Why Pay Premium Costs for Non-Rush Shipments?

Does it ever seem like you’re operating, well, on auto-pilot when it comes to determining service levels for your airline parts shipments?  Such is the plight of an AOG desk manager, who reflexively finds the fastest solution possible, often regardless of cost.  Sometimes though, shipments don’t need to travel via a premium service level, but instead can arrive a day or two later, at a much lower price point.

While the concept of using anything less than first flight out, or an expedited truck solution is anathema to AOG managers, the truth is, for many low value shipments, there is no reason to incur these steep charges.

This is especially true in light of the growing number of parts arriving from – and travelling to – Asia.  A business could find significant savings by evaluating whether or not a shipment truly requires top shelf service, or if one of today’s more creative, less costly solutions would be sufficient.

A few options to consider:

Ocean:  Shipping freight via air generally takes a day or two, while shipping via ocean carrier usually takes about 30 days.  But, the cost savings achieved via ocean transit can be significant, especially for larger, heavier loads.  This is because ocean carriers calculate cost based on volume, while air cargo providers calculate charges based on “chargeable weights” (calculation based on shipment size and weight).  One analyst estimates the cost of shipping via air is five-to-six times higher than shipping via ocean.

• For low-value shipments that can spend 30 days in transit, it’s an obvious choice:  Ocean shipping is a more cost-efficient option than air.

Intermodal:  Another consideration is to combine transport modes and find a less costly alternative than would be incurred using a single mode.  Intermodal solutions have become increasingly attractive as technology enables the seamless transfer of shipments, and optimization identifies “best possible” solutions for specific shipments.  A few intermodal considerations include:

• Ocean/Rail: Although rail service tends to be a rather inflexible transit option, several lines have made significant investments in capabilities, such that rail is increasingly found in today’s intermodal solutions. This is especially true for non-urgent, low value shipments.  For example, Asian-based ocean cargo arriving in Los Angeles or Long Beach can be seamlessly loaded directly onto a rail car for transcontinental service to all major population centers in the Northeast, Midwest, Southeast, and of course throughout Southern California.  Port of Long Beach Chief Commercial Officer Noel Hacegaba says that intermodal rail is the most efficient way to move containers from the harbor area.  He told the Journal of Commerce that, while 28 percent of containers now leave the port via rail, that number is expected to increase to 35 percent over the next few years.   Further, the CSX Railroad notes that using a rail solution for moves longer than 500 miles can reduce costs by an average 15 percent.

• Air/Truck. In some instances, it can be less expensive to use a combined air/truck solution as an option for less urgent shipments.  Let’s say an AOG manager in Atlanta has a shipment of low-value components heading to Toronto.  Depending on the size and weight of the shipment, it might make sense to take advantage of scheduled air service to move the goods into Canada, and then rely on a freight service for intra-Canada distribution.  Many AOGs make the costly mistake of using an expedited air solution, with courier service to handle final deliveries.  This can be a tremendous waste if such a high level of service isn’t truly needed.  For example, the price differential between Next Flight Out and a slower five-day air solution is roughly 35 percent.

• Consolidation. Transportation managers could save 30-40 percent of shipping costs by consolidating smaller shipments into a single, larger load.  Some managers have been hesitant to take advantage of this obvious benefit out of concern that if one unit within the larger consolidated shipment was delayed by customs, the entire shipment would be detained.  This can be avoided by clearing each unit under a House Bill of Lading, which includes itemized information about each unit of the larger shipment.  By relying on the House Bill, each unit can clear customs separately, thus eliminating the chance of a single rejected unit holding up an entire shipment.

As an example:  When a major European carrier needed to move a supply of airline parts to the U.S. for distribution to repair shops across the United States, it consolidated the units into a single shipment for direct comat service to Atlanta.  Once in Atlanta, customs cleared each unit individually, via the house bill.  Shipments were then picked up by transportation providers for final transit (via air or ground) to their final destinations.

This may seem like an obvious solution, but many transportation managers would reflexively send each shipment on an “as ready” basis, and achieve little economies of scale.  But by waiting, and consolidating all of its U.S.-bound shipments, the carrier was able to significantly reduce costs.

For any of these options to work, two elements are essential:

1. Since transit times would be slower, an AOG would have to assent to taking on additional inventory, and incur associated carrying costs. In many instances, the cost of warehousing and processing the extra inventory are offset by the reduced cost of transportation.  Taken as a whole, the cost is often less than the price of “typical” AOG premium service.
2. Critically important, is to partner with a logistics provider that has the required capabilities. For one thing, not every logistics company offers consolidation services, and many do not provide the comprehensive “soup to nuts” capabilities you’d need to manage an increased inventory level, and ensure it is properly positioned for on-time deliveries when needed.

In the world of AOG logistics, there will always be Code Red alerts when a shipment needs to travel to a stranded aircraft as quickly as possible, cost be damned!  But other times, there is simply no need to incur the additional costs.  A transportation manager might be pleasantly surprised to find how much savings can be achieved, just by taking advantage of less urgent transit solutions for less urgent shipments.