Since the end of the boom, the U.S. economy has often seemed stuck in a kind of limbo — not quite sick, yet not quite well either. It’s a condition that hasn’t made planning easy for anyone, from households to major corporations.

For most direct-to-consumer retailers, the limbo economy has demanded a limbo strategy — limbo as in that Sixties dance under a bamboo pole. With sales flat or falling, the only way to stay profitable has been to keep cutting costs — to just keep scooting back and forth under a bar that keeps getting lower and lower. And although many economists forecast a real economic recovery this year, most logistics experts agree that the biggest question in direct retail fulfillment will once again be Chubby Checker’s old, cosmic question, “How low can you go?”

Richard Hallal, principal of Logistics Development Corp., a Cleveland-based logistics strategy consulting firm, says that direct-to-consumer retail is “under a great deal of pressure right now, for a whole host of macroeconomic reasons.” The biggest factor, he says, is that today’s low interest rates make it cheap for “big box” retailers to hold inventory at point of sale, negating one of the key advantages of the direct-to-consumer business model. At the same time, he says, transporters’ factor costs “are really not good.” The reason is not just rising fuel costs, he adds, but labor shortages, increasing insurance costs, pensions, indirect labor expenses such as health insurance costs, and the cost of operating under-utilized infrastructure.

1 Transportation

Many industry experts agree with Hallal’s gloomy assessment of the trucking business.

Robert Costello, chief economist of American Trucking Associations, an Alexandria, VA-based trade group, says that truckers’ biggest costs have increased so substantially over the past few years that some in the industry talked last year about a “perfect storm” of bad conditions. Although shipping volumes are finally rising a bit now, Costello says, the average level of profitability is still only about 2% — a margin that leaves little room for error. As Robert V. Delaney, vice president of Cass Information Systems, noted in his latest annual “State of Logistics” report, 2,345 motor carriers went out of business in 2002, and 3,990 in 2001. Costello says that the actual figure is probably in the tens of thousands, because small owner-operators are generally not tracked.

Other factors may not be helping matters either. Karl Manrodt, an assistant professor of logistics and information systems at Georgia Southern University in Statesboro, GA, believes that new federal regulations governing the number of hours truck drivers must take off between shifts are likely to have a huge impact, one that will extend far beyond the transportation industry. “This is truly going to have a ripple effect through the economy,” Manrodt says.

The new regulations, which are slated to go into effect on Jan. 5, 2004, have attracted a great deal of concern within the trucking business. Under the new rule, truckers will need to rest two more hours between shifts — 10 hours instead of the current eight.

Some trucking industry executives say that the lower levels of productivity could lead the industry to have to hire 40,000 or more — and some say many more than that — drivers. And they anticipate that the rule change could lead to increases in shipping costs of at least 4%. “Unfortunately, I think, the truckers are at a point where they’ve absorbed everything they can absorb,” says Manrodt. “They can’t do another 4-5-6-7 percent [increase in cost], that’ll kill them. So they’re going to have to start taking those costs and passing them on.”

Unsurprisingly, perhaps, trucking association economist Costello agrees that those costs can’t be absorbed by his industry. “Profit margins are as low as they’ve ever been in this industry,” says Costello. “If [the new costs are] somehow not passed along, the shippers are going to run the risk of thousands of more companies going out of business because of this.”

Beyond increasing the number of drivers, Costello says, the hours of service changes will likely mean big changes for shippers as well. One of the key provisions of the rule is the end of the distinction between driving time and waiting time, he says. In the past, a driver waiting at a loading dock was considered to be “off the clock” in calculating his hours of service. Under the new rules, any hours spent waiting are now different from hours spent stuck in traffic, and will be included in the day’s total. “Before, there was the mentality, the driver’s just sitting there resting; it doesn’t really matter,” Costello says. “It does matter now.”

As a result of the new rule, shipping companies will soon need to consider the driver’s wait time as a factor in their loading strategies. Since the driver’s meter will be running throughout the delivery, shippers will need to find new ways to speed up loading and unloading times; buy more trailers, so the trucker can “drop and hook”; or just pay the company for that time, Costello says.

Others are less pessimistic about the impact of hours of service changes. Dan Moore, an equities analyst covering the transportation industry for Stephens Inc., an investment banking firm based in Little Rock, AR, says that while the rule change will lead to higher shipping rates in the short run, he believes that shippers will make adjustments to recapture that productivity elsewhere in the process.

Moore argues that the end of off-the-clock “dwell time” mandated by the new regulations — the time while the driver waits for loading and unloading — will push shippers to become more efficient and will eventually make up for the truckers’ lost productivity. “I don’t doubt that in the near term, this [rule change] is likely to put a little constraint on capacity…. Long-term, I think shippers will find a way to adjust operations to account for the changes in hours of service so that they don’t entail the same levels of cost that they’re likely to entail initially,” he says.

And all those new drivers? Moore does not think they’re actually going to be needed. “I would be very surprised if the industry found itself in a situation where it had to add tens of thousands of new drivers because of its adaptation to these new rules,” he says.

But however the hours-of-service crisis resolves itself, truckers are faced with other rising costs as well. Foremost of these is the eventual conversion of all diesel trucks to more ecologically friendly engines long mandated by the Environmental Protection Administration. Incorporating those new engines, which cost about 20% more than the last generation of engines and are between 3% and 20% less fuel-efficient, depending on the load — say about five miles a gallon instead of six, says one truck engine company executive — is also going to add more costs to the trucking business.

2 Shipping

At the same time, logistics prognosticators see a trend toward more experimentation in retailers’ shipping strategies, mostly motivated by cost cutting. For example, shipping systems that leverage the U.S. Postal Service are growing in popularity. RR Donnelley Logistics Co. of Chicago, for instance, is building a rapidly growing business around shipping consolidated loads of parcels to one of its 26 national distribution centers. The printing giant ships consolidated loads of parcels long-distance, then drops packages into the postal system, a practice that Donnelley executives say can undercut the cost of conventional delivery-service delivery by about 30%. Apparently a number of shippers agree: Donnelley executives say that the parcel delivery business has increased from 120 million to 180 million packages in the last three years. That’s not much compared to the 20 billion pieces of print and mail pieces the company handles annually, but it has been a bright spot in RR Donnelley’s financials. Last year, net sales in the package business climbed by 8.3%, according to the company’s annual report.

Elliot Rabinovich, an assistant professor of logistics at Arizona State University in Tempe, says that interest in working with parcel consolidators such as RR Donnelley and Parcel Direct has increased dramatically in the past few years. “It used to be a sleepy little area of fulfillment that nobody paid close attention to, but more and more they’re becoming very, very visible,” he says.

In Europe, however, some companies may have even closer partnerships with the post office. Hau Lee, a professor of supply chain management at Stanford University in Palo Alto, CA, says that several companies seem to have developed much deeper partnerships with the post office. In Germany, for example, DHL is experiencing some success in providing e-commerce deliveries through a system of lockers at Deutsche Post offices. Customers order online, then go to the post office to pick up their delivery from a special password-protected locker.

Lee says several factors may explain why these models are being developed in Europe — the first being that most European post offices think more like for-profit corporations than public services; the second that these ventures are in some cases business divisions of the parent, such as DHL, owned by Deutsche Post; and finally, that the United States is such a big country, which makes neighborhood delivery systems less attractive.

Of course, getting the package delivered is only part of the logistics challenge in direct-to-consumer retail. Returns have long been seen as a limiting factor to greater consumer enthusiasm for direct retail sales. Some experts point to such companies as Newgistics of Austin, TX, which operates a system designed to simplify returns by providing consumers with pre-addressed, pre-paid shipping labels that are then sent to regional destinations for consolidation. They also cite the Post Office’s recent decision to create an experimental lower postage rate for returned goods as a helpful trend as well.

But some experts question the wisdom of free returns. John Lenser, a San Rafael, CA, catalog consultant, says that he believes it’s usually a mistake to make such offers. He argues that as with free shipping, the cost of free returns outweighs the benefit. “It’s like giving free shipping,” he says, and “free shipping is like giving 14 points of your revenue away. That’s a huge portion of your gross profit dollar that you’re giving away. You’d have to have a lift in sales of 28%.”

Lenser doesn’t see free shipping as a trend. “I think that most people, if anything, are backing away from free shipping, realizing that it was [part] of the unprofitable business model that the dot-commers had.”

3 Technology

As ugly as the current economic climate looks from most angles, many logisticians are optimistic about the future. Reason number one is that in a few years, many believe that radio tagging will lead to some dramatic changes in logistics (see sidebar). Reason number two: Most logisticians say that a lot of the e-commerce technology that was promised during the last boom is finally ready for prime time.

“There’s just a wonderful amount of good integration systems work going on inside companies that are helping them to build their backbones, build their infrastructures, build ways to access their market,” says Logistics Development Corp.’s Hallal.

He advises that for companies that aren’t looking to outsource more of their fulfillment, now is a good time to make an investment. The cost of entry into some shipping technologies is just “nickels on the dollar” compared to three or four years ago, Hallal says, adding that ever since the end of the boom period, many top-tier technology vendors have adapted their products for use in smaller companies and have also improved their ability to integrate products between systems. While companies worth less than $200 million will still have to pursue the deal — mostly because marketing and sales budgets have been cut at many of the large firms — those first-tier companies are providing much better solutions now than they could just a few years ago.

Hallal believes that eventually — maybe in two to four years — economic fundamentals are likely to swing back in favor of direct-to-consumer retail, and when that happens, he foresees a “second coming of the dot-coms,” this time with technology that works and business models that make sense. But for 2004, as Chubby Checker would say, most fulfillment people are “gonna do the limbo rock, all around the limbo clock.”

Hau Lee of Stanford University agrees that RFID is coming, and that it’s going to be important, but he’s skeptical about its short-run impact on the supply chain. While it will help speed checkout, reduce theft, and improve inventory management, Lee believes that it’s unlikely to help companies make a tremendous leap ahead to such improvements as true just-in-time delivery. “That, I think, is far-fetched,” he says.

Lee’s skepticism is based on the irony inherent in many new technologies: They bear within themselves the seeds of necessary changes so great that they mitigate the speed of their adoption, and RFID is no exception. While RFID will be big, the capacity to absorb all the new data being collected is going to be limited at first, in Lee’s view: “The hardware is going faster than the software.” Writing the middleware programs to collect the data, and the forecasting programs to interpret all that new information, is going to take some time, he says.

Bennett Voyles is a business and financial writer based in New York City. He can be reached at

Will This Be the Year of the Radio Tag?

They used to say that as New Hampshire goes, so goes the nation. And while that still may be true in politics, when it comes to supply chain management, Arkansas may be the bellwether. The favorite leviathan of Bentonville, AK, Wal-Mart, has announced that it wants to begin converting to radio-tagging by Jan. 1, 2005, and many analysts predict that the retail giant’s demand is likely to push rapid adoption throughout the retail world, as suppliers rush to adapt to the new technology.

While most technologies take many years to roll out, some experts think that radio frequency identification tagging will be implemented much more quickly than past system-wide changes such as bar codes or enterprise resource planning systems, in large part because of Wal-Mart’s demands.

Karl Manrodt of Georgia Southern University thinks Wal-Mart’s move will accelerate the change — and everyone will fall in line: “If you’re a supplier to Wal-Mart and they say, I need you to do RFID on your case-level or your pallet-level product, are you going to run two systems for your other customers, so you’ve got a Wal-Mart system and your other system? I don’t think so. You’re just going to convert over to whatever Wal-Mart says.”

When it happens, Manrodt adds, he believes it’s going to lead to tremendous changes in retail logistics.

“It’s going to be a lot greater than [skeptics] can imagine right now,” he says. “I think the changes are going to be significant and broad-based.”

James Uchneat, of Benchmarking Partners in Cambridge, MA, says retailers can expect some dramatic shifts in two to three years. “Virtually every business process can potentially move to a more granular level of planning,” he says. The new technology is going to enable companies to track inventory much more closely, notes Uchneat. More efficient receiving and cross-docking, as well as shorter planning cycles, are all likely to result from adoption of the new technology.

Partner Content

Hincapie Sportswear Finds Omnichannel Success in the Cloud - Netsuite
For more and more companies, a cloud-based unified data solution is the way to make this happen. Custom cycling apparel maker Hincapie Sportswear has leveraged this capability to gain greater visibility into revenue streams, turning opportunities into sales more quickly while gaining overall operating efficiency. Download this ecommerce special report from Multichannel Merchant to more.
The Gift of Wow: Preparing your store for the holiday season - Netsuite
Being prepared for the holiday rush used to mean stocking shelves and making sure your associates were ready for the long hours. But the digital revolution has changed everything, most importantly, customer expectations. Retailers with a physical store presence should be asking themselves—what am I doing to wow the customer?
3 Critical Components to Achieving the Perfect Order - NetSuite
Explore the 3 critical components to delivering the perfect order.
Streamlining Unified Commerce Complexity - NetSuite
Explore how consolidating multiple systems through a cloud-based commerce platform provides a seamless experience for both you, and your customer.