Air freight retrenchment
Ericsson takes hands-on control of supply chain, limits air transport use through better planning.
By Eric Kulisch
Ericsson, the Swedish provider of telecommunications network equipment and services, is a prime example of the uphill battle facing the air cargo industry.
Global air cargo volumes have slowly improved since the financial crisis, but essentially are at the same level they were five years ago. World trade is subdued, demand is weak and there is plenty of capacity, so many airlines are having trouble making a profit on cargo. Declining load factors sent yields down last year.
Airlines are hoping cargo will bounce back to pre-recession growth of about 5 percent per annum, but shippers used the downturn to take stock of their supply chains and some determined they don’t need the speed of air for many shipments.
Ericsson a couple of years ago began an aggressive move away from air freight procurement and towards ocean shipping as part of an effort to pay greater attention to logistics requirements and reduce cost. At The International Air Cargo Association’s (TIACA) recent Executive Summit in Dallas, Robert Mellin, head of distribution and logistics, said the company will shift even more business from air cargo to other modes if the industry doesn’t improve customer service.
Quantifying the overall amount of air freight that has migrated to ocean is difficult because there is no simple way to measure the trend. Anecdotal evidence suggests freight forwarders have experienced growth in their ocean business while air cargo has declined, but even if there were concrete shifts they would be difficult to detect since 97 to 98 percent of all goods in international trade already move by ocean. A noticeable volume shift in air cargo is a drop in the bucket for ocean cargo.
Mellin said Ericsson, which operates in 180 countries, began taking a more disciplined approach toward logistics costs as its margins dropped. Last year, the telecom company pulled in 227.8 billion Swedish krona ($33.8 billion) in revenue.
In mid-April, the company hit its target of moving 80 percent of its international volume by surface transport, up from 46 percent in 2010. That has brought transport costs down to 9.50 Swedish krona ($1.45) per kilogram from almost 19 krona ($2.91) per kilogram. Nonetheless, Ericsson still spends 71 percent of its international logistics budget on air freight, with the balance for trucking (15 percent), ocean (8 percent) and customs brokerage (6 percent), according to Mellin.
The inverted cost and volume figures remain a pain point.
“You must be suicidal if you don’t try to get rid of air freight,” Mellin told the audience of 180 professionals, which included many air cargo executives.
The increased reliability of ocean and motor carriers, and the availability of commercial off-the-shelf transportation management systems that give shippers the ability to track the status of shipments in real time so they can compensate for shipping delays, make it easier for companies like Ericsson to switch to surface transportation, he said.
Less air freight also reduces the company’s output of carbon dioxide, which is a top corporate priority and sought by many customers, he added. Customers expect suppliers to show how much carbon dioxide is produced when delivering cellular stations, but Mellin expressed frustration that airlines and third-party logistics providers don’t provide more accurate information about their carbon emissions.
Nonetheless, Ericsson remains reliant on air transport for three reasons: governments in emerging markets are eagerly building fourth-generation cellular networks from scratch and want equipment in place within months of contract signing; customers can’t always accurately predict their volume requirements with enough lead time; and telephone and broadband companies won’t wait for expensive, custom orders.
“We don’t have time to put things on a boat” in those cases, Mellin said.
After gaining control of its international logistics costs, Ericsson is now concentrating on its local logistics activity. The focus is a direct outgrowth of the decision two years ago to shorten its supply chain by purchasing components and doing final product configuration close to the customer, which allows more transportation by truck.
Ericsson, for example, now buys batteries locally or, if necessary, ships them by ocean instead of flying them from Sweden to far-away markets, Mellin said.
Customers increasingly want Ericsson to take more responsibility of their supply chains as hardware prices decline over time and the proportional cost of logistics for those products rises. The price of mobile base stations in the past two years has dropped 50 to 60 percent, which means that logistics accounts for much more than 2 or 3 percent of the total landed cost assumed in the past. Even though customers continue to buy products from multiple suppliers, the trend is to ask one of them to manage logistics for the entire network rollout. The goal is to get a turnkey logistics solution that can reduce costs in line with hardware prices in order to maintain margins. Ericsson is accepting that role and using its logistics providers to arrange transport, provide real-time visibility and minimize long-haul shipments, Mellin said.
Besides cost savings, Ericsson’s new supply chain strategy aims to reduce risk from having extended trade lanes susceptible to disruption that could lead to component shortages – a lesson learned from the massive ash cloud that spewed from a volcano in Iceland a couple years ago and shut down air traffic throughout Europe for days, Mellin said.
The manufacturer is also fostering closer collaboration with customers to better forecast demand and minimize rush orders that require expedited delivery. It is more disciplined about signing standardized contracts with longer lead times so that it can use cheaper transportation modes or charge customers in case urgent freight deliveries are required. And distribution centers are located regionally allow Ericsson to quickly fill orders from safety stock.
Ericsson, which outsourced its logistics department a decade ago and brought it back within five years, now has the logistics expertise to manage an extensive global supply chain, utilize the transportation management systems and dictate to third-party logistics providers how to execute its strategy. Mellin said there are 100 people on his logistics team, with five persons dedicated to simulating distribution scenarios to help the company optimize the location of distribution centers and shipping routes. Ericsson is less dependent now on 3PLs for strategic planning and can instruct them on which preferred carriers to use.
“There is no more guessing. We really have scientific aids to help us with decisions,” he said. The transportation management systems allow Ericsson to plan use of scheduled transport service instead of charters, consolidate shipments into larger loads and otherwise take control of its network.
During the past three years, the telecom manufacturer has downsized to between five and seven global logistics providers and is significantly rationalizing hundreds of local and regional operators to better enable electronic data sharing and quick changes to the supply chain, Mellin said.
The logistics department was able to switch many shipments from air to truck within one day during the volcanic ash incident, which made officials realize that they had the ability to switch between modes and 3PLs as necessary to meet delivery schedules, he added.
The Swedish company has also developed a more sophisticated way of running requests for proposals, which is especially helpful when it wants to test out new shipping lanes.
Tough Medicine. Mellin delivered a blunt message to air cargo professionals that the industry needs to treat customers better if it wants to win back more of their business.
Topping his list of pet peeves are ad hoc surcharges, beyond fuel, that air carriers add to the invoice. 3PLs either pass through the fees or, if Ericsson complains, build a premium rate designed to cover those costs.
“No way, we can’t just accept that. We have a budget. We have a plan, we have a margin. We have told the customer how much we’re going to spend. That’s not a professional way of working,” he said.
Airlines also need to align their systems for reporting CO2 because the methodologies vary so widely that Ericsson can’t give an accurate measure of output to its customers.
“When I get an airway bill, I’d like to see how much CO2 is spent. There should be differentiation by what kind of plane is used because otherwise I don’t have an incentive” to seek out other carriers with better aircraft, Mellin said.
Ericsson requests that its logistics service providers use carriers that rate high on the environmental index of the Clean Shipping Project, a Swedish organization.
Airlines, Mellin recommended, should convert to electronic transactions for everything from booking, billing, track and trace, and real-time event notifications, to responding to requests for price quotes. Other modes do a better job providing shipment updates, he noted. Major airlines have adopted the industry’s e-freight initiative in varying degrees, but many forwarders and airlines still rely on paper documentation to accompany shipments.
Mellin also had advice for 3PLs, saying they too often act as a barrier to communication between shippers and carriers. Logistics companies should facilitate collaboration between all three parties to jointly optimize their processes, he stressed.
“I feel sometimes that logistics service providers become a big, fat wet blanket around (carriers),” that prevent a look over the horizon at a shipper’s future strategic direction and demand. “If we can sit together, we can explain where we are going” to help carriers become more efficient in their planning, he said.
Airlines and forwarders need to do a better job educating shippers about new safety and security regulations so compliance steps can be built into lead times for delivery, Mellin added.
Michael Steen, who recently ended a two-year term as TIACA chairman and is the chief commercial officer at Atlas Air Worldwide Holdings in Purchase, N.Y., praised Mellin for spurring a better dialogue between shippers, carriers, airports, handling agents and the rest of the air cargo industry.
His message “triggers the industry to explain its value proposition to companies like Ericsson to make sure it can deliver the speed and transparency, and be able to measure, plan and perform in the right manner at the right cost,” Steen said.
Air cargo can successfully compete when the total landed cost of shipping is considered, he stressed at a press conference later in the event.
Steen noted in an interview that all-cargo carrier Atlas Air is a shipper too because it needs spare parts for maintenance and outsources shipping to logistics providers, “so we can relate to Mellin.”
The International Civil Aviation Organization has already developed a carbon calculator for passenger travel based on aircraft type and TIACA will try to get it adapted for freight so that shippers can use it as a model, Steen promised in Dallas.
He expressed optimism for the long-term future of air cargo, pointing out that the need for air freight is unchanged in underdeveloped countries lacking good roads, railroads, and port infrastructure, and perishables, smartphones and pharmaceuticals and will always go by air. Air freight is the dominant transport mode for Spanish clothier Zara, which specializes in timing store deliveries when demand is highest and the chain can command higher prices, he noted. Demand for those types of high-value products will increase as the middle class grows around the world, he added.