Monday, December 2, 2013

A Drone Delivers Your Package - Part Deux

Today the logistics world is a buzz with the idea that Jeff Bezos rolled out on 60 minutes last night that a drone could deliver your package.

Too bad 60 minutes did not read this article "A Drone Delivers Your Package" back in FEBRUARY of 2013!

Tuesday, November 19, 2013

XPO Finds "The Missing Link" in Big Box Home Delivery - Game Over?

Last week XPO Logistics (See other entries about XPO here) made what I consider a ground breaking announcement and acquisition: They acquired Optima Service Solutions.  If you remember, a few months ago XPO purchased 3PD which catapulted the company into the a leading position in big box (Think appliances, home exercise equipment, massive TVs etc.) home delivery.  It was a big and bold move to complete the supply chain (They already had services for inbound, redistribution and this gave it "final mile" capability) for XPO.

However, those of us who have been working home delivery (This was a major focus of mine at a major appliance manufacturer) have known for years that the big struggle in this space is in installation and service along with returns.  The biggest reason people shy away from internet purchasing of big items (for this example lets say a refrigerator) is because it is so hard to coordinate installation and, if something goes wrong, who do you call?  The acquisition of Optima by XPO solves that problem for home deliveries made by XPO / 3PD.

XPO will now have the capability to provide a seamless solution.  Before this acquisition the purchase of the refrigerator went something like this:

  1. You buy from an internet retailer who may or may not coordinate the delivery (some just give you a phone number to a LTL carrier and basically you are on your own). 
  2. The refrigerator is delivered to your curb (many will only do curbside deliveries).
  3. The driver may or may not help you unload (many LTL carriers will tell you that you have to unload the refrigerator yourself). 
  4. The driver leaves and now you and your wife stare at this new beautiful refrigerator sitting in your garage and your wife says to you, "What the hell are we going to do with that"?
Now think of the "new world" of big box deliveries (again, our fictional refrigerator) with the  integrated and seamless solution XPO will offer: 
  1. You choose an internet retailer specifically because they have the XPO / 3PD / Optima team as their delivery agent (Same refrigerator but this retailer is preferred due to the delivery mechanism).
  2. When you coordinate the delivery you tell them you want it fully installed and the installation is seamlessly scheduled for you.
  3. When the driver shows up to deliver the refrigerator the installation technicians arrive at the same time and they take over. 
  4. Your refrigerator is installed, icemaker tested, etc. etc. 
  5. You and your wife look at the beautiful new refrigerator where it belongs - installed and ready to be used. 
This is why this acquisition is so important.  The complexities of buying a big box item over the internet are lifted from the consumer and put where they belong - on the delivery agent.  No one has been able to do this better than Optima and now Optima is exclusively part of the XPO / 3PD network.  

Bradley Jacobs has, in one masterful stroke, accomplished two great things for his company.  First, he has given the company the ability to make a seamless end to end solution for home delivery all the way through delivery and service.  Second, and probably as important, he took the leader of this service, Optima, off the market for other home delivery agents.  Now, if you were a local home delivery agent and behind the scenes you were using Optima, you will no longer be able to do to that as Optima is exclusive to 3PD.  

This is the equivalent of a "Pick 6" in football.  Your great defense not only makes a great defensive play but it also scores a touchdown.  

The last frontier for potentially preventing people from buying big box items over the internet is now just returns - and don't bet against XPO in this space - they will figure it out. 

Wednesday, November 13, 2013

Rethinking The Core Carrier Strategy - Too Many Eggs in One Basket?

There are two sides of a continuum in procurement strategies for transportation.  On one end is full "auction" type purchasing where you put everything out to bid, almost constantly, and let the market adjust the prices.  On the other end is single sourcing where you don't bid anything and you partner with a core company.

Close to sole sourcing is a strategy called "core carrier".  This strategy has you limit your carriers to a "vital few" and then you work with them.  Sounds great however lately I have seen this degenerate to what is virtually a sole source strategy.  So, what is wrong with this and is it time to rethink it?  It appears Amazon thinks so.

As I wrote on Monday, Amazon is teaming up with the United States Postal Service (USPS) to execute Sunday deliveries.  Sounds great and the possibility of this occurring I wrote about back in 2012 but there may be more to this.   In The Wall Street Journal's "Heard on the Street" column (subscription required) they mention how this may actually be a strategic decision to ensure they have options beyond FEDEX and UPS.

In conjunction with their private fleet for grocery deliveries, Amazon appears to be diversifying and growing their options.  A real strategic risk for Amazon is they become so beholden to Fedex and UPS that they are controlled by them.  This strategy appears to be their attempt to counter that risk.

For the average shipper you should be thinking about this strategy as well.  Initially the idea of sole sourcing or core carrier sounds great - low administrative costs, one point of contact, easy to do business with.  Long term, however, you have to ask yourselves if you are turning the keys to the kingdom over to someone who many not have your best interest in mind.  No fault of their own but their interest will always be in the profitability of their company.   So, here are some actions you should be thinking about to protect the long term ability of your company to execute their strategy:

  1. Be careful on too much concentration in one carrier - especially intermodal
  2. Ensure suppliers know (and it is believable) that you have options in the market place.
  3. Be careful of tying systems together which are core to your business.  Beyond EDI, once their are unique systems integrations you are married (sometimes for life).
  4. Think about strategically propping some carriers up to ensure they are competitive.  Think about Amazon and the USPS.  Why go with what is essentially a bankrupt carrier?  Amazon wants to keep them in business and is going to help them.  You may have to do that with some smaller carriers yourself. 
  5. Keep options open with private fleet.  By running a private fleet you will know as much or more about running a fleet than your suppliers.  Keep that as a competitive advantage. 
As always, there is a lot to learn from Amazon.  

Tuesday, November 12, 2013

Behind The 2.5% GDP Number.. Not So Fast

The initial read on Q3 GDP seemed pretty impressive at 2.5%.  That would indicate things are moving along and creeping up to the 3% "benchmark" everyone is waiting for.  However, like all things, there are the numbers then there are the numbers.

I had heard on NPR that the inventory numbers seemed elevated so I did some quick research and sure enough it appears that at least .5% of the GDP number was due to the growth in inventory. Of course, making things and throwing them in warehouses is not a driver of growth.  It is more like a ponzi scheme.

Forbes said the following:
"When you remove inventory accumulation and external trade, explains Capital Economics’ Chief US Economist Paul Ashworth, you get a slowing 1.7% growth rate of final sales to domestic purchasers. Ashworth calls this less impressive metric “a better gauge of underlying economic strength.”

What are the implications for shippers and transporters:

  1. The economy is not growing like the front page numbers may imply.  Things are sluggish for the most part with some strength industries - although those are not big freight industries.
  2. Due to the growth in inventory, there has been a "pre-positioning" that will have to bleed off.  This means, at some point, inbound freight will slow down dramatically waiting for the inventory to be sold. 
  3. Nothing indicates freight will speed up.  This slow freight environment which means demand is decreasing at least as fast as supply will be the "new normal" for at least one year. 
Everything I read and see says this slow "new normal" freight environment will go through 2014 at a minimum.  

Lesson:  Always read "behind" the numbers. 

Monday, November 11, 2013

United States Post Office and Amazon - Sunday Delivery in NYC

Sunday delivery was inevitable (USPS and Amazon team up) and I have talked about this a few times.  In an article titled "Home Delivery Lockers at Wal-Mart" I discussed how Amazon might be able to team up with UPS to fight the "Clicks and Mortars" advantage of Wal-Mart.

But buried in that article I said the following:
"Of course, there is still partnering with the Post Office (interestingly UPS has already started doing in the sustainability space) which I think makes a lot of sense."
I also said that the United States Post Office could be the big winner in the fight for immediate home delivery as they already have a 6 day per week infrastructure to make this happen.   I wrote an article over a year ago titled: "Could the Post Office Be The Big Winner in Same Day Delivery?"

It appears they have, at least in NYC, started to win this battle.

Sunday, November 10, 2013

State of Transportation - XPO Logistics

I have reported on XPO logistics  (Follow this link on XPO to see all my thoughts) a lot as it fascinates me how a company comes out of nowhere and becomes so large so fast.  It also amazes me just how much money a company can lose and still be wildly successful (think  But, since I am not a financial person I trust Bradley Jacobs understands these financial rules and is using them to his advantage.

The real reason I listen to their calls every quarter is no CEO I know of is as honest, direct, and has as much just common sense as Brad Jacobs.  I had the pleasure of meeting and talking with him a few weeks ago and for someone who has done as much as he has, he really is a down to earth person who knows this business well (especially for someone who is relatively new to the brokerage business) and, something that is refreshing, he is very upfront and honest.  So, listening to what he has to say about the industry is very interesting.

On this quarter's conference call he said three things which really were insightful on the market and match what I have said relative to telling shippers not to engage in the fear trade.  Here they are (Paraphrase):

  1. This is a lousy business environment for brokerage companies due to the fact that shippers do not have much of a problem finding trucks.  The reason for this is the market is balanced at best case (for transportation providers) and may even be edging to the shipper.  The shipper has no problem finding trucks (except for unique and specific lanes). 
  2. XPO is able to find trucks and is able to "clear their board" relatively early in the day so it is pretty clear that trucks are available.  
  3. This is probably the most important: When he was asked if he is seeing any issues with Hours of Service or other regulatory issues he clearly said no.  In fact, he said that the one thing which he hears most is just the transportation companies complaining about it.  
My mind is not made up on brokerage in general or XPO for the long haul.  I still wonder why good transportation departments need a "middle man" but I know there are reasons - I always think of them as back up capacity - but people do use them for their core transportation.  The dream of the internet was to eliminate the "middle man" yet in this space the middle man seems to be growing.  

Having said all that, I listen to the XPO call every quarter as you can learn a lot about what appears to be a strong emerging company and the industry in a very straightforward manner. 

Thursday, November 7, 2013

The Fear Trade Picks Up Steam - Don't Be Fooled

One of my favorite songs from childhood is "Won't Be Fooled Again" by The Who and this is my theme for what I have called the "fear trade" in transportation.  This is the time of year when people put their freight out to bid and as expected, and right on queue, some of the major transportation providers are putting out press releases and other statements to start the fear trade - make shippers fearful that truck capacity is magically disappearing and that trucking companies are suffering.

As reported in LogisticsViewpoints, both Schneider and Werner have, on queue and somewhat coordinated, put out press releases and statements saying there is a big problem with capacity, productivity is down and the big bad regulations are making it hard to run their business.  This will, I predict, be echoed by many others over the next few days.  All while earnings at the best run trucking companies are better than they have ever been and OR rates are at record levels (the REAL data in their annual reports).

These statements, of course, are designed to create the fear trade and to get the shippers to buy into a "fear premium" as they go into bid season.  Now, for the real data:

Using CASS data from the October report we see that both expenditures and shipments are down year over year.  In fact in 7 months of 2013 we have seen shipments down year over year which indicates, as CASS rightfully points out, that the economy is slowing and the shippers are finding alternative ways to deal with transportation problems (i.e., network redesigns, packaging, better inventory management etc.).  During these turbulent times it appears shippers have rolled up their sleeves to find innovative ways to solve transportation problems and it appears the transportation industry is issuing press releases.  The graphs below tell the story:

As I reported recently, I told my readers not to overreact to the numbers from September.  They were too strong to be sustained and if you see any other economic indicators you will know that strength was not supported by the underlying economy.  And, this month we find that to be accurate.  They were not supported.

Another interesting statement out of the CASS reporting was that for the first time since 2008 the National Retail Foundation is forecasting a decrease in holiday sales by 2.5% and this is supported by the less than robust holiday stocking.

For sure I am not saying to ignore capacity - if you claim the world is going to end and you live long enough, sooner or later you will be right.  However what I am saying is three-fold:

1.  Let the data speak.  Don't get wrapped up in the fear trade.  Watch this blog, watch the CASS information, watch macro economics and, of course, watch your own sales as a shipper.  These are the most telling indicators.

2. Look at your network and understand your network relative to freight flows.  I have said it many times that transportation is not a homogeneous network.  There are specific lanes (Northbound out of Mexico as an example) that are always under stress.  However, if you ship westbound you should be getting great deals almost always.

3. Understand that there is another side of the equation and that is demand.  Shippers have done an incredible job of productivity enhancements through packaging, product design, loadability studies, and network design which has allowed them to service their customers with higher quality goods at lower costs and lower transportation requirements.  There is no reason to think this will stop.

So, in conclusion, do not get caught up in the fear trade.  Do not think you need to pay a premium now as an insurance policy against future capacity.  One thing is for sure, capacity will flow to where the margins are and even if you pay more now it will not ensure future capacity.  If you pay a premium now you will be in a "Pay me now AND Pay me later" scenario.

Stay calm, stay focused and keep reading the data.

And now, enjoy the Who and Won't Get Fooled Again:

Tuesday, October 29, 2013

Truckload Strong; Intermodal Weak

I have not reviewed the CASS information for a while but have used other sources which have all told the same story.  Intermodal freight is soft relative to capacity which is putting pressure on rates.  However, the September truckload numbers show strong expenditure increases with shipments staying moderate.  Translate this into higher rates.

To show the issue with the intermodal market right now look at the chart above.  Clearly, going into Q2 in both 2012 and 2013 we see the price index decrease.  However, in the latter half of 2012 it rebounded.  In 2013 it tried but quickly was rebuked.  IM rates are in check mostly due to the capacity situation.

The real question though is whether this is a short term bump (The Christmas "rush") or is this a long term trend.  My belief is to watch it closely but be skeptical of anyone who says this is a long term trend.  Hours of service or none I believe there is no evidence to show the economy picking up or shipments growing rapidly.  Yes, there are bumps up and bumps down but the trend is pretty flat.

Don't get involved in what I call the fear trade.  The fear trade is when your carrier base comes running to you as soon as some data supports higher prices and tells you to "pay up".  Watch the data closely and I think you will find this to be a blip.

Saturday, October 26, 2013

3d printing goes mainstream

As my readers know I have been talking about 3D printing for a long time and have been theorizing and brainstorming how this will impact manufacturing, supply chain and the overall method of acquiring goods.  From one of my first posts back in 2012 titled "Don't Reduce Costs - Eliminate Them" through the many others I really believe this is a major change in how goods will get to market.

And, of course, when we were first talking about this topic it appeared to many to be "Star Wars" type conversation but I will tell you it appears to be almost mainstream now.  Many at the recent Council of Supply Chain Management Professionals (CSCMP) Annual Global Conference in Denver were talking about it.  There was even a display!

Now the question is not whether the technology will exist or even if it will be affordable but rather what are the innovative and exciting ways it can be applied.  Unfortunately, the press is all over the fact that people are making gun parts with it.  But here are some revolutionary ways this can be applied to the supply chain:

  1. Development cycle times cut dramatically:  Imagine when you can "print" prototype parts immediately and on demand as you build prototype products?  The idea of rapid prototyping  really becomes a reality and this technology drives this.  So, supply chains have to be ready for rapid deployment of new products.  Where supply chains might have had 3-5 years to plan and get ready for a new product to flow, they many now only have 6 months.  The "bottleneck" in new product development may have just shifted. 
  2. Batch Sizes decrease to just about 1:  The bane of supply chains is when you can get to 1x1 or batch sizes of one.  By nature, supply chains like huge batch sizes as this helps:
    • Inventory
    • Procurement
    • Shipping (Full shipments)
    • Receiving
    • Change overs in plants
    • Tooling and machinery
    Now the question is how will supply chains adapt to true batch sizes of one.  "Make on demand"  will be a reality and people need to be ready to deal with it. 
  3. Really small shipments:  People have always talked about the "push - pull" between reducing logistics costs by increasing shipment size (full truckloads - fullest the furthest) and the flexibility and agility of small shipments.  Most want both.  3D printing will bring a lot more demand on smaller shipments and even shipments of "one".  This will really benefit companies such as UPS and FEDEX at the expense of truckload and intermodal.  
So, the conversation has moved from "Can that really be done" to "Looks like it can be done" to "Yes, it absolutely can be done now how do we leverage and exploit the new technology. 

There are a lot more and I look forward to engaging on the other ideas which will develop.  I look forward to any comments you may have.  

Friday, October 25, 2013

Energy as part of the Global Bill of Materials

If I told you there was a portion of your bill of materials which could make up 20% -40% of a major component would you want to know what that was?  I hope the answer would be yes and that element is energy.  I heard a person talk this week (A VP of a car company) talk about the "energy it takes to make a car".  The interesting part of his talk is he was not just talking about the plant where the car was assembled.

Rather, he walked all the way back to the extraction of raw materials, through the various "tiers" of suppliers, to manufacturing then to the final delivery of the finished product.  He discussed energy as a component of the BOM and therefore it needed to be managed.

In transportation, people are just now starting to look at this way and the more enlightened managers see this clearly.  If you look at the "bill of materials" for transportation, energy is about 40% of the cost.  Who would ever not manage 40% of the cost of a BOM?

Between emissions and the actual cost of energy it is clear the time is now to manage energy.  Those who say to not manage it or, worse yet, turn it over to the transportation companies just do not understand how important this element is to their costs and to the security of their supply chain.  What element could disrupt the supply chain worse than the lack of energy?

It is time to step up and take control of this and think like that speaker... thing about transportation as you would manufacturing.  Think about what the bill of materials is and what deserves your attention.  40% deserves your attention.

Tuesday, August 27, 2013

Economic Gains - Concept or Reality?

Don't want to be a "debbie downer" here but I came across this article in Logistics Management Magazine titled: Economic Gains are Sometimes More of a Concept Than Reality.  I tend to agree with the author on this one and said as much in my Macroeconomic Monday post last week.

Monday, August 26, 2013

Is Domestic Oil Drilling The Right Security Policy for the US?

This is a topic near and dear to logisticians and the overall energy strategy for the United States which then translates into what supply chains can expect for energy policy.  You cannot pick up a magazine, newspaper or watch a news show without the discussion of "energy independence" and how wonderful that will be / is for the United States.  And it is precisely that popularity which causes me to seek out other opinions.

A person once said if two people always agree with each other then probably one is not thinking.  The hoard mentality of energy independence makes me think that there must be another opinion - another way to look at things.  Well, leave it to Charlie Munger, Warren Buffett's great partner, and some may say the brains behind Warren, to give me that other way of looking at things.

In looking at this idea of energy policy he brings us to a core question:  Is it in the United States' best interest to "drain" the US now or should we in fact follow a policy of "drain the rest of the world" first and save our precious resource for the future?  A different way of looking at this problem. In order to believe that you may want to drain the rest of the world first you probably believe:

  1. At some point, oil will become a scarce commodity.  This is not a popular view right now as we have moved from "peak oil" to an environment of oil abundance.  But, while we may argue about when, I think it is reasonable to believe that some day oil will be scarce.
  2. You have to believe that there will not be a replacement for oil when the scarce time comes. 
If you believe those two items then the right policy is actually quite clear: drain the rest of the world first. While we can afford it and before the world catches on to us we should drain the world, even if it means drilling oil and bringing it to the US just to store then wait and see.  Here are some comments from Charlie:
"Oil is absolutely certain to become incredibly short in supply and very high priced .. The imported oil is not your enemy, it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization. And what responsible people do with a Confucian ethos is suffer now to benefit themselves and their families and their countrymen later. The way to do that is to go very slow in producing domestic oil and not mind at all if we pay prices that look ruinous for foreign oil. It's going to get way worse later ...
The oil in the ground that you're not producing is a national treasure ... It's not at all clear that there's any substitute [for hydrocarbons]. When the hydrocarbons are gone, I don't think the chemists are going to be able to just mix up a vat and create more hydrocarbons. It's conceivable that they could, I suppose, but it's not the way to bet. We should spend no attention to these silly economists and these silly politicians that tell us to become energy independent.
Let me pose a question for you. It's 1930. Oil in the United States is in glut. We have cartels to get the price up to $0.50 a barrel. Everywhere we drill we find more oil in our own country; everywhere we drill in Arabia we find even more. 
What would the correct policy of the United States have been in that time? Well, the correct policy would have been to issue $150 billion of very long-term bonds and cart 150 billion barrels of Middle Eastern oil into the United States and throw it into our salt caverns and leave it there untouched until the current age. 
It's easy to see that in retrospect, but who do you see who ever points this out? Zero. We have a brain-block on this issue. We should behave now to do on purpose what we did on accident then."

This is truly a fascinating position which challenges the common thought of drill in the US first.  He made me think:  Why should we drill now?  Oil in the ground is money in the bank and given that the ultimate price will be a global price to the consumer (i.e, the economy and the consumer see no benefit of local drilling) and that oil drilled in the US will be refined and then probably exported to equalize the global price, the correct policy is probably what Munger suggests - drain the rest of the world.

The only argument against this policy would be that we somehow benefit from local drilling and by the time we are drained there will be some type of substitute so it does not matter.  To this argument I reply with the knowledge of Pascal's wager.

When Pascal was asked why he believed in God he basically said it was an exercise in probability.  Basically he said he believed in God because if it turns out God does not exist than he really has lost nothing by believing in God during his life.  However, if God does exist than it certainly was good he believed and for those who did not, they are looking at an eternity of flames.

So, let's apply this to Munger's ideas.  If he is wrong, we have not lost anything (assuming we did not have to sacrafice mightly to drill the rest of the world).  If he is right, we will have ensured the security of our children for hundreds of years after the rest of the world is drained.

Makes you think.

Ht: The Motley Fool 

Watch the entire talk here:  21st Century annual Conference - ROUNDTABLE III  Charlie Munger starts making his comments on energy policy at about 36 minutes in.

Wednesday, August 21, 2013

In Memory of A True Visionary - John "Jock" Menzies

Last year at the CSCMP Annual Global Conference I had the pleasure of randomly sitting down with a person I had never met before and his name was Jock Menzies.  I was immediately fascinated as he told me of his organization, American Logistics Aid Network (ALAN).  He told me his story of how he set out to complete reform the logistics and and supply chain of how disaster relief is executed.  And by all accounts he was highly successful.

Unfortunately I was greeted this morning with news of his untimely death.  I ask myself why we seem to lose the great ones far too early and when they have far more to contribute.  But, alas, that is not a question for me to answer.

I just mark myself as part of a very lucky and fortunate group who had the pleasure of having breakfast with Jock and listening to his fascinating story and sharing in his vision.  The works on the ALAN website this morning said it best:
"May we honor his memory - and celebrate his life - by listening more carefully, responding more positively, and living more gently with one another. Perhaps together we can retrieve some small portion of the grace we have lost with his premature passing" 

John "Jock" Menzies will be missed.

Saturday, August 17, 2013

Tesla Motors' Supply Chain VP to Speak at CSCMP Annual Global Conference; Closing Session to Focus on Personal Development

Tesla Motors' Supply Chain VP to Speak at CSCMP Annual Global Conference; Closing Session to Focus on Personal Development

A great development and looking forward to this fantastic discussion.  How to design and make a supply chain from scratch!

Macroeconomic Monday® - The Demographic Shift to Multi Family, City Dwelling is Real

For those reading this today, Saturday, I normally write this on Saturday then post on Monday.  But, I figured if you want to read on Saturday why not?  However, the name remains the same.

So, last week was an incredible week for economic news and the stock market.  I remind everyone who may think the financial sky is falling that the S&P is still up close to 18% this year so I would not fret too much (Unless you are a late comer to the party then you may wonder what happened).  From a purely financial point of view this week was bound to happen.  Call it reversion to the mean, a short correction or whatever you want the bottom line is stocks cannot just keep going up forever.  The curve is not smooth and if you want it to be smooth then you are involved in the wrong business.

But, there were some very interesting dynamics.  First, retail spending continues to be softer than the analysts predicted.  Sometimes I wonder if the analysts are really forecasting or are they hoping - I have said all along that until unemployment changes significantly (i.e. at 6% or below), retail is going to suffer.  Yes, there are some "must have" items which hit a replacement cycle (Cars and appliances) that you just have to replace no matter what.  But, the discretionary is where consumers just are not going to spend their money.   The graph to the right outlines the anemic changes in retail sales and it shows a very variable and anemic growth for retail sales. My readers know I do not buy into this "weather" blame game people make for why this is adjusted.  The bottom line is it just looks like people are buying essentially what they need.

The other big event was the move in the 10 year note.  This graph is even more telling about what is going on in the economy where you can see the interest rates are spiking fast.

The 10 yr T-Note of course is what a lot of mortgages are tied to which drives the housing market.  This is another "KPI" I monitor for the economy.  If the 10 year T-Note gets above 3% watch out!

Yes, I know and have heard many say that these are incredibly artificially low interest rates and so going above 3% is more of a reversion back to the mean or the norm.  My response channels the blog posting I made recently about Nate Silver and the idea of "out of sample".  Yes, in normal times the 10 Year T-Note should be at 3.5% to 4% and we should be able to live with it.  However these are not normal times.  We are above 7% unemployment, we are coming off of the worst recession (some say depression) since the 1930's and even for those employed many are dramatically underemployed.   So, imagine a scenario where you have 7% or above unemployment AND interest rates above 4%?  That is not a good indicator for the economy.

Finally, this leads to the behavior of the home buyer.  They are not buying.  What they are doing is moving into multi family dwellings. While multifamily dwellings increased over 26%, the building of single family homes declined by 2.2%.  On average people spend more money on other things (think lawnmowers, curtains, a lot more furniture, nicer appliances etc. etc.) when they move into single family homes rather than when they move into multi family homes.  This will be a net drag on the overall consumer spending numbers even though it will keep the builders busy for a short period of time.

So, in summary, we have a situation where the consumer has closed their wallet, interest rates are rising, single family homes are in decline.  All speaks for a sluggish economy with some bright spots (autos for example).  Freight will remain low (especially after these retail numbers) and hopefully the continued rise in 10 Year T-Notes will not choke off any semblance of recovery we may have going.

Thursday, August 15, 2013

Wal-Mart Guides Lower - Sales Weaker

Reporting this morning, Wal-Mart is describing slow sales, and it has guided the street lower for the remainder part of the year.  This is not good news but not unexpected for my readers.  Until unemployment gets to 6% or lower you can expect to see a slow tough slog on consumer goods and that will deflate the demand for trucks. If you have to continue to look at one economic number which ultimately will drive the demand for transportation, look at unemployment.

If Wal-Mart guides down 1.5% to 3%, which is roughly what the news is saying this morning, that is a lot of empty trucks and containers on the road looking for freight.

Consumer durables appears to still be a strong point in the market but overall the story of a tough slog continues to hold true.

Tuesday, August 13, 2013

Application of "Signal and The Noise" to Predicting Freight Volumes

I am deep into reading Signal and The Noise by Nate Silver - This is the guy who almost perfectly predicted the outcome of the last election, state by state, while virtually all of the talking heads and big public polling houses go tit all wrong. I have not finished the book yet but so far it is a fascinating read.

So, why discuss this on a transportation, logistics and supply chain blog?  As many of you know, I am a closet forecaster.  I use my data I observe and report on in my Macroeconomic Monday feature to try to determine what will happen in the transportation markets.  I have my ups and downs and so far, however, I would say I have been far more accurate than the official transportation pundits (Magazines which are essentially paid for by the trucking industry, analysts who "cover" the industry but in reality are just trying to push stock prices up.. etc.) who have, for the last few years, reported a dramatic speed up in freight, a dramatic drop off in capacity and a huge inbalance driving rates up.  I am sure they will be right one day but for now, if you had listened to them instead of me three years ago, you would have been paying far higher rates than you should have been.

Nate Silver describes a phenomenon in the book which I think is one of the core reasons why some of my predictions have been just a bit more accurate.  The concept is that of being "Out of Sample".  What this means is people will apply previous history to future results yet they will not realize enough data has changed which causes their examples they are using to not be representative of the current situation.  So, the general belief that when the economy "heats up" there will be a problem with capacity fails to account for:

  1. Growth in intermodal
  2. Smaller packaging and product
  3. Movement of people to cities
  4. Software and collaboration models
  5. 3D printing
  6. The fact that more and more of GDP is not product driven but services and financial driven
And I am sure a lot more.  My point here is that those who just extrapolate previous history to the future are doomed to have a failed prediction - my predictions seem to be a bit better because I am accounting for changes the external environment and accounting for them in my models.  

To be clear, this may and most likely will change however for now I say (as I have for almost two years now) say that capacity / demand is fairly balanced and you should act that way.  In the words of John Maynard Keynes, "When the facts change, I change my mind".  I will keep my eye on the facts and will change my mind but one thing I will continue to work on is making sure I do not succumb to being "out of sample." 

Monday, August 5, 2013

Why You, The Logistics and Supply Chain Manager, Need to OWN Your Sustainability Program

Many companies have sustainability offices or offices for Corporate Social Responsibility (CSR) and because of this many logistics and supply chain managers acquiesce their obligation to sustainability to these offices.  The offices do not have the staff to really do the job at the execution level (they are great at setting high level goals and making press releases) and therefore much of a company's sustainability program is thrown over the wall to external "validating" agencies.

Looks like a good strategy right?  After all, if you can say you are working with LEED or Smartway isn't that enough?  Well the answer turns out to be no and the supply chain manager who does this does it at her own potential peril.

In a recent article the New Republic highlighted an example of this as it relates to LEED certification of the Bank of America building in New York.  In this case, the investigative journalist found the building, while certified when it was empty, in practice is not very "green" at all.  Read:  In the EXECUTION of the sustainability program, it failed miserably.

Also notice the headline had Bank of America prominently displayed.  The brand under attack in the headline was not the LEED brand (although deep in the article it did not fair well) but it was the actual company brand. This is important because one of the critical success factors of all sustainability programs at the execution level is brand protection. Imagine this scenario:

  1. Your CEO is out on the speaking circuit touting the sustainability and social responsibility of your company.  Indeed, she is making this a cornerstone of why consumers should deal with your product. 
  2. You feel like you are doing your job because your distribution centers are LEED certified and you at least ask your carriers if they are in the Smartway program. 
  3. Someone now takes an inventory of what is really happening and they find out many of these "certifications" are so general in nature that they cannot be used to determine anything.  A true and real inventory shows not much progress in truly reducing greenhouse gas emissions.
  4. An aggressive reporter or investator starts questioning your CEO about this - she looks perplexed
At that point the brand damage is done.  All you are doing is playing catch-up to the damage and hoping time and some counter communication will work.  You can find yourself with a real problem at this point.  

Here are some recommendations to ensure this does not happen to you or to your company (and of course to your CEO):
  1. Take Ownership of Your Supply Chain Sustainability Program - The corporate office sets targets and high level goals and may be the location you send reports to but you must own the supply chain performance of this.  Not some other office in your company and not some external agency. 
  2. Employ external expertise as needed - This may sound contradictory but it is not.  When I say use this external expertise I mean to actually dive in and inventory.  This external agency should have no vested interest in the outcome beyond inventorying your GhG emissions, consulting with you on programs to reduce, developing road-maps and re-inventorying.  They have a fiduciary responsibility only to you.
  3. Put goals and targets on performance appraisals with equal weight to other items - This is not and either/or as it relates to a sustainability program v. financial performance - it is a both.  You must evaluate people on the actual performance of the program or they will only see it as a sideshow. Sideshows lead to results shown above. 
  4. When conducting your inventory do it at a very detailed level - There are a lot of generic databases out in the public domain which say, essentially, "on average" this is what the emissions are for a company doing what you do.  However, a lot of people have drowned in streams that "average" 3 feet deep.  You must inventory at the truck, fleet and fuel level.  Real consumption data for energy is a must.  The higher you generalize the more likely it is your CEO will be surprised one day. 
If you do not take ownership of your supply chain sustainability program with the same vigor and thoughtfulness you put against financial performance I can assure you someone else will... and that will not be the best day of your life.  

If you still do not believe me think about how your company deals with safety.  If someone asked you who is responsible for safety in your company would you really respond, "The safety office"?  I think that makes my point.  

XPO Logistics Starts a 8m Share Secondary Offering

The company says this is to help finance the previously announced acquisition of 3PD.  As I said in a previous post, this acquisition seems to be more about taking 3PD public than synergies.

I don't pretend to be a financial genius but I am always suspect of selling part of a company and diluting earnings to current shareholders.  Seems like if you really believe in the pro-forma you would want to keep as much as you can for yourself. 

Friday, August 2, 2013

Can We Finally Get on With Life? HOS is Upheld

Today it was reported that virtually all of the provisions in the hours of service (HOS) rule-making were upheld in court (again).  We should now be able to just get on with life, stop enriching the lawyers, and start planning our supply chains better.

Thursday, August 1, 2013

What Does 1.7%GDP Growth Mean for Transportation?

This week the first look at Q2 GDP came in and the number was 1.7%.  Headlines were anywhere from "GDP Crushes Expectations" (Set  the bar low) to "GDP Hardly Booming but no swoon in sight".  The key factor for which headline you believe is what were your expectations to start with?  Personally, I am in the camp that regardless, 1.7% is very anemic growth rate, it will not solve our unemployment problem and it will keep our economy somewhat mired for a long time.

But, what does it mean for transportation?  I believe this is just another indicator to show demand is very tepid and will remain that way for some time.  Revisions for GDP growth in Q1 were revised downward which means my experience meter seemed to have a better handle on GDP than the experts (I just look around and talk to people - Q1 was clearly worse than people had said).  The Q1 number was revised down from 1.8% to 1.1%.  Last three quarters have been less than 2% growth in each quarter.

For transportation this translates into lower demand and while there may be a little bit of capacity issues due to hours of service (HOS), demand is going down faster than capacity so net-net we are at balance or, in fact, slightly over capacity.  In total we are seeing real overcapacity in intermodal as the big rush to get into that space has caused a huge container growth at the various IMCs.

The story from the transportation economists a few years ago was when you see 3% GDP growth that is when transportation rates will start going up.  Of course, they have now changed that tune since 3% isn't anywhere near possible in the near future so the fear game is on hours of service.

However, my advice continues to be:  Those who do not allow emotion, fear and "the government regulation boogey man" get to them will use real data to determine what is really happening.  They will find capacity is there, rates are steady and in some cases going down, and for the foreseeable future that will be the story.

Keep calm and be diligent about your data analysis and you will find, while low GDP is not what we want for other reasons, this is probably a good time to be a buyer of transportation.  If you stay calm while your competitors panic, you really can pick up some competitive advantage points during this period.

Wednesday, July 31, 2013

XPO Logistics Records a Wider Loss Year over Year

I continue to follow this company closely as should anyone in the brokerage and now final mile business (see acquisition of 3PD).  However, I am also fascinated at how much money can be lost in the quest to make money.  I really question whether this is in the best long term interests of the company as they lost $1.00 per share or $18M dollars versus Q2 of last year when they lost $5.9M or .54 cents per share.

Bradley Jacobs, CEO, continues to say they will be EBITDA positive in the 4th quarter of this year but a lot of that (probably all of it) will come from the acquisition of 3PD.  Is it really accretive or has he just bought profits?  Time will tell and this business model is not for the faint of heart.  I guess it works really well in silicon valley where companies that make no money sell for $1bl but I am not sure it works in logistics.

What Supply Chain Needs is Long Term Thinking

We all know there is a conflict - a push / pull relationship if you will - between delivering current results and looking out to the long term.  The story goes that the short term are the "table stakes" meaning you have to deliver those in order to earn the right to think long term.  This makes sense.  After all, you would not want your company to go out of business in the short term just to ensure some long term plan is in place.

However, I do not believe that is our problem.  Actually, the issue is the other way around.  Very rarely do I see real true long term thinking.  How could you identify if your organization is spending too much time on the here and now versus setting up your strategy for the long term?  Here are some indicators to look for:

  1. Do you have any projects which span multiple years?  This is really a key indicator of strategic versus tactical thinking.  Tactical thinkers believe that somehow, magically, the whole world changes at the beginning of every year.  This, of course, is not true and therefore a strategic thinker is one who delivers todays results while working on a multi year strategy.  Very few real strategic plans and projects can be done in one year. 
  2. Does your bonus plan involve a strategic component?  If you are paying bonuses to your employees, especially senior manager and above, only on a yearly basis (they start and stop in a year) than you must likely are too entrenched in tactics and are not thinking strategy.  A way to ensure some strategic thinking is occurring is to provide bonuses based on some kind of 3 year (or maybe even 5 year) result.  Why?  Imagine you want to create an incentive to your team to redesign your supply chain network for the future.  This is at least a 2-3 year project to get it installed then, most likely, another year or two to find out if it actually works.  If you provide bonuses to hit timelines and finish tasks then you are not paying for performance rather you are paying for activity.  Pay for activity and you will definitely get more activity - just not sure that is what you want. 
  3. Every performance appraisal should have multi year projects on it.  Remko van Hoek (Twitter handle @remkovanhoek - Global Procurement Director for PwC and Visiting Professor at Cranfield School of Management) stated in an exchange that he has always had multi year projects on his goals for the last 3 roles he has been in.  This is the sign of a very strategic organization.  He also suggested said in a response to my tweet:  "Begin and end with the customer, think supply chain holistically, not silo, individual or quarterly gain".  Good advice and if you follow that you are pretty well assured that you will be thinking long term. 
Finally, I would like to address the issue of longevity in roles.  One of the big strategic problems is the speed with which people move around.  How can you ask someone to be strategic when they will be measured on just what they do this year and, if they do well, they will get promoted and move on.  For key roles (such as VP of Supply Chain) you have to inform them they will be in the role for 5 years and they will be measured on a 5 year performance cycle.  The first year or two are set up, then the last year 2 -3 years are execution.  Then and only then will you know if they did well and if they thought of and implemented a great strategy.  

If they come into a role, do some quick fix (slash costs) then get promoted I can assure you it will be a disaster.  

In the end, how you set up your culture and your rewards system will determine if you have a great strategy or just a bunch of disparate tactics. 

Warren Buffett once said (paraphrase):  Our business is not based on the orbit of the earth around the sun - meaning they do not set arbitrary targets and deadlines based on when January 1 comes along.  You should avoid doing that as well. 

Continue the conversation on Twitter using hashtag:  #Thinklongterm

Monday, July 15, 2013

XPO Logistics and 3PD - An End Run Around Coyote Logistics?

Back in November of 2012 I reported on XPO Logistics and their "insane" growth pattern.  The company, and its CEO Bradley Jacobs, seem to have no lack of money or desire to expand and acquire. In that post I said you should watch this company and time will tell. 

Today supported my claim I made back in November in a big way.  They have purchased one of the premier home delivery or "final mile" companies in the Country - 3PD.  This puts XPO in an entirely different league than most brokerage houses because it puts them squarely in the middle of a growing trend:  Final Mile Logistics. 

I have reported on FML extensively as well and now it appears there is a marriage made in heaven.  It will be interesting to see if the two can be brought together.  One thing this acquisition does prove is XPO logistics is not just about "dialing for diesels" but rather they want to get into the heavy lifting of logistics.  I think it also shows incredible foresight as the mega trend story for sure is the massive growth of this final mile segment.  Will a broker model win out over an asset based model?  Do they serve the same customer?  Can XPO overcome the inherent high costs of home delivery?  

All of this is yet to be seen and I can say however it appears that if anyone can do this right it will be XPO Logistics. 

Now the question is where does this leave the fast growing upstart, Coyote Logistics and the old guard of brokerage C.H. Robinson?  Coyote has grown rapidly and shown a great skill set in putting new and innovative technologies to use.  However, this move by XPO Logistics appears to be an "end around" around, over, and through Coyote's model.  Does this leave Coyote to be just "another broker" while XPO logistics is now branching out into more innovative services?  The initial reaction would be yes however I do think time will tell.

As far as C.H.Robinson is concerned, I think they will continue to be the "broker to the stars" - meaning a big brokerage house for huge industrial shippers.  I am not sure they will compete in this space with XPO Logistics or even want to.  

Finally, I must say the reaction of the market is ludicrous.  If I were a gambling man I would short the hell out of this stock.  Right now we are talking about a company (XPO) that is losing money and losing a lot of it.  Even with this purchase and even if 3PD is wildly profitable it does not change the fact that the base business is losing money.  Further, there is a real question if there are any core synergies between a truck brokerage company and 3PD beyond the fact that they do not own assets.  I just cannot in my wildest dreams comprehend how this purchase could or should add 15% to the value of the company.  

But, again, as I am fond of saying... we shall see. 

Read into The Earnings Statements - Freight is Soft - Beyond the Hype

I found something very intriguing for shippers in the JB Hunt earnings release and it had to do with the ICS (Integrated Capacity Solutions) earnings.  Essentially, the group is a broker so they act a lot like an actual shipper.  They have loads and they go to the open market to procure those loads.  Here is what the results say:
  • Revenue - $132M up 20%
  • Operating Income - $4.2M up 113%
That is telling as the OI is increasing at a dramatic pace over the revenue.  Why is this?  In their words:
"Operating income increased 113% over the same period 2012 primarily due to increased revenue and improvement in gross profit margin. Gross profit margin increased to 11.8% in the current quarter vs. 10.6% last year. A softer carrier environment contributed to the increase. " [Bold is mine]
So, those who are closest to the market are telling you there is a soft carrier environment out there.  A good line to have when a carrier comes in to tell you how tight the market is and why they need a rate increase.  With Revenue in a quarter of about $130M that makes this entity a $520M shipper - many shippers have a lot more freight than that and should be able to get the same results.

I am not picking on JB Hunt here, they are an incredible company, I merely use these results and statements to show what is really going on  - beyond the hype. 

Monday, July 1, 2013

Carbon Offsets Should Be Part of a Sustainability Program

When I talk sustainability, either individually or in groups, the same consistent theme comes from middle management:  We will do it if it also makes economic sense (i.e., immediate payback) but we will not do it if it "costs" us.  Very few companies and people today will execute sustainability projects purely because it is the "right" thing to do.

The problem with this however is that it is tough, if not impossible, for the free economic market to put a true cost on environmental issues.  The "cost" is down the road and the "benefit" of destroying the environment is now and that leads to distorted ideas and distorted business decisions.  I heard a person say a the Alternative Clean Transportation (ACT) conference this week that our minds would adjust if we thought:
"Rather than thinking we inherited the earth from our parents, we should think like we are borrowing it from our children."
When you think about borrowing the earth you think about what state it will be when you leave it regardless of whether there is a cost now.  And that leads you to build out a very detailed sustainability practice regardless of the immediate payback.  And this leads us to this great post about carbon offsets.

Yes, as Marc Gunther mentions, carbon offsets are so 2007.  Essentially the idea was you would either voluntarily or involuntarily (through mandatory carbon offset markets) buy into offset projects to help mitigate the long term damage any action you take may have on the long term of the environment.  This led to the EU carbon markets and now the California Carbon Exchange.  The problem right now is the price of a ton of carbon is far too low.

Some point to the fraud which naturally was part of these markets as proof they did not work - kind of like saying because people get murdered in Chicago it is proof the laws against murder are not good for society.  This is a ridiculous argument.  The fact there is fraud says more about the general business community than it does about the markets.

In the end, to build a true sustainability program you have to invest beyond the hear and now from an immediate business case, you have to acknowledge the markets do not properly price issues like carbon emissions, global warming, rise of sea levels etc. etc., and you have to be willing to do something about it.  I am not saying you have to bankrupt your company in the defense of the environment but I am saying you have to realize that the market does not price 400ppm of carbon in the atmosphere properly. The carbon which brought us to 400ppm was catastrophic (see where some say 350ppm was the tipping point) and the marginal cost should have been astronomical. But, alas, it was not; it was essentially free.  That is a market which is not working properly.

Sunday, June 30, 2013

Will Monday Morning, July 1, be Y2K All Over Again?

The fear mongering that has gone on about the hours of service (HOS) changes taking effect on Monday remind me a lot of the Y2K fear.  For those who were around then remember the TV networks showing every major city in the world as Y2K hit?  The idea was to see if the lights all turned out, the computers shut down and some sort of Mad Max - Beyond The Thunderdome scenario would start?

Well, here we are again.  The transportation industry believes the world is coming to an end when the hours of service are installed on Monday.  And, as in Y2K and in CSA, it will be a big thud as it relates to the scare tactics.  I have heard everything from 10% capacity reductions to almost 0 so even the "experts" appear to be making this up.

And, of course, all estimates assume perfect productivity today, perfect execution today and that there is no way for the transportation companies to improve productivity - through efficiency - to offset any reduction due to HOS.  They essentially assume perfection and tell the shipper to be ready to pay up.

As one example of how ridiculous this argument is, this blog claims it will mean "15 minutes of lost productivity per driver per week" as if this is a catastrophe.  Is our industry really working at such efficiency levels that we cannot possibly overcome a 15 minute loss in productivity?

I have said this before and I will continue to say it - our industry seems to have lost the desire and ability to drive productivity.  Part of this is because we blame all these external issues for our problems. Stop looking at the externalities and start looking for ways to improve.  Once we change our mindset to actually look at what we can do we may be surprised that we can actually make dramatic, 10x level changes in productivity.  

For those who still think this is a train wreck and continue to predict the ruin of civilization as we know it due to hours of service, I offer you a scene from Mad Max:

Saturday, June 29, 2013

What Can Logisticians Learn from Emergency Room Doctors - The idea of "Thin Slicing"

I have read a lot about "control towers" and "big data" lately as I am sure many of you have.  This has led me to ask myself, "What will I do with all that data"?  More so, I also ask myself, "does more data really result in better decisions or does it get in the way  - create so much "noise" that I cannot even see what is really going on"?  In previous times we would ask ourselves if we could see the forest through the trees?

Back in 2011 I had actually wrote about the idea of control towers and said I was a big fan - as you can see my ideas and thoughts are "maturing".

As I thought about that question I was also, luckily, listening to the audiobook called Blink by Malcolm Gladwell ( of Tipping Point fame) and he talked about how too much information can, indeed, get in the way of good decisions.  In an example of the Cook County (Chicago) emergency room he talked about the idea of "thin slicing".  Thin slicing is the idea of taking just a few critical points of data and using those to make swift and accurate decisions.  Let's follow his example of the emergency room.

Before thin slicing, if a person came to the ER with chest pains (a very common issue in emergency rooms around the country) the doctors, nurses and technicians would run a battery of tests - height, weight, blood pressure, etc. etc.  Tons of tests and the idea was to get as much data as possible - Big data".  However, the success rate of diagnosing whether those chest pains were in fact a heart attack or were they just something else less important was not very good.

So they tried something different.  What they did is reduce the amount of data the doctor saw.  They realized most of the tests and the data coming from those tests were just noise and were not pertinent to the decision of whether the chest pain was a heart attack. In Gladwell's own words:
One of the stories I tell in "Blink" is about the Emergency Room doctors at Cook County Hospital in Chicago. That's the big public hospital in Chicago, and a few years ago they changed the way they diagnosed heart attacks. They instructed their doctors to gather less information on their patients: they encouraged them to zero in on just a few critical pieces of information about patients suffering from chest pain--like blood pressure and the ECG--while ignoring everything else, like the patient's age and weight and medical history. And what happened? Cook County is now one of the best places in the United States at diagnosing chest pain.
By reducing the amount of data provided, the doctors actually were able to make better decisions.

What does this have to do with logistics?  I am consistently inundated with requests and ideas on Big data, collecting tons of data, control towers to see "everything", full visibility etc. etc.  and I ask myself, do I really need all that data and if I had it what would I do with it?  Then I come back to this example above and see the real secret in all this is not big data but pertinent and actionable data.  In fact, I am starting to think big data may be a front for intellectual laziness.  Because a logistician can't figure out what they really need they just say "let's capture everything".  And, of course, software providers are quick to jump on as Big Data translates into Big Sales and Big profits (first few hits on google when I queried Big Data and logistics were from SAS and Oracle).

My lesson is this:  Take the time up front, a lot of time, to determine what you really need, what will really give you the signal you need to determine what is going on, and what you need to actually do something.  Take the rest of the data and throw it away - not only is it noise but because it is so noisy and full of static it will actually slow down your decision making rather than speed it up.  Big data may actually not only be a waste but it could actually be harmful.  So much data will drive you to be parallelized versus taking action.  The article I cited above about control towers brags about collecting "mountains of data". - I don't need mountains, I just need the vital few.

It turns out, we logisticians have a lot to learn from emergency room doctors.

Monday, June 24, 2013

More on Crude By Rail

As I said on my last post I would come back to this topic as it truly has become the most interesting transportation topic to come up in a while.  Not only are there articles being written about this but tonight on Mad Money Cramer talked about it.  He thought the Union Pacific was to become the big benefactor of this operation.  Really interesting and starts putting meat on the bone for those who are shipping retail products.  If Cramer is right, UP resources will turn to CBR and they most likely will leave your freight at the side of the track.

I am not saying this will happen. What I am saying is anyone using these rail lines should keep very close to this development and ensure you have a contingency plan if your freight is no longer seen to be competitive to the CBR freight.

Act Expo 2013

I will be using twitter a lot more than the blogging site as I will be attending the ACT EXPO 2013 this week. Please follow me at: my logisticsexpert twitter feed.  twitter/logisticsexpert.  I will follow up with at least a nightly recap.

Awakening the Sleeping Giant - Crude by Rail

I am short on time as I am heading to the Alternative Fuels Conference (ACT 2013).  I wanted to give the light of day to this article on the growth of Crude by Rail (which I mentioned as a trend back here).  This has huge impact on the movement of crude and will likely impact the movement of retail goods.  Think about things such as priority of movement on track, where capital spending will go and the locomotive resources.

More to follow.  Be ready.. whatever industry you are in you will be affected by this.

Thursday, June 13, 2013

Why Benchmarking In Its Current State for Transportation is Dangerous

I hear a lot about benchmarking in my travels and it makes me think about this idea, why it is used and what it really is.  What also fascinates me about the subject is the real forward looking business leaders never really care what their competition is doing.  The reason is they are so far ahead of the competition it just does not matter.  Could you imagine Steve Jobs worrying, wondering or working on what Sony was doing?  Would the iPod ever have been invented if Steve Jobs' goal was to be incrementally better than the Walkman?  Would the iPhone have been invented if his goal was to be incrementally better than the Motorola Flip Phone?

This is the danger of benchmarking.   When you benchmark you put a lot of attention on the current state and you tend to feel good if you are incrementally better.  But, that is not where true innovation comes from!  Real innovation and real "disruption" comes from thinking critically about the future, being imaginative and creative and thinking about things no one else has thought of.  That is where energy is best spent.

What I find about benchmarking is it is often an internal exercise to justify what someone is doing to higher management.  It is very rarely about anything else - have to prove to higher management that you are doing better than the other guy.  It is also incredibly inaccurate because there are so many external factors that effect the price of transportation beside just the zip to zip and the rate.  Here are some questions:

  1. Do you compare with exact size and operating characteristics?  Sometimes I will hear of giant shippers presenting they are "better than market" based on their benchmarking through external agencies.  My question always has to do with expectations.  Of course, you are better, you are huge!  The question is, from a "should cost" analysis, are you as good as you should be?
  2. What about your operating characteristics were taken into account when the benchmark was done?
  3. Are you comparing prices of how freight is actually moved  or how it was bid?  I have seen this before where companies will send their bid data into the agencies that do benchmarking but that may or may not be how the freight is actually moved.  And, of course, how the freight is moved is what is most important.
  4. And, my final question is this:  Why is everyone better than average?  How could that be?

There are so many people out there who are being told they are doing better than market in the benchmarking I am wondering just who is doing worse?  Someone must be... who are they?  I find benchmarking and Las Vegas have a lot in common -  everyone says they win when they go to Vegas yet somehow the casinos keep getting more cash than they know what to do with.  Someone must be losing.

My opinion is there is far too much energy spent on this topic and it actual restricts innovation instead of driving it.  Think about where you want to spend your time and think about whether this really adds much value or not around the edges.

I would advocate you should spend a lot of time on innovation and by definition if you are innovating you cannot benchmark... your competitors will be too far behind you to even matter.

Wednesday, June 12, 2013

Applying My One Big Thing in 3PL Management to The "Capacity Crisis"

Yesterday I blogged about the "One Big thing" for managing your 3PLs.  This was essentially ensuring the incentives and goals of the 3PL perfectly align with you as the shipper.  I talked about how no one can really serve two masters and each will always act in their own best interest.  It is for this reason those interests have to be perfectly aligned.

Today I want to explain this through an example which highlights the risks of letting your 3PL buy the transportation and then charge a "mark up" over the rate to you (with no transparency this is a disaster with some transparency it is just not good).  We can see this in the "Capacity Crisis" issue. 

The 3Pl / brokerage company has an incentive to report to you the capacity crisis is bad and getting worse.  In fact, they can even blame their own poor performance in tender discipline, carrier management and routing guide compliance to this nebulous issue called the "coming capacity crisis".  They can point to a few reports and tell you if you only would pay more you would be a preferred customer of the underlying transportation companies. 

They convince you and you pony up.  All the while this is going on they are negotiating with the carriers and their story is something completely different.  Why?  Because your goals are not aligned!  The 3PL in this situation has a goal to expand the spread between what they pay for the transportation and what they resell it to you for.  While it appears they are giving "advice" to you what they are actually doing is working to improve this spread.  What are you to do about this as a shipper. A few things:
  1. As I have said before, I highly recommend you do not get into this situation in the first place; keep procurement in house and let the 3PL execute.
  2. If you have already outsourced procurement, work hard to insource it!
  3. If those two do not work then become extremely smart in what is happening in the transportation market.  The 3PL cannot be your trusted advisor because they have another set of incentives.  You need to build that expertise in house.  For example, when they talk about "capacity shortfall" ask them:
    • In what lanes is this shortfall prevalent?  Do I ship in those lanes
    • What about mode conversion?
    • What  are you doing to reduce my fuel costs and make my fuel costs more aligned to what you are actually paying for fuel?
    • What is your carrier base?  Have you looked at regional carriers?
    • What are you doing to leverage your spend to keep my rates down?  (if you are hiring this expertise you expect they will not just perform at market but below market - remember, market price is what you get without even trying)
In the end you can see this type of relationship actually causes more work rather than saves work.  You will not only pay for the outsourcing but you will also have to employ a "shadow" organization just to ensure you are getting a competitive deal. 

Again, unless you do not believe in the basic tenants of capitalism you have to see where this relationship is fraught with misalignment and conflict.  In this case, the 3PL will use a market event (or non event) not to better your business but to better theirs at the expense of yours.

Tuesday, June 11, 2013

When Selecting a 3PL Ensure Your Goals and Incentives are Aligned

As I travel and speak to industry leaders I am always asked about strategies for shippers to manage their 3PL relationships.  There are many theories from transactional "beat them down" relationships (which I do not advocate) to the "Vested Outsourcing" espoused by Kate Vitasek (Which I believe is a great framework for how to manage any third party relationship).  And, of course, there is everything in between. 

While a great strategy to manage these relationships is a subject too complex for a blog posting, and usually too complex for my short discussion, I do get asked "what is the one thing" they can do.  Well, here it is:

The One Thing: - Align Goals and Incentives

Let me start with my philosophy on human behavior and one which is built into the DNA of a capitalist society. People will always act in their own self interest.  Think about this as you develop your relationships and let me use an example totally outside of our industry -  Financial advising.  There are two broad categories of financial advisers:  Those who work for a fee for which you pay and those who get commissions, 12b-1 fees, rewards etc. from the products they are selling.  The latter looks like a good deal because you do not pay the up front fee.  But is it a good deal?

When we apply my general philosophy of people will always act in their self interest  to this case the answer becomes clear.  The financial planner who is considered "free" has an incentive to sell to you the product which will make them the most amount of money - and they will.  Two products, one of which if sold gives her and her family a free trip to Hawaii v. another which gives her just a few bucks commission are the selection.  Which do you think she will sell to you?  If you picked Hawaii, you are right.  

Now, the former advisor, the one who you pay a fee for has a fiduciary responsibility to work in your best interest. In fact, because you are their sole source of income, they have no incentive to provide anything to you that is not in your best interest.  The only way their income continues is if you are happy and that only comes if they work in your best interest.  In this case the goals and incentives are aligned.

Let's apply my philosophy (again, it is people will always act in their self interest) to the world of the 3PL and specifically to the outsource model of transportation management.  I see many models where both the operations and the procurement of transportation have been outsourced.  The key question here is whether the goals and incentives are aligned when you are in a relationship where the 3PL essentially acts as a broker for you. 

Imagine that the "broker" 3PL relationship comes across a way to lower your overall transportation costs knowing however that it will eat into their margin on the spread they make between what they are selling transportation to you for and what they are buying it for.  In this situation they have a choice to make:  Will they act in your best interest  or will they act in their own self interest?  Both my guiding principle philosophy and my experience is that the answer is clear: The 3PL, when confronted with a conflict between their self interest and the client's, will almost always choose their self interest first. This is especially true if they have shareholders (whether public or private) to report to.  Why would they do anything different.

However, if their goals and incentives are aligned - such as the my recommended solution which is the shipper should always retain the procurement process in house and NEVER outsource this part of it - then the 3PL will never be put in this conflict situation.  You pay them for a service and they execute that service.  

The critical point here is the 3PL should not make money on both sides of the transaction.  As soon as that is the case, they will be in conflict. The only way the 3PL should be able to make money is by acting in the client's best interest.  In other words, they have a sole and singular fiduciary responsibility and that is to you the shipper. 

This is "The one thing".  If you are a shipper who has outsourced your procurement to a 3PL you should think again and ask yourselves what is driving the 3PL thought process (By the way this also applies to "dedicated" fleets who make money leasing equipment to you - are they working in your best interest or in the best interest of the profitability of their leasing operation).

I am not one to quote the Bible much in public but, if you do not believe me about this then listen to what Matthew has to say:
"No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money."
In my case change the last sentence to: You cannot serve both sides of the transaction.  

The Business of Supplying The Transportation Business - Tires and Trucks

The Wall Street Journal reported on two major industry suppliers today - Navistar and Michelin.  For Navistar, the story continues to be bleak.  Due a major, almost existential mistake with how they dealt with emissions control. (went against DEF initially) they have been struggling since 2010.  In fact, they essentially pay fines for the trucks they sell because until recently, when they teamed up with Cummins, their trucks violated EPA standards.

The WSJ reports the following statistics for Navistar:

  • 34% drop in truck sales
  • "higher" warranty costs - an increase of $164M
  • Ending the quarter with 15% market share which is down from 25% at the end of 2009 (A direct cause of this is the miss on emissions)
  • Loss of $109M in the quarter v. last year a loss of $45M (Truck Business)
  • Overall, Navistar lost $374M in the quarter ($4.65 per share) v. $172M ($2.50 per share) last year for this quarter. 
The basic story for Navistar is they went all in on their own emissions system while the rest of the industry went the route of using Diesel Exhaust Fluid (DEF).  It was a "bet the farm" move and it appears they may have lost the farm. 

The second report was on Michelin.  Michelin of course is a French company and they are highly exposed to Europe.  This is causing a problem for them and the numbers in Europe are staggering.  Think of this:
  • Demand for truck tires in Europe is down 25% since 2007.  This is a key indicator for how bad the economy is on the Continent.  This decrease is due to lower miles which is due to just less product being moved. 
  • Middle East and Africa - down 12% and 18% respectively.
  • While South America appears to be booming, sales globally are down 5.6%
  • Volvo truck sales are down 7% in April in Europe.
These two companies are not in the same situation.  Michelin is all about being in a bad market - Europe.  Navistar is a self inflicted wound which may not be a foot shot as much as a head shot.  

If the state of transportation is one considered fairly bland - not huge growth and not huge deficit - the work of supplying the transportation industry is downright tough. 

Monday, June 10, 2013

Macroeconomic Monday® - A tale of Two Economies

There are two economies developing and it is very important you do not confuse the two.  The first economy is the financial  economy.  This is Wall Street, investing, arbitrage and commodities.  When bundled together this economy is on a tear.  It is booming and if your business is just to make money with money the Fed has become your friend and your company is most likely doing very well.

The drawback to the financial economy  for my readers is just this: There is no freight.  There is no freight in the booming of Wall Street.  Nothing is produced, shipped and delivered beyond bits and bytes of data which magically turns into money in your bank account.

There is the second economy which is the physical economy.  This is the area where my readers and I have participated for most of our lives and this area is operating in a murky, up and down environment and is not nearly as "booming" as the financial economy.  While the financial economy, in a lot of cases, is at a pre-recession level, the physical economy is not.

Here is why it matters for us logisticians.  If the physical economy does not improve we will continue to mired in a low freight environment while at the same time believing the economy is booming.  This is why shippers need to keep a real eye on the actual physical economy and not let the financial economy sway their opinion.  Will capacity continue to decrease?  Yes.  However, and unfortunately, demand for goods seem to be decreasing as well.

You need look no further than the unemployment rate to know why.
 The graph to the left shows us in a stubborn range of unemployment.  As many economists have discussed this also does not reflect the underemployed, those who have stopped looking and those who are employed but are too scared to spend due to a fear of losing their job.

The simple fact is when unemployment is this high people will hold onto money and not spend it.  When they do not spend, their is nothing to move.  And, this translates into lower freight volumes.

This can be reflected in my infamous love affair with the inventory to sales ratio.
 This ratio has stayed flat for a while and recently had a small uptick.  We will be getting a new reading this Thursday but the trend line is clear:  Businesses thought sales would increase, inventory went up and the sales did not come.

Again, more indication of a lack of freight demand.  This also means that when demand picks up there will be a lag in freight demand as inventories will need to clear out.

The summary is simple:  While last week may have ended with a bang on Wall Street, it was a thud on main street - inventories up, unemployment up, construction spending did not keep pace with expectations and manufacturing actually contracted.

In a real perverse way, you know the physical economy is doing poorly when the market is up because the market is being driven by the expectations for the FED to keep rates low and keep the quantitative easing program going.  When physical economy results come in below expectations, the traders believe this will keep the Fed going, which will then boost the market.  If you see the market collapse then, perhaps, we will see a signal in the growth of the physical economy as the market collapsing will be an indicator the traders believe the Fed will be backing away.

What is down is up!