’s 74-page ruling on this case, available on the Canadian Legal Information Institute (CANLII) web site at www.canlii.org (search Docket no. L032139). Following the many twists and turns of this case, the reader is taken on an intriguing journey that makes reference to agreements between the parties, the Canadian Standard Contract Terms and Conditions for Merchandise Warehousemen, the Warehouse Receipts Act of BC, the Occupiers Liability Act, the Negligence Act, the Sale of Goods Act, and numerous case references surrounding legal precedents on bailments (defined as: The transfer of possession of something (by the bailor) to another person (called the bailee) for some temporary purpose (e.g. repair or storage) after which the property is either returned to the bailor or otherwise disposed of in accordance with the contract of bailment, Source: Duhaime.org).

This case presented many issues for disposition. Perhaps of most significance however, succinctly outlined by Mr. Rui Fernandes of Fernandes Hearn LLP in their November newsletter, was the failure of the warehouser to successfully claim exemption from liability under the Canadian Standard Contract Terms and Conditions for Merchandise Warehousemen, to wit (excerpt):

“Liability of Warehouseman – Section 9, (d) Without limiting the generality of the foregoing, it is specifically declared that: i) All goods are stored at the owner’s risk of loss, damage or delay in the delivery caused by or through inaccuracies, obliteration or absence of marks, numbers, address or description, act of God, irresistible force, enemies of the Queen, civil or military authorities, insurrection, riot, strikes, picketing or any other labour trouble, water, steam, sprinkler leakage, floods, rain, wind, storm, fire, …”

Presumably, the presence of the named loss “fire” in this clause was fundamental to the warehouser’s defense, in addition to other clauses contained in a Warehouse Management Agreement negotiated (but not signed) by the parties. In his ruling, Justice Burnyeat stated “a warehouser may limit its liability but not if it lowers the statutory duty of care.” He then cited instances where the warehouser did not fulfill its obligations under the Agreement, along with inconsistencies and conflicts in the Agreement language.

Of equal interest to me was the issue of determining limitation of liability. Section 9, Liability of Warehouseman in the Canadian Standard Contract Terms and Conditions for Merchandise Warehousemen referenced above further states:

“ii) The legal liability of the warehouseman shall be strictly limited to the lesser of the monetary amount of the damage incurred or 100 times the monthly storage rate on any one package or stored unit with the contents (or, in cases where the warehouseman’s charges are calculated for other than actual storage, maximum $50.00 per unit) unless the
owner specifically request a higher limit in writing and declares an excess value, in which case the warehouseman may, at his option, accept liability and assess an additional charge to the monthly storage or other applicable rate.”

As explained by Fernandes Hearn LLP, “First Choice took the position that “unit” was a pallet or lift given how the warehouse dealt with the product. Kruger Products took the position that the “unit” measure was a case given how customers ordered the product. The court found that the limitation amount…was the lesser of the monetary amount of the damage incurred or of twenty five times the monthly storage on any “case” (not pallet or lift).” In other words, the court agreed with Kruger Products that the unit of value to be used in determining limitation of liability would be the “case”, not the “pallet” as put forward by First Choice. In my mind, that’s obviously a salient point for those of us in the service industry.

The Warehouse Management Agreement between the parties was of paramount importance in settling this case, particularly its effect on deciding the “duty of care” obligation promulgated by Kruger under common law, the Warehouse Receipts Act and the Occupiers Act. The importance of a pertinent, congruent Warehouse Management Agreement in a scenario such as this cannot be underestimated, particularly in light of Justice Burnyeat’s closing remarks under the heading of “Limitations by way of Insurance Provisions: (excerpt) [210] In addition to having the potential effect of impairing the duty of care owed by First to Scott, I am also satisfied that acceding to the submission made by First would make meaningless the indemnification contained in the Warehouse Management Agreement. Any such acceptance of the position advanced by First would have to be in very specific language. That specific language cannot be found in the Warehouse Management Agreement.”
That remark got my attention since it speaks directly to the issue of contracting in (our) industry. As service providers, we frequently write agreements of this nature in an attempt to clearly identify the obligations of the parties, to help resolve disputes, to lay out a path for mediation in the event of disputes, to preserve business relationships, improve performance, and above all else, keep the parties out of court! In this case that clearly did not happen.
I started this blog somewhat facetiously with a schoolyard example, but I certainly take no delight in the misfortune of the two parties involved in this case and the ensuing litigation. In fact as a service provider, I sympathize with both. Warehouse management agreements such as the one described in Kruger Products vs First Choice Logistics are common enough in our industry. Many of us have been involved in drafting similar agreements and are familiar with the pitfalls.
This case is complex, involving many issues at common law as well as issues of contracting, and as such the information herein is presented for reference and general information only, and is not intended to represent a legal opinion, position or advice. I would certainly recommend that those of you with an interest in this subject matter read further into the issues surrounding the case. This wasn’t an “easy” lesson for those involved, but its certainly one the rest of us, both sellers and purchasers of warehousing services, should take note of.
Mr. Rui Fernandes perhaps put it best in his closing remarks in the November newsletter: “The moral of the story is that, if you are a warehouser and you want to limit your liability in any way you should have a well drafted signed warehouse agreement that does not have any conflicting language.” I couldn’t agree more.

The International Chamber of Commerce (ICC) completed its review of Incoterms 2000 earlier this year and the new version, Incoterms 2010, will become effective January 1, 2011. Although the official ICC publication will not be available until September this year, news is already circulating about possible changes in the international trade terms.
The most notable change apparently is that, for the first time, the number of Incoterms will be reduced, from the present number of thirteen, to eleven. If correct, all of these changes will be taking place in the “D” group, with four of the five terms being eliminated and two new terms being introduced.
The terms supposedly being eliminated from Incoterms 2010 include DAF (Delivered at Frontier), DES (Delivered ex Ship), DEQ (Delivered ex Quay) and DDU (Delivered Duty Unpaid). These four terms are being replaced by DAT (Delivered at Terminal) and DAP (Delivered at Place). The DDP (Delivered Duty Paid) term will remain.
The new terms should help to simplify some of the overlap, up to now, with the old D terms. For example, DES, DEQ and DDU all placed responsibility on the seller to bring the goods to the destination place, which in many, if not all, cases would have been a Port. These three terms also placed responsibility for risk of liability on the seller up until the destination “delivery” point. Introduction of the new terms will presumably have the effect of simplifying these multiple terms.
Another exciting development regarding the new terms is that they will apparently address domestic transportation requirements. This will be good news for shippers who have voiced concerns for years that Incoterms did not provide a suitable alternative to domestic FOB terms. The new version should also help reinforce the position of the ICC as the main patron of international shipping terms of sale, especially since shipping terms were removed from the UCC (Uniform Commercial Code) in the United States in 2004.
Other rumoured changes include more emphasis on multimodal terms, acknowledgement of modern cargo security programs, and a change of “delivery” point for some terms. The latter would be a critical change since it refers to the point at which risk (liability) transfers to the buyer; as a result, buyers should review the new terms to ensure they clearly understand when cargo insurance should apply.
The issue of title/ownership remains unchanged in the new version, with Incoterms suggesting a remedy to this issue is better found elsewhere, notably in the buyer/seller contract of sale. As with every new edition of Incoterms, it is worth reminding shippers that it is not mandatory to upgrade to the new version. In fact, many shippers will probably continue using Incoterms 2000 for several years. More importantly, buyers and sellers should review the new terms to determine if there is any advantage in switching to the new version, and ensure any changes are clearly understood, and documented, between contracting parties.
If you haven’t already done so, now is the time to order the new Incoterms 2010 publication, available from the ICC, or your local Chamber of Commerce.
The ICC provides solutions for companies trading internationally in over 130 countries around the world. More information can be found on the ICC web site at www.iccwbo.org.

If you haven’t done so already, check out the “Inside the Numbers” column in the May edition of Canadian Transportation & Logistics magazine, featuring a snapshot of shipper perceptions regarding modal rate increases.
As we all know, forecasting works best when you are dealing with “certainties”; for example, reasonable expectations of demand volume, cost of materials or changes in economic conditions. And when one or more of those components is missing, the forecast model starts looking more and more like a roulette wheel. The summary charts in this month’s Inside the Numbers column help to illustrate that point, particularly in the marine mode.
When asked if they thought marine rates were going to increase, decrease or stay the same in 2010, shippers were split almost evenly with approximately half of those surveyed predicting an increase, and half predicting no change. Only a small percentage, 7%, forecast a decrease in rates for 2010.
On one hand, predicting an increase was a safe bet. Look at it this way (the benefit of hindsight not withstanding) if someone asks you “are rates going up or down next year?” you’ve pretty much got a 50/50 chance of winning the door prize. Rates bottomed out in 2009 so an increase should have been expected, especially since rate levels dropped by as much as 50% over the previous three to four years. The group that forecast ‘no change’ probably felt rates were at their lowest feasible levels and, with no firm economic recovery in sight, estimated that steamship lines would hold rate levels pending signs of increased demand. The 7% who forecast continuing decreases might have been gambling demand would continue to fall and rate levels would follow suit.
The group that forecast increases this year were correct of course, but the really tough question still remains – by how much? On this score, it looks like just about everyone who forecast an increase missed the boat (no pun intended). The largest group, 35%, forecast increases in the range of 2.1% to 4%, with the next group, 22%, expecting increases of 4.1% to 6%. Although this group was astute enough to see increases coming, we all underestimated the aggressive approach liner companies would take to “return rates to sustainable levels”. So far this year the industry has seen increases of close to 30% in some areas due to successive general rate increases. And there are rumours that the peak season surcharge expected in June/July may be repeated in August, so the net result of marine rate level increases may not be known for some months yet.
At least those transportation managers who forecast increases were able to prepare their organizations for the fact that costs would be going up, even more so for the small group of 11% who forecast increases in excess of 10%. Not so unfortunately for the 47% of transportation managers who forecast “no change” in marine rates this year, or the 7% who forecast rate decreases.
Forecasting transportation costs doesn’t get easier in the face of economic uncertainty, it just gets more important.

There’s no doubt the past couple of years have been a “shaking out” period for the transportation industry. And although business indices and industry forecasts of late are apt to contain phrases like “the recession seems to be slowing” or “results are showing signs of an increase”, industry experts and government officials often disagree on the state of our economy’s recovery, sometimes in the same industry presentation!
When was the last time you heard blanket industry concerns over tight capacity, driver shortages and the need for market pricing to regulate high demand? Industry concerns over low demand, excess supply and idle equipment are still problematic. And with oil prices inching steadily upwards, drivers will continue to have one eye on the road and the other on the fuel gauge.
Despite the continuing challenges many transportation firms have valiantly held on, making tough decisions, initiating cost-saving measures and squeezing efficiencies out of every turn of the wheel. Many of the firms who survived invested wisely in technology resources that enabled them to develop partnership arrangements with shippers to weather the economic downturn. These investments included user-friendly web interfaces for tracking and tracing shipments, web portals for electronic shipment status reports and, in some cases, direct links to shippers' computer systems to integrate order-entry and transportation information.
Unfortunately, not every transportation company has the resources to invest in sophisticated technology platforms. As a result, when the economy does rebound, many small to medium-size freight companies will still be competing heavily to develop a value-added service strategy.
Software as a Service (SaaS) may well provide the answer for many smaller firms looking for a cost-effective opportunity to compete in this arena. SaaS offers the potential for flexible, on-demand web-based computer applications, at lower cost than many in-house or off-the-shelf packages. Industry leaders like Descartes, Red Prairie, Sterling Commerce, Management Dynamics and Manhattan Associates are offering or exploring these on-demand solutions as various transportation/supply chain applications. Coupled with web-hosted supply chain management hub services that work with existing ERP systems like those offered by Supply Chain Connect based in Houston Texas, providing a platform to share order entry data with end-to-end inventory visibility, and you have a powerful new opportunity to partner with your customer in developing service solutions.
Transportation service providers have always maintained this business is about more than “just rates”. On the other hand, there are many shippers for whom transportation is just that, rates, and their continuous quest to drive freight costs to the lowest possible level. These firms treat transportation like a commodity, rather than a service. Undeniably, that's a strategy that works for some organizations; the challenge for transportation companies is finding shippers who value transportation as a service, as a means of connecting to their end-customer by leveraging transportation to their competitive advantage. SaaS may offer a cost-effective way for small to medium-size transportation companies to reinforce that position and develop new value-added relationships based on information sharing.

People can be fairly predictable at the best of times, and certainly in tough times. As a service provider, I can almost guarantee I’ll get two types of requests from customers when the economy enters a period of downturn; first, “we want lower rates” and second, “we want better service at those lower rates”. Fair enough, both of those scenarios are understandable and can be negotiated and resolved (even if it results in a negative resolution with companies changing suppliers).
But then what? Where do you go for continued savings or improvements once you’ve renegotiated with suppliers?
To begin with, an understating of “where” savings can be found is essential. It’s common to look outside first, at external suppliers, since “savings” appear immediately when suppliers reduce their rates. However, “better service at lower rates” may be more of an oxymoron than a successful negotiating strategy. Let’s face it, when was the last time you bought a bottle of wine (at a lower price) that advertised “better taste with half the grapes”, or an automobile that claimed “better performance with half the quality”. In other words, it might work, but there is probably a better chance it won’t, or of it does, it might only work for a short period of time, or until the supplier can replace you with a more profitable customer.
The downside of this strategy of course is the potential for administrative (and service) disruptions and, eventually, even higher rates if new suppliers have to be sourced. Which is why every good cost reduction/service improvement strategy should include both external and internal sources.
In other words, don’t forget to look at your organization’s internal practices as a source of potential savings. There are many internal processes that can yield savings or service improvements, including the use of consolidations. From a transportation perspective, the principle of “consolidating” is relatively simple: combining orders so you can ship in bigger lot sizes, thereby lowering unit costs at the higher weight level.
The same principle can be leveraged with suppliers. In the case of inbound collect shipments for example, requesting that suppliers ship inbound orders once, or twice, per week rather than daily, will increase load weights (and reduce unit costs). Additional savings can be obtained by having inbound carriers pick up and consolidate orders from suppliers in close proximity to one another.
Consolidations on the customer side of your operation can be more difficult. Take the example of a customer who places orders with your firm every day before a noon cutoff, in order to receive next day delivery. Oftentimes a company will resist asking customers if they will entertain changes in shipping policy for fear it will impact negatively on their sales. Nonetheless, its an opportunity worth exploring and some customers may well be willing to receive your orders fewer times per week without impacting their business operations (i.e. even though your customer orders daily, the orders may be to replenish safety stock; or having fewer orders to receive may enable your customer to better schedule receiving personnel, etc).
There are many ways to reduce operating costs. Renegotiating supplier prices is one method, but reexamining internal processes, such as the use of consolidations, can also be effective and should not be overlooked.

CT&L’s Daily News for October 2nd reported July trade numbers published by the Bureau of Transportation Statistics (BTS) of the US Department of Transportation, and it wasn’t all good news. The BTS report reflected the gloomy state of trade between the NAFTA partners this year, now decreasing for seven consecutive months.

According to the BTS, the reported value of Canada/US surface transportation trade for July fell just over 33% compared to a year earlier. One interesting note to the report however included mention that the state of Illinois replaced Michigan as Canada’s leading US trade partner that month. Which prompted me to wonder what we bought more of from Illinois than Michigan in July.

A quick review of the Canadian government’s international trade site revealed that Michigan’s leading exports to Canada in 2007 (the most recent data reported) were, not surprisingly, motor vehicle parts, automobiles and trucks. Michigan is, after all, the heartland of American automobile production. In 2007 in fact, 66% of Michigan’s total exports were transportation related products, followed by metals and energy products respectively.

So how did Illinois knock Michigan from the top spot? Was it a surge in Canadians’ appetite for Illinois corn, soybeans or ostriches? That’s right...ostriches! According to the Illinois Department of Agriculture there actually is a specialty market for ostriches in Illinois. I thought I was onto something here. Perhaps I would be the first to discover a burgeoning trade in ostrich feathers for the Canadian entertainment industry, or the wildlife safari business (can you ride an ostrich I wonder?) or (at worst) a growing underground market for ostrich burgers (even I have trouble with that one).

Presumably it was nothing so exotic, or (arguably) tasty. The automotive industry once again featured prominently in 2007 with Illinois exports to Canada of automobiles and motor vehicle parts, followed closely by machinery and metal products. Given the state of our North American economy I am somewhat heartened to think that our automobile industry may still be the backbone of Canada/US trade, whether from Michigan or Illinois.

(But I can’t help but wonder when the BTS will find out about those ostriches!)

There has been a growing awareness in recent years of a difference in perception between C-level executives (CEO’s, CFO’s, COO’s) and O-level managers (Operations-level managers including Transportation, Purchasing, Logistics, Inventory, Materials Management, etc.) when it comes to the role of supply chain management. These differences in perception within the same organization may seem paradoxical, but they also illustrate a potentially troublesome scenario for transportation managers.
Julia Kuzeljevich, Features Editor for Canadian Transportation & Logistics magazine, touched on this subject in her excellent cover story “Not Too Close For Comfort” in the May issue of CT&L. The cover story addressed changing global sourcing strategies identified in the 15th Annual 3PL Provider CEO Perspective study. One of the many important trends identified by participants in this study was the increasing number of organizations adopting near-sourcing strategies, relocating their operations away from Asia and closer to home (reportedly 20% of European CEO’s and over 30% of CEO’s in the Asia-Pacific area) in response to increasing fuel costs, currency fluctuations and time-to-market concerns.
These changes in direction also serve to highlight the differences in perception between C-level executives and O-level managers. For example, transportation managers traditionally balance cost and service concerns, although with the advent of global sourcing practices increasing freight costs are a reality, focusing more attention on service concerns as a result. Faced with longer transit times, potential delays and multiple border crossings, it’s understandable that transportation managers would strive to develop long term carrier partnerships based on consistent, reliable service patterns.
In many cases, cost concerns may take second place to delivery performance as transportation managers respond to requirements for sales-driven customer service objectives, balanced by financial concerns for minimal inventory levels. Optimally, these carrier relationships tend to be founded on repetitive (or forecasted increases in) shipping volumes.
The 3PL Perspective study however identified concerns among C-level executives that extended chains also raise vulnerability issues, resulting in a desire for more agile supply chains, providing flexibility to relocate operations to other countries as market conditions dictate. These differences in perception can result in competing interests between transportation managers focused on supply chain costs and attempting to develop long-term supplier relationships based on stable, repetitive shipping volumes, and C-level executives more concerned with quarterly results and total landed costs, requiring flexible supply chains that can have adverse effects on rate levels and may result in shorter-term carrier relationships.
For transportation managers faced with this dilemma, two requirements should become abundantly clear:
1. The need for O-level managers to have senior management representation so they can have access to information that might indicate pending market changes.
2. Provision for flexibility when developing strategic supply chain plans, including the potential need for contingency carriers in the event near sourcing becomes reality.
Another consideration in this decision-making process is the impact on inventory, both from the perspective of investment costs and carrying costs. Near sourcing may result in shorter lead times, which in turn can have a significant impact on inventory levels.
Employees look at inventory in different ways: C-level executives view inventory in terms of its impact on working capital, while O-level managers view inventory as a buffer against erroneous forecasting and potential customer complaints. In fact, inventory overlaps both of these areas and needs to be reviewed as early as possible when organizations consider changes in strategic direction.
Understanding this difference in perception is critical for O-level managers to be successful, particularly with regard to how their performance will be measured by the executive suite.