Will premium freight remain a course of last resort or should it now be a built-in part of logistics budgets?
Every night, a TNT Airways Boeing 777 freighter takes off from TNT’s European hub in Liège, Belgium, bound for New York City’s John F. Kennedy airport. For a period of time last year, each of those flights had 10 tonnes of their 103- tonne payload taken up by gearboxes, heading for an auto assembly plant 200 miles (320km) south of New York.
“We collected the gearboxes from the manufacturer, drove them to Liège, flew them to New York, and then shipped them to the plant – every night for three months,” says Nick Beard, corporate account director for the automotive and industrial sector at TNT Express. “And that’s on top of the normal flow of gearboxes from the manufacturer [which is] carried by sea.”
Welcome to the world of automotive premium freight – a segment of the market which Beard estimates at no more than 5% of TNT Express’s business. As he acknowledges, it can be “incredibly expensive – but when it’s needed, it’s needed”. TNT’s niche, he explains, is to carry the “screamers” that thirdparty logistics providers can’t handle or arrange in time.
Got 20 engines to move from Spain to Turkey? A BAe 146- 300QT freighter will do the job for €30,000 ($38,300) – a price that includes a pan-European range, pre-positioning to a convenient airport, and the return leg back to Liège.
“For TNT, our customers’ need for premium freight arises when auto manufacturers’ production plans get out of sync with their supply chain,” says Beard. It’s a pure ‘spot’ market, he explains. The market is dictated by the essential questions: Have you got the aircraft? Can you move it in time? What’s the cost?’
The cost of premium freight is usually borne by the component supplier, to whom TNT’s invoice is sent. They must decide how the cost of premium air freight compares with the costs of the penalties imposed for bringing production lines to a halt? Having made that decision, the production planners at both the supplier and the plant will want to know that the shipment arrives as promised.
In other words, this is a market in which normal businessto- business shipment tracking practices won’t cut the mustard: forget typing in a shipment number over the internet. Instead, says Beard, 16 automotive control centres around the world take up the task – coordinating the pick-up and the delivery to Liège, making sure that the shipment gets on the aircraft as planned, and providing an estimated time of arrival, updated as circumstances change. “What the planners need to know is: ‘Has there been a deviation from schedule? If so, what is it, and what is the impact?” he stresses. “Granularity of information is everything.”
How to define premium freight
Talk to people in the premium freight business and certain key themes quickly emerge. That time is of the essence, for instance, shouldn’t come as a surprise. Likewise, the value placed on information provision during transhipment: e-mails, phone calls, faxes and web-based updates are de rigeuer – it seems there’s never too much information.
Slightly more surprising, though, is a market segmentation based on price and exclusivity of service. To some players in the market, TNT’s door-to-door transatlantic shipments of gearboxes simply doesn’t count as premium enough – even if the invoice value might bring tears to an accountant’s eyes.
These premium freight providers define the service in terms of one-off shipments using dedicated facilities as well as on-board couriers, if necessary. The premium market, on their terms, is one of an emergency response to an emergency situation, using whatever modes of transport are required to get the job done.
“We undertake very specialised transport, globally, on a point-to-point basis,” says Stephen Kelly, global manager of Dublin, Ireland-based Emergency Freight International. “We might be moving hazardous goods, or goods sourced from a challenging part of the world, or moving goods which require specialised knowledge and capabilities because the lead times are so short.”
Those capabilities, he adds, extend from helicopter and aircraft charter to on-board couriers, emergency customs clearance and dedicated vehicle transport: a one-stop-shop of transport options that can be connected together to provide a point-to-point delivery service.
Kelly sees a clear distinction between his company’s offerings and those of carriers such as TNT, DHL and Fedex, which offer expedited freight shipment over existing trunk routes, supplemented by customised collection and delivery services. Indeed, he notes, it’s not unknown for such carriers to make use of Emergency Freight’s capabilities for precisely such customised collection and delivery services.
But while Kelly cites carmakers such as Rolls-Royce, Jaguar and Renault as Emergency Freight customers, most of the demand for the company’s specialised automotive capabilities, he acknowledges, comes from tier one and tier two suppliers such as Valeo, Bosch and TRW.
That said, according to Brad Brennan, managing director of premium freight specialist Evolution Time Critical, the appearance of tier two customers is a relatively recent thing. “Prior to the 2008-2009 recession, customers were almost entirely vehicle manufacturers and tier ones,” he notes. “Now, there are a lot of tier two customers in the mix as well. Vehicle manufacturers have been demanding more resilience in their supply chains, which has forced the adoption of premium freight capabilities further down the supply chain. Even tier three and tier four automotive customers have now appeared: manufacturers of small but high-value items – such as electronic components – which can still close an assembly line if they don’t arrive on time.”
Emergency Freight’s Kelly concurrs. In today’s tight-knit automotive supply chains, he explains, when things go wrong, premium freight is the way out of trouble.
“The impetus for picking up the phone and calling us is almost always a shortage of parts, caused by failure in one part of the supply chain,” he says. “It could be a production failure, or a logistics failure, or a failure to forecast demand accurately enough. In short, something has gone wrong, and there’s a need to put on a special journey to get things back on track.”
Or even several journeys. As with Emergency Freight, the power of the premium freight provision lies in an ability to offer a series of individually-tailored transport options as part of an end-to-end service.
Take, for instance, a real-life parts shortage cited by Neal Williams, group managing director at Dover, UK-based Priority Freight, when a UK manufacturer suffered a shortage of electronic sensors to be mounted on rear body panels as part of a rear-view reversing aid camera.
“The initial requirement was to collect the chips from the factory in Michigan, take them to Detroit airport, where an on-board courier took them to Venice, Italy via Amsterdam-Schiphol,” says Williams. “In Italy, the courier was met by a motorbike, which took them to the factory. Once the assembled cameras had been mounted on the body panels, we trucked them to Verona airport, where they were loaded onto a chartered Antonov 12, which flew them to Birmingham, after which we trucked them to the assembly plant.“
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At Lufthansa Cargo Charter, premium freight for the automotive industry has a special meaning: the transport of complete vehicles – not so much by way of getting them to market, but as an adjunct to trade fairs, motor shows, and for severe terrain or climate testing. What’s more, says managing director Reto Hunziker, it’s a market that has remained fairly buoyant, despite the economic downturn of recent times. “Tests and exhibitions are planned well in advance, to match the schedules for new vehicle launches,” he explains. “So we haven’t seen a big impact from the economy in regard to demand for our automotive business.” That said, it’s a business with its own special requirements. Dedicated staff must plan the loading of vehicles in fine detail, so as to ensure the maximum utilisation of the aircraft in question. Furthermore, adds Hunziker, such checking also extends to the available infrastructure at origin and destination to make sure all necessary equipment is on hand to handle an automotive movement. “Being experts with many years of experience, we aim to offer a reliable and tailor-made solution that fits the customer’s demand, but also one that works when it comes to the aircraft type and the infrastructure on ground,” he says. “What’s more, we always have our dedicated load masters on automotive flights to be able to supervise, manage and control the movement at any given time.” And the market, he suggests, is getting tougher, driven by exacting quality requirements and the need for a seamless chain of communication and fulfilment. “It’s no longer just about a flight from point A to point B,” he stresses. “The main players on the forwarding side, as well as the airline side, will need to work closely together in order to be able to offer a ‘one-stop shop’. In future, there will be fewer players able to provide the service and know-how needed in order to fulfil the special requirements of the automotive industry.”
Sometimes not the solution
Besides understanding the supply chain failures that prompt such customised logistics solutions, it is instructive to note what doesn’t serve as a trigger for carmakers or their suppliers to pick up the phone and order a premium freight delivery. Namely, the sort of natural disasters that we’ve seen in recent years, which might be expected to disrupt the automotive industry’s supply chains.
Take 2011’s Japanese earthquake and tsunami. Within hours, Toyota, Suzuki and Nissan had ceased production completely – not necessarily because of damage to assembly plants, but because of earthquake or tsunami damage to tier one, two or three suppliers’ plants. Within days, the contagion had spread across the world – from Ford to Volvo, and General Motors to Renault, carmakers suddenly suffered from parts shortages.
PSA Peugeot Citroën, for instance, cut production by between 40-70% at most of its European plants because of a shortage of an engine airflow sensor imported from Japan. Chrysler, meanwhile, stopped taking dealer orders for vehicles in 10 paint colours, the pigments for which were sourced from Japan. Similar stories emerged from Ford and Volvo.
But was this tragedy a boon for premium freight providers, as OEMs rushed frantically to fly material from alternative suppliers? Not really, it turns out.
“Emergency shipments weren’t as extensive as one might imagine,” says Evolution Time Critical’s Brennan. “The problem wasn’t a shortage of freight capacity, but the fact that the parts weren’t being produced. A small percentage of tier one suppliers and carmakers shipped pallets of parts by air to Europe, but they were very much the exception.”
Emergency Freight’s Kelly concurs. “It wouldn’t be true to say that disasters such as tsunamis, earthquakes and floods wouldn’t have an impact, but it’s not as big an impact as you might imagine,” he notes. “The proportion of overall demand that such events make up is very, very low.”
Ultimately, the 2010 eruption of Iceland’s Eyjafjallajökull volcano showed the limits of what premium air freight could deliver. High-altitude ash clouds led to the closure of much of Europe’s air space and the cancellation of some 95,000 flights, ultimately impacting production at plants from Michigan to Japan. In the US, Ford and BMW’s assembly lines were hit, while Nissan was forced to halt production at two plants in Japan that make its Murano, Rogue and Cube models.
Premium freight providers scrambled to arrange other solutions, including helicopters or expedited van, truck and rail deliveries for urgent freight. But while premium freight might have been limited during the closure of airspace, the backlog of freight in airports in the weeks that followed as a result led to a sharp rise in expedited shipments.
Premium freight, premium savings?
Insiders reckon that premium freight can deliver much more than shipments of urgently needed components and raw materials. And events such as those in Japan or Iceland have prompted logistics planners to reconfigure some supply chains, to include more consideration of how premium freight provision could actually save money. That is, as a back-up in case planned inventory reduction and just-in-time initiatives backfire, says Evolution Time Critical’s Brennan.
“What we see the industry doing, intentionally, is designing supply chains with very limited buffer or safety stock, with the actual warehouse being ‘on wheels’, namely in transit,” he notes. “Which means that when something goes wrong they need to get replacement parts lineside very quickly. So they pick up the phone.”
Priority Freight’s Williams agrees. Premium freight – or “expedited contingency logistics”, as he prefers to describe it – is these days often being budgeted into the total cost of acquisition for the component in question, he says.
Priority Freight’s Williams agrees. Premium freight – or “expedited contingency logistics”, as he prefers to describe it – is these days often being budgeted into the total cost of acquisition for the component in question, he says.
“In automotive parlance, ‘premium’ is sometimes seen as meaning ‘outside of budget’ and as something to be avoided,” Williams notes. “As vehicle manufacturers have moved from a reliance on suppliers close to their plants to a model of lowcost country sourcing, they’ve had to accept that sourcing issues aren’t just about labour and material costs, but also logistics and supply chain complexity issues. The result is that a proportion of premium freight is reflected in their plans, on the basis that they know they are likely to need it, and it’s unrealistic to expect otherwise.”
But expectation isn’t the same as acceptance, stresses Harry Chase, vice-president of logistics at Kimura Unity, a Japanese logistics provider whose biggest customer is Toyota, and which is now establishing itself in North America, headed by Chase, a former logistics executive at Hyundai and Whirlpool in North America.
“In our terminology, ‘premium’ is anything outside standard practice, and which attracts costs,” he explains. “So for us, it’s not about air freight, carry-on logistics, or very rapid response. It’s about doing anything outside the usual.”
At which point, he says, formal review processes swing into action to see what can be done to prevent a repetition. Including, he explains, strict “root cause analysis” processes, which aim to track exceptional issues back to the events which brought them into being.
“Premium means an abnormality. So you need to focus on eliminating it, rather than just accepting it – and root cause analysis is the best way of doing that,” notes Chase. “And then, if the abnormality can’t be eliminated, we move to build it into the standard way of doing things; reserving cargo capacity on aircraft, for instance, even though we might not always use it.”
In this view, therefore, premium freight has a positive role to play in the industry – not just in getting urgently needed parts from point A to point B, but in delivering real value as part of inventory reduction and efficiency programmes.
It might not be what the premium freight industry set out to deliver – or what manufacturers would want in their ideal supply chains – but being ready to react in the worst case scenario is not just a benefit in today’s globalised, complex automotive supply chain, it is a must.
