Jasco, a major distributor of GE Consumer Electronics products, is moving into this Oklahoma City facility vacated by Fleming Foods in 2002. Jasco's move will also add 120 employees. Photo: Mark Hancock – The Journal Record

The Transport Squeeze

They'll have to, sooner or later. And if their inspiration doesn't come from forces within, it will come from doing without.
        For some third-party logistics and distribution companies and investors – like AMB, First Industrial, Keystone Property Trust or the newly anounced $500-million partnership between ING Clarion and Trammell Crow – it's all about getting in early near airports and seaports. The same applies for end user corporations. But new rules and new markets are making for higher transport costs on the open seas and the open road.
        The tremendous commodity demand in China has caused ocean shipping rates to triple within the last year, as ports throughout Asia back up with queuing ships and both port and ship capacity lags behind demand. The Baltic Dry Index, the leading indicator for commodity freight rates, rose by 170 percent in 2003. According to shipping publication Lloyd's List, container freight rates rose by 30 percent in 2003 and are expected to rise another 10 percent in 2004.
        Domestically, those containers may be more expensive to haul too, thanks to new trucking rules that took effect in January 2004 limiting driver hours. Now drivers are required to limit work hours to a maximum of 14 hours a day (down from 15) and to rest for 10 hours, not eight. However, 11 of the 14 working hours can be behind the wheel, up from 10.
        The U.S. government estimates that the new regulations will cause trucking companies to spend about $1.3 billion more per year. The concomitant rise in trucking rates could be between 4 percent and 7 percent. And corporate end users seeking to keep up with their current cargo are expecting to spend millions more on extra trucks and drivers.
        The key point for warehouse operators? Time spent waiting on docks is now counted as work hours, and many transportation companies will be instituting extra charges for those customers who make a habit of making them wait.
        The situation is not helped by increasing freight train congestion on rail lines between the West Coast and the Midwest, which carry such a large proportion of the containers bound from Asia to the U.S. marketplace.

Hiring By the Hundreds in Kentucky Gordon Food Service, in September 2003, announced it would build a 300,000-sq.-ft. (27,870-sq.-m.) DC in the Louisville, Ky., suburb of Shepherdsville, where it will employ some 200 people within two years. The company has another Kentucky DC in East Bernstadt, as well as facilities in Grand Rapids and Brighton, Mich.; Springfield, Ohio; Martin, Tenn.; and Miami, Fla. Gordon received $7.5 million in tax credits through the Kentucky Economic Development Finance Authority. But that's just one small part of the Bullitt County DC story.         That same month, AEC One Stop Group also signed up for a Shepherdsville DC, planning to employ 85 at its 168,000-sq.-ft. (15,607-sq.-m.) facility in the distribution of various media and entertainment products. And in early 2004, San Francisco-based Internet shoe company Zappos announced it would more than double its warehouse space to 280,000 sq. ft. (26,012 sq. m.) and add its own 200 jobs in the next two years.         Even a recently located manufacturer in the same area, Guelph, Ont.-based snowplow and utility trailer firm Snowbear, may build a DC of its own, on the same 10-acre (4-hectare) property it now uses for its 103,000 sq. ft. (9,569 sq. m.) of manufacturing activity, which will eventually employ, yes, some 200 people. Several DCs have recently opened in Shepherdsville, Ky.'s Cedar Grove Business Park.

        Topping off North American transport worries, the U.S. Energy Information Administration has now forecast a U.S. average gasoline price of $1.67 per gallon for the full year 2004.
        All of which means that when the hot potato lands near a distribution facility, the pressure is more intense than ever to keep it moving and keep it tallied.

Got RFID?

Notwithstanding consumer paranoia about tracking products throughout their life cycles in their users' homes, radio-frequency ID (RFID) systems are gradually making their way into the DC picture – not least because Wal-Mart says so. In 2003, the company announced that it wanted its top 100 suppliers to have the technology in their products (replacing the old barcode system) by the end of 2004.
        The mandate hasn't prevented the company from seeing some delays in its implementation – primarily in the handling of tightly controlled prescription drugs. – or in its scope, which has now been reduced to pilot status.
        But Wal-Mart is not the only one getting on board with RFID. Ford Motor Co. uses the technology at a handful of its engine plants, as have many manufacturers and the U.S. Dept. of Defense over the years. Now, as the technology's costs begin to come down, fellow retailers like Target, Albertson's and Germany's Metro AG also have launched their own development programs.
        A study released in November 2003 by management consulting firm A.T. Kearney predicts that retailers using RFID will see a one-time cash savings estimated at 5 percent of total inventory; an annual benefit from a reduction in store and warehouse labor expenses of 7.5 percent; and a reduction in out-of-stock items resulting in a recurring annual benefit of $700,000 per $1 billion in annual sales for retailers who re-engineer their current shelf fulfillment processes.
        The cost will be around $400,000 per DC and $100,000 per store to implement the systems, says Kearney, "with an additional $35 to $40 million needed for systems integration across the entire organization."
        The firm notes that manufacturers, however, will not see the same benefits, as they must factor in the costs associated with placing the ID tags on their pallets and cases.
        According to Kearney, the relative costs depend on the type of manufacturer. The report compares two manufacturers with $5 billion in sales, a low-impact (but high-volume) grocery manufacturer and a high-impact over-the-counter drug manufacturer. It concludes that "the low-impact manufacturer loses out by $155 million from a capital budgeting perspective (assuming the current $.15 cost per RFID tag, a 10-year horizon and a weighted average cost of capital of 12 percent)."
        "The hit on manufacturers' cash flow is not something that can be made up by volume, as the saying goes," said Dave Donnan, an A.T. Kearney vice president. "In fact, the high-volume manufacturers will see the greatest cash-flow impact."
        But the consultants also note that manufacturers are far enough ahead of the supply chain curve that they may not have that much left to gain.
        Among the offshoots of RFID is product development by such luminaries as IBM, Microsoft and Sun Microsystems. Sun has just opened a 12,000-sq.-ft. (1,115-sq.-m.) European RFID test center in Scotland, a twin to one already up and running in Wal-Mart's test city of Dallas. IBM has opened a similar center in Denmark. And in the U.S., Morgan Hill, Calif.-based Alien Technology Corp. is building an RFID research and manufacturing facility at North Dakota State University's Research & Technology Park in Fargo.