Companies are shipping more items by plane to meet customers’ rising expectations for rapid delivery, prompting a scramble for cargo space that has sent airfreight rates soaring and pushed Amazon and others into the airline business. Global airfreight traffic climbed almost 9% this past year.
The cause is twofold: As online shoppers come to expect faster home delivery of everything from smartphones to paper towels, passenger jets and dedicated cargo planes are picking up more kinds of cargo traditionally carried by container ships, trains and trucks. At the same time, strong global economic growth also is spurring demand for goods long ferried by air, such as automotive and manufacturing parts.
Those factors are creating some of the stiffest competition for air-cargo space in years, reports The Wall Street Journal (Jan. 10, 2018). To meet the rising demand, Amazon has started its own airline and some air-cargo operators are searching for older, idle jets to convert into freighters. Amazon has used its current fleet of about 30 use Boeing 767 jets primarily for its fastest Prime delivery service, and is adding 10 more planes this year. The dedicated fleet has allowed it to extend the window for guaranteed 2-day delivery from 6 p.m. on the East Coast to as late as 11 p.m.
Demand for new smartphones from Apple and Samsung last year pushed up airfreight costs. Elevated semiconductor shipments, an airfreight mainstay, also have been gobbling up cargo space. And increasingly, manufacturers are loading toys, clothing and other products onto planes to meet shorter delivery windows and leaner retail inventories.
Airport cargo terminals are now teeming with items such as dog food and spaghetti sauce. “We’re shipping more and more of what you might consider to be everyday basics,” said a UPS spokesman.
Classroom discussion questions:
- What can operations managers do to better control shipping/logistics costs?
- What technique in Supplement 11 (Supply Chain Management Analytics) could be used in this situation?
One of the observations in the article is that “passenger jets and dedicated cargo planes are picking up more kinds of cargo traditionally carried by container ships, trains and trucks.” This can not help the container shipping industry which is currently overcapacitated. For example, on August 1, 2017, SupplyChainDIVE reported “Since 2015, the world’s most prominent carriers have suffered from depressed freight rates, industry-wide overcapacity and two years of declining profits.”. (See https://www.supplychaindive.com/news/shipping-industry-consolidation-shift-2016-2017/448068/). FreightHub uses the term “enormous overcapacity” in its Feb 2017 article on shipping. (See https://freighthub.com/en/blog/current-state-shipping-capacity/.)
What can operations managers do to better control shipping/logistics costs?
Poses an interesting question. Are you better to predict sales accurately and ship to the right place in bulk (not very lean…) or should you respond to customer demand and incur high freight costs instead?
James—Great question! Every company is different, so the answer may well depend upon the conditions that each company faces individually. Having said that, I would argue that in the long run it’s better to have a proactive strategy than a reactive strategy. Firms can be more proactive not only in forecasting more accurately, as you say, but even in better managing demand to reduce uncertainty and seasonality. Tactics such as pre-orders, reservations, and appointments can reduce demand uncertainty, while well-timed promotions or the production of complementary seasonal products (e.g., producing both lawn mowers and snow blowers) can reduce seasonality. We touch on these issues in Supplement 7 and Chapter 4 of the book. Such tactics may allow the firm to use slower but cheaper shipping methods while still providing speedy customer service.
Having to rely forever on expensive shipping seems to be an uncompetitive position. Large firms such as Wal-Mart and Amazon can afford the investments to perform some of their own logistics. But for everyone else, getting a better handle on customer demand may be the best approach.