Talking Freight: Supply Chain Needs and Industrial Site Selection Decisions
August 19, 2015
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Nicole Coene
Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Nicole Coene and I will moderate today's seminar. Today's topic is Supply Chain Needs and Industrial Site Selection Decisions.
Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.
Today we'll have three presentations, given by:
Mr. Steve Schellenberg is the Vice President of Business Development at IMS Worldwide. He has been involved in logistics, manufacturing, distribution and transportation for over 30 years. His experience includes managing all aspects of automotive supply chains, global distribution and third-party logistics. He has extensive experience in the North America Free Trade Agreement trading regions and has managed air cargo, freight forwarding and air charter operations.
For the past fifteen years, Mr. Schellenberg has conducted assessments of global supply chains and has performed evaluations related to supply chain security, supply chain custody and emerging technologies to identify container location, status and condition.
Mr. Russell Held is Vice President of Economic Development for the Virginia Port Authority. In this capacity, Russell leads the Economic Development and Foreign Trade Zone Services teams in working with public and private entities to locate logistics partners and port customers within the geographic reach of the Port.
Russell has over 30 years of experience in international business development and cargo transportation including ocean, rail, truck, barging and warehousing. Before joining the Virginia Port Authority in 1999, he spent 10 years with international ocean carrier Sea-Land Service, Inc., holding sales and trade lane management positions, including Trade Lane Director for the Middle East and Indian Sub-continent.
Mr. Rick Langer is Quetica's (Q why ti kah) President and Managing Director. Quetica (Q why ti kah) has a well-respected industry expert team of consultants in supply chain, freight transportation, trade and information technology in both private and public sector. Quetica (Q why ti kah) uses multi modal transportation systems and data to design a client's global supply chain, trade and freight transportation networks.
Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the chat area. Please make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. If time allows, we will open up the phone lines for questions as well. If we run out of time and are unable to address all questions we will attempt to get written responses from the presenters to the unanswered questions.
The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next few weeks, along with a recording and a transcript. I will notify all attendees once these materials are posted online.
Talking Freight seminars are eligible for 1.5 certification maintenance credits for AICP members. In order to obtain credit for today's seminar, you must have logged in with your first and last name or if you are attending with a group of people you must type your first and last name into the chat box. I have included more detailed instructions in the file share box on how to obtain your credits after the seminar.
For those of you, who are not AICP members but would like to receive PDH credits for this webinar, please note that FHWA does not formally offer PDHs, however, it may be possible to receive PDHs for your participation in Talking Freight if you are able to self-certify. To possibly receive PDHs, please download the agenda from the file download box and submit this agenda to your respective licensing agency.
Finally, I encourage everyone to please also download the evaluation form from the file share box and submit this form to me after you have filled it out.
I'm now going to turn it over to Steve Schellenberg of IMS Worldwide to get us started.
Steve Schellenberg
Good morning or good afternoon. Thank you for the invitation to participate in the seminar. Thanks to the many of you who joined from across the country. I looked at the attendee list and many people are interested in the subject. We will try to provide in the next 20 minutes some overview and conversation about the impact of logistics on industrial development on site selection and on economic development. My agenda today is really focused on a number of activities. I will talk about imports and exports. I will talk about inland ports. The places where there are large logistics hubs and what is driving those and what is contributing to the growth. Today's agenda is to talk about how logistics affects real estate, the notion of distribution patterns and demands and population trends, why e-commerce is an important consideration to be paid attention to, and re-shoring and manufacturing because of our access to oil and petroleum.
IMS is a small firm in Houston, Texas but we operate on a national basis. We've conducted over 300 foreign trade zone sites implementations around the country virtually in every corner of the country and all of the ports. The result of that is that the developers who built the buildings have been involved to understand how logistics affects real estate, investment opportunities and where the path of progress will be in the future. And how to conduct and build a logistics facility or a distributional retail facility that has a logistics advantage over the competing or neighborhood facility. In addition we have done work with the TSA and Department of Homeland Security. Both in the space of the CTCAT program as well as an initiative called Operation Safe Commerce. In order to get into the conversation, I want to start with this heat map. These are the global shipping routes that are used by the container ships that bring freight from overseas markets to the U.S. and to Europe. The yellow lines are the important lines to pay attention to because they are the high density freight lanes. And for those of you with a recollection of geography, we have the Suez Canal running through Africa and the Panama Canal runs from the same through Panama up the East Coast. Those canals contribute a great deal of freight to the U.S. and to Europe. We still have a majority of freight that arrives on the west coast through LA and West Long Beach. Those ports have a high density of ship rotations. A ship rotation is a new word. It means there is a ship that calls on a port on Monday and next week on Monday another ship will rotate across the ocean to call at that same port on Monday. If you do the math from the South China to Norfolk, it takes 12-14 ships to put a rotation in place. So every Monday there is a ship arriving at Norfolk. You have 5/6 ships on the eastbound leg and about 5/6 ships on the westbound leg. That is how you make a rotation work. Think through that in terms of the investment in the ship operations.
This is a picture of the problem and the opportunity we faced in the logistics industry. This is a container ship. It is filled with TEU's and FEU's. A FEU is a 40 foot equivalent unit and the other is a 20 foot equivalent unit. You see them driving down the road. They are basically steel boxes that are loaded in foreign locations and shipped to the U.S. by ocean, and then moved by rail or truck and only unloaded at the time at the distribution center at a port or an inland port. If you look at the ship, this is a reasonably large ship. The newer ships are 24 containers across. The last time I saw 24 trucks parked side-by-side was at a NASCAR event. If you look at this and think about the logistics, the container on the left side of the ship, you have to be able to reach over from the land side to pick that container off of the ship. If you think about the size of that box, it is the equivalent of eight suburbans in the box that is the infrastructure requirement that the crane has to have. We talk about these infrastructure requirements not only from the standpoint of the water requirements, the ship also has to have clearance under the bridges and the people in New York and New Jersey are spending money to raise the Bayonne Bridge in order to accommodate ships. The terminals have to manage the ships and the terminals have to be able to get the freight moved inland. There are certainly challenges and restrictions in some of the ports in terms of capacity. The TEU and the FEU are building blocks of the supply chain that move between modes. The containers are never unloaded and the seals are never removed. But you can move a container efficiently across the supply chain of many thousands of miles.
In the United States we operate major load centers. The largest centers in the U.S are Los Angeles and Long Beach combined for about 14 million TEU. In New York and New Jersey there are 6 million TEU's that are processed. Oakland and Hampton Roads, Tacoma Roads, Houston, and Charleston are all in the 2 million range. These are the major load centers. Those are the places where the large ships are aggregating. There were some challenges on the West Coast over the last year in terms of labor. I will not spend a lot of time there. There have been folks in the market who have chosen to resolve some of the challenges on the West Coast by moving freight to the East Coast. While 2% shift in market share in the West Coast may not be a lot, the 2% coming to the East Coast is a significant volume of new freight that has to be managed. This is a graphic of the pricing and the routing for freight as it moves from Shanghai. The blue numbers and the pink numbers are the transit times. The yellow numbers are the cost. The carriers operate on managing the cargo and the cargo owners have to manage three things, cost. That is the all in all cost from the manufacturing center across the supply chain to the destination. They also have to manage predictability. There are some sensitive pieces of Freight than others. Obviously speed has to be part of the consideration as well. If I want to get to Chicago, the fastest way is from Shanghai to LA and put it on a train to Chicago. For the logistics part, they have to be managed very carefully.
This is a slide from the American President Line presentation. They have summarized challenges that large ships are having on U.S. ports. Bigger ships mean less vessel and port calls per rotation. An older model ship may have called on five ports; the bigger ships may have only been called upon by three. By virtue of capacity and by virtue of the need to be more efficient, there has to be a balance between the water, the terminal, on-site rail and road enhancements. As a warning to people in my business, when I look at distribution center locations and site selection and economic development, I have to be cautious to point to the fact that some of the ports in the U.S. will not have the capacity for the rotation to be included therefore placement and distribution centers must be taken very carefully. This is a picture of the Panama Canal which shows a 4,500 TEU ship being processed. We were anticipating the expansion of the canal which is the next slide which shows the fix which will have the capacity to move ships through the canal with up to 12,000 TEU's. The canal will be completed and expanded next year if all things stay the same. It will allow much larger ships to transit the canal. The challenge is the shipbuilders and the people who operate the ships across the world have already put on order for ships that the canal can take in capacity. The expansion will provide an equalizer to the recently expanded Suez Canal.
The next slide is the role of the intermodal terminal. This is the story of how freight moves from the ocean inland. This is a facility where the containers are unloaded from trains that bring them from the East Coast or West Coast. Transits of several thousand miles on shorelines whey they have been effective in matching up the movement of containers and remove trucks from the road. You can see in the graphic there has been a great deal of distribution activity that has occurred in or near or around the intermodal terminals and the graphic is significant. Our conversation about this has to include the notion that the container that moves across the supply chain is dynamic and in some cases the cargo owner will stop at the port and manage the freight there. In other cases the cargo owner will run it intact into the intermodal center.
This should be advanced several times. The first is the route from LA. The second advancement is from Oakland. There is advancement from Seattle/Tacoma and Prince Rupert is closer to China and is a desired route for cargo management. There is also a route that shows Lazaro Cardenas which is one of the faster growing ports in North America and Houston which is both a port and an inland port. We get part of our freight from the water and freight from the West Coast directly from rail. These are all intermodal destinations where logistics activity have been built and are being built. A new one in Kansas City, an immature one in Dallas Fort Worth where they have developed on 17,000 acres. There are center point properties in Chicago on the rail terminals. Kansas City Southern has several new initiatives coming out because they also connect into Mexico which also connects to Lazaro Cardenas. The next slide shows the metropolitan areas. We clearly pay attention to the demands of the population based on where ships are occurring. This drives to some extent the retailers who are users of the intermodal freight. As we see the graphics move around, we want to make sure we are good students of that relative to where the demand will be or industrial development and requirements.
The next slide shows the projected online retail and e-commerce, online versus retail versus traditional retail. The challenge here is that the e-commerce industry is completely changing the entire distribution fulfillment activity. We are several years into this phenomenon. It is expected to change in the course of the next five years to move to 25% of the retail will occur outside of a traditional retail storefront. That changes the strategy of the distribution center from the standpoint of a retailer using distribution centers to support retail. If you have 68 of your own centers supporting a much shorter distance and time frame between the retail center and the facility. The next slide is e-commerce impact on industrial. You can see the amount of demand that is occurring. These are not traditional warehouses in the same vein as a traditional big box. These have mezzanines, a high density of employees, a lot of activity. They like to be located to a FedEx or UPS hub. They are built out with significant automation inside. I wanted to point out what Ali Baba is doing with their mall with the billions of dollars they reached in their shopping network. They also have a payment processing center which is significantly larger than PayPal.
The next slide is e-commerce industry in transition. I want to make sure that there is a relationship in industrial development, industrial demand, and economic development. Between retailers promise for delivery, do you want it today or tomorrow? That promise is driving a new logistics system in order to compress the cycle time between the click and the knock which is the cycle time click to pick and pick to ship and ship to door cycle time. In order to compress that, you have to get local with inventory. That localization requires that the freight be closer to the ZIP Code where the delivery will occur. As you ratchet up the promise for one day or two day, it requires a closer proximity. The Amazon strategy is more warehouses in a more locations, faster fulfillment, and a quick pick from the time the click occurs. The largest retailer in the U.S. is using a different strategy. They have four warehouses in key locations. Within three or four days they can fulfill shipments from those four warehouses to 100% of the population in the U.S. in the U.S. but with a different promise platform.
A large retailer in the U.S. is taking a completely different approach. They use all 840 of their storefronts. When the ZIP Code for the order is routed to the nearest store, the activity occurs today and it goes to UPS or FedEx for delivery tomorrow. They can accommodate an e-commerce platform without having to invest in significant real estate. One last comment I will make that is not a slide. We are in the midst of a significant energy revolution in the United States. The result of that are new opportunities for investment. There has been $140 billion invested in chemical activity on the Gulf Coast this is driven by the cost of low-cost natural gas. It will drive a significant amount of exports toward the ports, significant amount of export processing facilities for plastics, and millions of square feet of new warehouse space will be required to support the new exports that are driven by the opportunities we have as we face up to the New Orleans gas industry in the United States. I think I am over time. Thank you.
Russell Held
Good afternoon. I am glad we got Steve back. His comments really set up nicely what I want to talk about which is the freight transportation facilities and their impact on economic development. By the freight transportation facilities I am referring to the ports and also to the inland destinations by rail and by water so what we are calling our inland ports both rail facilities and inland ports on rivers. I want to go over what I am seeing as far as trends worldwide. International cargo trends that have been affecting the freight transportation facilities and where cargo is going. As Steve mentioned, we have canal fever. We have been talking about the Panama Canal for a decade or more and the expansion of the Panama Canal which will come to fruition next year. In the meantime we have seen the Suez Canal complete an $8 billion renovation pretty much in the last 18 months or so. We see articles about a Nicaraguan Canal at $40 billion. Every once in a while there will be an article about icecaps melt that it is freeing up the Northwest Passage for ships. While I don't expect that to be a route any day soon, we are seeing competition for different routes. I think it is good for all of us. It is good for risk management in the supply chain as well. As far as it goes for transportation planners, port planners and inland road and rails planners, it is a moving target. You have to keep up. The canal activity is all about one thing, the big ships. It is to the point that the ships are getting so big so fast it is hard to keep the biggest vessel on a slide. We are around 19,000 or over 19,000 TEU's on vessels now and some are on the drawing board with 20,000 or 22,000.
The more containers you can move on one ship, the greater economy of scale is realized. That causes problems because ports and the networks are not necessarily built to handle exporting or importing those kinds of numbers in one ship stop. We are seeing congestion at the gates and congestion on the first and last mile especially and congestion on the rail. It has started a lot of importers and distribution importers, supply chain importers to really start thinking about managing risk in the supply chain. We will see that after we see congestion. We will see that after natural disasters. Things come along like that. More recently we have had a second go around with West Coast labor issues. That has started a whole new process of risk mitigation in the supply chain. Congestion on the West Coast and threats of labor issues, have started the swing again in shifting cargo from the West Coast to the East Coast.
A recent study is suggesting that between 2007 and 2014 that 6% market share switched from the West Coast to the East Coast. I think that was in the name of risk mitigation. This is prior to the expansion of the Panama Canal. Boston Consulting Group put out a study a few weeks ago that suggested that after the expansion of the Panama Canal is done we could see another 10% market share change from West Coast to East Coast. That is overwhelming. East Coast ports cannot handle those numbers. We do not have the infrastructure. Even with that 10% shift, it is also not going to relax any of the needs for transportation planning and cargo movement on the West Coast because volumes continue to grow even with that shift according to the Boston Consulting Group study. For planning around the country, there is one thing we can take away and that is import and export cargo growth to continue.
On the East Coast, the big ships can only get into some ports not all. There are either eight or nine ports that are not on this map. But if you look at the numbers on the left would be the depth in feet of where those ports are now and on the right where they are going to or where projects are in hand. When you look at those ports, you need to start to ask the transportation planning question if the big ships come in, do we have the road and rail connections to move to the hinter-land where the population is. The answer in some cases is yes and in some cases no. The phenomenon that may occur is that some of these ports on the map that I am showing become the hub ports and other ports on the East Coast become feeder ports. I could use the analogy of the container as a passenger on an airplane. The container moves on a vessel very similar to a passenger on an airplane where you may go from a smaller market to a hub airport and get on a different plane and maybe get on a second plane somewhere else like a container getting on the rail or getting on a truck.
As you start thinking or planning long-term, you need to look at where the feeder ports may be, where the hub ports may be and move accordingly. The reason there is interest in handling this cargo and driving economic development and getting the manufacturing in your areas and the distribution centers in your areas is because of economic impact. This is a study from our Port of Virginia volumes in 2013. As you can see direct, indirect, and induced jobs produced $17 billion in wages. It touches over 374,000 employees and is nearly 10% of the Virginia workforce. If you would look at the studies in Savannah or in South Carolina or other ports around the country, you would see similar impact. In some cases where there is greater volume even greater impact. That is one reason that there is attention to driving development, transportation infrastructure development, and a logistics facility development to these areas. It is not limited to the coast. There is also a good impact in the hinter-land. As you look at a rail map of Norfolk Southern it touches all the ports that I had on the map. To emphasize how important Norfolk Southern thought moving cargo to the hinter-lands was, several years ago they spent $200 million to redo 29 bridges or tunnels that double stack containers could not fit under. A double stack would be one container on top of another container in a well car. The economy scale is that you are moving twice as much cargo. They opened up that path from Norfolk up to Columbus on to Detroit, Toledo, and Chicago. It has an economic impact in Columbus. One thing built around Columbus and has grown since the end Quarter opened up is the Rickenbacker Logistics Park. The park alone has over 15,000 jobs associated with it. Before I get hate mail from Ohio, the actual annual lift capacity is up to 400,000 containers. Being the hub that they are, they are getting rail cargo from the East Coast and rail cargo from the West Coast and also through Canada. We have been a partner with them since the planning days and do work well with them and stay in touch with them and with the market to make sure we have free-flowing capacity and can stay ahead of the curve.
It is not limited to Norfolk Southern. CSX has a similar network that lays over top of the Norfolk Southern map. They touch many of the same ports and go to some of the same areas. While their big hub in Ohio would not be Rickenbacker it would be the Northwest Ohio development. This is a picture of what the Wood County economic development group has done to secure 2,000 acres for development around that rail hub. It would be for import distribution development, manufacturing development, and companies that would need both the international and domestic distribution that the facility would offer up. I want to give you an example of moving this rail distribution hub concept a little closer to the coast. When we talk about rail movements from the East Coast into Columbus or East Coast into Northwest Ohio, we are talking about several hundred miles. We're seeing a phenomenon now which is short hauls. I will use the example of what we are doing in Virginia via the Port of Virginia. This also applies to other areas of the country.
We refer to it as the transportation triangle. The first part of that triangle was the Virginia Inland port. This was developed over 27 years ago. It basically is a parking lot with rail access. We have trains coming and going daily. While it was put there to basically compete against Baltimore at that point in time, what has happened is it has become an economic engine in the northern Shenandoah Valley in Virginia. Over the years we have seen 39 companies locate around the inland port because of the port being there. Over 8000 jobs have been created and almost $800 million in investment. You can see some of the big names. Many of the ones that have come into the area and that region have expanded several times.
While the Virginia inland port was one of the first, there are several going up around the country. One I want to point out is the South Carolina Inland Port in Greer, South Carolina. Where the Virginia Inland Port opened up to a market that was not there at the time, we were trying to cut off some truck traffic moving to and from Baltimore. If we had known then what we know now we would've taken 1000 acres and made an Intermodal Park out of it. At the time we did not think that the cow pasture across the road would be a suburb of D.C. and a golf community. In Greer, SC they have taken what is pretty much a good base of cargo to start with, opened an inland port and it is thriving in the first year. I think I read 60% above projections in just the first year. There is an article about that inland port in the Charleston Post and Courier this morning.
The Greer facility took advantage of cargo that was already there but has also become an economic development engine for that area. Taking advantage of cargo that is there takes trucks off the highway. That was one of the main things. The second point of our transportation triangle in Virginia is our Richmond Barge. The Port of Richmond is a city-owned port 90 miles from the ocean terminals and connected by the James River and we started running a once a week barge back and forth between the Port of Richmond and the international ports in Hampton Roads. It really grew because of shippers that wanted to mitigate traffic congestion and reduce air missions. While I was not one that thought it would be someone's business plan, I was wrong. We have seen the business grow in a facility to where we are running three barges a week each direction and at capacity. In the last year we have done about 15,000 moves to and from Richmond. These are within a two-hour truck drive. But for reasons of convenience and reasons of being good corporate citizens, the barge is thriving. The barge service has become an economic engine as well with customers locating or expanding in the area.
The third part of the triangle is not within our state but down in North Carolina. It is different in that it is a site owned and operated by the Norfolk Southern and they operate the rail as well. We have leased property adjacent to it to run a container yard. We see it thriving as well. It is a short-haul, 200 miles rail facility. If you are moving by rail or by barge, if you can give good service and integrity of service and transit time integrity so that the shippers can plan around those services, they are willing and able and sometimes happy to use alternative forms of transportation. What I want to point out is that there is a lot of activity on the short-haul moves. I mentioned Greer; there is an inland port in Cordell, Georgia and potentially others in eastern Pennsylvania, or up into the state of New York. It is something to look at. You have to look at what the geography and the assets around that to really take advantage. One piece of our transportation triangle is a state owned and operated facility. Another is a city-owned, port authority leased and operated, facility on water. The third is owned and operated by the railroad.
The point I want to make to the transportation planners is look at these opportunities. See where there are ones that make sense. The economic development around those areas will be the thing that really sells it and it is important to the economic well-being of your region and state. Thank you.
Nicole Coene
Thank you Russell, we will now move on to Richard Langer.
Rick Langer
Thank you. I appreciate the opportunity to speak today. First of all we will actually talk about a specific application or specific case studies. To do extent, I want to give a little bit of background on our firm. We are a supply chain transportation global trade information technology consulting firm. We actually built the largest freight audit and payment business, supplied chain transportation software business and a global trade bank in Ireland. Why that is important is we would actually take the transportation bills of lading a year for our customers which is half of fortune 500 and half of the federal government and we had the largest market mobile transportation data warehouse in the world. It supported 43 countries and all of North America. We would take the transportation data and built a model that allows us to design transportation network and a supply chain network. We look the product demand for our client. We had a large retailer so we look at the product demand. We also look at the potential sources for the products or materials to create the products and we look at and define the physical transportation network alternatives between it. And we defined the physical distribution centers, warehouses etc. etc. What we do is we run simulations through a program model basically redefining the constraints in the transportation network through math models. We run simulations. We learn what the next best simulation is. Based on the simulation we keep rerunning until we understand what are the ideal modes or multi-modes to transport those goods to the demand. What is the best way to store it? What is the best inventory for the client? We also identify what are the largest constraints in the supply chain. We create a model for our clients.
It allows the clients to see when the demand patterns change, when the transportation network changes, or when the distribution center changes or a source of the products changes, we are able to rerun the model and look at alternative designs that help them reduce the overall cost of their supply chain. We actually worked on an interesting product. For most commercial companies their supply chain is relatively fixed.
The transportation network evolves fairly slowly. The main change you would have with a private sector client is there demand changes. As was mentioned earlier, the demand for online purchasing that can change your supply chain network. We help clients rerun based on demand changes. We had a project with the Department of Defense where they had a bigger issue which is Supply Chain Resiliency, where they could have humanitarian crisis, natural disaster, wartime mission that significantly changes their supply chain. They actually had this interesting thing. They have the Army Corps of Engineers and the Navy Seabees where they can affect the constraints in the transportation network to sustain the force and deploy the force. I was speaking at a TRB conference about how we built the model that creates supply chain resiliency modeling. As the world changes for the Department of Defense we were able to identify the highest value constraints or those constraints that cost the most in terms of performance or financial costs in terms of shipping goods. We were able to identify the highest value constraints and allow the Department of Defense to actually resolve those constraints.
The Secretary of the Department of Transportation for the state of Iowa said could you do that for the entire multi-mobile transportation network for the state of Iowa. I don't care what the mode is, I would like to know what are the biggest constraints or the most costly constraints in terms of the cost of transportation back to our shippers and could you look at it at those constraints and say these are the largest constraints that create the largest or most expensive impact on businesses in Iowa. Could you make recommendations on what things we could do to change those? Whether they are public or private investments? We set out to take a look at rather than products for a private sector company or federal agency, we looked at the commodities that went to, thru, and from the state of Iowa. The idea was taking those commodities and grouping them by common equipment types for each of the shipments. We took a database of all of these common shipments: origin, equipment type, weight, and specifically the cost of transportation. We reran the model to be able to identify what is the highest value infrastructure. Basically looking at what is the demand for these commodities, where are the sources, and what is the physical transportation network going between Iowa at the ZIP Code level to the rest of North America and 43 countries/ country zones. We were able to create a model that allows us to take a very specific view on how we optimize the overall transportation infrastructure investments that the state or private sector would make.
What we used is our weights and measures. Typically what they do within a DOT, there is a travel demand model which is focused on forecasting capacity for road networks and what they will do about capacity constraints. Instead we look at the demand for the commodities and looking at the source of the commodity. They are saying let's look at the best way to ship within the constraints of the current network. What we do is we run a quantitative analysis which focuses at the actual cost of transportation back to the buyers of transportation as well as we look at the lead time or the predictability of the shipment and the delivery time. We also look at what is the network resilience in case something changes.
Then we go back and do a qualitative analysis which allows us to look at the different alternatives or the constraints we identified and say there are qualitative factors we could apply. We were able to take trucks off the road and improve areas that existed within the state. This is a basic visual diagram of the actual model we created for Iowa. We took in supply chain cost data, we took our benchmark cost data so we could value the cost of shipments whether it is was rail, road, ocean, pipeline, barge and we took in domestic freight flow data, import export data, and county level socioeconomic data. We have very specifically defined the origin, destination, equipment type, commodity type, the distance in the cost, and weight of the transportation transactions that are going through. We define that transportation network in between demand and source and we rerun the optimization to see what were the highest or most expensive constraints that exist between Iowa and the 43 countries. We rerun the simulation and we learn from it to create the next simulation until we get down to diminishing returns. We apply the qualitative measures to the quantitative recommendations to come up with a recommended optimization strategy.
The original goal of this is what are the highest value infrastructure investments I can make regardless of mode that Iowa can make or the private sector can make that will lower the cost of transportation for shippers within the state of Iowa. What we had were some events that we did not set out to do. One was, we could tell them what are the highest constraints or most expensive constraints in the multi-modal. But also what solutions we could put in place to reduce those cost. We were also able to measure based on increased transportation responsiveness and predictability. We were able to incented business expansion within the state based on those investments. We have several examples of where we are working with the state of Iowa with their economic development authority and some of their MPOs and regional planners to work with private sector. We've had success with businesses expanding within the state by making smart supply chain investments to lower their overall cost of their product. This is important to them than tax incentives or free-land or utilities being put in.
The second thing is we were actually able to identify what part of the commercial freight road networks that are irrelevant. This is a politically hot potato. We were actually able to look at how much of the commercial road and bridge network does not make sense for them to maintain. They are making significant investments because the math does not pencil out. We were able to feed back into their travel demand model how much truck traffic would be reduced so as they look at the capacity investments how would that change based on them having access to other multimodal opportunities? We were able to run contingency-based or transportation network resiliency. The idea is that if they had a bridge go down over the Mississippi River, would their commercial freight or transportation network be able to support that? Another example would be if there utility network of the electricity grid had a transformer that was damaged and they weigh anywhere between 400 and 400,000 pounds, where is the heavy haul alternative route if that network is affected?
We were able to use the data to support specific businesses. There are some MPOs, corridor initiatives, and regional planning areas that we were able to use the commodity data in combination with specific business data in their region. We could run the analysis and identify what are the highest value investments and give them a quantitative view as to why it is highest value. We take in the specific company data in the state and use that state and benchmark it against the commodity data so we can be very specific about -- 80% of the company's represent 80% of the traffic. Here is an alternative to an expanded road.
Here's the first case study. It is a cross dock facility. It is a common technique for supply chain or logistics. Basically it is trying to combine multiple truck shipments into a common origin destination from the cross dock to the final destination. We reduced the amount of truck traffic. When we looked at the state we said, it is obvious we have a lot of mixed freight going through the state. We had a specific example where we saw refrigerated traffic going through the state. We could identify a refrigerated warehouse with a rail access facility in be able to take the refrigerated freight and move it onto containerized freight on the rail going to the West Coast saving money. In this case, we looked at the statewide and identified four regions where if we could increase the cross dock capacity that existed within these four regions, we identified a total annual savings opportunity in terms of actually the cost of transportation back to the shippers, after they paid for the cross dock: $909 million in region one, $883 million in region two, $908 million in region three, and $713 million in region four. They are fairly simple logistics technique. In order to pull off a cross dock you have to have two things. You have to have a private sector company invest in building the cross dock's and you have to have a public sector investment in terms of creating that access, the road access to the cross dock facilities. It is a combination of saying what is the smartest investment? I can create another lane on a highway 80 based on my travel demand model, or I can reduce the amount of truck traffic by creating shipment consolidation through a simple logistics technique. This slide shows you the actual specific shipments in the current state and it shows you the future state of the shipments based on us being able to consolidate the actual shipments through a cross dock solution.
The second case study I wanted to cover is the intermodal facility. Basically we identified a small intermodal facility. We asked what is the minimum bar to avoid having to ship through Chicago or Kansas City. We think there is an opportunity for intermodal to do exist, potentially a logistics park. We identified about $289 million in terms of annual net savings. That is the cost of transportation and the annual lift numbers are about 494,000 so it is a small facility. We think that this becomes a big opportunity. We are working with a barge company and tested using the deadhead up River Mississippi barges bringing empty containers. We think it will be a good source of containers and it is a source of constraints in the upper Midwest. Getting empty containers is a challenge. This gives you an idea. This is current state with the truck traffic. This is the future state with the intermodal facility. It provides an extensive reduction in traffic for the state again affecting the travel demand model we can say this many trucks come off the road and we can reduce the cost of transportation and we are able to increase the economic viability of expanding within the state because we directly impact their supply chain.
One last comment I want to make, when we started looking at the commodity flows in the database, we actually were able to identify commodities that we were able to use through the economic development authority to approach businesses and say, do you realize that certain amount of products are being produced in the state of Iowa and they are being shipped out of the state? We call those the boomerang commodities and there is value added processing that occurs and being shipped back into the state. We had a specific commodity where we identified 24% of their fully landed cost was tied up in transportation. We were able reduced that cost to about 5% if they were able to relocate the facility within the state. It is pretty valuable.
We are able to work with the MPOs, the corridor's, or the regional planning authorities to actually take the commodity data we have that is global, as well as take the transportation data, and take the individual companies data from the transportation management system or their freight audit payment system and remodel what is the specific quantitative investment recommendations both private and public that create the greatest impact in terms of lowering the cost of transportation, increasing predictability, improving the service level, and reducing the infrastructure investments that the government local or state government needs to make. Thank you.
Nicole Coene
Thank you. We will move on to the question and answer session. I will begin with questions typed in the chat box. The first question is for Steve. Do you see a time when the retailers decide they have overpromised on delivery times to their customers? And scale back on the demands placed upon the supply chain?
Steve Schellenberg
That is a rather interesting conversation. If I had another 15 minutes I could get my arms around the answer. There is actually a continued effort to satisfy the shorter delivery time. If you look at the business model for Amazon, one side of that, and the pressure to satisfy same-day delivery within the larger metro areas. There are tests underway in Chicago, New York, San Francisco that I know of that are about testing the opportunity to compress the supply chain to several hours using a company called "Delive or Uber" as a partner to compress the supply chain. I think you run out of energy in this conversation when you get to the point where the cost to support the delivery starts to get pushed back by the people who are paying for the stuff that they are buying on the Internet. I don't think we've seen the end of this conversation. Clearly, the infrastructure is being developed so when a company makes a promise of two or three days they can support that with their network of warehouses and they can support that with the services provided by either UPS or FedEx or other parcel movers. And I think we're going to find there are times when you need a blue shirt at a convention in Charleston or Norfolk and you buy it from Macy's and it is there the next day. And other times it does not work. There is a generational gap that we have identified between people we call millennial's and guys like me who use the phone and are still timid about a lot of the e-commerce transactions. It is really still a live conversation. It is a moving target. I don't think we've seen the end of the array of effort to try to gain market share through retail and delivery model.
Nicole Coene
The next question, what impacts will near-shoring or reshoring have on companies' supply chain needs? Where do you see near-shored or reshored manufacturing locating within the U.S. or North America? Finally, do you see nearshoring/reshoring becoming a significant trend in the coming years?
Steve Schellenberg
You can look at the Gulf Coast, the investment being made by U.S. companies and I think the numbers were $140 billion in petrochemical activity. A lot of that will drive manufacturing cost down. If you look at the global natural gas cost, we are the lowest cost producer of natural gas in the world. We are becoming the place where companies are moving to take advantage of the low-cost resource. The result of that if you look in Corpus Christi, Texas there is a Chinese company building a new steel mill. There is a Norwegian company building a second steel mill. These are steel mills. We never used to build these in the U.S. In Corpus Christi there is the end of a pipeline that brings a lot of available low-cost natural gas which is a user. We are seeing near shoring. We are competitive in North America and certainly in Mexico than we thought 10 years ago with China. It is a commodity by commodity activity. The people that make sneakers in some markets are using resources from Africa for the very high labor content with low product value. You have to look at those components to determine where the re-shoring and near shoring will occur. In the U.S we are going to produce about 20 million pounds of plastic as a result of low cost natural gas. It will export volumes that will drive infrastructure. It will drive new routes for the exports to be routed either through the Gulf Coast or by East Coast ports through the Suez or by West Coast ports. There is a lot still to be done. A lot will be occurring along the Gulf Coast or in the southern U.S.
Rick Langer
I want to make a quick comment. What we are seeing with our private sector companies is we are almost at the tipping point where the cost of plant automation, which reduces labor from 25 people to one person in the manufacturing process, where the cost of plant automation is getting to a point where it's beating the cost of transportation for offshore. As that continues to advance we will see more re-shoring of the manufacturing or value added processes that exist.
Russell Held
I would add the new shoring activity. It is foreign investment looking for a safe, financial, and governmental system to operate in. Add to that the lower cost of transportation and lower cost of energy and the ability to come into foreign trade zones. You are importing product into U.S. economy and exporting as well.
Nicole Coene
This question is directed to any of the speakers. What should transportation/freight planners in landlocked hubs like Chicago anticipate with some of the changes in the world shipping climate?
Russell Held
I think that is a sweet spot in the sense that as you see different ways to come in and out of the country by rail and other ways, you can access the borders or the oceans by rail to either coast, to the Gulf or to Canada or through Mexico. From a supply chain risk management perspective, you are in a good position to build the infrastructure around all of the different paths.
Rick Langer
When we did modeling you would think the East Coast is becoming a bigger alternative to the West Coast for shipments specifically because of the Suez Canal. We think the Suez Canal, the math might pencil out better than the Panama Canal or shipping directly west to the western ports.
Steve Schellenberg
We look at the inland port mechanisms that support large volumes of distribution. Around the centers they are driven by the population but they are driven by the investment in infrastructure to park the long trains and to manage the long trains to get the freight into a distribution center either there or nearby. The circle of influence around those distributions, those rail logistics centers, typically it is 200 or 300 miles. Then you start to look for the next node where I can be competitive and reach the market that I need by eliminating a lot of truck traffic. Chicago continues to be a major center of logistics and connect both the Canadian rail lines. If you connect all four of the East-West Norfolk Southern, Kansas City Southern, and CSX, there are very few places that have that kind of infrastructure capacity to get freight from virtually every corner of the country to the consumer and to the manufacturer. It is the same in Dallas-Fort Worth. It is the same in Columbus. Our emerging places where a lot of the freight activity is concentrating.
Nicole Coene
The next question is, why would you believe that hub and spoke would be with U.S. hub ports, vice offshore hubs, such as Kingston, Panama, etc., to avoid use of Jones Act feeder vessels?
Russell Held
Some of that is happening today from Kingston and the Bahamas. I think some of that from offshore hubs will continue. But the vessels that are coming to the U.S. from those offshore hubs today and possibly in the future are going to be large vessels as well because it comes down to the economies of scale. Those vessels are part of routes that are going elsewhere. They could be coming through the expanded Panama Canal, hit Kingston, and come up the East Coast. Other vessels have come to Kingston from East Coast South America and trans loading vessels there. It becomes a hub of a trans load point. I think we will see some of that always. I also think we will see it development of some of that going on the East Coast. It will be a combination of both.
Nicole Coene
Next question is open to all three presenters. SE Florida (Miami and Greater Ft Lauderdale) is spending $3.5 billion on ports and over $10-bilion on airports, plus over $4-billion on access expressways. What do you see as the opportunity for SE Florida as the direct link to South America? How can this translate to new "inland ports" in Central Florida (to provide less expensive land) as a link between the rest of the USA, the rest of Florida and the world?
Rick Langer
A couple of ways to answer the question. The Port of Miami is concluding a dredging project to give them the capacity to be at a water depth of 50 feet. It provides an opportunity for Miami to become a more robust first call on a rotation of a large ship coming through the expanded Panama Canal. Miami is already a major trans-shipment spot for both ocean and air cargo going between Europe as the U.S. and Central and South America. That will not diminish with any of these new infrastructure pieces. Miami is trying to do is becoming more active player in the through put of containers from the ocean to rail and inland. The challenge Miami has is that the rail network in South Florida requires them to use Florida East Coast Railway as the origin and to move that freight further inland if it goes beyond Jacksonville is required to be transferred to CSX or Norfolk Southern. You have the intermediate step cost and handling that is part of a move from Florida. It does not say that CSX who is building a new inland intermodal center in Winterhaven which will have several multimillion square feet of warehouse and distribution facilities does not understand that having better access into Florida for freight arriving from the East Coast and as far as the West Coast for distribution in Florida, it is clearly a necessary component of their strategy. They also will be positioned to take advantage of any winds that the Port of Miami has in terms of gaining new freight that will be moving from that corridor back to the U.S.
Russell Held
I would echo the comments on the limited rail capability that the Port of Miami has. One of the things that I think that greater study needs to look at is there an opportunity for creating access through the deep water port through the hub and spoke that was mentioned through intercostal barge traffic.
Nicole Coene
With the Panama Canal expansion to accommodate large ships, do you forecast significant ocean freight rate decrease between Asia and the Gulf ports?
Steve Schellenberg
That is a politically correct challenging question. I will answer it by saying that we have not yet seen what the through-put rates for the expanded Panama Canal will be as they assess against the containers on ships. We are going to wait and see for that number to be made available to be published so the ocean carriers can put pencil to paper and understand what the new tariff will be in the new expanded canal. We just had an expansion in the Suez Canal where they basically opened up the canal for more two-lane traffic to pass so there is not the restriction of one-way traffic. And then you look at the long haul railroads that new freight from the West Coast to the places where there will be expectations that the Panama Canal will supplement that freight movement and the railroads that operate from LA Long Beach to the Chicago, or Dallas-Fort Worth, or the transfer point in Memphis are going to have a response to any version in their market share by virtue of a cost shift toward the Panama Canal. This is still a work in progress.
Russell Held
I agree. It will be a work in progress for a long time. Ocean freight rates have not historically been a supply and demand model. When you put all the different aspects in with ocean, rail and truck together it will change over time and rates will fluctuate as demand increases or someone reduces rates or congestion holds up someplace. Significant reduction, no. In theory it should be a reduction. It will be a long process.
Nicole Coene
What are the main backhaul products moving from Richmond back to Norfolk that has allowed the ferry to be financially successful? Especially when the ferry was only running once a week?
Russell Held
They were almost all export products on the barge at that point in time. Are you going to wait seven day for your import cargo or drive the two hours? What we saw was agricultural products in containers and manufactured products moving on the barge in an outbound direction. That also became a good thing for some of those, especially manufacturers. They can run bigger lots of a product and use the barge as warehousing or waiting for the barge as warehousing to get to the export vessel. Now that those volumes have brought us around to three times a week, we have seen the growth of the import containers as well. So from a financial model, the original barge to this day is supported by grants in a big way. As any other model like this around the country it has to get to a point where he can be self-sustaining. The models show we are close to getting there as far as capacity.
Nicole Coene
Is there a demand for Port Centric Logistics, where distribution centers are located immediately adjacent to the port (a recent example being the new London Gateway port in the UK)?
Steve Schellenberg
There is a significant amount of demand for Port Centric logistics infrastructure which we can see almost the entire inland Empire in Southern California which supports the warehousing distribution trans loading or cross dock of the business. There is a great example in Charleston of a facility that is located inside near the fence line of the terminal. It is very rare for a logistics facility to be located within the terminal boundaries. That is one of the only places I know it exists. There are many examples around the country of significant infrastructure outside the terminal fence. Some of that is used for pure distribution. Some is used for cross docking. The other benefit of being close to a terminal is that in many ports there is a capacity for a heavy haul corridor that allows the truck to be loaded with exports or imports heavier than is allowed outside that corridor or outside that region allowing the shipper or the importer to be more competitive loading the container to the capability of the ship or the rail rather than the DOT of that particular state.
Russell Held
I would agree. I will add that in many U.S. ports there is not available land by the ports to develop because they are more mature areas. So where there is land availability there is a good advantage.
Nicole Coene
How many shipment records were used for the Iowa project, and how did you determine whether the data you used was representative?
Steve Schellenberg
The air cargo industry across the U.S. has not kept pace with the growth of the ocean industry. Last year during the crisis on the West Coast there was a significant spike and an increase in demand for air cargo to supplement the lack of predictability because of the west coast labor disruption. It created an environment of demand for goods that needed to be on time and on schedule. Air cargo was the alternative. A lot of that freight has found its way back into the ocean. One of the things that has occurred in the industry is that the supply chain security initiatives that are in place to protect cargo from loss and pilferage and damage and routes both by the cargo owner and the ship carrier, has made an environment where the a lot of the freight that is high end that traditionally went for an air cargo environment is moving on the water. You can look at JFK over the last five or seven years. Not all of that because it has been a significant erosion of air cargo but also because it has been displaced by ocean and some because it has been displaced by other ports where there is the ability to move the same freighter at a lower cost and with a greater degree of predictability even though all of the freight movers have a spot near JFK. The other part of the air cargo phenomenon is that as you get wider body airplanes you can put more freight in the plane. There is less demand for pure cargo freighter operations and that will continue to be a solution that is presented by the airlines as they move more market share into the passenger hold.
Nicole Coene
How many shipment records were used for the Iowa project and how did you determine whether the data you used was representative?
Rick Langer
We used two sources of data. We used the U.S. Department of Transportation freight analysis framework which is the commodity flow survey data and we used the significant portion of private sector data. Private sector data is at the product level. The public level is at the commodity. Private sector data we had to aggregate to the commodity level. We had to disaggregate from the public sector data to the shipment levels. We could use both sources of data so we would have a representative data set of shipments. We are at the three digit zip to zip origin destination within 43 countries or country zones. It was a big challenge. When we do it in the private sector or federal agency we do it at the product level. We get the shipment records. To make sure it was representative we had to get the freight flow survey or freight analysis framework data to make sure we had a representative set. We validated with private sector data. We made a recommendation. We went to the areas where geographies that were making the recommendations and through the economic development authority and nondisclosure agreements we validated those recommendations with the specific company data of the businesses in the geography where we made the recommendations. The database has tens of millions of records, it is quite large.
Nicole Coene
Final question. What challenges or push back the received from communities located in attractive freight locations regarding logistics related development?
Russell Held
That does come up. Sometimes there are communities that want to maintain the way of life they have. If that is what the communities decide to do, good. Generally we move on to another place to find a spot. Often it is a case of these areas also needing the economic investment, tax base, the income to get services that they want. An example would be if the Greer, South Carolina ramp that I talked about, citizens would show up at the Virginia Inland Port just to see what it was about. By looking around there and seeing the operations and seeing the impact, they went back to South Carolina with a good idea of how they could exist or coexist. I think we can show them examples. Sometimes if they do not want it, so be it.
Steve Schellenberg
There is always a challenge in logistics environments for a phenomenon to occur. So when we look at industrial developments it has to be part of the planning accomplishment. In most cases we have been able to show that the economic outcome and benefits from a development done right, that is the key. If you build it right the berms are high enough so you can't see what's going on over the fence. The fence is tree-lined it is not an eyesore. In most cases the economic development outcome, the jobs and indirect numbers are rather compelling on a large scale for industrial development in most cases. People looking for jobs will outweigh the voice of the few that say not in my backyard.
Nicole Coene
Thank you all for attending today's seminar. The recorded version of this event will be available within the next few weeks on the Talking Freight website. The next seminar will be held on September 16 and the topic is the 2015 Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report. Registration is not yet available but I will send a notice out through the Freight Planning LISTSERV announcing the topic and the availability of registration.
I encourage you to join the Freight Planning LISTSERV if you have not already done so. Thank you and have a good day.
