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Table of Experts: A conversation on logistics & distribution

MEMPHIS BUSINESS JOURNAL

Dr. Ernie Nichols: Why do logistics professionals recognize Memphis and the Mid-South as a great distribution center location?

Don Lake: In Memphis, you’re within 24 hours of 80% of the population of the United States by truck; all five Class I railroads come into Memphis; the amount of warehouse space that’s available in Memphis; and FedEx.

Stu Towner: I think the overall connectivity, you have great Class I connections, the river system, and very good interstate connectivity for trucks. There are also already large businesses established in the area, which help attract other businesses, such as JB hunt, Tyson, Walmart, FedEx.

The Memphis area is a great location for distribution because it’s in the heart of the “Battle Ground States,” which is where foreign trade is wanting to get to. The reason is exactly what Don said, access within a 24-hour truck drive to so many great markets such as Chicago, Dallas, and Houston. The Mississippi River is basically the dividing line to where 50% of the population live on the East and 50% on the West, so Memphis is a natural mid-point to locate for distribution. The goods are coming in from the west coast, and you have a growing opportunity to use the Panama Canal to bring it further East if you can continue to lower overall logistics costs.

Phillip SorrellOur area is centrally located with transportation infrastructure and convergence of I-40 & I-55, five Class I railroads, river access and one of the largest cargo airports in the world. So, you’ve got that multimodal aspect here that really doesn’t converge anywhere else in the U.S. like it does here in the Memphis region.

Scott Hothem: The rail/river/truck connection has put Memphis on the map. The challenge for Memphis right now is with the growth of e-commerce and the fact that locations such as Dallas, St. Louis, Columbus, Nashville, and Kansas City are also investing hundreds of millions of dollars into their own logistics infrastructure as a legitimate alternative to Memphis. Because in some cases, they can offer the same or better transit times to consumers, more real estate options, lucrative business incentives, a trained and diverse workforce, quality of life advantages, etc. The competition is fierce and Memphis cannot rest on its laurels. Long term, there’s definitely more options for shippers today.

Nichols: If connectivity and access are critical, what are some problem areas?

Lake: We’re starting to get snippets about a 24-hour connectivity from the East Coast to Memphis via the rail. And it’s going to put a lot of pressure on the West Coast ports—our customers are asking us not to go through LA/Long Beach because it’s a disaster. The Port of Prince Rupert is not a lot better, but it is better.

The East Coast ports are spot on, they’re much better. You don’t have the problems you do from ship to crane to on a chassis and off to the rail. So, that could be somewhat of a game-changer.

Hothem: I agree. Our customers want to bypass LA as much as possible and get their freight inland and connect to a distribution center (DC) strategy or a single site like Memphis or Dallas—and not risk getting containers hung up in port.

Towner: The points mentioned above is why Precision Scheduled Railroading (PSR) is being implemented. In the short term, it can be painful to shippers because it’s a change in how railroads schedule/ship goods. Smaller shippers may feel left out because their volumes may not be prioritized during this phase, and even larger shippers are facing challenges because of the new push to move away from unit trains and shared power to more manifest shipments.

It’s hard to say exactly what the long-term impact is, but I personally believe that these changes can be very good for all stakeholders due to improvements in safety, asset utilization, improved transit times, and overall operating efficiencies; our leaders in the rail industry are trying to drive long-term improvements for all stakeholders, which includes shippers. If we want to grow domestic production, then we have to have infrastructure capacity to support the logistics for all modes of transportation—the PSR implementation may create opportunity by increasing capacity so that shippers are not so worried about bottlenecks on the West Coast and overall transit time to get across the country.

Lake: Recently we’ve had some major issues with the Panama Canal because of the drought. They’re restricting the draft on the vessels coming through, but that’s a short-term issue.

The biggest push back through New Orleans and Mobile—anywhere through the Gulf—is transit time. But, having said that, the cost is eye-opening through Mobile. New Orleans has a bit of a bad reputation as being pricey—everything down there is pricey: warehouse spaces, the drayage, the first and last mile. New Orleans does a great job, and we do quite a bit through New Orleans. But our customers are asking us to price things through the Gulf—this means they need to ramp up their lead time and inventory.

Nichols: What are some specific advantages that West Memphis offers?

Sorrell: Infrastructure and available space. West Memphis is part of the Memphis MSA, and it’s important for us to take advantage of Memphis being the distribution center of the U.S. One of the big obstacles in Memphis is a lack of available space. That’s why some of the development has been pushed down into North Mississippi and farther east.

West Memphis is a five-minute drive from downtown Memphis. We have two available sites—one is an Entergy “Select Site” certified mega site targeted toward automotive. The other site is a target for heavy industrial development and distribution, where we have transportation assets, rail, river, and adequate truck routes to provide opportunity for development and growth.

West Memphis has available space with the infrastructure to support it without the congestion. So, it’s the lower cost of land, available land, and infrastructure to support development that sets West Memphis apart from competitors.

Towner: When we looked at the opportunity in West Memphis, we saw exactly everything Phillip said.

Memphis is a great city and has been very important to the country, and now there are opportunities to take the great things that Memphis has done and expand that into West Memphis to create more logistics and distribution capacity with a newer approach to creating very high-efficiency, multimodal, multicommodity and high-technology logistics hubs for the country.

The City of West Memphis has focused on economic development and has done a great job in facilitating the rehab of the Friday-Graham rail spur. There are two transload sites on the railroad, six great customers on the rail line, and there is available land and sites on the railroad for new customer development. The rail line is very close to three river ports and within three miles of I-40 and I-55. We believe that by having all of these things mentioned previously along with our great relationship with the Class I railroad that we are establishing a great platform that will create opportunity for shippers and the community.

We are actively in talks with customers who are interested in the opportunity to invest real money to build business in West Memphis. These opportunities will create great paying long-term jobs, generate good revenues for the community, and the one degree of separation economic activity and investment that it will spur will be an overall great success for West Memphis.

Nichols: With Class I railroads in the Mid-South, what are some of the advantages that rail provides for your customers?

Lake: From an intermodal perspective, cost is the advantage. Trucks are expensive, especially over the past two years with Electronic Logging Devices (ELDs) coming into play. We would never consider trucking anything from here to the West Coast to get onto the vessel or the East Coast or the Gulf for that matter. These trains are leaving on a very scheduled timeframe, so the advantages are cost and schedule.

Towner: There’s about 30 billion tons of freight moving in the U.S. alone. On a per ton basis, trucks have the majority of it, because the majority of traffic moves within 100 miles. This stat is a little dated, but rail is less than 20% of the total amount. Cost per ton is significantly lower, especially when you’re taking it over the 200-mile radius standpoint. Rail has a 4-to-1 ratio, four trucks to one rail car. So there’s a good amount of asset reduction, expense per ton reduction, and bulk reliability potential for customers.

The 30 billion tons currently moving is projected to grow by 1.5% per year over the next 30 years, which means it will grow by half over that time period. With today’s 46,000 miles of interstate and the amount of goods being transported, if we didn’t have rail, we would need to double those interstate miles and we’d need nine new large airports to support todays volumes. Think about how congested the highways would be, how worn down they would get, and, most importantly, how safety would be impacted if we did not have a good rail system.

Safety is the most important discussion topic when discussing the advantages and importance of rail. On a per ton mile basis comparing rail to truck, rail has 1/8th the amount of fatalities, 1/16th of the injuries, 50% less employee injuries, and trucks have 16x the amount of hazardous releases. As volumes grow, congestion on our interstates continues to increase, and our tenured truck driving workforce retires, we could reasonably expect that the spread between safety of rail versus trucks to continue to increase, making rail an increasingly safer option.

Being environmentally responsible is also very important to discuss when comparing truck versus rail. Emissions are tied directly to the environment, and fuel efficiency is directly tied to emissions. Railroads can transport one ton of freight 500 miles on one gallon of fuel and in comparison, trucks are able to transport one ton of freight 125 miles on one gallon of fuel. Another interesting point about fuel efficiency is that rail freight has doubled since 1975, but rail fuel consumption has remained flat. In the 70s, trucks averaged 5.6 miles per gallon, and now it is about 6.5 miles per gallon. When you look at just these two points, it becomes clear that rail is a great way to continue to lower our impacts on the environment.

Last but not least is the cost advantage to shippers. Just considering the 4-to-1 ratio that we discussed, the fuel efficiency, and reliability, it’s easy to see that the average cost per ton reduction or value per ton increase to shippers to move freight over longer distances should be significantly improved if shipped by rail.

The statistics shared seems to pit rail and truck against each other, but in reality, they can be used together to create solutions. There is that natural tension, but then it’s also a strategic partnership because rail can’t go everywhere, and truck can’t either. if you take the blinders off and start thinking—how we work together and how we solve these problems together—a lot more value can be created for all parties involved.

Hothem: Our customers typically are moving 100% intermodal versus boxcar. If they’re dealing with domestic suppliers, by and large, they’re coming in less than load (LTL) and truckload, but anything that’s imported off the West Coast or the East Coast, it’s all coming in intermodal. It’s super reliable, cost efficient, and offers more flexibility than moving freight on boxcars.

That’s the bulk of what we handle in our network. And from an intermodal perspective, when you compare to moving through Chicago, you see fewer weather and congestion delays coming into Memphis. That’s where we’d like to see more of the focus of investment made on efficient transloading on those intermodal containers coming into Memphis.

Nichols: What challenges do your companies face operating in the Mid-South?

Hothem: Qualified labor. The unemployment rate is so low and new shippers are coming into Memphis creating more competition for management and production labor. In the past three years, we’ve added 400 employees to our operation in Memphis. We’ve had to build out a significant staffing and recruiting network with dedicated human resources and training staff to meet that demand.

We’re essentially having to recruit people who are already employed. Most of the qualified people who need a job have a job. The challenge is that Memphis has the reputation of being in a tough labor market. Memphis has developed a well-deserved reputation as the logistics hub of America, but that status may be challenged in the future if the pool of qualified labor does not keep up with demand. That could be a limiting factor for Memphis growth over the long term.

Sorrell: The biggest challenge is workforce. With a tight labor market and unemployment low—it’s an employees’ market now.

Many of our local businesses tell us they need applicants with soft skills, who are trainable, who show up on time, and pass drug screening. Obviously, certain positions require more highly skilled applicants but, overall, it’s general fundamental soft skills.

Towner: The workforce. For us in West Memphis, we’re trying to change the dynamic of the population there and create good paying jobs for people as a means to provide for their family and change the way that they look at life in general. Creating those jobs means you’ve got to have a good workforce. So it’s the chicken or the egg situation.

You have to have leaders who aren’t afraid of being first through door, creating those sustainable jobs for the communities—and over time, look at the greater benefit of the communities and their overall network by doing that.

Lake: A great answer to that question is what Carolyn Hardy said at the Memphis Business Journal’s “Big Deals: Logistics” panel recently—she said it once took her 24 workers to load 30 trucks a day, and now she has four workers. The four people loading those trucks3it’s almost like they’re playing a video game. It’s incredible with that level of sophistication.

The second part is the infrastructure, some is decaying and getting older. It’s not just in Memphis, it’s Chicago, Dallas, everywhere. You have multiple chassis providers all across Memphis that make everything difficult and add cost.

Nichols: What are your companies doing to help develop the workforce?

Sorrell: Recently, Crittenden County was designated a “Work Ready Community” through a program administered by the American College Testing program.

The effort was a collaboration between the county and educational institutions, the Office of Workforce Development, and local business community, trying to identify workforce needs and align the training with the needs of local employers. It provides a narrative that we’re focused on workforce development.

Towner: We fundamentally started our business wanting to earn the right from customers for the next carload. We’ll get our foot in the door with a customer, and that’ll take us to new areas. We have the same philosophy with our people. We don’t want to have excess labor, we want to run efficiently and operate in excellence, so that we can pay our people more rather than just have more jobs.

Being a privately held company, we can invest more in our people by paying them or giving them overtime to have a better means for their family. And we hold onto our people even in downturns as much as we can. As we grow, providing training opportunities becomes more important so we can help people improve over their careers.

Hothem: We have increasingly focused our efforts on training and trying to position workers with career opportunities. In support of this effort, many of our temporary associates are now called FBA: Future Barrett Associates, where we put people through an in-depth orientation to make sure they’re a good cultural fit and understand the expectations and standards our customers require to work for us.

Some people want no part of that, they like the temporary staffing lifestyle. But there are lots of people who are looking for a permanent home and opportunities for advancement. We’re looking for a specific set of skills but also attitude. We really try to differentiate ourselves by giving people a path forward where they can progress with their career.

Lake: At the end of the day, we’re a logistics business that offers a service, and we have to do it as efficiently as possible and with as few employees and as little overhead as possible. So, we like to create those opportunities for our associates to advance and remain committed.

The problem is every time you lose somebody, you have to train somebody, and you lose time and efficiency. We do everything we can to maintain our employee base with highly skilled workers. We try to make sure they’re happy. We want Dunavant to be a fun place to work, but at the same time, we want to work hard and work professionally.

Nichols: How big of a role does automation play?

Hothem: We’ve put robotics into some of our facilities that support our B2C fulfillment customers. They’re co-bots, they work alongside our workers. It hasn’t replaced labor, it’s actually made us more efficient. During peak periods, we can hire fewer seasonal help by using automation to handle those peaks in volume.

Sorrell: Automation is the game-changer in the workforce area. An example is the number of workers needed to load trucks at a distribution center has been greatly reduced by automation in recent years.

Another example is autonomous trucks. That’ll be on us before we know it and could be a game-changer as it relates to the volatility of the trucking industry now due to the driver shortages. I think it’s going to play a key role going forward.

Towner: With automation, the number one thing is the improvement in safety. Just something like improvement in how heavy material is handled. Think about the significant improvement and safety when we started using gantry cranes from old style loaders. Phenomenal improvement in safety.

Equipment is now using AI to see things in front of you, which a human driver may not have seen, and the equipment will slow or come to a stop before an injury or incident occurs. Automation is unleashing all kinds of safety benefits that are keeping people safer.

In the end, it will create better, more sustainable jobs, and people going home to their families without harm. It should also continue to drive cost reductions with efficiencies and reduction of lost time production.

Lake: With autonomous trucks, think of the costs savings that are going to generate throughout the supply chain. It’s going to be immense. And with the driver shortage, driving a truck just isn’t sexy and millennials and others don’t want to do it. The average age is mid to lower 50s. That’s scary.

Nichols: What key skills are you looking for from the next generation entering the workforce?

Hothem: People who are comfortable with technology and able to interact with technology in new ways. Whether it’s using co-bots on the job or the ability to utilize and deploy business event reporting and analytics to benefit our customers. Our warehouse management systems have access to a tremendous amount of customer specific activity data. We are working to develop customer-specific business analytic tools to help them make better decisions about their business and, at the same time, help us become more efficient within our own operations.

We will be deploying additional automation technology in our warehouses in 2019 and beyond, so we need internal and external resources that understand how to best utilize and deploy these technologies in new ways to benefit our customers.

Sorrell: Technological skills and abilities are key. Programs evolve at an ever-increasing rate. The ability to understand and use such programs is expected.

Towner: I don’t think you can teach this, but integrity is critical. A workforce with good character and work ethic.

Lake: Being able to see big data and trends and figuring out how to use that data to your and your customers’ advantage. Analysts must look from 50,000 feet and drill down into the weeds to make it make sense and present it to customers in way that they can understand.

Nichols: How are companies handling global events like tariffs?

Hothem: All of our customers are dealing with the uncertainty around tariffs. It’s driving them absolutely nuts. In the interest of safety, they’re pre-buying inventory. It’s filling up warehouses, but it’s also impacting the balance sheets of customers because these are unplanned purchases—they’re trying to lock in a price and bring more inventory to the U.S. earlier than they might want because they don’t know what’s going to happen.

It’s having an impact on us because it’s taking up unused capacity, which is good. But, if there’s not a resolution by July or August, it could have a material impact supply chains and the holiday shipping season.

Lake: The absolute disruption this causes in the supply chain is such a staggering trickledown effect. Everybody’s trying to get all their stuff out of Asia to beat the big tariffs. Vessel demand skyrocketed. You go from a $1,200 container rate from China to the West Coast to $1,800—50% increase in a month.

Then all of the warehouses are full, the shipment is sitting in a container as a main storage, but the shipment can’t be shipped because there’s no place to store it because the warehouse is full. The detention and demurrage that people paid in ports and inland ramps were horrendous.