Saturday, December 31, 2011

Price of Fuel Going Down as Supply Increases? Don't Bet on It.

It is arrogance to assume the US can control the worldwide price of oil and refined petroleum products (PP).  It is also delusional to think the oil companies will do anything other than what is in their best interest.

Practically, what those two statements mean is 1) Petroleum products, regardless of where they originate, will flow to the most economical location - it is fungible.  2) Oil companies could care less if the US is dependent on foreign oil or not (see 1. above).

We now have the interesting situation where US demand for petroleum products (i.e., gasoline) is lower than the supply.  The narrative has been when this occurs, prices will go down and that will spur more demand, a new "market clearing" price will emerge and all will be fine.  Of course, this assumes the US is a closed society and the only thing the oil companies can do (or want to do) is dump the excess oil /PP on the US market.  But, we learn, they have a second option.  They can export it to countries where demand is growing the price is higher.

This puts us into an odd situation: The US is now a net exporter of petroleum products.  The excess supply did NOT lower prices or wean us off of foreign oil.

So, if you are a trucker or shipper thinking all that shale gas and oil will ultimately lower your operating costs you may want to think about a "plan B".  It will merely get exported.

Friday, December 30, 2011

Thoughts on Economic Distortion

In transportation I have heard shippers say they do not want to negotiate too "hard" with carriers because they want to treat them as "partners".  I have always wondered what that meant.  What does "negotiating hard" mean and what does being a "partner" mean are key questions for both the buyer and seller of transportation services?

I submit they mean the same thing and tend to be emotional statements.  What I prefer is to work with transportation providers as an extended supply chain.  After all, unless one side is trying to get unfair or undo leverage on the other side we should be working together as a single entity for the common good of the ultimate customer.

What this means is there cannot be economic distortion in the discussions.  Economic distortion exists when one side has information pertinent to the discussion the other side does not have - some call this information asymmetry.  When economic distortion exists there is bound to be an outcome which is weighted to one side or the other in terms of value.  When that occurs the sub-optimum solution is obtained and it will ultimately lead to mistrust and a dissolution of the relationship.

I go from the premise that eventually all information will become known and will be available to both sides.  As soon as one side realizes they were disadvantaged by the other side not disclosing pertinent information the disadvantaged side tries to fight back and so begins the war of distrust and trying to "one up" the other side.

So my warning to the buyers is do not think you are somehow out maneuvering the transportation provider.  Ultimately, the real situation will be discovered and when it is you will be hit back and hard.  You may get a short term gain but at a long term price. To the suppliers / logistics providers: If you are thinking you have a long term sustainable business model by taking advantage of your customers by not disclosing proper information (costs, operational efficiencies etc) you are kidding yourself.  Sooner or later what you thought was secret will become known and when the customer realizes they have had the wool pulled over their eyes, they will dump you.

In the end, American business could save a lot of time, money and extraneous resources if this little dance did not need to be played out every time an arrangement needed to be made between buyer and seller.

This may not be a 10X idea but it certainly is a 10X program if properly implemented.  If a company and its suppliers really took this to heart I believe both sides would see dramatic improvement in productivity and efficiency thus driving the 10X change that we seek.  Lots of people talk about this, few if any actually do it.

Assume all relevant information will become available and save a lot of time by trying to take advantage of short term economic distortions.

Thursday, December 22, 2011

US To Be A Net Exporter of Petroleum Products in 2011

For you transportation professionals who bought into the idea if we drill and produce more oil, prices will go down.  Think again.  This article in Seeking Alpha shows the US will end the year as a net exporter.  Yes, the prices are not going down, the fuel is just going out.

Final HOS Rule Released and Sec. LaHood is on Santa’s Naughty List! - Article from Logistics Management

Final HOS Rule Released and Sec. LaHood is on Santa’s Naughty List! - Article from Logistics Management

Dodged a few bullets but the total work hours are down from 82 to 70. What is interesting, quite amazing and important is this gets phased in over 18 months. That is a lot of time for shippers and carriers to get ready and for lobbyists to get it overturned. Ok, I am a bit cynical but as the article points out, if there really was a "crisis" of safety on America's highways would we wait 18 months to implement a resolution?

Taking a Control Tower Approach - Article from Supply Chain Management Review

I am a big fan of the "control tower" idea and think it is absolutely a necessity. Whether you outsource it or not is an entirely different question. Outsourcing is a decision concerning what the core competency of your company is and where you want to put your capital to work. A manufacturing company who has a core competency in manufacturing may choose to outsource logistics. A retailer who believes their competitive advantage is logistics may choose not to.

Either way, you should embrace this control tower concept. It is an idea which has seen many lives over my 20+ years of logistics experience and it keeps getting better with age and technology.

Saturday, November 19, 2011

Q3 GDP Growth is a Fire in The Pan Spurt

Conference Board's perspective on the Q3 "growth" spurt.  Personally, I cannot imagine GDP continuing to grow when we are at 9%+ unemployment.  Just the simple economist in me coming out.

Conference Board Report

Supply Chain Executives Define Social Media Too Narrowly

Supply Chain Executives Define Social Media Too Narrowly

A good post and one which I responded to. Please click on link and look for comment from Kevinaom. A very timely and interesting topic.

Learnings Through Logistics' Visits

I  had a great week visiting with many logistics providers and trying to get insight into just exactly what is going on in this business.  Some will tell you the business is collapsing due to low demand, some believe the transportation business is ripe for a great uptick in profitability due to constrained capacity (the jury is still out, in my mind, on whether this is artificial or not), some believe it is all just the same.. we are moving around the margins.

I get conflicting signals.  For example, everyone tells me the driver shortage is wildly acute and we run the risk of just not having enough capacity to service the industry because of a lack of drivers.  Many say if the GDP stays above 2.5% or greater then we will just not have enough capacity to service the shipper market.  However, using "Econ 101" this would tell me driver wages should be increasing.  That is not the case. Driver wages are flat.

The next question is whether the increase in intermodal actually is absorbing the otherwise demand for driver capacity?  This seems to be a plausible answer.  Container capacity is up 10% to 20% (depending on who you talk to) and this means those containers have to be filled.  They will not let them just pile up in a container yard.  Add to the fact that many shippers are lowering their point of indifference of choosing between trucks and IM (Indifference is the length of haul in miles where a shipper sees the two as interchangeable) and more shippers are choosing IM on more lanes.  Obviously, this reduces the need for drivers on long haul runs.

So, data is really mixed.  The analysts are all saying most of these companies (public) are "fairly valued" and the industry should not be overweighted in a stock portfolio.  Projections for pricing have been reduced (early this year most were claiming a 4% price increase but that does not seem to be happening) and capacity has freed up.

The one caveat?  Last year we were saying this same thing and the market for trucks and transportation went on fire in the first quarter.  So, this post did not give you an answer (sorry) but may have provided some things to think about.

Friday, November 18, 2011

Home Construction Will Be Muted - Bad News for Logistics Providers

I think we have all learned over the last few years why home construction is always looked at by economists.  It is probably the single biggest indicator of the health of the economy.  When people buy homes all sorts of things happen:

  1. Construction materials are bought
  2. People are employed en masse
  3. Peripherals are purchased (appliances, lights, drapes etc.)
  4. Landscaping is performed...
I do not know the exact number but my guess is after someone buys a $200K house they most likely, over the next year, spend another $20K at least on "stuff".

This drives all sorts of logistics activities - warehousing and most importantly, transportation volume.  Transportation is inbound into the manufacturing plants which gear up for the activity and outbound finished goods going to all those new homes.

OK, now we know why this is so important.  This is also why it is depressing to hear home construction will be muted for a while - most likely 5 -8 years. The inventory is just too high and there are still a lot of adjustable rate mortgages to reset in 2012.  Not a good sign.

For those of you who say, "Yes, but those staying in a home will remodel" I would say this "rule" (if it ever was one) does not hold up anymore.  The reason is most people, intuitively, know they are now living in a depreciating asset and not an appreciating asset.  Remodeling makes sense in the latter as it is much like a bank account.  However, in the former remodeling is like buying a consumable product which has no sustainable value.  People know this intuitively and will not, in total, increase dramatically their major remodeling (assuming they are sane and rational).

Sorry to be the bearer of bad news.

Thursday, November 17, 2011

Leasing companies see their supply chain as a competitive advantage.

Saturday, July 9, 2011

What Does the Economic News Tell Us

Things are slow and everyone is in a "wait and see" mode is what I believe these numbers are telling us.  Unemployment stayed high at above 9% (9.2%) while all orders (durables and non-durables) increased slightly from manufacturers.  The question of course is did that result in sales or did it result in inventory?  We shall see as companies report their 2d qtr earnings.

In my mind the equation is fairly simple:  No jobs and no job growth leads to a lot of uncertainty which leads to consumers not spending which starts the "death spiral".  Tax cuts for the wealthy will not put people back to work as the wealthy can make a lot of money right now "trading paper" and they do not need to open factories and stores.

The real scary thing is the fact that the one economic engine which has driven even the meager recovery (if you can call it that) we have had so far is Government spending.  Now we will see what happens when the Government retrenches spending in a recessionary environment.  I think we know the answer and it is not a good one.

The Government is playing with fire and unfortunately they are going to have to be burned to have them learn the lesson of implementing contraction policies in a time of a no growth economy.

Tuesday, July 5, 2011

A very sad day as Dr. Bowersox, the founder of the supply chain industry has passed away. Look for more on this great man.

Monday, July 4, 2011

Hybrid Cars and Reverse Logistics

Took a ride in my new Hybrid Ford Fusion yesterday and as always, everything causes me to think about logistics.  First, I will have a "call out" to Ford Motor Company as this is an incredible car.  Write me if you would like more information but suffice to say, I am thrilled about the automobile (and the 39.5mpg I had driving to Chicago).

OK, but the one issue (if there is one) with Hybrids is there is a giant battery pack in the back of the car.  As others have asked (rightfully so), "what happens when that dies"?  Ah, this is where the reverse logistics industry comes in.  There will have to be a way to recover the batteries, ship to a central point and a way to disassemble and recycle the components.  A big business just waiting to be started.

A quick google shows Toyota (as you would expect) has started a service like this and I am sure others will follow.  Amazing how new needs are created, then people fill those needs and all of it requires logistics!

Sunday, July 3, 2011

10X Logistics Now in Mobile Form

If you like to read my blog 10xLogistics, you will like it even better now that it is easily accessed from your iPhone or other mobile device.  If you just save the bookmark and go to it from your mobile device you will get a very readable format optimized for the smartphone environment.


Logistics Report Out

I have read the new report on the "state of logistics and I have a few thoughts.  First, we have to figure out how to make the report more relevant.  The logistics' industry is under tremendous change right now and to have a report on 2010 come out in the summer of 2011 is tough.  All the verbiage around what is happening in the transportation industry is almost not worth reading beyond just good history.

Second, it does forecast for 2011 correctly but it probably is a bit late in its prediction.  The report says rates will change dramatically in late 2011.  Well, we have gone through a cycle already in 2011 where rates changed a lot in Q1 and now the economy has put the brakes on thereby changing the capacity / demand equation just in the last few months.  I think however capacity has finally come out faster than demand has slowed resulting in a still favorable environment for carriers.  Intermodal is still on fire.

Real estate is still very weak.  It is not hard to find great warehousing deals but, of course, who the hell wants a warehouse!

Overall, if there were a measurement of whether the "shipper" or the "carrier" are in control, I would say it definitely is favoring the carrier at this point.  Shippers will need to ensure they have a good strategy in place to manage carriers and also work with good regional carriers.  I have found a lot of value in the regional carriers and the value they can provide.  Do not always just default to the "big 5".  There are other great players out there and as the "big 5" regionalize their operations they lose the competitive advantage against the local players.

More to follow but it is very interesting times to say the least.

Sunday, March 27, 2011

The Business of Investing

Ok, I know this is a logistics blog but I also have a passion for business in general so I thought I would write very quickly about investing.  Warning:  I am a Jack Bogle, index investor who believes there is absolutely no way to beat the market in the long run.  I am reading "Don't Count on It!" by Jack Bogle and he summarizes the simplicity of investing in this way:

A return on a stock / equity investment is simply the addition of:

1) The economics (i.e., growth rate plus dividend yield) and...

2) Speculation / Emotion - This is essentially the change in the P/E ratio over or under the long term averages.

For P/E, he basically says if P/E is under 10 then it is clearly likely to increase and if P/E is around 20 it will likely decrease (of course as all good indexers remind you, you just never know when!).

Applying this very simply, here is what I think of what your or my expectation of stock market returns should be right now:

1) Growth of the entire market is about 2 - 4% (i.e., the GDP0
2) Dividend yield is (Using the vanguard total market ETF as proxy): 1.76%

This means you can plan on "enterprise" returns of 3.76% to 5.76%.  However, the P/E is 8.04 which means you are likely to pick up an additional 2% or so in "emotional or speculative" returns as the P/E reverts to the mean.  So, you should plan on about 5-10% returns on stocks with the middle ground being most likely.  That is a normal expectation.

Impact of High Diesel prices.. Get Ready

Owner operators will exit the business, the "big 3" will get bigger, everything will cost a lot more. Get ready.

Impact of high Diesel prices.

Sunday, March 13, 2011

Government to Buy EOBRs for Mexican Trucks

I saw this a few days ago when it was revealed but had not commented until now.  My first reaction was what a disgrace.  How can our tax dollars be used to fund Electronic On Board Recorders (EOBR) on Mexican trucks when US trucking companies are making the investment themselves?  Further, what is the point of this and how will it be managed?

I just read Brian Straight's article over at Fleet Owner titled Tax Dollars Wasted on Mexican Truck EOBRs and there was a bit of a different spin here.  Could this provision be a "poison pill" placed into the agreement by the US Government knowing it will cause huge outcry?  While that is possible, I do not give them that much credit.   I really believe someone in our Government thought this would help the cause by showing how we will be able to track these trucks.  The enforcement just seems massive and the costs outrageous.

In the end, I do not think we will see many of these trucks coming across the border as it is just too complicated.  But, time will tell and if the American trucking industry gets out of hand in terms of cost and low capacity, I suppose this will become our relief valve.

The Logistics Daily is Launched

Get a compilation of my twitter feeds (@logisticsexpert/logisticsindustry) in a newspaper form at the Logistics Daily.

Japanese Tragedy Brings Importance of Logistics to The Front

There has been a raging debate going on over at Linkedin about whether Logistics has lost its importance and luster in the corporation.  I think the devastating tragedy in Japan will put this to bed once and for all as it is clear logistics will drive the recovery in that Country.

For the GIS folks who believe logistics has been displaced with information flow, I would love to see you get water, food, fuel and recovery needs to people who need it with an iPad and some code.  What will solve Japan's crisis and help people in need are trucks, truck drivers, warehouseman and "boots on the ground" not computers.

This puts this debate to bed in my mind.  Computers are a tool for the people who will actually do the work recovering.

My heart and prayers are with the people of Japan AND with those courageous people who will risk their lives to get the food, fuel and medical supplies to those who desperately need it.

Saturday, March 5, 2011

Back to Square One - Mexican Carriers in the US

Well, we are back to square one... what was the point of that?  Mexican Carriers Will Be allowed in US

Very Interesting Article in NYT: Does Technology REDUCE The Need for Education?

This is really interesting and it may apply in the logistics' field.  Paul Krugman asks the question if technology reduces the need for an eduction ?  He also cites an article in today's NY Times about software which is making a lot of junior lawyers and paralegals' jobs obsolete (combing through documents during the discovery phase). This article is titled: Armies of Expensive Lawyers, Replaced by Cheaper Software.

So, the question this poses for all of us is as supply chain software gets ever so sophisticated will it reduce the need for much of the higher education currently being used in supply chain management (i.e., Masters in Supply Chain Management, Ops research, etc.).  This is also being debated right now over at Linkedin.  Logistics and supply chain will continue to be extremely important in the firm and the overall structure of a corporation, the question is will the people managing it be that important?