McDonalds - No Product Out of Stock - Ever!

I like it when a company knows and understands its core principles relative to the supply chain.  I see so many companies make the mistake of trying to develop a culture where everyone can suggest trade-offs.  When that happens then everyone has a great idea on what should come first, second and third in terms of priority.

In this article titled, McDonalds Wants to Be Assured of Delivery, the McDonalds Director of Global Supply Chain Integration and Logistics, Alex Bahr makes it pretty clear that first and foremost nothing can be out of stock - ever.  And, it is for a very simple reason: efficiency of the restaurants. He states:

"A typical McDrive needs to be able to handle 120 cars per hour in Europe, and as many as 150 to 160 cars per hour in the US. That leaves us no time to suggest alternatives if a product is out of stock."

I believe more supply chains need to be just this blunt on what the priorities are.  I once worked in automotive service parts where the objective was 80% of last nights orders are delivered by 10:00am the next day and the remaining 20% were delivered by the end of the day.  This was a "non-negotiable" standard and any cost cutting project had to be done in the context of this objective.  An idea which said we could save $xx dollars if we pushed delivery out a day was rejected immediately.

Clarity brings simplicity and unity of purpose for a team.  Are your supply chain objectives this clear?

Discussion at Michigan State

I had the pleasure of speaking to the Broad China Business Society this past Friday concerning my thoughts on where global logistics is headed, what are the big issues or mega-trends and what are some of the things we logisticians can do to solve these issues.  I first want to thank the group for inviting me and say how incredibly impressed I was with the leadership and the membership of this group.  All incredibly intelligent students and it makes me feel really positive about our future.  With these students as leaders, the world is in good hands.

After showing the state of our industry as measured by efficiency and quantity of goods (the state is healthy but has some challenges) I then went into 5 major challenges:

1. The continued rapid explosion of global trade
2. The evolving infrastructure issues around the world
3. Global security issues - this deals with supply chain disruption for any reason
4. Global climate and sustainability issues
5. The "war" for talent and the need for great talent in our industry. 

While I will not go into this in depth here I do believe all of these issues are issues the logistician and the supply chain professional will need to study and deal with over the next 10 - 20 years.  Each person will have to evaluate these areas relative to the industry they are in, the goals and objectives of their business and their business' current situation.  

I warn people - there are not one size fits all solutions to these issues.  What works for a CPG company may not work in consumer durables.  Again, the tough work of detailed analysis in your own business must be done to determine where you will take your strategy. 

I also caution people to reevaluate these periodically.  While these trends will stay with us the severity of each one may change which may change your prioritization of what to work on.  

The discussion was almost an hour long so the details are beyond the scope of a blog.  Thank you again to Michigan State University and I hope to do this again soon!

Is The Apple Supply Chain in Trouble?

Forbes is questioning the efficiency of the Apple supply chain now that Tim Cook is running the company and not just the supply chain and operations.  I think this is a bit of a stretch and also a bit of hype as everyone tries to find issues with the leader.  I doubt very much if anything substantively has improved or devolved since Tim Cook took over the entire company - things don't "rust" that fast.

The future will tell however I would hate to be part of the millions of people who have counted Apple down for the count more than once.  It is a great company and will be for quite some time.

Cap and Trade Has Come To Be in California

Consider it a birthday of sorts.  Yesterday, California launched their first "Cap and Trade" market by auctioning off allowances in the California Carbon market.  This, while just being California, actually becomes the world's second largest carbon market right behind all of the European Union.

While right now it essentially only applies to major refineries and electric plants the day is coming when it will apply to transportation fuels.  My personal recommendation is the industry should get prepared to deal with this inevitability rather than fight it.  Politics aside, what we have found is what generally starts with the California Air Resource Board (CARB) moves across the Nation fairly quickly.

The Wall Street Journal reports on this launching and reports California expects to raise $1bl in 2012 and $2.8 to $11bl by 2015.  A critical factor for success is we have to ensure this money goes to actually reducing emissions or offset projects rather than the general coffers of the state.  If we can avoid the "money grab" then this will be a very effective way to use market incentives to lower emissions.

 According the the California auction site, the results will be listed on November 19, 2012. Auction information can be found at the CARB auction site.

Speaking at Michigan State

If any readers are near Michigan State this Friday, I am keynoting at the Broad China Supply Chain Forum.  My topic will be on The Current and Future State of Global Logistics.  I will also be on a panel concerning sustainability.

Stop by and say hi!

Oil Independence? Yes - "Cheap" Oil? - No

I have written about this before because I feel the headlines are misleading for those in energy intensive industries such as transportation.  The headlines talk about energy independence and energy dominance and the underlying assumption by most is this will translate into low cost oil.  This could not be further from the case.

We will continue to have high priced oil and the IEA in the same report where they said the US will be the dominant producer of oil also said you can expect oil priced at $125 per barrel (inflation Adjusted).  Oil is a global  commodity and therefore will settle on global prices.  The Wall Street Journal in an article entitled "Don't Expect Lower Oil Prices Even As US Output Surges" quotes the report by saying:

"But oil prices, the IEA said, will continue to rise, hitting $125 per barrel in inflation-adjusted terms — more than $215 per barrel in nominal terms — by 2035. U.S. consumers, the agency makes clear, won’t be shielded from those price increases, even if the country doesn’t import a drop of foreign oil."

The report goes on to say:

"Oil is a global commodity. What matters for prices is total supply and total demand — not where the oil is produced or consumed. That means that even if the U.S. relied only on domestically produced oil, prices would still be dictated by global market forces."

 Oil prices are based on global supply and demand and oil is very easily exported.  As soon as there is a big enough price differential where traders can make money in arbitrage they will export the oil. The graph below shows the predictions by the IEA:

So, the conclusion is clear... The US will be a large oil producer AND you will still be paying $3.00 - $4.00 in adjusted dollars per gallon.  

An Interesting Post On Value of Supply Chain MBA

20 years ago "plus" when I started in this industry I would not have even been able to tell you where to get a "supply chain MBA".  Usually it was finance or operations research degrees who somehow meandered into this field.

This is not true anymore and this blog post from "The Strategic Sourceror" explains why.

EU Freezes Carbon Charge on Airlines

Many know the EU was going to charge a carbon emissions charge on any airline flying in the EU airspace - this included foreign airlines.  Of course, this caused a furor in international relations and the US actually passed legislation (prior to the election) preventing US flagged air carriers from implementing this charge.

Now, the EU has agreed to "freeze" this for a year.  This is an interesting development and one which I am sure is designed to bring "peace".  I am just not sure what they are waiting on?  What will really be different next year than this year?

Bill Graves on Fox Business

Bill Graves, the head of the American Trucking Association (ATA) does a nice job on Fox Business discussing the impact of Sandy, the readiness of the transport industry and the future of the industry.

I found it fascinating that he believes we will "slog along" until Q3 of 2013.  I think this was about as direct as I have heard an industry leader speak about the "flat lining" of the transportation industry recently.

U.S. Overtakes Saudi Arabia in Oil Production by 2030 - IEA

This is a fascinating statement and it shows how disruptive technology (i.e, the ability to extract tight oil and shale oil / gas) will really turn the world energy markets on their head.  The International Energy Agency (IEA) has two reports out.  The first (as reported by Bloomberg) describes how the US will overtake Saudi Arabia in oil production.  Some interesting statistics:

• Last Month Saudi Arabia pumped 9.8 million barrels per day; The US 6.7 million - very close. 
• US production this year will be highest since 1991.
• 83% of the US domestic oil needs were met with domestic oil supplies in the first 6 months of 2012. 

The second report (again as reported by Bloomberg) tells us by 2030 natural gas will be the predominant source of energy in the United States as it will be plentiful and cheap.  Both of these are incredible developments given just a few years ago people were talking about "Peak Oil".

I will add a bit of commentary on sustainable practices.  I hope we as a country are wise enough to see these developments as incredible luck which gives us time to move to a more sustainable way to power our economy.  If we use this as a way to get "cheap energy": which then makes the business case for sustainable energy not economically viable then we will have squandered a huge opportunity.  

Also, as I have stated before, do not confuse "energy independence" with "cheap oil".  The oil prices will almost always be at world levels because if they are not then the energy will simply be exported rather than consumed in the US. 

The impact on transportation will be clear:

• Oil supplies abundant
• Oil prices at world levels (i.e., no "cheap oil")
• Movement to natural gas will continue. 

A Good After Action Review (AAR) for Logistics Companies Post Sandy

A neat article in Reuters today titled "Transport, Logistics Weather Sandy Well Despite Glitches" calls out the great work the trucking and logistics industry is doing in Sandy.  Specifically, the good news is the industry learned from Katrina and has developed very good playbooks to deal with big storms and natural disasters:

"Freight transportation company triage playbooks have been evolving with a series of disasters, including Hurricane Katrina.

 By the time Sandy hit, trucking and logistics companies had topped off gas tanks, bought or rented back-up generators to power distribution and fueling centers, and shipped relief and manufacturing supplies to the Northeast that customers would need after the storm. During the storm and in the days after, these companies and East Coast railroads diverted shipments away from the hardest-hit areas and found alternative delivery options for customers"

This is good news as we know these disasters will not only increase with frequency but also with severity and the fact the industry is preparing for them is a great service to the US.

On Veterans day, we thank all the veterans who have served this Nation.  I would also say if companies are preparing to work in disaster stricken areas there is no better person to lead these efforts than a veteran.

Rail Volume for Week 44 Down - Hurricane Sandy

Association of American Railroads released week 44 on Thursday and as expected volumes were down significantly.  However, anyone who graphs and analyzes this data closely will need to asterisk this week forever as Hurricane Sandy drove most of it.

The data shows a 4.8% decrease in container traffic versus week 44 of 2011.  This can only be explained by the Hurricane and embargo of certain locations.  Container traffic through week 44 increased 5.6% for the year showing the increased volumes will continue and, as expected, trailer traffic on the rails continues its decline in favor of the more efficient COFC.

Overall ton miles are down both for the week and for the year and the driving factor for this is Coal.  Coal is down substantially and while petroleum products are up due to all the shale oil it is not enough, on a ton mile basis, to offset the decrease in coal.

The story continues to unfold despite the blip due to Sandy:

• COFC is up
• TOFC is down
• Overall ton miles are down
• Coal down
• Petroleum up dramatically. 

Cap and Trade Launches in California

It is finally here in the United States with California launching their carbon market on November 14th.  On November 14th, California Air Resource Board (CARB) will launch the selling of 21.8 million carbon allowances to be bought by stationary carbon emitters (plants, utilities etc.).  Distributors of transportation fuels and natural gas will come in 2015.  

This offset mechanism is supposed to have the desired effect of putting a market mechanism in place which will allow rules of economics to force companies to either lower their carbon emissions or pay a price.  Presumably, the price will get high enough where there can be business cases made to implement new technologies or new conservation programs which will drive down the emission of green house gases.  The ultimate goal is to get CO2 down to 1990 levels even with presumed growth of the economy.  

To give an idea of the pricing mechanism below is a graph from Point Carbon which reflects the prices, per metric tonne, of CO2 allowances currently trading in the very illiquid California market. 

Source: Point Carbon

You can see the carbon allowances are trading on the low end of the scale.  The point of injecting the allowances by the state is to give a shot of liquidity to the market to get the market functioning better.  Best estimates are they will sell for between $10 - $12 per metric tonne and we will see on November 14th how it all pans out. 

This mechanism is similar to the European market already in place and this will make the California market the 2d largest market in the world. 

Like it or not, I think the evidence is clear:  1) CO2 is causing climate change. 2) Human activity is producing excess CO2 3) We must reduce CO2.   Given all of this using rules of economics to create a market which "prices" bad environmental behavior is the right way to go.  People will either have to pay the price and continue the bad behavior (that money would be used by others to clean up after the bad behavior person) or they will use the economics to create business cases to create projects to fix / lower their carbon emissions.  

The issue here of course is anytime the government creates a "currency" out of thin air their is huge opportunity for abuse.  However, there are mechanisms to solve that abuse potential, or at least make it not in their best interest to execute the potential corruption, and those mechanisms should be researched, implemented then fine tuned before we decide to end what will be a great program. 

Of course, this will come with the obligatory law suits on both sides so we will wait and see how this all turns out.  Bottom Line: If you are a transportation provider or transportation user you should watch this closely because in 2015 it will impact your business.  You will be participating either directly or indirectly. 

XPO Logistics - Insane Growth?

I just read a great article on XPO logistics which is growing their brokerage business very dramatically. I have been close to this company since it was just Express-1 and the leadership had the foresight to see the potential growth in brokerage.  They started this business at exactly the right time and now it is the fastest growing part of the business.

As you can see from the graph below (Source: Seeking Alpha) the revenues from brokerage are really taking off.  The other key point I draw from this graph is they have a really nice mix of business.

XPO Logistics

I think this is a company to watch very closely and it is at a major point.  They clearly have shown they have the capability to bring in acquisitions and grow the revenue.  Like most companies in a major growth period they are losing money but I do believe in the leadership and the strategy of the company.  

As a shipper, I have always loved doing business with companies in this sweet spot.  Big enough to do what I need them to do, they are willing to invest and yet they are small enough that you are a big player in their portfolio.  You generally get much better attention and you have the ability to be a core customer regardless of size. 

I could be wrong but I had the same feeling about Coyote Logistics when it was much smaller and so my intuition tends to be pretty good on these things.  Watch XPO.

The Logistics of Fuel in Post Sandy

I recently read a quote from Boone Pickens where he said there was plenty of fuel but no electricity to pump it. I remember in the Army we had "retail tankers" which could fuel up retail trucks and cars ( and tanks) right from the tankers.

I wonder why we don't have this capability as part of homeland security? Seems this would be core to what is needed during extended times of power outages for whatever reason.

I hope we involve experienced logisticians in a detailed and non emotional review of what can be done to mitigate suffering in the future.