The Most Important and Most Misunderstood Concept in Business - Opportunity Cost

 The term opportunity cost is thrown around a lot in business. However, my experience, through observation, is very few people truly understand it. My intent in this blog post is to try to explain why you should always consider opportunity cost in every decision you make. 

Let's start by defining the term using the economic idea:

"Opportunity Cost is the potential benefits an individual, investor or business misses out on when choosing one alternative over another" 

I had a conversation with a person today who said they were saving a lot of money by not hiring a house cleaner. My mind immediately went to this concept, so I asked the person, "How much is your time worth"? I had a general idea of their income and, more importantly, their income generating capability so I explained to them not hiring house cleaner was costing them money! The next best alternative for their time (i.e., working) generated more income than cleaning their home themselves. Voila! Opportunity cost!

If the person responds, as some do, that they make no more money by working more (Strictly salary), therefore the concept does not apply, I ask then a follow on question. 

If you paid me $100 and I was able to give you 3 more hours with your kids would you pay me? The answer is almost always yes. Once again, the value of those three hours is $100 (likely they would have paid even more) and the cost of a house keeper, at $20 per hour, means it costs $60 to clean the house, so it is clear the person makes money by hiring a house keeper. They get 3 hours with their kids for $60 when they already told me they would pay $100 or more. 

Now, let's apply this to business. You hear a lot in business how strategy is as much about what you will not do as what you will do yet companies can't seem to turn anything off. Why is this so important? The answer is simple. In an environment of scarce resources (which I dare say every company has scarcity) you have to assume that every dollar and every minute spent doing one thing is a dollar or a minute not spent doing something else (see kids and housekeeping analogy above). If you assume that is true then where is the analysis of what the dollar or minute could be doing?

The concept of NPV (Net Present Value) tries to get at this. Theoretically, any project with a positive NPV should be funded. However, that assumes unlimited resources. Given that we know resources are limited NPV will tell you that the project with the highest NPV should be funded and the other should not. This is the opportunity cost. If you choose the lower NPV project then you would be forgoing the more lucrative one. I found the conclusion at Sapling to be the clearest:

"If both projects have a positive NPV, compare the NPV figures. Whichever project has the higher NPV is the more profitable and should be your first priority. Doing both projects is fine, since both will be profitable, but if you can do only one then go with the higher-NPV project. 

Some may say "the resources are different so do both" but that is very rarely true. Almost always resources are fungible or, you can relieve some resources and acquire the ones you need. Time, of course, is your most valuable resource and that is completely fungible. 

In his book Good Profit by Charles Koch Mr. Koch describes this concept and uses it throughout the book. He says:

"The true cost of any activity is the highest-value activity forgone [italics and bold are mine] - that is, the opportunity cost. This is the methodology I encourage employees to use in making decisions, and I strive to practice what I preach."

So, the next time someone does a project ask them, "what activity are you forgoing to do what you are doing and what is the value of that forgone activity"?  If they cannot answer that question, then they have not done good project analysis and they are not allocating scarce resources efficiently. 

I think this is a core concept whether you are in supply chain or any other part of the business and what I find is the businesses that are highly successful are able to prioritize, using the concept of opportunity cost, and focus all their resources on the few incredibly high value projects. They do not spread their resources so thin that no high value resource is starved. 

Many of you know I served in the military and we called this the "Principle of The Concentration of Forces". The definition is:

"The ability to apply sufficient military force at the right place at the right time and in a manner that assures the achievement of the desired and decisive results"

Let's all agree to learn from the concept of opportunity cost and its military counterpart - concentration of forces. 

  

 

Why CSCMP EDGE Conference is So Important

 Last week I spent most of my time at the Council of Supply Chain Management Professionals (CSCMP) Edge conference in Orlando Florida. Just a few hours into the first night and I remembered why coming to this conference is so important and has been such a great part of my supply chain career. I thought I would share some thoughts with you and hopefully the younger readers will realize your supply chain career is a life long journey. Getting to know the leaders of your generation will make you a leader. So, here goes:

1. Relationships: Yes, we all talk about this, however, this is truly very important and CSCMP has been there for my entire career. From the moment I started coming to this conference I met a number of people in different industries and different supply chain disciplines. From that point, we grew up together, learned together, celebrated together and helped each other. If I had not joined CSCMP early in my career and been intentional about coming to the conference year after year, I would not have known these people and my career would have been less fulfilling. 
   
   
2. Education: Continuous learning is must for any career and certainly supply chain is no exception. Because of my connection to CSCMP and attending conference sessions, I have been able to learn a lot of nuances about the discipline and I have used those learnings to hone my craft. I highly encourage anyone who attends to also attend the academic's conference on Saturday and Sunday. Quite frankly, that has been a highlight of my sessions and learning from the most brilliant academics makes me challenge what I think "I know". 
   
   
3. Time to Sharpen the Saw: I use my attendance at CSCMP EDGE to immerse myself in learning. That could be from the academic sessions, the practitioner sessions or the key-note and mega-sessions which challenge my thinking on many topics, not just supply chain. By listening and thinking deeply on the leadership topics, the supply chain topics, the business management topics and all the other items presented, I am able to use this time to truly execute what Stephen Covey called, "Sharpening the Saw". If you do not take time to do this periodically, just like a saw-blade, you will become dull and worn down. CSCMP EDGE is the perfect place to rededicate yourself to this discipline. 
   
   
4. Learn what is new: The vendor portion is truly world class. By walking the show and being disciplined about making sure you visit suppliers and interact with them, you learn what is new and interesting. My advice is to plan this out and plan your interactions. Learn and engage. You will be better for it. 

Overall, I just cannot imagine being in this discipline and not interacting at CSCMP Edge every year. Thank you to the CSCMP staff and all the volunteers who helped with the conference and worked tirelessly to make it such a great event. 

I leave you with a few pictures of my participation this year on two great panels. One on X-Shoring, Hosted by Alan Amling of University of Tennessee and the other on Meaningful Employment Environments hosted by Trail Paths founder, Robert Martichenko. 

J.B . Hunt v. Schneider... Head to Head Match Up

 I always find it interesting to compare these two companies and looking at the 10K's for 2022 and the 10Q's for the first half of 2023 and interesting picture is emerging:

Projection for 2023 at Beginning of Year from 10K:

Summary (Beginning of the Year): JB Hunt and Schneider are two of the largest trucking companies in the US. Both companies reported strong financial results in 2022, but JB Hunt's results were slightly better. JB Hunt also has a more optimistic outlook for 2023.

Here's a quick look at the numbers:

• JB Hunt: Revenue of $18.4 billion, up 27% year-over-year; Net income of $1.7 billion, up 43% year-over-year; Earnings per share of $3.33, up 41% year-over-year.
• Schneider: Revenue of $16.2 billion, up 23% year-over-year; Net income of $1.2 billion, up 22% year-over-year; Earnings per share of $2.45, up 21% year-over-year.

So, which company should be more successful going into 2023? I think JB Hunt is the better choice. It has a stronger track record of revenue growth, and its guidance for 2023 is more optimistic. Additionally, JB Hunt is investing heavily in new technologies, which could give it a competitive advantage in the long run.

Of course, there are some risks to consider. The trucking industry is facing some challenges, such as rising fuel prices and a driver shortage. These challenges could impact both JB Hunt and Schneider, but JB Hunt's stronger financial position gives it a slight edge.

After 1H2023 Has Concluded, How Is The Situation Developing?

Metric JB Hunt Schneider Revenue (first half of 2023) $9.2 billion $8.3 billion Net income (first half of 2023) $778 million $622 million Earnings per share (first half of 2023) $1.55 $1.24

As you can see, JB Hunt's first half of 2023 performance was slightly better than Schneider's. JB Hunt's revenue was up 12% year-over-year, while Schneider's revenue was up 8% year-over-year. JB Hunt's net income was also up 12% year-over-year, while Schneider's net income was up 9% year-over-year.

However, it is important to note that the trucking industry is facing some challenges in the first half of 2023, such as rising fuel prices and a driver shortage. These challenges could impact both JB Hunt and Schneider, but it is too early to say how they will affect the companies' full-year results.

Overall, JB Hunt's first half of 2023 performance is in line with my expectations. The company is still growing and profitable, and it is investing in new technologies to stay ahead of the competition. I believe that JB Hunt is a good investment for the long term.

Here are some additional thoughts on the first half of 2023 performance of JB Hunt and Schneider:

• JB Hunt's intermodal segment, which handles the movement of containers between trucks and trains, performed well in the first half of 2023. This is due to the continued growth of e-commerce, which is driving demand for intermodal transportation.
• Schneider's truckload segment, which handles the movement of freight over long distances, performed more weakly in the first half of 2023. This is due to the driver shortage, which is making it difficult for Schneider to find qualified drivers.
• Both JB Hunt and Schneider are investing in new technologies, such as self-driving trucks and artificial intelligence, to improve their operations. These investments could give the companies a competitive advantage in the long run.

I will continue to monitor the performance of JB Hunt and Schneider in the second half of 2023 and beyond. I believe that both companies are well-positioned for long-term growth.

I Used the Most Recent 10Ks to Create a SWOT analysis

 Using an AI tool, I had it look at the 10K's for the top 5 trucking companies and asked it to provide a SWOT analysis for the trucking industry.

NOTE: This is Generative AI:

Here are the top 5 trucking companies in the US, based on revenue in 2022:

1. UPS Inc. (NYSE: UPS)
2. FedEx Corp. (NYSE: FDX)
3. XPO Logistics (NYSE: XPO)
4. J.B. Hunt Transport Services Inc. (NASDAQ: JBHT)
5. Knight-Swift Transportation Holdings Inc. (NYSE: KNX)

I have reviewed the 2022 10Ks of these companies and here is a SWOT analysis for this industry:

Strengths:

• Strong financial performance: These companies have all reported strong financial performance in recent years, with high revenue and profit margins.
• Large and diversified fleets: These companies have large and diversified fleets, which allows them to offer a wide range of transportation services to their customers.
• Experienced management teams: These companies have experienced management teams with a deep understanding of the trucking industry.
• Strong brand reputations: These companies have strong brand reputations, which gives them an advantage in attracting customers.

Weaknesses:

• Rising fuel prices: Rising fuel prices are a major challenge for the trucking industry, as they can eat into profits.
• Driver shortage: The trucking industry is facing a driver shortage, which is making it difficult to find qualified drivers.
• Increased regulations: The trucking industry is facing increased regulations, which can add to costs and complexity.
• Competition from other modes of transportation: The trucking industry is facing competition from other modes of transportation, such as rail and air freight.

Opportunities:

• Growth in e-commerce: The growth of e-commerce is creating new opportunities for the trucking industry, as retailers need to move goods more quickly and efficiently.
• Expansion into new markets: These companies could expand into new markets, such as international markets.
• Development of new technologies: These companies could develop new technologies to improve their operations, such as self-driving trucks.

Threats:

• Economic downturn: An economic downturn could lead to a decline in demand for trucking services.
• Technological disruption: Technological disruption, such as the development of self-driving trucks, could pose a threat to the trucking industry.
• Changes in government regulations: Changes in government regulations could impact the trucking industry.

Overall, the trucking industry is facing some challenges, but there are also some opportunities for growth. The top 5 trucking companies are well-positioned to take advantage of these opportunities and continue to grow their businesses.

I hope this helps!

More on Scenario Planning - 5 Thoughts for Surviving the Supply Chain Downturn

 "You can be wrong half the time and still make a fortune"

I am reading a fabulous book about managing your emotions as it relates to investing. The book is titled, "The Psychology of Money" and, as you can imagine, my mind went to supply chain strategies and how this psychology can apply. My mind also went to a theme I have been writing about relative to scenario planning. 

The quote above is from the lead page in Chapter 6 titled, "Tails, You Win". and it truly embodies a lot of what scenario planning is about. Here are the key lessons:

1. Your Business Plan Cannot Depend on Perfection:  Whenever I see someone developing a plan the first question I ask them is, "What if assumption [fill in the blank] is not accurate? What happens to the plan? If they cannot answer that question or the answer is the plan falls apart, then there is no plan. There are numerous sayings on this but it all comes down to not developing a plan which relies on a hole in one. Holes in one rarely happen. "The more you need specific elements of a plan to be true, the more fragile [the plan] becomes".
   
   
2. The Plan "Bets the Farm": The quote from the book which applies here is: "Few gains are so great that they're worth wiping yourself (or your business) out over. When I hear people say they are going to be the "Amazon of..." or the "Tesla of...." I know the plan is doomed. Going to Vegas and putting it all on one number is not a strategy.
   
   
3. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan. The follow on quote to this is, "you plan, God laughs". The author reinforces over and over again that "A plan is only useful if it can survive reality. And a future filled with unknowns is everyone's reality".  Bottom line is you must plan on the plan not going the way you want it to. 
   
   
4. Margin of safety / room for error: Allow for margins. It is one reason why leverage really can be a problem. Using leverage in financing removes a lot of the margin for safety and then you are back to violating rule 1 - you are hoping for perfection. 
   
   
5. Develop a barbelled personality - be optimistic about the future, but paranoid about what will prevent you from getting to the future. Andy Grove, founder of Intel, wrote a book titled, "Only the Paranoid Survive" and he was write. However, you must also be optimistic (not blindly) about the future. The future curve is almost always up and to the right for great plans as long as they meet these rules. 

These rules are just fantastic reminders of what makes a great business strategy and makes a business that can survive both the great times and the not so great times, like freight and supply chain entities are seeing now. 

Since it is July 3d and I am off tomorrow, I will leave you with a fantastic patriotic song. As a veteran, I am "Proud to be an American". 

Supply Chain Transformations Involve Many Elements - Thinking is The Most Important

It appears every supply chain I know of is in the middle of a big transformation. In many cases people misread the COVID Pandemic surge as a "new normal" and many invested heavily only to be shown that the idea of mean reversion is serious business. This is affecting even big and very sophisticated supply chains. Today we learned The Home Depot is even relooking at the supply chain efforts started during the COVID period (H/T: Supply Chain Dive). 

With great fanfare, just a few short years ago, Home Depot talked about the investment of $1.2 billion to create the "One Supply Chain". Today we learned they are now embarking on a $500M cost reduction in their supply chain as sales "return to normal".  This is happening all over as we discussed previously (Amazon adjusts) and is not unique to Home Depot. So, what are these transformations is missing? How do we whipsaw so quickly? Again, this is pervasive across many companies so I think it is worth thinking about. I have a few ideas. 

1. Strategy Duration: Many companies confuse tactics with strategy. Many companies also confuse short term "flash in the pan" with true change. I have always discussed the idea of mean reversion and have also used the statement "if something is too good to continue, it likely will not". Did anyone think the growth rates of 2020/2021 could continue indefinitely? So, strategically, should anyone have set up their long term capital investment and strategies around a growth rate that mathematically just could not continue? Lesson One: Strategy has to survive at least 5 years otherwise it is a tactic. 
   
   
2. Market First: Supply chain leaders and supply chains can sometimes get caught up in the science of running a supply chain but the leaders forget that all strategy has to start with the market then work its way back into the operations. I discussed this in my blog post titled: Go To Market Strategy Before Supply Chain Strategy
   
   
3. Scenario Planning: Many leaders forget this incredible necessary and powerful competency. As I wrote in my blog post: Scenario Planning - Face it, You are WRONG, predicting the future is a very difficult and dangerous business. In fact, I would say it is futile. However, what you can do is predict multiple futures and assign probabilities to each "future". You then can plan for it and also identify the key factors that you will monitor to determine which "future" is going to happen. The goal is to maintain optionality as long as you can. Don't commit until you absolutely have to. 
   
   
4. Change Management: Likely the most important part of any supply chain transformation is the idea of change management. You have to communicate, communicate and communicate along with doing the hard work of bringing people along with the transformation. 

So, have we learned any lessons here? Maybe. Although I fear the rush to supply chain automation could be another situation where supply chain industry think and FOMO is taking over. My prediction: in 5-7 years people will realize all this automation has made operations far too rigid and not agile enough to change. Much of it will get ripped out and as Elon Musk said in a tweet from 2018:

“Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated,” 

Strategy is hard work and it takes a lot of thinking. Humans are inclined to want activity and generally they do not believe thinking is an activity. But, it is the most important activity you can do in a transformation.  

The Who makes a return appearance in "Won't Get Fooled Again" (or, maybe we will):

Reality is Settling in for Supply Chain Companies

One observation for supply chain companies is becoming very clear: The anomaly in the business cycle is the period of 2020 through 2022 and that will not be a "new normal". The new normal is really just the old normal: You have to provide value, cost and efficiency rule the day, service is great but not at any cost (See my discussion on Amazon below) and money is not free so disciplined capital allocation is back in vogue. Of course, we should not be surprised at any of this. Did we really think the basic "X's" and "O's" of business were totally being changed? Some thought so in a big way, some were skeptical but found it interesting, and some actually predicted we would be back to the basics. Count me in the middle to the latter of that and I admit there were times where I was even in the FOMO mode of thinking. No more.

So, what is the data that points to the fact that we are back to basics:

1. Disciplined Capital Allocation: We read in the Wall Street Journal Logistics Report how Venture Capital Money is getting tight for logistics and supply chain start-ups. I think 2020 - 2022 will be seen as the "get it all while you can" time frame and those who raised as much capital as possible during that time will be winners - especially if they sold the company before the end of 2022. Disciplined capital allocation means less money (a lot less money) for companies who are not earning a profit or are a "me-too" company. Also, supply chain practitioners, who are under pressure to lower costs, are no longer going to get caught up in the FOMO sales game (software being bought for fear of missing out and the JDS - Just do something mentality). Bottom line, in this environment where money is actually valuable again, raising money on an idea will no longer be appropriate. 
   
   
2. Service is King BUT NOT at Any Cost: Amazon touted their idea of "we provide the service people want and we will figure out the cost" during the hyper growth phase of the pandemic. This meant if their inventory systems did not place the inventory at the right spot, and you wanted it same or next day, Amazon would incur the cost and get it to you. There was no debate. That was their issue and their job was to provide the service then go back and find out why it happened and how to ensure it does not happen again. They are calling this their new "Regional Distribution Model".
   
   Under the new regime they have decided if the product is not available "in the market" then the customer will have the burden. So, if you paid for "Prime" but the product is not in the market, there is no same or next day delivery. You wait. They are saying (it is fantastic marketing spin) that this provides better service however anyone who uses Amazon Prime a lot realizes the service has degraded dramatically due to this change of philosophy. I remember during the pandemic getting packages that clearly were flown to me from a different market. They did this for the reason I cited above. Now, the customer waits. Supply Chain Dive outlines this:
   
   "Under its previous national distribution model, Amazon would have to ship an ordered product from other parts of the country if a local fulfillment center didn’t have it in stock. This increased the company’s cost to fulfill the order while lengthening delivery times." The last statement is magic in marketing. 
   
   
3. Efficiency is King: Remember during the pandemic when all the major distribution players were screaming for labor? "Where has everyone gone?". Well, they came back but were not welcomed for long. As we learned recently, Shopify's logistics arm was sold to Flexport (run by Dave Clark who was the leader at Amazon when the previous, customer-centric, service model was developed). Shopify must have realized that running a logistics company is far more complicated and this transaction could be the revenge of expertise. Having a veteran like Dave Clark run a logistics operation makes more sense than doing it as an offshoot of a bunch of tech marketing people. Of course, the obligatory mention of "AI will make us more efficient" is woven throughout the Shopify announcement. 
   
   
4. The Stock Market is Rational - in The Long Run: A pandemic darling was Freightos (CRGO) because it was a source a lot of people used for information and freight services when containers were $20K each. As the saying goes, "If something cannot go on forever, it won't" and container prices have now normalized and the need for all of this information and service has disappeared. The company went public in a SPAC transaction (SPAC transactions are another thing we will look back at 30 years from now and wonder how we all went so mad at the same time) at $10 (as they all are) and now is priced at $2.08. This is after a big spike leading up to their earnings announcement next week. Although, earnings are somewhat of a misnomer as in December 2022 their earnings announcement showed they lost $7.24M dollars. 
   
   The good news for them is they went public. I think there are many venture capital owned supply chain firms which have not revalued themselves yet but when they do they will find they are valued a lot less than the previous round of financing AND they have no path to going public. Some doors may have to shut. 

In summary, we are back to where business belongs: Disciplined execution, real earnings matter, and capital allocation matters.

Round up Of Today’s Logistics News

Here is a roundup of some of the latest logistics news from around the world:

FedEx to transfer LA airport maintenance to Indianapolis

FedEx will exit a maintenance facility at LAX and send the work to its Indianapolis hub to increase efficiency. The move is part of a larger effort by FedEx to reduce costs and improve customer service.

Teamsters reject Yellow's proposed changes again

The Teamsters union said Thursday it has rejected less-than-truckload carrier Yellow Corp.'s plan to restructure operations at more than 200 terminals. The union said the changes would have resulted in job losses and a decline in service.

Countries Compete to Lure Manufacturers From China

Countries around the world are competing to lure manufacturers away from China, as the country's labor costs rise and its supply chains are disrupted by the COVID-19 pandemic. Countries such as Vietnam, Mexico, and India are offering tax breaks and other incentives to attract manufacturers.

Biden's Push to Counter China Steers EV Investments to Canada

President Biden's push to counter China is steering electric vehicle investments to Canada. The country has a number of advantages over the United States a and includes a skilled workforce and a stable political environment.

European Ports Brace for Cybersecurity Regulation

European ports are bracing for new cybersecurity regulations that are expected to be implemented in the coming months. The regulations will require ports to take steps to protect their systems from cyberattacks.

Stanley Black & Decker to Close Texas, South Carolina Plants

Stanley Black & Decker is closing two plants in Texas and South Carolina, as the company looks to reduce costs. The closures will affect about 200 employees.

Europe Moves to Revive Mining to Cut Reliance on China

Europe is moving to revive its mining industry in order to reduce its reliance on China for critical minerals. The European Commission has proposed a number of measures to support mining, including financial assistance and tax breaks.

South Korea Plans Mega Chip-Making Base to Stay Ahead

South Korea is planning to build a mega chip-making base in order to stay ahead of its rivals in the global semiconductor industry. The base will be located in the city of Pyeongtaek and will cost $20 billion to build.

Japan and South Korea Pledge Cooperation at Summit

Japan and South Korea have pledged to cooperate on a number of issues, including the development of new technologies and the promotion of economic growth. The two countries agreed to work together to develop artificial intelligence and to promote the use of hydrogen fuel cells.

Apple Supplier Foxconn Plans to Rely Less on China for Revenue

Apple supplier Foxconn is planning to rely less on China for revenue in the coming years. The company is looking to expand its operations in other countries, such as India and Vietnam.

And that’s all folks!! 

What is all the Fuss About With chatGPT? My Conversation WITH it…

Yes, I am saying my chat WITH it as I had a very interesting chat about the trucking business. I have a lot to think about relative to chatGPT and one thing is for sure. This is real and I can already think of many use cases for this tool. So, if you are not using it, you may want to think about it. A couple of observations from my conversation below:

1. Think of this as another version of a search tool but rather than giving me a list of websites to go to, this actually answers questions for me in conversational English. 
2. Notice my somewhat random follow on questions. I asked about trucking, then a follow up question on drivers, then e-commerce and then the impact on climate. The responses were perfect and very conversational. 
3. It is not just a screen scrape of another website as it brought disparate information together. 

NOTE: This post is about the viability of this new technology and I am sure people will take exception with some of its answers. That is not the point. The point is that the world is changing and you need to understand it. 

Here is my recent conversation with my new friend:

Me: Is trucking a viable business?

ChatGPT: Trucking can be a viable business, as it is an essential industry for the transportation of goods and materials. However, like any business, it can have its own set of challenges and obstacles to overcome, such as competition, regulation, and fluctuating demand. Additionally, the industry is currently facing a shortage of drivers, which can make it more difficult for trucking businesses to operate efficiently. It is important for those interested in starting a trucking business to conduct thorough research and have a well-crafted business plan in place to increase their chances of success.

Me: Why are they short drivers (I did not use a question mark so apparently punctuation is dead).

ChatGPT: The trucking industry is currently facing a shortage of drivers for a few reasons. One reason is that the job can be physically and mentally demanding, which can deter some people from pursuing it as a career. Additionally, the lifestyle of a truck driver, which often involves long periods of time away from home, can be unappealing to some.

Another reason for the driver shortage is the aging demographic of current drivers. Many experienced drivers are nearing retirement age, and not enough new drivers are entering the industry to replace them.

In addition, the industry has been facing a significant increase in demand due to the e-commerce boom, which has led to an increase in shipping and logistics, putting further strain on the limited pool of drivers.

Finally, the pandemic has also played a role in driver shortage, as many drivers were forced to stay home due to quarantine restrictions, and trucking companies were forced to limit the number of drivers on the road.

All these factors have contributed to the current driver shortage in the trucking industry.

Me: How big is the e-commerce boom (again, no punctuation):

ChatGPT: The e-commerce boom has been significant in recent years. According to recent data, global e-commerce sales are projected to surpass $4 trillion by 2020 and continue to grow rapidly in the coming years. This growth is being driven by factors such as increasing internet penetration, the proliferation of smartphones, and the convenience of online shopping.

In the US specifically, e-commerce sales as a percentage of total retail sales have been steadily increasing, reaching 16.1% in 2021. Online sales growth has accelerated during the pandemic, as many consumers were forced to shop online due to store closures and social distancing measures.

This e-commerce boom has also led to a significant increase in demand for shipping and logistics services, as more goods are being purchased online and need to be delivered to customers. This has put pressure on the trucking industry, which is a key component of the supply chain for e-commerce businesses.

Overall, the e-commerce boom is having a big impact on the economy and the way we shop, and it is expected to continue to drive growth in the coming years.

Me: What are the global warming issues related to e-commerce (The question mark is dead):

ChatGPT: E-commerce has several global warming-related issues associated with it.

1. Increased transportation emissions: The increase in e-commerce has led to an increase in the number of delivery trucks on the road, which contributes to air pollution and greenhouse gas emissions.

2. Energy consumption: Online retailers and delivery companies consume a lot of energy to power their warehouses, data centers, and transportation. This energy consumption can lead to higher carbon emissions.

3. Packaging waste: E-commerce often generates a lot of packaging waste, especially from the use of single-use packaging materials such as plastic bags, bubble wraps and cartons. These materials are not easily recyclable and end up in landfills and oceans, releasing methane, a potent greenhouse gas.

4. Returned goods: A large percentage of e-commerce purchases are returned, which can lead to additional transportation emissions and packaging waste.

5. Air freight: Some e-commerce companies rely on air freight to meet fast delivery expectations, which generates high carbon emissions and contributes to climate change.

To address these issues, e-commerce companies are exploring ways to reduce their environmental impact, such as investing in electric delivery vehicles, implementing more sustainable packaging materials, and increasing the efficiency of their warehouses and data centers.

This is where I ended the conversation.

More thoughts later on the use case for this but let this sink in a bit. The biggest use case I can think of right now is the threat to the google search engine. Rather than me asking for and getting a list of sites that I may have been able to get this information from, the system returned to me, in natural language, the answer to my question.

More to come…

Scenario Planning - Face it You are WRONG!

 I want to discuss some thoughts I have on scenario planning and why I think this skill is the future of supply chain management and planning. But first, let’s cover one thing and that is something you have to come to grips with: YOU ARE WRONG. 

As great supply chain managers, we all like to show how great we are with math and how great we are with developing algorithms to come up with “the number”. “The number” could be an ESOP number showing inventory requirements after detailed and exhaustive analysis of demand requirements or it could be something like what transportation or labor capacity I need to satisfy expected demand in the up coming months. Coming up with these numbers requires a lot of thought, a lot of data collection and the inevitable crunching of numbers. We then like to show everyone that these numbers are “the answer”.  As you can tell from what I titled this entry, I do not believe they are the answer. 

Rather, the supply chain manager should think of the number as the first step in a multi-step process to develop and document different scenarios which could occur. Think of this first number, not as the answer, but rather as the “base case”. It is a hypothesis. If all your assumptions come true then this number will likely be “the number”. Of course, in life, and in supply chain, all the assumptions almost never come true or develop as you planned them. I submit that almost every major event in the last 20 years in supply chain (2008 recession, 2020 COVID, etc.) were not in anyone’s base case assumption. 

Now that you are thinking of this number as just one possible outcome, what do you do next? Well, you build scenarios and you calculate what “the number” will be under all the different scenarios. You assign probabilities to those scenarios and, in some cases, you build out contingency plans to deal with specific scenarios, in advance, in case those scenarios come to fruition. 

There are many documented ways to think about this and for those who are academically inclined, I point you to a great research paper titled, “Next Generation Supply Chains” where they discuss the Gausmeier-approach to scenario planning and the Applied Approach to scenario planning. It is a great read to get the more academic base on scenario planning especially in supply chains. However I would suggest, after reading this article, you discover what will work in your company. How can you simplify it and bring it to the practical level.

I believe if you do this work, in advance, you will be much quicker in executing well thought out plans for each scenario that could develop. You will have thought about it in advance when you were not under undue pressure, you will have documented the assumptions and potential scenarios, you will have assigned responsibilities and tasks. All when you could think much more clearly. 

After all this is done, just like a great NFL quarterback, you can call the play and audible out of it with confidence and conviction that you have planned for the change of events and you have practiced it. 

Yes, getting “the number” is important. But, what is more important is that you admit that the number is wrong, and you plan for it. 

Go to Market Strategy before Supply Chain Strategy

This article is directed mostly towards practitioners who operate supply chains within companies which market and sell products. I have done a lot of thinking recently about the discussions going on concerning "is just in time dead" or "on-shoring / near shoring" etc. There are a lot of conversations happening relative to all sorts of strategies for supply chains (and no lack of consultants who want to sell you on the latest and greatest ideas). My thesis here is that the first thing you have to develop and fully understand is your business' go to market strategy. Then, after that is completely articulated and written down, you can discuss your supply chain strategy. 

So, what is a go to market strategy? It is simply writing down what products you will provide, what markets will you provide them into, who are your competitors, who are your customers and how will you compete? In a 1993 Harvard Business Review article (and subsequently in his book Double Digit Growth) Micheal Treacy and his co-author Fred Wiersema argue that most companies have to pick one strategy they will really excel at and exploit it. The three strategies, from which a company picks are: 1) Customer Intimacy 2) Operational Excellence 3) Product Innovation. It is a fairly rare unicorn which can "master two".

Just by the names of these strategies and without reading the book (Although I highly encourage you to read it) the reader can understand the implications for your supply chain strategy:

1. Customer Intimacy - High service is the calling card. Maybe not service at any cost, but high service nonetheless. The thesis here is that if you provide a truly differentiated and incredible service level, customers will be loyal and they will buy more from you. You will also keep your competitors away as they likely cannot functionally or financially compete against you. 
   
   
2. Operational Excellence - This is low cost. You will compete on cost and every nickel counts. Your customers do not want (and certainly will not pay for) extra bells and whistles. Just do what you say you will do. At this year's CSCMP Edge conference I attended a great presentation with one of the returnable pallet providers. Their strategy was all about efficiency and low-cost. 
   
   It is not "bad" to be in a low cost industry. You have to know it and embrace it and that is what this person did in his presentation. The company's network design, systems and operations were totally geared towards efficiency. They will do exactly what they say they will do with no frills, bells or whistles and they will do no more. The customer gets what they need at rock bottom prices. 
   
   
3. Product Leadership - Think Apple. This is where the product is so good that customers, while they want efficiency, will actually "pay up" or even wait for the product because that product is so good and desirable. Everyone uses the iPhone as an example of this and so some may think only Apple can do this. Let me use another example: The Kitchenaid Standmixer. I worked specifically for this division of Whirlpool for over a year and I can tell you, people will wait for that product. It is iconic. Everyone wants one. Mother's took bus tours of the plant with their daughters before they got married. So, yes, if you truly do have an exceptional and differentiated product, you do not need to be Apple to win. 

So, what does this have to do with supply chain? My submission is it has everything to do with supply chain because you first have to understand which of the three your company is doing to determine what your supply chain strategy will be. Imagine if the person from the pallet company decided his supply chain strategy was going to be "Customer Intimacy" and he built a highly responsive, high service and high cost supply chain. This would be a complete mismatch to the customer's desires and expectations of a low cost and highly efficient supply chain. The supply chain leader needs to fully understand the "go to market" strategy of the company before s/he can build out the supply chain strategy. 

One last bit of advice and warning: Be very leery of a company that wants to be one of the strategies above but is in an industry that demands another strategy. For example, many sales and marketing people want to be in a customer intimate industry because that is what they do. It is fun and energizing. But, this what they want. What do the customers want? If the customers want operational excellence or product leadership then what you will have is chaos. You will never get the supply chain strategy right.

In conclusion:

• Understand your company go to market strategy before you do anything.
• Ensure that stated strategy matches up with the industry you are in. 
• Then, and only then, develop and implement your supply chain strategy. 

After two years of supply chain disruptions and craziness, I tend to think I am Napoleon at Waterloo so tonight, I offer ABBA singing Waterloo:

Zero Dark Thiry, Precision, and Supply Chain

 Last night I re-watched Zero Dark Thirty which is a great Hollywood rendition of the search for and ultimate killing of Osama Bin Laden.  No politics here and I just want to reflect on what the learnings are for us, especially in that final scene where we get to see execution with amazing precision.  

There is a lot to learn here for supply chain professionals and it all revolves around the word precision.  If there was one word which defined that mission, it is that word, precision.  I underline and bold it as it is a word to not forget. Precision is an outcome of two other key words: planning and practice.  This could become a new term in supply chain, or perhaps a new formula:  Prc = Pl*Prct.  Precision = planning multiplied by practice. Let’s look into this:

1. Planning: If the Pandemic taught us nothing else it taught us the importance of scenario planning. This means you look at all the different scenarios which could impact your business and supply chain, you identify those things which are “early warning indicators” to let you know if the scenario is happening or not, you identify what the severity of the issue will be if it occurs, then you plan and execute a mitigation strategy if needed. This is similar to a FMEA except you do this for external events. 
1. Note:  McKinsey and Company reports 37% of supply chains implemented some element of supply chain scenario planning and these were 2.0x more likely to not have supply chain disruptions
2. Practice: This is an area business tends to lack and as the formula would imply, if your planning is 100 but you practice at 0 then your precision will be 0.  It is also something the military does extremely will. Think of the movie I am referencing where they have complete mock ups of where they are going, they knew when they went in the house, even at night, exactly where they were and they knew the name of every occupant.  They knew this because they practiced, and practiced and practiced.  How many companies do you know have great scenario plans but they just sit on a shelf somewhere and no one has looked at them, let a lone practiced them.  

This all leads to precision which is what supply chain is all about. Precision means a process is both reliable and repeatable. It means you do what you say and it means “9x%” is not good enough (Remember, you can be 95% on time but to the customer in the 5% part you are 100% not on time). Precision means each part of the chain can absolutely rely on the other parts of the chain to execute exactly what they are supposed to do without even checking. Another part of the military is when they go on missions and they do minimal or no talking with each other (Radio silence). They just expect you to do your part and there is no checking. 

Precision then leads to a world class customer experience.  Technology and even talent are means to get to precision.  If you have great technology but still cannot get precise in your execution then it was, what I described last week as FOMO technology. Technology which is “cool” but does not accomplishes much. 

So, lesson for today, recommit to precision, never say “good enough”, once you get to one level of precision, spend 5 minutes congratulating yourself and then move to the next level. 

With this, I leave you with the trailer of this incredible movie.  Next time you watch it, watch it with the thought of a precise supply chain in mind. What can you learn?

My Thesis on FOMO for Logistics and Supply Chain Technology Has Stood The Test of Time

Paraphrase:  "We reduce the logistics' cost as % of GDP which results in lower costs for goods and services, which lifts the standard of living for all Americans" - Don Schneider

 

Don Schneider

That phrase, while I many not be getting it word for word, has stuck with me from the day I met him almost 30 years ago. 

First, I apologize as it has been a long time since I put thoughts on the blog about what is going on in the supply chain world.  I should have kept up with it better.  I just went back and looked at my last posting which was on January 19, 2022 and it addressed the issue of supply chain technology. 

Two quotes from that post really stand out:

"The "free money" aspect of the pandemic has also driven an explosion in supply chain / logistics technology. Again, some have driven huge value but by far the vast majority have not.  They have just been the recipients of a lot of money sloshing around in the economy looking for a place to land."

and:

"They [Supply Chain Practitioners] layer technology on top of technology and it still does not get them very far.  This is FOMO.  This is "I am going to try anything and everything because I am afraid I am going to miss out on the latest greatest thing". 

We are starting to see the realization that this technology, without good processes and without assets, is not helping very much. The aggregate outcome metric I like to use is the US Business Logistics Costs as a percent of the nation's GDP. After all the technology improvements we have made, in 2021, this cost was 8% of GDP which, according to the 2022 State of Logistics report issued by CSCMP, has not been this high since 2008.   

Source: CSCMP 2022 SOL Report

Ultimately, we as an industry have to be measured on whether we are delivering value (higher service at lower costs) or not.  This table and information would say we are not doing that.  From the same report, we can trace these costs back to 2012:

Source CSCMP 2022 SOL Report and 10xLogistics Analysis

The graph is up 2bps since 2012 (coming out of a deep recession) and has, more importantly, changed the game significantly since 2018.  Some may say is only 2bps so what does it matter and my point is you would think we could get improvement with all the technology spend we have incurred. 

Do not get me wrong as there is a lot of good in our newest supply chain technology and there are certain aspects of running a supply chain I could not live without however, in the aggregate, logistics has become more costly for less service. 

My question for the supply chain industry is: "Would Don be Happy with this result"?  I will leave you to answer that on your own.  

This is something the supply chain industry has to address and hopefully people will talk about this at CSCMP EDGE conference this year.  Engage on Twitter with the hashtag #logtech