# Business Logistics

# From Push to Pull Logistics [^1]

## Executive Summary

The migration from manufacturing-based "push" logistics systems to
"direct-placement" or "pull" networks has appeared as an emerging trend
in physical supply and demand coordination. The implications of any
large-scale migration to "pull" logistics could be significant for a
national freight productivity program.

To determine whether or not manufacturers are indeed shifting from a
"manufacture-to-supply" or "inventory-based" logistics model to a
"manufacture-to-order" or "replenishment-based" logistics model, we
conducted a series of interviews with major shippers and transportation
providers.

Our interviews suggested that of the two dominant logistics models in
use, inventory-based logistics prototypes still dominate among most
large-scale manufacturing and distribution firms. Inventory-based
logistics also represents the primary model for "E-tailing"
(Internet-based retailing): national or regional warehouses supplying
home and business delivery with airfreight and package delivery
services.

The manufacturers and retailers we interviewed believed that
replenishment-based logistics systems offered efficiency versus
traditional inventor-based models, but were reluctant to risk the
increased stockouts perceived to accompany replenishment models. We
found little evidence of pure pull systems in high-volume logistics
applications. The companies interviewed did not anticipate a major shift
over the next decade, but rather a gradual expansion of pull systems in
response to increasing pressure to improve customer service and still
reduce inventories. Most interviewees believed that a "blended model"
would emerge as the dominant system: one that incorporates elements of
both push and pull systems. For example, General Motors (GM) logistics
strategy still incorporates built-up inventories for finished goods
(automobiles), but is seeking to adopt more "pull" logistics on the
supply-side (auto parts). Conversely, DuPont has implemented
pull-logistics systems for the distribution of industrial and consumer
products, but has maintained an inventory-based model for supply
logistics due to the high cost (in production inefficiency) of
stockouts, and the inconsistency of current rail services.

Despite the slow adoption of pull logistics among major manufacturing
and retailing firms, the interviewees suggested that several related
factors could significantly affect the rate at which replenishment-based
models are implemented. These factors include (1) the rate of e-commerce
growth, (2) the shift to smaller shipping quantities, (3) the migration
to customer-direct delivery, and (4) the growth of 3rd and 4th party
logistics services. Our interviews suggested that an increase in the
rates of change for any or all of these factors would presage increased
adoption of replenishment systems in their sectors. Working as a strong
deterrent to the adoption of "pull" logistics models is carrier
performance. The shippers we interviewed strongly believed that carrier
services were not sufficiently reliable to allow them to significantly
reduce or eliminate safety stocks.

Although "pull" logistics are considered to be economically superior to
the inventory-based systems that are still prevalent, the transformation
is taking place very slowly. While several emerging trends -- such as
the growth of direct delivery \-- could significantly alter the current
adoption rates for replenishment models, other factors -- such as
inconsistent carrier performance -- will continue to restrain the
evolution.

## Introduction

Migration from manufacturing-based "push" logistics systems to
"direct-placement" or "pull" networks has appeared to be emerging trend.
The theory behind this trend is that timely access to point-of-sale
transaction information allows manufacturers to reengineer production
and distribution processes around the replenishment of sold inventory,
rather than the production of "likely-to-sell" stock. Such a shift is
expected to result in improved production efficiency, reduced stock
discounting, and significantly lower levels of inventory. "Pull" systems
have been a much-touted innovation in logistics, and have been most
closely associated with Internet-based retailing ("e-tailing") firms
such as Amazon.com.

> David Simchi-Levi, a Professor of Engineering Systems at MIT, recently
> commented[^2] on the emergence of this trend, noting that:
>
> > *"...many firms are shifting from "push" systems - in which
> > production decisions are based on forecasts \-- to "push/pull"
> > systems, in which the assembly of finished goods is based on actual
> > customer demand, and parts/raw materials inventory is replenished
> > based on forecasts."*

But while the application of "pull" logistics is apparent in "dot-com
distribution", the degree to which this trend has taken hold in more
traditional channels is less certain. Some logistics analysts believe
the shift is apparent in heavy industrial sectors, such as automotive.
J. Ferron, a partner at PricewaterhouseCoopers in Detroit believes[^3]
that:

> > *"Consumer demand is forcing automakers to shift from a supply chain
> > where they "push" inventory to dealerships to one where consumers
> > "pull" product. To compete, manufacturers will need to operate with
> > a lower cost structure and more agility."*

The implications of a large-scale movement to "pull" logistics could be
significant for a national freight productivity program. Partly in an
effort to validate this trend, we conducted a series of interviews with
transportation executives from around the country. These interviews
offered us the opportunity to verify the extent to which "pull"
logistics systems are employed in industrial and consumer logistics
systems, and to estimate the degree to which this trend will expand over
the next decade. This analysis combines the results of those interviews
with secondary research, and attempts to develop a series of conclusions
and policy recommendations specific to the issue of "push versus pull"
logistics.

## Trends

### Evidence of a Trend to the Pull Logistics Model

Our goals for this aspect of analysis were threefold. First, we sought
to determine if manufacturers are indeed shifting from a
"manufacture-to-supply" or "inventory-based" logistics model to a
"manufacture-to-order" or "replenishment-based" logistics model. Second,
we sought to identify to what degree this trend already is evident in
the logistics marketplace. Third, we sought to assess the likelihood
that this movement would expand over the next decade. As background, the
basic theory of product resupply can be divided into two main models:
"inventory based" versus "replenishment based" logistics. The primary
differences between the two types are described below.

#### Inventory-based Logistics Models

Inventory-based models presume that production is scheduled based on
forecasted demand, and retail or industrial deliveries are made from
pre-manufactured inventory. That inventory is generally placed in a
warehouse or distribution facility near the production site
(conventional), or "forward-placed" near the customer. Often
inventory-based systems combine both conventional and forward placed
inventory, making frequent distribution center (DC) to distribution
center transfers. As forward placed warehousing is generally more
expensive to obtain and operate (locations are generally more urban),
historical practice has been to maintain large warehouse facilities in
more remote (suburban and rural) areas, and smaller more nimble
"forward" DC's. Many firms have found that the cost of airfreight
transportation from remote DC's is a reasonable trade-off against the
sometimes high-cost of forward-placed inventory and ground transport.

#### Replenishment-based Logistics Models

Replenishment-based models suggest that product manufacturing is
coordinated to actual point-of-sale transactions, and that resupply is
made directly from the production site. The purchase of an item in a
retail or industrial transaction prompts the production of a like item
for replacement. Overall inventory levels are minimized, as completed
units are either at the transaction site, or in-transit to the
transaction site (from the manufacturer) as a replacement for a sold
item. A true replenishment-based logistics program seeks to eliminate
stock inventory, and re-supply sales inventory directly from production.

#### Implications

Widespread implementation of pull logistics systems should result in
lower inventory levels and less slack production capacity. These changes
would naturally create a greater dependence on in-transit inventory as
the primary source of replenishment stock, and reliable transportation
service as a critical component of effective merchandising. It would
also be expected that any broad adoption of "pull" systems would place
an additional burden on high-service infrastructures. The expected
increases in airfreight and high-service truck transport would force
additional traffic on already congested networks and exacerbate
congestion issues.

#### Findings

![](media/image1.wmf)In the course of the interviews conducted with
numerous transportation professionals[^4], it was determined that the
application of true pull logistics models is very limited. Furthermore,
the appearance of these programs is generally not in primary industrial
and retail industries, but among specialty producers and retailers for
whom stock-outs are infrequent because of low transaction volumes. Much
of the current logistics environment appears to be a "blended model":
one that incorporates elements of both push and pull systems.

Most of the interviewees indicated that while their primary distribution
strategies remain inventory based, they have adopted more pull-like
retailing strategy. This trend seems to be evident for both retail and
industrial manufacturers. For example, General Motors (GM) currently
maintains comprehensive electronic field inventories for many vehicle
lines. If a particular dealership does not have a specific model in
stock, a search of the database can reveal the closest available
matching unit. A simple dealer-to-dealer vehicle transfer can then
deliver the car to the customer in a matter of days. In this way GM has
been able to reduce total vehicle inventories, and increase the
likelihood of a sale. GM is working to integrate this retail model into
the Company's overall logistics strategy through the construction of
regional vehicle storage locations. These centers could reduce field
inventories overall, and potentially support the gradually emerging
E-tailing of automobiles.

While a vast improvement over previous retailing methods, GM's logistics
strategy still incorporates built-up inventories. The limited number of
option combinations and the high risk of lost sales due to stock-outs
will probably limit the expansion of pull logistics programs in
automobile distribution. In fact, Mike Hrivnak, Director of Rail
Transportation for General Motors, asserts that true pull systems are
unlikely to emerge for the automobile industry in the next decade. GM,
and many other heavy-industrial firms have found a more fertile
opportunity for pull-logistics on the supply-side, and have worked with
parts suppliers and subassembly providers to develop
manufacture-to-order logistics systems. The linkage of information
systems allows these firms to pick, assemble, pack, and ship parts to
GM's vehicle assembly plants only hours before they are installed in a
finished vehicle.

Similarly, DuPont has seen only limited application of pull-logistics
systems for their line of industrial and consumer products. Mary
Pileggi, Manager of Rail Operations for DuPont USA, sees this trend as
being driven more by customer service demands than by inventory
reduction programs. For DuPont's industrial chemicals and compounds,
pull logistics is barely evident. The overwhelming economics of large
production batches has led the Company to forward place product
inventories (generally in multiple railcar quantities) at customer
sites. Similar batch economies exist for many of DuPont's industrial
chemical customers. This field inventory allows DuPont to provide their
customers with consistent and timely replenishment. DuPont has found
that transit consistency \-- rather than speed -- to be the most
critical element of implementing "lean inventory" programs. Thus even
slower rail and water transport have become integral components of their
replenishment systems. Recently however, inconsistent railcar delivery
has prompted DuPont to postpone efforts to implement pull-type logistics
systems, electing instead to maintain larger on-site customer
inventories.

#### Conclusions

The results of the interviews suggest that the emergence of true pull
systems among large volume shippers is extremely limited . More evident
is the gradual blending of traditional push and newer pull systems. The
application of pull systems appears more widespread in physical supply
systems, and at the very ends of physical distribution systems. There
was no evidence of pure pull systems in the analysis, particularly in
high-volume logistics applications.

The companies interviewed -- significant players in the logistics market
-- did not anticipate a major shift over the next decade, but rather a
gradual expansion of pull systems as a technique to serve customers
better and reduce inventories. The manufacturers and carriers
interviewed were content to allow the gradual expansion of pull systems
in the logistics marketplace. These individuals believed that whatever
migration does occur will be determined as a result of other issues --
or trends -- in the logistics marketplace; several of which are
described below.

### Trends Impacting Logistics Model Migration

Despite the evidence that adoption of pull logistics is moving slowly,
the interviews suggested that several related trends could significantly
affect the rate at which more sophisticated logistics models are
implemented. The additional trends that emerged in the freight scans
were (1) the growth of e-commerce, (2) the shift to smaller shipping
quantities (3) the migration to customer-direct delivery, and (4) the
growth of 3^rd^ and 4^th^ party logistics services. We sought to develop
through the interviews, a better understanding of the linkages that
exist between these trends and the movement from push to pull logistics
systems.

#### Findings

**E-Commerce.** The revolution of E-commerce has been broadly divided
into two categories: Business-to-Consumer (B2C) and Business-to-Business
(B2B). Business-to-consumer transactions -- such as an individual's
order of a book from Amazon.com - are generally viewed as the
substitution of an electronic transaction for an in-person, telephone,
or mail-order transaction. The impact on the logistics system of such
transactions has contributed to the increase in small package movement.
These are, in many cases, "new" logistics activities using commercial
assets (a UPS shipment) to accomplish something previously handled with
a personal asset (an individual's car). While this growth has been
significant, the relative number of transactions remains small.
Business-to-business transactions, on the other hand, generate
significantly more volume, and thus the E-commerce implications of B2B
shifts are significant.

While the hype surrounding B2C e-commerce has far exceeded actual
results, there remains a systematic progression toward increasing B2B
electronic commerce. For many firms we interviewed, B2B applications of
e-commerce are little more than an incremental expansion of Electronic
Data Interchange (EDI). Generally, the interviewees did not distinguish
between the two, indicating that EDI is now subsumed in e-commerce.

Common logistics applications of E-commerce in business include booking
freight transport or load matching (either directly or via a 3PL). Both
carriers and shippers alike indicated their firms were pursuing
opportunities to expand the use of electronic communications for
logistics applications. Most also indicated that the bulk of current
activities are not transactional, but rather informational. B2B
E-commerce seems to have had little direct impact on logistics: a
truckload tendered through an E-com transaction is still a truckload
movement, and an airfreight pick-up dispatched through an e-commerce
transaction has not resulted in a modal shift.
![](media/image2.wmf){width="2.134027777777778in"
height="3.3048611111111112in"}

The interviews also suggested that despite the publicity, there is not
currently a significant degree of e-commerce activity among traditional
industrial firms. One DuPont representative indicated that many
transactional processes are still via traditional telecommunications
links such as telephone and fax. Another believed that the use of 3^rd^
party services has helped progress e-commerce applications.

Woody Richardson, of Schneider National, agrees that e-commerce has not
significantly impacted their business processes as yet, but he believes
that over the long term the effects will be profound. E-commerce, he
feels, provides the information necessary to optimize both pricing and
service - and as information improves, it will propel carriers toward
greater operating efficiency. Moreover, and equally important, the
attraction of e-commerce is a reflection of deeper social change. The
huge business-to-business market has a substantial component that
supplies consumer goods through the retail channel. As consumers
allocating their time begin to substitute electronic for in-person
shopping, it changes the value of keeping goods on the retail shelf,
which is the defining feature of the traditional channel. Arguing that
society transforms distribution, Schneider expects the rise of new
logistical channels that accommodate changes in the behavior of
consumers, who now have new options available.

Respondents agreed that the expanding application of information
technology to the logistics model has resulted in the evolution of a new
style of logistics process -- the so-called \"neuro-logistics\" model.
"Neuro-logistics" fuses information systems with physical logistics
processes to create more responsive and leaner supply and distribution
networks. Information is substituted for inventory in its role of
managing stock-out risk, which several executives cited as a real
phenomenon and source of continuing productivity gains.

#### Shift to Smaller Order Quantities

There is both empirical and anecdotal confirmation that shipment sizes
are indeed shrinking. This trend appears to be rooted in inventory
reduction and supply chain management programs, although the growth of
e-commerce has an accelerating influence.

Rising inventory unit costs and more rigid customer demands have
combined to make package and airfreight re-supply an economical
alternative to forward placement of inventory. General Motors offers
evidence of this trend in its Service Parts Organization (parts
re-supply to dealerships). There, a restructuring of distribution
activities around smaller shipments has been a means of providing better
service to GM's dealer network.

Similarly, executives at Yellow Freight have seen shippers opting for
more expedited delivery services, reasoning that while transportation
costs increase, overall supply chain costs decrease. Other shippers
agree, citing inventory reductions, or "rescued" sales (sales that would
otherwise be lost due to slow delivery) as rationale for expedited
services.

In the rapid growth sector of B2C e-commerce, retailers are constructing
vast distribution centers (so-called "Bricks & Clicks" distribution)
proximate to air freight hubs, creating land-use problems in high-demand
areas. Jack Fracker, Executive Director of Cushman & Wakefield -- a real
estate development form, indicates that "in centrally located areas,
demand for industrial space far exceeds supply."[^5] Sites convenient to
Federal Express' Memphis, Tennessee hub are fetching top dollar, and
cities like Allentown, Pennsylvania have seen double-digit warehousing
growth because of their proximity to major East Coast markets.

The movement towards smaller shipping quantities and hence smaller
package logistics is one that should significantly influence the rate of
adoption of pull logistics systems, and may in fact represent a "leading
indicator" of additional logistics model migration. The respondents
clearly recognize the linkages, but are unsure of the collateral
impacts. Both shippers and carriers are watching this trend closely for
larger implications to their respective logistics systems.
![](media/image5.wmf){width="2.9854166666666666in"
height="2.2423611111111112in"}

#### Shift to Customer-Direct Delivery

Another significant trend that appears to be influencing the rate of
migration towards pull logistics systems is an explosion in
customer-direct delivery. The competitiveness and effectiveness of air
freight carriers and package delivery companies in providing efficient
ground delivery service has, in many cases, eliminated several links in
traditional supply chains. Residential deliveries have reduced trips to
retail establishments for many items from food to automobiles. Mail
order companies ship many products directly from manufacturers and
eliminate intermediate warehousing and distribution. As evidence of this
trend, Les Passa, former President of CSX Intermodal, commented that he
has seen a significant decline in traditional DC-to-DC movements, and a
corresponding increase in package traffic volumes[^6]. David Simchi-Levi
of MIT notes that:

> > *"The move to push/pull systems means that more firms are shipping
> > products directly to customers, thus bypassing traditional supply
> > chains. With more direct-to-consumer-business, many firms will need
> > to adjust their transportation mode away from bulk shipments toward
> > parcel shipments, creating an increase in demand for small package
> > delivery as more consumers shop on the Internet."*[^7]

DuPont agrees, estimating that 70-80% of the Company's domestic truck
shipments are now direct-to-customer deliveries. For DuPont's consumer
products, such as Tyvek® house wrap, these deliveries are often made
directly to construction job sites.

A looming challenge for this trend is taming the "last mile" delivery
costs, which remain unacceptably high even for the most efficient
carriers in the marketplace. This has been evident in the failure of
several high-profile dot-com companies that specialized in home delivery
of small low-value packages, as well as the reluctance of FedEx and UPS
to provide universal home delivery to all addresses.

Woody Richardson of Schneider National commented[^8] that he believes
that several potential customer-direct distribution models are vying for
success but at the moment no clear winner is apparent. He infers that
the rise in customer-direct delivery is a function of consumer time-use
decisions rather than inventory management principles. One possible
distribution model has goods moving directly from a plant to a home
delivery consolidation center or cross-dock center, and thence to
residences. This approach eliminates several stages of handling from the
traditional channel. As a version of the pull model, it could
significantly reduce total logistics and transportation costs for
consumers, by creating long haul lanes with concentrated volumes.
Whatever system ultimately emerges, the implications for logistics
patterns will be significant.

#### The Shift to Greater 3PL and 4PL Participation

Another trend that appears to affect the rate of migration to pull
systems is the growth of 3^rd^ and 4^th^ party logistics providers.
While 3^rd^ party providers have been around for some time, the 4^th^
party phenomenon is relatively recent. Jack Roeser, a longtime logistics
consultant, defines the difference between a 3PL and a 4PL provider in
this way:

> > *"\[A 4PL\] acts as the integrator of multiple 3PLs all working for
> > a company which requires multiple 3PL services, no 3PL having the
> > ability to provide all of the required services itself. The multiple
> > 3PLs work through the integrator to the company itself. The 4PL
> > integrator...is the direct contact to the company."*[^9]

Industry executives interviewed felt the differences were more
definitional than practical. Officers at Yellow Freight haven't really
seen anyone effective as an integrator on a large scale. Indeed, most
integrators are small. They believe that the expansion of integrator
roles is a function of customers' willingness to give up control.

Despite the growth in 3rd and 4th party logistics services, the market
appears to be expanding more laterally than vertically. An annual survey
conducted by Boston\'s Northeastern University and Mercer Management
Consulting of third-party usage by major manufacturing companies,
indicates that over 60% of the services offered by 3rd party providers
are simple transportation services, and nearly 50% are warehousing
services[^10].

DuPont is a believer in 3rd party services, and has outsourced much of
its truckload and LTL transportation processes to APL Services in
Charlotte, NC. APL coordinates the load booking, tracing, billing claims
and carrier evaluation efforts for DuPont. Of critical importance is
carrier safety; APL provides the information DuPont needs to keep tabs
on carrier safety performance. But, DuPont would also like wider product
offerings from 3rd party providers.

General Motors is also looking at large scale outsourcing opportunities,
and anticipates significant outsourcing of GM's worldwide logistics
activities in the near future. With substantial experience in worldwide
delivery, airfreight carriers are seen as the front-runners in this
process.

#### Outsourcing the Supply Chain

The emergence of 3PL's and 4PL's is one sector of the broader
"outsourcing" trend. Our interviews suggested that firms pursue
outsourcing based on two key principles:

(1) The desire to focus scarce corporate resources on core functions
    such as production or marketing and outsource secondary functions to
    specialty firms, or

(2) The perceived lack of in-house logistics or information technology
    skill to develop and maintain complex logistics networks, and the
    availability of these capabilities in the marketplace. In fact,
    logistics outsourcing is on the leading edge for several of the
    firms we spoke with.

The 1997 Global Supply Chain Study, developed by KPMG Consulting and the
J.L. Kellogg Graduate School at Northwestern University found that among
451 companies \[located in 24 countries across eight industry
segments\], 54 percent had outsourced transportation services, while
about 30 percent had outsourced other supply-chain functions, including
manufacturing, warehousing, and logistics information systems[^11].
Third and 4th party Logistics companies account for nearly all of this
outsourced activity[^12].

Responding to these customer programs, 3rd and 4^th^ party logistics
companies often build themselves around information systems platforms
that permit greater pipeline visibility and lower transaction costs than
most shippers can attain by themselves. By leveraging these coordination
skills, the 3PL's and 4PL's are hoping to make the business profitable.
But profits have been elusive. A Northeastern University survey of 3^rd^
party CEO's indicates that a majority believes that the industry is only
marginally profitable, and that the difficulty and expense of
implementing new contracts will make profitability difficult to
sustain[^13].

Schneider questions the ability of integrators to bring value. They
perceive heavy administrative costs in conducting the role effectively,
and question whether the cost of technology may exceed the benefits for
the customer. Consequently, such winners as may emerge among integrators
will be those with the biggest pockets.

The growth of 3rd and 4th party logistics services represents a positive
step for more widespread implementation of pull logistics systems. The
technology and experience these companies provide is often the precursor
to more sophisticated logistics model implementations. As logistics
systems grow more complex, however, 3rd and 4th party providers struggle
with implementation costs and shipper control issues. The tension in
this area is as yet unresolved, and thus the impact on the expansion of
pull logistics models remains somewhat uncertain.

## Implications

### Carrier Preparedness for Pull Logistics Models

Pull logistics models, through the reduction of inventories and the
elimination of safety stocks, rely heavily upon carriers to perform
timely replenishment of products and avoid stock-outs. A recurring theme
from shipper interviews, however, is that carriers have not kept pace
with the changing logistics requirements of the marketplace. Shippers
have invested considerable time and expense in contingency planning and
service recovery programs to preserve manufacturing and retail
continuity in the face of service interruptions. General Motors believes
that rail service is much worse than 10 years ago. Of the approximately
50,000 railcars shipped by GM in 2000, only around 50% arrived within 24
hours of their expected delivery.

> DuPont agrees, and, as a result of current service levels, they have
> been forced to add inventory to pipelines and railcars to the fleet,
> to maintain customer delivery commitments. Shippers generally
> indicated that carrier performance is a significant roadblock to
> continued inventory reduction initiatives like pull logistics.
>
> Carriers tend to believe that their own service performance has risen,
> but are less complimentary about their industries as a whole.
> Moreover, they are having difficulty capitalizing the technological
> improvements required to manage more sophisticated logistics
> processes. CSX Intermodal has looked to third party technology and
> experience to intervene. Railroads and trucking companies are faced
> with significant investment in upgrading basic operating systems, and
> are reluctant to make investments in leading-edge logistics technology
> tools. And to make matters worse, shippers' expectations are rising.

Executives at Yellow Freight agree that disruptions in the low-inventory
supply chains can take place more readily now. They are concerned,
however, that too little is being done to prepare for them. With the
current pressures to reduce logistics costs, there is not much incentive
to build in redundancy. The parties agree that service disruptions are
likely and are apt to ripple through the economy more rapidly than in
the past, but that the private sector is generally unprepared.

In addition, the pressure to reduce rates, combined with higher costs of
capital, fuel, and insurance, has squeezed many carriers to the breaking
point. Yellow Freight reflected that consolidation in the LTL industry
has historically taken place through business failures, not through
mergers. They predict more of the same in both the LTL and truckload
sectors.

Finally, carriers continue to wrestle with security issues. CSXI sees a
more sophisticated criminal involved in cargo theft. With the
"upscaling" of criminal activity has come a trend to more violent and
sophisticated thefts. Cargo theft has graduated from a box lifted from
the loading dock, to gunpoint hijackings of entire trailers or
containers. CSX Intermodal has begun to work more closely with local
police in an attempt to protect cargoes. In addition, they have expanded
the use of sting operations to catch well-outfitted criminals, who often
use cellular phones and two-way radios to communicate the location of
valuable cargo or law enforcement forces.

The results of the interviews suggest that carriers may not be prepared
to provide the service quality and consistency that an expansion of pull
and neuro-logistics systems would require. The inability to fund
technology investments and the inconsistency of many current service
offerings are combining to limit the application of the more
sophisticated logistics models. Until significant changes occur in this
area, it appears that the productivity improvements available through
pull logistics models will not be realized in the near term.

## Issues

While theorists suggest that pull logistics systems are fast replacing
more traditional push models, the interviews suggest that this
conversion is taking place very slowly. Several factors are limiting
this migration, including advanced information systems, inconsistent
carrier performance and batch production economics. Much of the
emergence of pull systems has been at the outer ends of the supply chain
-- in physical supply or retail commercial transactions. There, areas
have converted more quickly because of several prominent trends in
logistics including, consumer driven e-commerce, smaller shipment sizes
(a by-product of aggressive inventory reduction programs) and expanding
direct delivery. As these initiatives become more widespread - a fact
agreed upon by nearly all of the respondents - a more rapid expansion of
pull systems is anticipated.

Carriers are aware of the conversion to pull models, but as a result of
the competitive rate market, some have been unable to capitalize the
costly information systems necessary to raise service and reliability
levels to accommodate the new logistics processes. Even so, there is a
strongly held belief that information technology is a clear route to
higher service performance.

Shippers are continuing to capture additional logistics savings through
the expanded use of 3PL and 4PL providers. Among 3PLs, the service
offerings are generally ubiquitous. Shippers expressed interest in
outsourcing a broader range of functions, but providers, struggling with
the profitability of "cookie-cutter" services, are reluctant to absorb
the risks of development investments. The integrator role, a form of
super supply chain management, has yet to move from theory to reality as
carriers and shippers alike remain skeptical of the incremental value of
integration activities. At present, all parties seem content to let
theses trends emerge slowly.

Given that a rapid expansion of pull logistics models may not be
imminent, government policies probably can evolve to accommodate the
more gradual shift that seems to be taking place. Stresses on air cargo
and package delivery facilities are anticipated to increase the most
over the next decade, as the shift to smaller and faster resupply
systems expands. Still, distribution channels themselves are in flux,
and new designs for the production of density and the associated service
economies can be expected to rise.

-   Continuing changes in business-to-consumer (B2C) logistics
    activities will give the first indication of a shift in the broader
    logistics network, but the marketplace's tolerance for change in B2B
    is substantially less.

-   Land use management issues will continue to emerge in connection
    with the reduction in shipment sizes. Air cargo hubs such as Memphis
    and Louisville will quickly reach saturation and new air cargo hubs
    will emerge.

-   The high cost of information systems development appears to
    represent a roadblock to additional pull logistics implementation.

[^1]: This working paper was prepared by Reebie Associates, Inc., a
    member of the Battelle Team providing research and analysis support
    to the Federal Highway Administration Office of Freight Management
    and Operations. It is one in a series of working papers providing
    initial analysis and discussion of the trends and issues affecting
    freight transportation productivity in the United States and North
    America. The series is available at
    http://www.ops.fhwa.dot.gov/freight/adfrmwrk/index.htm. The working
    papers were prepared under contract DTFH61-97-C-00010, BAT-99-020.
    The opinions expressed in the working papers are those of the
    authors, not the Federal Highway Administration. The working papers
    are being circulated to generate discussion about emerging freight
    issues and may be updated in response to feedback from public and
    private sector stakeholders.

[^2]: Simchi-Levi, David, Professor of Engineering Systems. The Supply
    Chain and the New Economy. Speech given at MIT Affiliates Day 2000
    (hosted by UPS: Louisville, KY). October 2000.

[^3]: Automakers shift to \"pull\" strategy. Logistics Management &
    Distribution Report. January 1, 1999.

[^4]: ![](media/image6.wmf)

[^5]: Deutsch, Claudia H. Bricks-and-Clicks World Needs Commercial
    Space. *The New York Times*. October 30, 2000.

[^6]: Personal interview, August 2000.

[^7]: Simchi-Levi, David, Professor of Engineering Systems. The Supply
    Chain and the New Economy. Speech given at MIT Affiliates Day 2000
    (hosted by UPS: Louisville, KY). October 2000.

[^8]: Personal interview, August 2000.

[^9]: Roeser, Jack. http://www.logistics-aug.com/.

[^10]: Foster, Thomas A. View from the top: How third-party CEOs view
    their industry. Logistics Management & Distribution Report. August
    1, 1999.

[^11]: Logistics Management and Distribution Report. March, 1998.

[^12]: The balance is Contract Manufacturing. While traditionally not
    considered a 3^rd^ or 4^th^ Party logistics activity, 3PL firms such
    as CTI and Penske Logistics do perform light manufacturing and
    assembly for several clients.

[^13]: Foster, Thomas A. View from the top: How third-party CEOs view
    their industry. Logistics Management & Distribution Report. August
    1, 1999.