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!

Friday, June 7, 2013

More Signs of a Financial Economy; Not a Production Economy

On June 3 the Institute for Supply Management issued their May ISM index and it came in at 49.  Unfortunately, this means the manufacturing component of our economy actually contracted in May (despite all the talk of a manufacturing renaissance).  This is the lowest since November of 2012 and the lowest level since June of 2009.

Both the price index and employment index showed decreases as well.  This is aligned with the CASS readings of a relatively soft economy resulting in balanced, or slightly in shipper favor, rate environment.

My opinion is this is one reason why you are seeing the markets swoon back and forth as the economy is teetering between growth and contraction.  Every little bit of data could tip it in one direction or another. Expect continued contraction and caution in any type of growth which will continue to keep transportation capacity and shipments in balance.  We have evidence that rates are flat at best and could be falling and clearly intermodal / rail is taking business from trucking.

 One area where this is very noticeable is in the cross border moves where trucking is losing to rail.  This, of course, releases capacity to other areas for movement.  (see chart to the left)

Bottom line:  Economy is slow, shipments are down, and capacity is balanced.

Wednesday, June 5, 2013

CASS Freight Index for May - Volumes and Expenditures Roughly Steady

The May Cass Freight Index is out and it is clear that rates are staying flat and volumes are a bit behind where they were last year.  Despite never missing an opportunity to say "Hours of Service (HOS) in July will cause rates to go up" the industry is starting to see the interesting phenomenon that the economy can have positive GDP rates yet freight volumes do not increase enough to put pressure on rates.

I have discussed this a lot and will not rehash it but you can read my theories on why this is occurring.  The Cass report also commented on the large increase in Crude by Rail which I had commented on here earlier. 

At the end of the day the story is remaining the same:  Yes, truck capacity is leaving the market AND yes demand has decreased due to other situations with size of product, product being shipped, lean inventories and other types of actions. 

Impact for Shippers:  My advice remains the same:  Do not succumb to the industry fear of a doomsday coming in capacity.  Take a look at your individual  situation with type of freight, volumes and lanes and make a decision on your strategy based on that.  The data is suggesting a balanced industry with rates staying flat and unfortunately a slowing economy.

Tuesday, June 4, 2013

Amazon Fresh - Amazon Groceries to a Door Near You

A fascinating discovery occurred the other day on my way to Chicago from Michigan.  As I was driving down I-94 I saw a delivery truck coming the other direction.  It looked a lot like the size / model of a UPS truck except it was somewhat lime green.  On the side of the delivery truck was a logo that said "Amazon Fresh".  It had the distinctive Amazon "arrow" logo and I thought to myself - OK, here it comes.

When I arrived at my location I immediately googled Amazon Fresh and was taken to their website and found it fascinating that it said " They offered limited delivery to Seattle neighborhoods" yet I had just seen an Amazon Fresh delivery truck in Southwestern Michigan! I had heard of this even as far back as 2007 and 2008 however I was shocked to see the truck in my area.

Then today Twitter and other news services lit up with the news Amazon is going to dramatically expand its grocery delivery service.  Those of us who were around in the late '90s remember webvan, Peapod and an entire host of these that ended really badly.  However, Amazon has been able to execute extremely well those things others could never figure out.  I would not count Amazon out at all and I would never discount their ability to make this work.

Along with a massive expansion of DCs, a push into same day delivery and now Amazonfresh going nationwide (or at least expanding) I would be very careful if I were a bricks and mortar retailer.  These guys are for real and it looks like they will be a force to be reckoned with in grocery delivery. 

Note:  I have written fairly extensively about the "delivery wars" including the idea of crowd sourcing for home delivery.  It is worth reading through all of this as you will see a pattern developing and a true "war" about to take place. 

Monday, June 3, 2013

Crude By Rail is The New Hot Thing

Many have always said crude by rail was just a "stop gap" until new pipelines are built out to support the new finds of oil all over North America.  However, as this article in the WSJ points out (subscription required) Kinder Morgan is canceling a $2Bl pipeline project because West Coast refiners want the crude delivered by rail.  Pipelines lock contracts for a long time where rail is far more "variable".

For a while manufacturers and retailers were the beneficiaries of low utilization in rail due to the coal drop off and the switch to natural gas.  Then, an odd thing occurred which is crude by rail started and most people thought this was a stop gap to new pipelines which would eventually depress the crude by rail market.  However, this new development, and other information I have received, says that the refiners such as Valero and Tesoro value the flexibility that crude by rail brings to them very highly.  High enough that they would not meet Kinder Morgan's requests and lead the cancellation of this pipeline.

What does this mean for the average shipper?
  1. Don't expect the lack of coal argument to go far in negotiations - they have found alternatives and it looks to be a very good alternative
  2. Don't expect the "glut" of North American crude to depress prices very far.   One reason why the refiners like this is they can "shut off" the flow much more quickly when prices depress too far.
  3. Expect a lot of capital investment to go into this segment of rail - and since there is not an infinite pot of money this will mean less investment in other areas of rail.