Wednesday, December 26, 2012

Buyer Beware... of Anchoring!

Sitting tonight watching the news and the topic was the "after Christmas sales".  The story, of course, made me think of transportation but let me digress and tell you what I saw.

The reporter interviewed a young lady at a Chicago mall who was just thrilled with her new purchase.  I paraphrase and here is how the conversation went:
Girl: "I went into a store and the boots were 'regular $900'. I got 50% off, then I got xx% for something I did, then another xx% for opening a credit card... " (you get the idea) "I got a $900 pair of boots for $125!"
Reporter:  "Wow, you did great.  You must be real happy"
Girl: {giggling}: "Yes, I am a very happy girl"
Of course, somewhere there is a merchandiser who popped the champagne bottle and wasn't just giggling but was laughing out loud.  They had anchored the girl and anchored her good.

What never crossed the girl's mind, nor the reporter's mind apparently, is the fact that the boots may have only been worth $5.00.  How do they know?  Why was $125 a "deal?  The answer is simply that they have no idea whether it was a deal or not except in the relative terms to the "retail" price of $900.  The retailer and their all powerful merchandisers had anchored the discussion.  The consumer, the girl in this case, was set up by the merchandiser because they were able to get her to reference her thoughts around the $900.  Anything less than that was a "deal" and certainly $125 was a "steal".

It never occurred to her that the boots were probably made in a factory in Vietnam and cost the company selling them about $5.00 to make.

How does this relate to transportation you ask?  I say: beware of industry "anchoring".   It is that time of year now when the transportation industry executives and the so called "independent" analysts will come out with predictions on what will happen with rates for next year.  They will say "be ready for capacity crunches" and "be ready for at least 5% increases" and they are doing nothing more than, as an industry, anchoring, as a group,  the entire transportation buying community.  By establishing these expectations as "the truth" and giving buyers reasonable cover with what appears to be scholarly articles to reference, the industry establishes "greater than 5%" as the anchor.  Anything less than that appears to be a "deal" and occurs due to the great procurement skill of a buyer somewhere.

I can see the conversations in board rooms now:
Executive: "Mrs. Logistician,  how did you do this year"?
Mrs. Logistician: "Great!  The industry was going to go up over 5% and we were able to hold the increases at our company to 3%"
Executive: " That is great Mrs. Logistician.  You beat the market!  Fantastic!
Mrs. Logistician gets a great bonus and off she goes to Maui for vacation..
Or.. the conversation could end with the Executive asking this:
Executive: "Mrs. Logistician.  How do you know 5% is the right expectation?  The macro economic conditions don't seem to warrant it and with the changes in freight, the lower freight demand, and the fact that we are a very large shipper lead me to believe that you should have actually experienced a rate decrease this year. Shouldn't you have?"
Mrs. Logistician: Gulp!  She wonders if she will ever get to go to Maui!
What the executive did not do is she did not fall for the industry anchoring.  The executive built her expectations from the ground up.  She ignored the arbitrary industry expectation of 5% and started at 0 and then applied good macro and micro economic analysis to build her own expectation.  And, her own was far lower than where the industry tried to anchor her.

The critical lesson here for both the girl buying the boots and the transportation procurement professional is do not fall for anchoring.  Do not allow the industry to set the expectation.  Ignore these predictions and build, from the ground up, what the status and situation is for your own company, your own freight with its own characteristics  what your current pricing situation is etc. etc.  From that you should be able to develop what a very good expectation is for this year, for your situation and many of you will find it is dramatically below what where the industry will try to anchor you.

Holiday Sales Disappoint - Leading to Inventory Issues?

First, Merry Christmas and my wishes for a very happy holiday season.  Regardless of what you celebrate at this time of the year the messages all are the same: Happiness to all of you and your families!

Unfortunately, it was not a happy retailing holiday season.  As ABC and others are reporting, holiday sales have disappointed and have actually had the lowest year over year increase since 2008.  That is a haunting statistic yet not one my readers would be surprised about.  The impact on transportation can be summed up in two words: Excess Inventory.

Normally, after the holiday season the transportation industry prays for an "inventory restocking" cycle. However given the dismal sales, and the fact inventories were already elevated (as measured by the inventory to sales ratio), my estimation is the restocking cycle will not even be noticeable.   Transportation rates will remain somewhat depressed and my predictions of the transportation industry continue to hold:  
  1. Rates are somewhat elevated (relative to the true capacity and demand picture) and the buyer who holds their ground should be able to negotiate good contracted rates.
  2. The buyer needs not "fear" the capacity issue (which has been discussed since about 1980) until deep into 2013 at the earliest. 
  3. Great rates favor those who do their homework, understand these macro trends, and are prepared to discuss them at "the table".
Going into last year, FTR predicted a potential for a 10% increase in rates which was very far off the mark.  I saw some "panic buying" (i.e, shippers accepting large increases using this prediction as justification). Going into this year we continue to hear "this is the year of the capacity crunch" and while shipping conditions are "benign", "shippers can expect to see increases in 2013" (again, have heard that since 1980).  However, the macro economic data, along with the data around the digitization and miniaturization of products, leads me to believe demand is being pulled faster than capacity and shipping conditions will favor the shipper for the vast majority of 2013.

Update 12/26/2012 10:15AM: More reports of slow holiday sales: "This Was Definitely Not A Merry Christmas for Retail" - Business Insider

Wednesday, December 19, 2012

And A Third Set of Predictions....

I bring you yet another set of predictions concerning supply chain for 2013.  Adrian has a fantastic track record for seeing into the future so I would pay attention to this.  I will not give the excruciating details as you really should go over to the posting "Supply Chain and Logistics Predictions for 2013" at Logistics Viewpoints.  Here is the summary:

  1. Big Data, Social Media, Cloud Computing, and Mobile Technologies will continue to dominate the headlines
  2. User Interfaces for Supply Chain Apps Will Get a Social Makeover.
  3. “Siri” Comes to Enterprise Apps.
  4. The Robots Keep Coming.
  5. Continued Focus by Retailers and Service Providers on Innovating the Final Mile.
  6. Further Blurring of the Lines Between 3PLs, Tech Providers, and Consultants
  7.  Increased Adoption of Alternative Fuel Vehicles.
  8. More Programs and Partnerships to Address the Talent Shortage Problem
The themes continue to remain similar except Adrian clearly has a social bent to his ideas which I highlighted in an earlier post.  I can't imagine any of these predictions being too far off the mark. 

Yet, Even More Supply Chain Predictions

It is that time of year again when the supply chain (and other) predictions come out.  The really smart people keep them broad enough so, like a fortune teller, they cannot possibly be wrong which is why I do not necessarily believe in this type of crystal ball.  However, as I said in my previous post on the IDC predictions, it is good to get all this into one area so as you build your 3-5 year strategies, you can incorporate these broad directional ideas.

Today, we get a guest column on Forbes.com from Mark Woodward who is the CEO of E2Open, entitled: 5 Supply Chain Predictions for 2013, The Year of The Network. Given he is a CEO of supply chain technology firm, you can expect his predictions to be both centered around technology and offering up technology as solutions to problems.  Nevertheless, this is a very good list and I reprint it here with some of my thoughts:

  1. Fast Data Will Become The New Big Data -   I know I promised not to use the term "Big Data" anymore as it has become the most overused term in the fastest amount of time of any business buzzword I know.  However this is an interesting twist which is big and fast are critical elements of a successful data management plan.  The speed with which you share and collaborate using accurate data is at least as important (and maybe more) as just the shear volume of data.
  2. The "Social Supply Chain" Will Transform How We Work - Don't confuse your view of "social media" (i.e., your experience with your kids on Facebook) with the social supply chain.  The social supply chain, as written about extensively by Adrian Gonzales (Quickly becoming "the" expert on this topic and wrote this great blog post about why companies were not using social media in their supply chain) is about open collaboration, problem solving and open source dialogue about issues relating to supply chains.  As stated in this article, demand sensing is really part of the idea of the social supply chain.

    The one concern here is if companies really do compete on supply chain efficiency as much as they do on the product then we have to ask ourselves how far collaboration will really go in the open social world.  Some firms, like Apple, which consistently get high remarks for their supply chain efficiency are notorious for being closed up like a vault when it comes to collaboration and sharing outside of their own supply chain ecosystem.  A quick posting on this idea of companies competing on supply chains can be found here at: Businesses Don't Compete: Supply Chains Compete.
  3. Supply Chain Control Towers Will Transition from Concept to Adoption - This I completely agree with and the time is now for this type of operation.  Control towers are a requirement for really dynamic supply chains to adjust to ever changing market and environmental conditions.

    This does not have to be a complicated IT solution either.  A great control tower, using lean methods and the idea of visual management can consist of white boards, manual tracking and the use of forward indicators of data.
  4. Dynamic Cost Will Transform Decision Making - The idea of a static standard cost which gets adjusted once per year is dead.  It is a relic of times gone past when that was all our systems could handle.  Costs and the macro economic environment change far to frequently and quickly to allow you to not have accurate, fast and transparent costs into your supply chain. Transparency of costs is critical to accurate decision making.  The next time a supply chain partner tells you that you do not have to worry about this I suggest you hold on to your wallet.  A true partner would want accurate and transparent cost data so you can make the right decisions quickly and accurately (notice the them on costing:  Fast, Transparent and Accurate).
  5. Risk Management Will Move From Static to Dynamic - I have written about risk and resiliency a lot recently so I will not rehash it here however suffice it to say the same theme applies in terms of dynamic, fast and transparent.  
As with other predictions, I am not sure if "this is the year for... " or not, however the ideas set forth by Mr. Woodward are fantastic and clearly the ideas all supply chain executives should be thinking about and balancing as they work towards transforming their supply chains to meet 21st century challenges. 

Tuesday, December 18, 2012

The Math Behind Tracking Packages - Marketplace, NPR

NPR does a very good podcast on the "math behind the packages".  A very fascinating quick story on how the "quants" are taking over logistics as well as finance.  Being able to develop mathematical algorithms is critical to UPS' mapping success.  Their mapping success is critical to the efficient routing of drivers.

Have a listen and enjoy:

Lessons From Kozmo.com for Same Day Delivery

Yes, it is true if you live long enough what is old will be new again.  This, of course, is the situation as it relates to the so called same day delivery wars.  I have mentioned over and over again that I am very skeptical of this beyond being a marketing hype ploy as the density needed (low miles per stop and high number of packages per stop) is virtually unachievable except in very dense cities.  And, of course, in those cities "couriers" have been around a long time so same day delivery is not new.

Now even our friends at the Wharton School of Business have weighed in on this by analyzing what went wrong in the late '90s with Kozmo in a posting entitled " Same Day Delivery: This Time it May Actually Work" - an organization dedicated to same day delivery which went out in a flash of glory - and why this time it may be different.  The basis of this argument?  It is all about density.

The issues remain and the questions continue to go unanswered in my humble opinion.  Some of them are:

  1. How will you get the density?
  2. How will you overcome the high costs of fuel?
  3. Will this really generate incremental sales?
  4. What happens when this becomes "an expectation"?  
  5. Will this be given away for free and ultimately put pressure on margins?
  6. Do people even want it (beyond the procrastinators who are probably not your best customers)?
The answer to number 6 equates to the idea of sticking a knife in a horse to get one last gallop out of it before you run it to death (i.e., What Kris Kristofferson does in True Grit).  Every retailer is fighting over that last incremental dollar as if it will make or break them.  My analysis suggests the amount of money spent to get that very last dollar of revenue probably is not worth it however that is what they are doing as a crowd.  They want that last dollar and appear to be ready to spend a fortune to get it.  

In my next posting on Same Day Delivery, I will propose a solution to this issue and we shall see what they think. 

Monday, December 17, 2012

IDC 2013 Supply Chain Predictions

Last night I sat through the archived broadcast of the 2013 supply chain predictions for manufacturers from IDC.  While it is a little bit of "mom, Country and apple pie" I do think it was a very good presentation as it summarized almost all the key supply chain challenges in one spot.  I would not say this was a "2013" prediction but rather a good primer on what supply chains always have to deal with and what should be in your playbook.  Some years one will be prioritized over another (for example they believe responsiveness and service will override cost in the year ahead) but overall these are the items you are always reviewing as you develop both tactical and strategic plans.

Here are the top 10 as they see it:

  1. Resiliency becomes a priority for end users looking to master massive multidimensionality. 
    • Prioritize flexibility, visibility and agility
    • Mastering this will require you to deal with massive amounts of data. 
  2. On the supply side of your supply chain, recognizing inherent cost of long lead times, end users will look at global networks through the lens of both regional and country level sourcing. 
    • Finally companies will quantify the effect of long lead times. 
    • Trade offs will be made - Most effective sourcing will take over from "low cost" sourcing as companies build tools to quantify the true costs of these activities [ this bullet is my commentary].
  3. On the demand side of supply chain, recognizing the need for better service levels and mass customization, end users look again to postponement techniques and data analytics to drive more effective customer insights and smarter fulfillment. 
  4. End user IT organizations must support a more productive supply chain ecosystem.
  5. Service excellence becomes a strategic priority. 
  6. Supply chains optimize omnichannel customer service and cost by enabling trustworthy, efficient and effective supply chains (TEE). 
    • The consumer will demand value and trustworthiness (right product, right time, right place, right value).
  7. End user supply chains focus efforts to improve collaboration both upstream with suppliers and downstream with customers to better compete in a faster world. 
    • Sales and operations planning (S&OP) collaboration will be critical [ my commentary]
    • Technology to bind business partners together and to facilitate the flow of information [ my commentary] will also be critical.
  8. The modern supply chain gets smarter
    • Integration
    • Optimization
    • Embedded analytics
  9. Supply chains invest in technologies that enable visibility, virtualization, and visualization
  10. The 'Big Data' era draws dawns for supply chain organizations (what prediction would be complete without mentioning "big data" - my comment)
Those are the 10 and most will say this is what I do all the time as we always are trying to figure out the perfect mix of all of these things.  I would agree.  However, it was very helpful to get it all in one spot and perhaps use a maturity model to rate your supply chain - where are you on each of these dimensions and how important is that dimension to your organization.  

Once you draw that out graphically you can then socialize it in your company and begin drawing out what your 3 - 5 year strategy will look like along with what tactics you may use next year.  

Sunday, December 16, 2012

Do You Have a Supply Chain or a Spiderweb?

This question was recently asked by Zurich's "Risk Engineers" and I think it is a fascinating question.  The metaphor we are all familiar with, the "supply chain" connotes a nice set of interlocking rings, probably made of steel, and that are perfectly aligned.  It brings to mind a very planned and organized way to get from point "a" (raw materials) to point "b" (finished goods) to point "z" (The consumer).  We all know the problems recently experienced from hurricane Sandy however this study clearly indicates the issue is deeper and more broader than just a freak storm.

Reality is, unfortunately, many are spiderwebs.  Not made in any particular order, overlapping and easily disrupted with the swat of a hand.  Zurich believes 2013 is the year companies better take managing, or at least mapping, this web a bit more seriously.  A few key statistics:

  • 73% of respondents to a survey in 2011 reported at least one supply disruption; 50% reported two. 
  • 40% of those who experience extended disruptions eventually go out of business.
  • The leading cause of disruptions is IT or telecommunications. 52% saw some or a high level of disruption from these issues. 
  • One in five companies said they had one instance where they incurred at least $161M in damages
I had an opportunity many years ago to meet with the people of Zurich about this topic in New York City.  At that time it was an "interesting"topic but not much more.  Today, it is critical.  Terrorism, global warming, reliance on sophisticated telecommunications networks, "just in time" (i.e., lack of buffer stocks) and the web of globalization has not only made the likelihood of a disruption more probable but the consequences of it far more severe. 

Their solution is at least to start mapping out your supply chain through tier 2 and rate it based on likelihood of disruption, financial stability and physical stability.  From there I imagine you can create significant contingency plans to at least have a fighting chance at keeping your business running.  

Saturday, December 15, 2012

CNN Story on Natural Gas

An interesting story on the heavy duty trucking industry and natural gas:


Wednesday, December 12, 2012

Inventory to Sales Ratio Tells a Grim Story

As my readers know I follow this very closely as this ratio tells us whether product is "backing up" in the supply chain or flowing as it should from manufacturer to consumer.  We are already hearing anecdotes of sales not being where they should be for the holidays, slow movements of imports, extended automotive shutdowns and now this... the inventories in the pipeline relative to sales are growing:

Inventory to Sales - Published 12/11/2012

The slope of the line looks very ominous and it certainly looks like it did back in the 2006 time frame.  Of course, we came out of that but only for a short period before we had a collapse.  This clearly leads us to believe freight will be very soft for Q1 and perhaps into Q2 as companies execute the "final mile" by selling what is inventory but not restocking until these inventories get back to normal. 

Some may look back into the '90's and say "we have a long way to go before we get to those levels". To this I say retailers and manufacturers learned their lesson during the "great recession" and I would not anticipate ever going back to those levels of inventory (At least until those who lived through the great recession die off then the new younger hip crowd says "this time is different" and go back to it - it is a generational cycle).

This data, along with the idea that we will have extended automotive shutdowns (at least with GM on the Cruze line) leads me to believe my prediction for soft freight in the first half of the year is very reasonable.  

As always, I hope I am wrong however I truly just let the data speak.  

Friday, December 7, 2012

Where Reverse Logistics and Sustainability Meet

We all know the technical reasons for reverse logistics and at this point in the season many retailers loathe it.  Product is returned, packaging is just thrown into landfills and old product is thrown in the garbage in favor of the new and fancier version.  This is both a reverse logistics and a sustainability nightmare.

What is worse is a lot of the garbage created ends up in the ocean.  There are floating patches of man made waste all over the ocean and it just sits out there generally making a mess of things.

Well, fret no more as one of the most forward thinking and sustainable companies on the planet, Method, has come to the rescue.  According to both their website and this article in the Mother Nature Network Method has devised a way to take that post consumer use ocean garbage and re-purpose it to make the bottles for their 2 in 1 hand soap / dish wash soap.  What a great idea.  by using this product you will accomplish three things:

  • Get a great soap (Yes, I use Method and love it)
  • Help to clean the oceans
  • Eliminate waste in the creation of new plastic bottles which are unneeded since we as humans have provided patches of the old stuff ready for use. 
It is very rare you can accomplish all of this in one purchase. Yes, recycling what we throw away is part of reverse logistics. 

What are you doing for your personal sustainability initiative today?


Exporting Natural Gas - No Cheap gas Part deux

I wrote back in the beginning of November that we can expect an abundance of domestic oil and gas but not low price oil and gas.  I said this because what the candidates refused to say was that while it is abundant the fact it all can be exported means it will almost always stay around the world price for oil and gas.  My thesis was if the price in the US just became too cheap all of it would be exported.

I hate it when the facts prove this out.

Today in the Wall Street Journal there is an article titled "US Gas Exports Clear Hurdle" and it is  talking about a Government study which said was good for the economy if we "liquefied and exported" natural gas.  Voila.. your "cheap domestic source of energy" has just evaporated into a world price domestic source of energy.  So, those expecting a great amount of domestic energy and all the good things that come with this should be happy.

Those who expected "cheap" energy will be disappointed.