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In recent years, there has been a remarkable increase in demand for air freight, including a 9 percent surge in 2017 alone. By the end of 2018, demand for air freight services is expected to rise another 4.5 percent. Suffice to say, this is one of the strongest peaks in almost a decade. What’s behind this staggering uplift in air freight demand, and how can businesses deal with the fact that demand—at present—is outstripping capacity, leading to what some are calling an “air freight capacity crunch”?
"When it comes to the lack of affordable air cargo space, small and medium-size businesses are bearing the brunt of the pressure."
Today’s rising air freight rates and the growth in demand for air cargo space can be traced back to a combination of factors. Principally, there’s the growth of the e-commerce sector and the ensuing higher demand for cross-border e-commerce, with industry giants relying heavily on the express delivery services provided by air cargo carriers. Since 2005, global internet retail sales have grown by an average of 20 percent (or more) per year, and with retailers seeking to reach their customers as quickly as possible, air freight is reaping the rewards.
As you’d imagine, economic factors are also a significant driver in the explosive growth of air cargo volumes. As Keith Andrey, vice president of global freight forwarding at UPS, notes, “We’re seeing higher demand out of China and Asia coming to Europe and the U.S., as well as an increase in demand for U.S. products.” The rise of global GDP and the growth of the global economy are boosting international freight and worldwide demand for air cargo. In addition, European carriers are pursuing long haul options to increase operating margins. Consequently, the cost of international freight is shooting up, particularly for air cargo carriers in Europe and Asia.
Finally, there’s the “everything takes two days” mentality that e-commerce giants are inscribing in the consumer mindset. Many consumers aren’t willing to make allowances when buying from smaller companies. They expect exactly the same level of speed and convenience regardless of which company they’re buying from. According to the PwC Global Insights Survey, 50 percent of customers expect their goods to arrive the next day or within two days. It’s the “need it now” mentality. This is leading many companies to seek out new ways of minimizing lead times, with air freight services becoming a key mechanism for retailers to move more inventory and meet consumer demand.
While demand has been soaring, capacity has struggled to keep up, having risen by just 3 percent in 2017, the slowest annual growth rate for freight capacity since 2012. As a result, air freight rates are rapidly increasing, and airlines are becoming much more selective about the cargo they accept. In some cases, even the highest paying freight is being turned away by carriers. So, what can your business do if you need to ship goods quickly by air?
When it comes to the lack of affordable air cargo space, small and medium-size businesses are bearing the brunt of the pressure. Here are some of the strategies that your business can use to cope with the air freight capacity crunch:
1. Source from multiple locations.
“Businesses need to look at their strategies on sourcing to make sure that they’re providing themselves with contingency options,” Andrey points out. If your business sources products or raw materials from a single factory or party, you’re more at risk of incurring losses in a capacity crunch, wholly because you’ll lack an alternative product or global source point.
By making alternative arrangements and sourcing from multiple locations, you can help ensure that in the event of an air freight capacity crunch, your business won’t be facing the dreaded stockouts that can spell disaster for retailers in a competitive environment.
2. Implement SKU rationalization.
SKU rationalization—the decision-making process that helps businesses determine whether they should add, maintain or remove products—is an important part of dealing with the capacity crunch. Some businesses don’t pay attention to SKU level detail, which means they’re in the dark as to whether individual products are urgently needed or can be deferred. As the number of SKUs increases (from an average 7,000 SKUs in a grocery store in 1970, for example, to over 40,000 today), the consequences grow costlier for businesses.
As Andrey notes, a failure to implement SKU rationalization can lead to chaos in supply chain management: “A part that can wait seven days ends up flying in two days, and parts that are needed in two days can end up flying in seven days because sometimes businesses can’t rationalize demand to that level.” All in all, effective SKU rationalization can enable your business to get the maximum use out of the available air cargo space, allowing the right freight to move at the right time.
3. Improve forecasting and lead time accuracy.
Improving lead time accuracy is another key means of navigating airline capacity constraints. By forecasting customer demand, businesses can determine which products they need at certain times throughout the year.
“Many of our customers struggle to forecast availability,” explains Andrey. “Being able to tell your forwarder far enough in advance, with a fairly high level of accuracy, how much and when that shipment is going to be conceived at the FOB shipping point is very important for planning.” So, how can you gain greater insight into lead times? It basically comes down to supply chain visibility and flexible logistics planning.
This is where UPS air freight solutions come into play. Andrey states, “We have tools that are very popular with customers in order management and supplier management, which help them see when orders are going to be available from the factory for shipment. From that, it allows our team to plan further out and determine whether it can go via ocean or air freight.” One such tool is UPS Order Watch® cloud-based technology, a program that can help support air logistics and minimize air freight demand caused by factory delay. According to Andrey, an increasing number of smaller size customers are engaging in this type of visibility to navigate periods of peak demand. UPS also offers Flex® Global View, an air freight event management and visibility tool that can provide an integrated view into your company’s supply chain.
4. Build relationships with air cargo carriers.
As capacity tightens, rates increase. According to the TAC Index (Transportation Air Cargo), the average rates for services from Hong Kong to North America increased by 14.8 percent year over year in April 2018. In a period of increased capacity constraints—during which the balance of power shifts back in the direction of the airlines—it pays to have good relationships with carriers. One forward-thinking company has invested in strategic partnerships and contracts blocked space percentages with air cargo carriers, thereby ensuring the ability to deliver in a capacity crunch. With current e-commerce volumes set to increase, and global sales forecasts for 2019 expected to reach $3.5 trillion, entering into a blocked space agreement (BSA) could be an expedient way to guarantee your cargo gets to where it needs to go.
Other big-name companies are reported to have pre-booked extensive airline capacity, while some major pharmaceutical companies are exploring the advantages of shipping via their own dedicated flights. Businesses are learning that advanced planning and loyalty to a carrier are rewarded in a capacity crunch situation.
5. Align inventory to reflect increased demand.
Day-to-day fluctuations in air cargo capacity often mean that space simply goes to the highest bidder. According to JOC.com, this auction-style approach to cargo can make the price per kilogram 10 times higher. To avoid paying exorbitant, short-notice air freight rates, your business may want to consider building up inventory using ocean and multimodal freight.
Historically, the businesses that struggle most in a capacity crunch are specialty retailers (and occasionally industrial manufacturing companies) that have a maximum they can afford to pay for transportation. This is because they may have to pay outside of their budget for priority air freight services. Building up inventory in advance of peak times or to handle urgent situations can help businesses avoid paying premiums for unplanned air cargo shipments.
By contrast, industry segments that commit to year-round volumes (such as high-tech and some consumer goods) are usually better able to weather periods of peak demand and the inherent pressures of seasonality.
While demand for air freight services remains high, there are many ways that your business can come out on top of the capacity crunch. Find out more about the air freight services provided by UPS.
The information provided here is based on information obtained from government, industry, and other public sources and reflects prevailing conditions and our opinions and views as of this date, all of which are accordingly subject to change. In preparing this article, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. UPS accepts no liability for the content of this article, or for the consequences of any actions taken on the basis of the information provided.
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