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Sunday, October 21, 2018

The End of Sears Should Be Mourned by The Supply Chain Community

If I described to you a retail entity which did the following what would you say?

  • Took orders nationwide over multiple channels (whatever technology was available) - phone, mail, store
  • Delivered to your door most items
  • You could buy anything - a belt for your suit or a complete home for your empty lot as you came back from fighting for America
  • Had a complete after sales service network which reached just about every town in America
  • Had brands which leveraged contract manufacturing so you always had the "store brand" but behind it were the best manufacturers available
You likely would say, "Wow, that must be Amazon".  Then if I added this:
  • You could order any product at the store and when you ordered it you could immediately, at the cash register, set up a delivery appointment.
  • They delivered everything, installed it and provided great after market service
  • They did this anywhere there was a store.. which literally was everywhere.
Now you would say, "Wow, that is Amazon combined with XPO in one grouping.  The technology (inventory, scheduling final mile routing etc.) must be amazing!"

But, of course, what I am describing is what Sears was literally doing 25 years ago.  Sears Logistics Services was a pioneer in all things omnichannel and all things final mile delivery. I personally always shopped at Sears as I was in the military so I moved a lot.  However, every town I went to had a Sears, they all serviced you great, they would deliver where ever I lived and I could always count on them. 

Many stores today are just warehouses which are full of "stuff" to buy.  Sears sales people were experts at what they sold.  Ask a person in a "big box" today about an appliance they are selling on the floor and likely they will go over to it with you and read the sign (which I can do) and then start filling in gaps with what they "think".  They have no knowledge beyond what I have and in some cases, a lot less. 

When you went into a Sears store the appliance person (using appliances just as an example) had manufacturer training, likely had worked for an appliance company and were actually old enough to have owned a few themselves.  Pure expertise. 

So, while we all can sound smart about all the dumb things the modern leadership of Sears did we should not forget their logistics and supply chain expertise.  When I read what some of the retailers are doing today to make their delivery network more available and efficient for the consumer I can only think, "hmmm, that looks like Sears 25 years ago".

Reminds me of a great quote "Want a new idea, read an old book".

Friday, September 28, 2018

Capitalism without Capital and Why Amazon Was Able to Get To Scale

I am currently reading a fantastic book titled Capitalism without Capital:  The Rise of The Intangible Economy by Jonathan Haskel and Stian Westlake.  The essential message of the book is how the "new" economy allows companies to get to hyperscale size because they are built on intangibles (software and ideas).  These are infinitely scalable and have allowed the growth of FAANG (Facebook, Apple, Amazon, Netflix, Google ) to incredible levels.  Because this is a supply chain blog, I will focus on what this means for everyone else relative to Amazon. 

People constantly ask the question: How can Amazon keep growing if they do not make money?  There are two answers:  First, Amazon has proved that if they want to scale back investment they can make a lot of money almost at will.   Just in Q2 of this year they made over $2bl in profit in one quarter.  Not bad for a company that "does not make any money".  Second, and this is the most important point, they have built this profit machine on the value of intangibles.

Most companies value themselves based on what can physically be put on the balance sheet.  Something is an "asset" if it is physical in nature and can be valued in the marketplace, mostly by figuring out its resale value.  Further, accounting rules actually favor this as when you put this "asset" on the books you do not have to expense it all at once but rather depreciate it over time.  This makes a physical good more valuable than an intangible good. 

However in the intangible economy where it is intangibles which truly drive value this is a real problem.  Think of it this way:  What makes Amazon's supply chain so great?  It certainly is not the buildings, racks, trucks or even the Kiva robots.  All of those are easily replicable.  Rather, it is the intangible assets which make it great and where they have invested a lot.  It is the algorithms, the engineering solutions, the supply chain processes (inventory, order management and advanced delivery routing) which add all of the distinctive value of Amazon.  So now we can answer the question:  Why doesn't everyone just replicate Amazon?

Because their rigid and outdating accounting systems won't let them.

While others are looking to physical assets which can be depreciated and can easily be valued for ROI purposes Amazon looks to the intangibles.  By doing this Amazon has built a cash machine which now allows them to put up physical assets with ease. 

The basic tenet of the book is companies which value their intangible assets have infinite scale.  Once they get to this point it is tough for anyone to catch up. 

Heading to Edge 2018 - CSCMP

I hope to connect with a lot of colleagues and meet new ones as we head to Nashville for the CSCMP Edge 2018 meeting.  For those who are new in the industry, this is the premiere event and the "must go" event for the year.  As I reflect on why I try to go every year, I think about the following:


  1. Thought Leadership:  The people who are setting the trends are here and they are happy to engage with you.  Just by attending sessions, listening deeply and interacting with the industry leaders I get to think about issues, how others have solved them, where the supply chain industry is going and, most importantly, what our customers (of our products) need from the supply chain.
  2. Connection: The ability to connect with colleagues whom I have worked with or known for the better part of 30 years.  The supply chain industry is a community and you must engage in it.  One of my key recommendations to those who are starting out in the industry is the need to engage with colleagues.  Think of it as your own personal "crowd sourcing".  This is where you get this done in the span of 4 days.
  3. Sharpen the Saw:   I really try to "get away", disconnect and that allows me to deeply engage in the conference.  I work hard not to jump on my cell phone, do email etc.  My feeling is if your organization cannot run for 4 days without your constant interaction then that is a signal there is a real problem with the organization.  So, I encourage everyone to engage.  
I was lucky enough to be the conference chair in Denver a few years ago and also serve on the board of this great institution.  

Look forward to seeing you all there!

Sunday, June 3, 2018

Convinced Even More That Wal-Mart Should Be The Winner v. Amazon

I have written many times about the idea of Walmart v. Amazon in the battle of retailing and e-commerce.  My basic thesis has always been this:  Walmart can do everything Amazon can do but Amazon CANNOT do everything Walmart can do.  And, yes, it revolves around the stores.  

One of my first posts on this topic was back in March of 2013 when I posted "The Battle for Retail Sales is Really the Battle of Supply Chains".  In that article I concluded:
"In the end I believe Walmart and the other big retailers can and should be able to beat Amazon.  Just like Dell could have and should have beaten Asus and just like Sears could have and should have beaten Walmart."
I concluded because of the huge logistics and retail head start Walmart had they could beat Amazon at their own game.  I also, however, posited the problem Walmart would have - the ability to innovate and brand.  Here I said:
"The problem for companies like Wal-Mart and other retailers is they are losing the "branding" war.  The name "Amazon" is becoming synonymous with on line shopping.  People I talk to really do not "shop" on line they just go to Amazon to buy what they want.  It is becoming what Marissa Mayer (New CEO of Yahoo) calls a "daily habit".  As a consumer, you decide whether you are going to go to a store or buy on line.  If you decide to buy on line you go directly to Amazon.  I am sure Wal-Mart has all sorts of statistics that try to pat themselves on their backs but reality is Amazon is building a brand which equates to on line shopping - The Amazon brand is to on line shopping what the term "Xerox" is to copiers.  If this hole gets too deep, Wal-Mart may not be able to dig out. "
Then, it appeared Walmart "awakened" and I wrote a post titled: "Welcome Back Wal-Mart:  We Missed You Over The Last 5 Years".  In this article I discussed how I went to a Walmart and also used their on-line e-commerce system.  Both experiences were extraordinary and this posting was written about 1 year ago.

Today, I have seen the future and it is, in fact, in Walmart.  I am more convinced then ever they will win this as long as they stay hungry, scrappy and focused on the customer.  In my local Walmart they recently added the giant "Pick up Tower" which essentially is an automated way for you to buy products, have them brought to the store and have a very seamless and frictionless way of getting them.   A picture of this is to the left.  Because just about everyone in America goes past a Walmart just about every day, ordering on line and picking up in the store is essentially a no-brainer.  Can Amazon do that?  Sure in the few Whole Foods stores, maybe, but not at the scale a Walmart can do it in. 

So, think of this scenario.  You "shop" on line at night after work and in front of your T.V.  You set to pick it up tomorrow at the local Walmart.  On your way home from work you swing past, you pick it up and voila.. it is at home.  So, why is this so intriguing to me?  Well, it is because there are a few external events occurring in the retail / e-commerce space which are converging and making the pure e-commerce play more difficult.   They are:

1. Rising Cost of Transportation:  Who does not know about this topic?  The way to mitigate high costs of transportation is to keep trucks "fullest the furthest" and don't break them down until you absolutely have to.  This allows for far more efficiencies when delivering to stores than to people's homes.

2. The Rise of "Porch Pirates":  This is a very interesting phenomena where people just go around to houses and steal delivered goods.  If you live in an apartment complex, it is like the wild wild west.  Between people stealing and boxes being left at wrong buildings and doors, it is a true mess.  Many companies are trying to solve this with "lockers", ability to go into your home, delivery to trunks etc. but net net, it all adds cost and complexity to the delivery system. The simple solution already exists - deliver it to a store.

3. Infrastructure Costs: Without a store network, the cost of building out a really good e-commerce infrastructure are astronomical.  The Home Depot, which already has one of the best supply chains in retail and has 2200 stores is about to spend over $1bl to build out what they believe they need for same day / next day service.  Imagine if you are starting from scratch?

4. Inability of Small Package Carriers to Deal With "Surge" Periods:  Finally, we hear this every Christmas season - one of the two major players will have "guessed" wrong and either they lose their shirt in terms of cost or they have not nearly the capacity needed to service the boxes. 

In the end, this is Walmart's game to lose and it appears they have no intention of losing.  I personally use both and am a "Prime Member" however when that comes up for renewal I think I will be rethinking that automatic sign up.  From a supply chain perspective, I believe Walmart is better situated than any other retailer in the business for the following reasons:

1. A very mature small box, big box and cold chain distribution network already in place.  They have a huge head start.

2. The ability to service an "endless aisle".  With this mechanism you could buy anything from them even if they never stock in the store.

3. Prime real estate for retail.  Any chance you do not drive past one?

4. Walmart Pay:  I have not mentioned this but the ease of paying using Wal-Mart pay is truly incredible. Also, it does not use NFC but rather QR codes which means all phones essentially can use it (Google Pay and Apple Pay require NFC which is in higher end phones). 

The battle continues but right now, due to the maturity of the supply chain, I am leaning to Walmart.
 

Sunday, May 27, 2018

Macroeconomics are Supporting The Tight Freight Market (Macroeconomic Monday)


I wanted to write a quick note about the tight freight market.  We all know it is tight and certainly there are no lack of free webinars telling us how to be a "shipper of choice" and make our freight easier to handle.  With this note, I wanted to outline a few key statistics which will help you quantify the issue. 

Macroeconomics:

PPI
There are three items I want to show.  First, the PPI for General Freight, Trucking, Long Distance Truckload.  This important statistic produced and updated by the government tells us what is going on at the wholesale level (which virtually all freight is).  As you can see, we are now much higher than we were at when we were "pre-recession.  While the last month appears to have stabilized I cannot believe this curve is going anywhere but in the upward bound direction.  Fiscal stimulus is very strong in our economy and unless there is an existential threat (War, trade war etc.) I think we have at least two years to run on this cycle.  Learn to work in an inflationary cycle.  

Second, the infamous Inventory to Sales Ratio.  This tells us how much "slack" is in the economy and the story supports the inflationary pressures cited above. 
Inventory v. sales
In this graph we see that in about 2017, the "worm turned" and inventories started being depleted.

This has two implications.  First, it means that at some point, if sales stay strong companies will feel a need to restock inventory.  When that occurs we will see even more pressure on the transportation infrastructure of the United States.  This is not just a rate issue but rather has to do with the overall infrastructure of the country.  Pressure on bridges, roads, capacity and congestion all will continue to drive a very inefficient transportation network (including rail). 

Finally, we see the end results in the CASS Freight Index and it is not pretty. 
We continue seeing costs increasing in this very important index and they are at the highest levels we have seen in a long time.

These three pieces of data make it very clear we are in an inflationary environment for freight and it is not just an isolated lane or area of the country.  It is a broad based inflation due to fiscal stimulus driving an incredible amount of business.

Like the "spiral downward" we experienced in 2007-2009, we are not seeing a "spiral upward" with the market driving a "wealth effect" and the wealth effect drives consumer spending which ultimately drives everything we are seeing in freight.

Having said all this, there are pressures on the macroeconomic horizon.  Specifically, there are 4 things I worry about:

  1. Fuel Prices:  When fuel prices increase (both at the retail level which we buy at and the wholesale level the carriers buy at) it is just an implicit tax levied on people and businesses.  People have to drive for their work and their lives so it is really not a discretionary spend.  More money spent on fuel is less money spent on other things.
  2. Interest Rates Rise Too Fast:  We did get some good news last week with the Fed saying they may let inflation run above 2% but if the interest rate hawks take over, this could brake the economy hard.
  3. Student Loans:  There is an implicit brake on the economy with the large overhang of student loan debt.  If you think this is small, think again.  Here is some information from the website StudentLoanHero.com:
    • Total student loan debt:  $1.48 Trillion 
    • 44.2M Americans have some student debt
    • Delinquency rate is 11.2% (people who are more than 90 days behind)
    • Average Monthly Loan Payment: $351 
    • Median Monthly loan payment:  $203
  4. Existential Threat:  It seems we are just one "Tweet" away from global war or at least a trade war. 
Those 4 are the key ones which could put a stop to the party.  However, as a planner who manages probability, I would plan on the "party" continuing for the foreseeable future (But have your contingency plan B ready).  


Will Disruption in The Inefficient Transportation Market Come From Within

Many of you who have read my blog over the last many years know I am a bit critical of our industry.  Innovation has been very slow in coming (Thus resulting in a somewhat man made crisis), executives at major trucking companies treat their service as a commodity (Talk about pricing relative to supply and demand not relative to value) and when measured by performance, our industry has not performed well.

I have advocated for outsiders to come in and disrupt the industry which led to my excitement when Elon Musk put his crosshairs squarely on the industry.  Unfortunately, the "outsiders" have almost the reverse problem of the insiders - the outsiders just don't understand the industry.  They think a driver is going to be on his iPhone all day.  So, if the insiders are stodgy and not innovative and the outsiders are not knowledgeable enough to matter, where will the industry get the innovation it needs to defeat the current crisis and truly add value to consumer's lives?

Well, it appears the disruption is coming from within which is probably the best we could hope for.  Two companies, Lanehub and the BiTA alliance are really driving significant innovation and both are led by long term industry experts.  Even the major carriers are providing some innovative solutions such as JB Hunt's 360 solution for both carriers and shippers. 

Our industry is on the verge of a major crisis and while clearly there have been some externalities which have exacerbated the problem, most of the issue is within the industry.  A lack of looking forward, a lack of innovation in productivity and finally, even leaders of the industry, treating it like a commodity, have all contributed to this crisis.  Look to the innovators, some of whom I have mentioned above, for leadership. 

Saturday, April 28, 2018

Why Are People Using The Driver "Crunch" as An Excuse for Poor Service?

Ok, no more webinars or explanations of how to be a "shipper of choice... please.  I think we all get it that there is a driver problem and there is a capacity problem.  However, as I think about this there are two real issues I just cannot reconcile with the problem.  The two are 1) Lack of delivering on commitments and 2) Lack of investment.

First, lets deal with commitments.  This word really lacks meaning in this industry but I will try to define it. The definition is simply "Do what you say you are going to do" and regardless of tight capacity or not, this is something everyone should be able to do.  Why is freight being left on docks after companies have made commitments (through tender acceptances) to pick up the freight?  If there are no drivers to pick up the freight be up front and honest with the shipper.  Tell them that.  I fear too many companies are just "sweeping up" tenders then, over time, figuring out what they will do and what they won't do (sometimes by just not delivering at all).  I cannot figure out if this is purposeful or if it is just horrible execution. 

This also brings me to the idea that we are blaming ELDs for this crisis which seems ridiculous to me.  Essentially, when someone says that, they are saying they used to operate illegally but now that there is an electronic device they can no longer be illegal. Oops.. that type of argument gets you in trouble.

So, this brings me to my second and final point:  Don't listen to what the sales people tell you, listen to what the CEO's of the companies tell the investors.  The key question you should be asking carriers when they say they need higher rates to offset the capacity crunch is what are they going to do with that money?  If they are plowing back into driver investments then I am all in.  If they are increasing dividends and or buying back stock then you have to wonder who is kidding who. 

My fear is this issue is going to be a circular problem that will never be solved.  Let's follow this logic:

1) How is leadership compensated?  Increasing stock price.

2) How do you increase stock price in a tight market with raising rates?  Buy back stock and raise dividends. 

3) Will the stock price go up as much if you invest the money in driver pay versus doing #2 above?  No. 

This says we likely will not see driver investment or productivity investment.  Rather, we likely will see shareholder investment which will make the problem much worse.

Please prove me wrong by doing the right thing. 


Sunday, January 7, 2018

When Does a Comment to Investors Become an Illegal "Signal" to Competitors?

On July 18, 2015 I wrote a blog post entitled:  DOJ Investigates Airlines - Are the Trucking Companies Next?  At that time I had just read an article about the DOJ investigating the airlines concerning collusion on capacity and ticket pricing (The original article was on Bloomberg News and titled: What Does it Take to Prove Airline Collusion).  What I found interesting is they were investigating statements made during earnings calls and "investor" conferences where one airline executive might say they are going to practice things such as "disciplined capacity control" or have "expected price increases through disciplined revenue management".

The question raised by the investigation was essentially whether these were statements to investors so they could make a good investment decision or where they "signals" to the competitors?  For example, does the statement "disciplined capacity control" state a good business practice to the investors or does it state to the competition "If you don't add capacity I won't add capacity".

As part of the post, I posited this exact question could be applied to the trucking and freight transportation industry.  Every conference I have been to and every investor deck I have seen usually has the freight transportation executive using these exact words. 

The example used in the lawsuit is, according to the article:
"...airline officials repeatedly assured one another on earnings calls and at conferences that exercising "capacity discipline was good for the industry"
Sound familiar?

It is a fascinating question and it really puts the companies in a pickle.  If they do not disclose "material" items to the investors they can get sued for not disclosing but if they disclose too much they can (and are) get sued for collusion. 

Well, there is an update to the story and I think it is a big deal.  In today's NY Times it is reported: Southwest Airlines Settles Suit but Denies Colluding to Keep Ticket Prices High.  Southwest has agreed to pay $15M in cash and "provide extensive cooperation" with the on-going investigation against American Airlines, Delta Airlines and United Airlines. "Extensive Cooperation is defined as:
 "a full account of facts relevant to the plaintiff's case as well as a series of informational meetings and interviews with industry experts and Southwest employees facilitated by the company."
How could this effect trucking:

  1. We all have been to the many conferences where this type of language has been used by top executives.  Could the airline case be used as a precedent for a case against transportation?
  2.  Does SWA have something and essentially became the first one to talk - get a lighter penalty for turning?  $15M is a lot more than just "nuisance" money.  Something is going on here.
  3. Will trucking companies start being a lot more careful at conferences and public statements as a result of this settlement?
As I said in 2015, this is definitely a case to keep an eye on and it could have broad and deep implications for the transportation industry as a whole.