The Defense Department is looking to outsource the management of its domestic freight?a contract that could run into the billions of dollars. The program is intended to cut costs and boost service; it could also shake up the industry.
Steve Geary is adjunct faculty at the University of Tennessee's Haaslam College of Business and is a lecturer at The Gordon Institute at Tufts University. He is the President of the Supply Chain Visions family of companies, consultancies that work across the government sector. Steve is a contributing editor at DC Velocity, and editor-at-large for CSCMP's Supply Chain Quarterly.
Perhaps it's no surprise that the people who brought us stealth technology have launched an all-out war on freight spending and nobody seems to have noticed. And the Department of Defense (DOD) surely is thinking big. In August of this year, DOD began reviewing proposals submitted under its Defense Transportation Coordination Initiative (DTCI) a program through which it will outsource the management of all DOD freight moving commercially in the continental United States.
The goal of DTCI is to improve the speed, predictability and reliability of transportation while simultaneously reducing costs by as much as 20 percent. The rest of us call it third-party logistics (3PL), but hey, this is the government, which rarely misses an opportunity to make up its own acronym.
Now, DTCI is no secret ... the DOD has been working the circuit since early 2004, talking the vision and addressing concerns. It has even created a public Web site devoted to the initiative. But outside of the defense world, it hasn't generated much buzz, and it should.
We're talking billions of dollars in freight over the life of the contract. That's not a typo. Billions of freight dollars. And when you start shifting that kind of money around in a market, changes happen. Not just for the players involved, but for everybody playing in the sandbox.
Looking for leverage
If the DOD is thinking big, it's because the opportunity is big. Today, DOD's freight movement system is decentralized. No central traffic management office exists. Freight costs and freight movement are managed at the local or command level, leaving a wide-open opportunity to improve service and reduce costs through proven techniques like pooling, backhaul management and mode optimization. Policy comes down from on high, but management and execution is left in the hands of the individual services, agencies and suppliers.
Currently, DOD shippers in the continental United States initiate freight movements using commercial freight transportation providers to myriad U.S. destinations, creating thousands of origindestination pairs. Multiple information systems are employed to execute and manage shipment activity. There is no centralized planning, coordination or control.
Individual DOD shippers act unilaterally, independently selecting transportation mode, level of service, and transportation provider. There is limited collaborative visibility or coordination of movement requirements and therefore, there are limited opportunities to implement commercial "best practices" such as cross-docking and consolidation or using alternative modes of transportation to meet customer requirements. By implementing DTCI, DOD hopes to change all that and in the process, cut costs, improve service and gain better visibility of overall traffic patterns and performance across the department's supply chain.
A not-so-modest proposal
To test the plan's feasibility, the DOD in 2001 collaborated with 3PL EGL Eagle Global Logistics on a pilot
project in which it outsourced the management of its freight across the southeastern United States. Encouraged by the results of the pilot, the DOD then hired GENCO, a well-known 3PL, and the non-profit firm LMI Government Consulting to put together a report on the potential benefits of outsourcing. Conservatively, the study estimated savings of 10 to 13 percent, while noting that actual savings could be higher. And, based on pooling opportunities, the study forecast improvements in both service and cycle time.
Once persuaded of outsourcing's feasibility, the DOD moved quickly. On June 22, 2006, the U.S. Transportation Command (USTRANSCOM) issued a Request for Proposal ith an August deadline. The DOD's plan is to award a ong-term contract to a world-class transportation coordinator, and through this relationship employ best commercial practices to achieve the goal of improved performance at lower total cost." It goes on to say, "The coordinator will leverage current commercial capabilities and proven best transportation practices of commercial shippers to manage, consolidate, cross-dock and optimize specified [domestic] freight movements using contractor-chosen modes among DOD shippers."
In all, the main body of the request for proposal ran to 168 pages, excluding supporting data, exhibits and appendices. One bidder reports that its team's proposal weighed 75 pounds. Although tempting, it would be unfair to suggest that the size is driven by the bureaucracy; the military logistics environment, even in the United States, is very complex with some unique requirements.
The successful bidder can expect a very large piece of business. According to Earl Boyanton, assistant deputy under secretary of defense for transportation policy, the DOD spends more than $700 million annually on freight shipments. Of this, once DTCI is fully implemented, DOD anticipates that about one-third, or $250 million, will be actively managed by the coordinator, with freight rates subjected to the competitive pressure of the open market.
Nothing's ever easy
According to the published timeline, the award of the DTCI contract should take place before the end of calendar year 2006, with implementation (which will take place in phases) to begin early in 2007. But any government decision has political implications, and a decision of this magnitude inevitably draws attention from Congress. Recently, Congress directed the Comptroller General to conduct a study of the DTCI and to submit a report no later than Feb. 1, 2007.
Special interest groups have not been idle, either. The American Trucking Associations, for example, continues to oppose key elements of the initiative. As currently described, DTCI will empower and hold accountable the 3PL to negotiate freight rates, using incentive plans as a lever and the power of competition to drive down freight costs. ATA advocates leaving rate negotiation in the hands of the government. And, while DTCI is built to establish a business relationship directly between the 3PL and the carriers, taking the government out of the picture, ATA prefers to maintain government involvement as the ultimate decision-making authority in dispute resolution.
While the taxpayer would still benefit if the ATA succeeded in limiting the initiative's scope, many intimate with DTCI say the program's full power and benefits will be unleashed only if the 3PL is given sufficient authority to execute against the program's objectives. Let's hope the essence of DTCI survives congressional review and lobbying activities.
Delays can also be expected by the award process itself. Competitive award of federal contracts includes "protest" provisions. If anybody files a protest, alleging violation of law or some other action that runs counter to the spirit of free and open competition, the contract may not be legally awarded until the protest is reviewed, objectively considered and a decision is issued. Given the size of the contract, a protest is likely.
Between congressional interest, special interest group lobbying, and the inevitable protests, final award may not take place until the middle of 2007.
On the offense
The military environment in the 21st century is very different from the conflicts for which the U.S. military has been trained, equipped, structured and organized over the past 50 years. During the Cold War, national security processes and policies were designed with a capability set meant to defeat large, powerful nation states with massive armies and weapons systems. Then, threats moved slowly and predictably, which allowed for static distribution network designs.
Today, the adversary is more likely to be a shadowy multinational terrorist network than a foreign government. And so, the push is on to create a nimble, hightech fighting force, supported by an equally nimble, high-tech supply operation.
However, this journey to improved combat capability must be tempered by the need to deliver against the requirements in a cost-effective fashion; DOD does not live in a world of limitless resources.
To meet this challenge, the DOD is trying to leverage contemporary best practices, the power of the commercial sector, and the latest advances in information technology. DTCI is just one part of that deliberate strategy to restructure and rationalize supply chain management capability in response to current and projected threat environments. Or, as Under Secretary of Defense (Acquisition, Technology, and Logistics) Ken Krieg likes to puts it, "the DOD is pursuing a number of strategic supply chain initiatives to truly make our supply chain an offensive weapon."
Another part of that strategy is the 2005 Base Realignment and Closure (BRAC) initiative, finalized earlier this year. Under BRAC, the DOD will shut down 25 major sites and realign 24 others over the next six years. And to create a more flexible and reliable distribution network, it will increase the Defense Logistics Agency's regional distribution hubs from two to four, and shift local stock back toward the regional hubs.
A third example is at the local level, called Joint Regional Inventory and Material Management (JRIMM). It is a DOD-sponsored program designed to streamline and regionalize material handling. Drawing on lean thinking, the program seeks to minimize physical touches of material, streamline the materials management process and minimize inventory layers. Rather than maintaining functional capability at multiple locations within a command or region, JRIMM will draw common operations together and provide distribution excellence as a shared capability.
The opportunity
The award of DTCI, the execution of BRAC and the extension of JRIMM will create very real business opportunities for private sector companies across America. As the management of DOD's freight moves into the private sector and as the department seeks to rationalize its physical network, opportunities will emerge to compete to provide any number of services under the DTCI umbrella, without the complexity, cost and political challenges normally associated with government work. Hundreds of millions of dollars of freight movements and associated distribution activities will move into the open market.
Of course, we should not overlook the potential implication of extensions of DTCI into the international arena. Already, USTRANSCOM is acknowledging the possibility of expanding DTCI, once rollout across the United States is complete. The Department of Defense is one of the largest generators of shipments from the United States to international locations, so there will be downstream multimodal opportunities as well.
President Bush has said, "The real goal is to move beyond marginal improvements to replace existing programs with new technologies and strategies ... to use this window of opportunity to skip a generation ...." DTCI is an attempt to tame a very large problem and deliver near-term benefit to both the warfighter at the tip of the spear and the taxpayer funding our national defense.
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”
That result showed that driver wages across the industry continue to increase post-pandemic, despite a challenging freight market for motor carriers. The data comes from ATA’s “Driver Compensation Study,” which asked 120 fleets, more than 150,000 employee drivers, and 14,000 independent contractors about their wage and benefit information.
Drilling into specific categories, linehaul less-than-truckload (LTL) drivers earned a median annual amount of $94,525 in 2023, while local LTL drivers earned a median of $80,680. The median annual compensation for drivers at private carriers has risen 12% since 2021, reaching $95,114 in 2023. And leased-on independent contractors for truckload carriers were paid an annual median amount of $186,016 in 2023.
The results also showed how the demographics of the industry are changing, as carriers offered smaller referral and fewer sign-on bonuses for new drivers in 2023 compared to 2021 but more frequently offered tenure bonuses to their current drivers and with a greater median value.
"While our last study, conducted in 2021, illustrated how drivers benefitted from the strongest freight environment in a generation, this latest report shows professional drivers' earnings are still rising—even in a weaker freight economy," ATA Chief Economist Bob Costello said in a release. "By offering greater tenure bonuses to their current driver force, many fleets appear to be shifting their workforce priorities from recruitment to retention."