2012 Was A Good Year for Shippers Who Used Analysis Over Emotion

Despite all the noise about how CSA, regulations and a surging economy would create a massive deficit in capacity, what we saw in 2012 was a very shipper friendly environment for those shippers who did not let their emotions runaway with them.  If you stood fast, watched the data and understood the market you were able to reap some pretty good rewards in 2012.  The ATA truck tonnage report even showed a reduction year over year in December.

Bob Costello, economist for the ATA was even quoted as saying in 2013 the outlook is for a sluggish truckload environment.  My personal believe is the rules of good transportation management and procurement management don't change much.  Some highlights are:

• Always conduct should costing before talking rates.  Understand the costs of every component (Equipment, driver wages, fuel etc.) and the best in class purchasers will know those costs as well as the person across the table. 
• Don't let emotions and the industry hype sway you.  Stay focused with the data.
• Understand your personal procurement situation.  Even if the market is "on fire" if you have counter freight to the prevailing freight flows you are in the driver's seat. 

I had one person tell me a long time ago that transparency and accuracy will always prevail in costing and I believe them to be right. 

Why I Thought FEDEX Was Best For My 3D Printing Model

I received a lot of comments about my post yesterday concerning 3D printing and how I think FEDEX is really set up to exploit this opportunity.  Many of the comments pointed out there are other similar companies to FEDEX (such as DHL) who could do the final mile delivery.  However, I have not found the discussion compelling as none of them possess the extensive storefronts which are set up as printers already.

Yes, UPS purchased Mailboxes etc. to try to do something similar however there is a big difference.  The FEDEX Office (formerly Kinkos) locations are set up to print and produce where the UPS offices are essentially private post offices.  The keys to being able to exploit the advent of 3D printing are:

1. Locations which are local and already established to do the printing.
2. A brand which is already very trusted.
3. A process which people are already familiar with such as sending your documents for printing. 
4. An integrated final mile delivery network to do the final delivery of the "printed" material. 

Think of the FEDEX office location as the "transporter room" in the enterprise for Star Trek.  In the United States, no one has such an extensive and integrated network.

I have no idea if FEDEX is thinking of this however my speculation is they are keeping a good eye on the developments. 

Big Economic Week Ahead

Macroeconomics drives everything.  I am reading Warren Buffett's new book "Tap Dancing to Work" and he is fond of saying a fantastic manager cannot do much with a lousy business.  That is true, I believe, of the macro economy as well.  It sets the field of play and in that business, this week is a big one.  Watch out for:

Monday:  Durable Goods Reporting
Tuesday:  Consumer confidence
Wednesday:  First estimate of Q42012 GDP and statement by the FOMC
Thursday:  Wages and Personal Income
Friday: Construction Spending, Employment and Manufacturing activity.

Let's hope for a great week!  Good luck.

More Impact of 3D Printing - Nokia Gets in The Game

I have written about 3D printing many times and its impact on the transportation industry (read:  Soon a lot less will need to be transported).  Of course, this is a way away and most people I talk to aren't overly worried about it.  "Not in my lifetime" is what I hear most.  This reminds me of the discussions people had in the '80s when we said email will take over communications.  And, we all know what happened there.

Now we see Nokia is issuing standards so people can print their own covers using 3D printers.  This has massive implications.  First, a lot less product will need to be shipped.  Yes, I know these are small but soon it will be bigger and bigger product.  "Designed in California" will be printed and the item will be made on the spot and on demand. Transportation demand will decrease dramatically.

Second, it truly will mean "mass customization".  Mass customization has been a dream for a long time where people have predicted the benefits of large scale batch production coming to products which are made for a consumer of one.  In effect, this will be what 3D printing does.

Finally, it will put a lot of manufacturers out of business in total.  I essentially will make the product myself and will have no need of a "conversion" partner - i.e., the manufacturer.

The big winner in all this could be FEDEX and their acquisition of Kinkos many years ago could be a fantastic application for this.  Imagine the following the next time I want a case for my iPhone:

1. I download plans for the case I want.  I customize logos, words etc. on the case.  Perhaps I pay $1.99 for the plans for "one time use" and I get them right off the Apple store. 
2. Once completed I send them to FEDEX (like I do a document today) who routes it to the local FEDEX store (formerly Kinkos). 
3. The local FEDEX store "prints" the case for $5.00. 
4. I choose at this point whether to have FEDEX deliver it to my house through their "final mile" network or I pick it up.  

Voila!  No (or very limited raw material) inventory; customization for me specifically, made locally and ready to pick up in 1 hour.  Soon, just like we are used to "1 hour photographs" at Walgreens, we will have "1 hour manufacturing" and FEDEX may be in the best spot for this.  

(Note:  I have never seen anything saying FEDEX is planning this but I just think it makes sense.  In this very in depth and good article from 2011 entitled "3D Printing: The Future is Here" the author says "imagine a time when 3D manufacturers are as common as Kinkos offices completely ignoring the idea that for a lot of items Kinkos / Fedex office could be the manufacturer. ). 

Cost Control Gone Bad..Subway Agrees to Make all "Footlongs" well.. A Foot Long

We have all seen it in just about everything you buy; packaging is thinner (resulting in more damaged product), metal is replaced with plastic, minor features just no longer exist, what was 4oz is now 3.8oz (same price)... well, you get the picture.  To "manage costs" just about every company eventually goes too far.  What is that limit you ask?  It is when the brand promise is violated to save a few cents.

This is the case of the "Footlong" sandwich which it turns out was not a footlong.  At first the company declared that the word "footlong" was more of a trade name and not intended to imply the sandwich was actually a foot long.  Yea right.  And now the company finally comes out and agrees they will make all future sandwiches a foot long.  

I bring this up because all who run companies have to realize there is an unwritten brand promise to customers which cannot be violated or you risk huge backlash.  Virtually every company's single largest asset is its brand and the brand is based solely on trust.  The only reason any brand would command any premium over a commodity price is that the consumer believes somehow the people behind that brand name are doing something no one else is.  So, without knowing what that is (i.e, they trust) people will pay a premium.

When the consumer realizes the trust has been violated they turn on the brand fast and furiously.

This is the reason why there is virtually no intrinsic brand loyalty in air travel.  Most (not all with Southwest being a notable exception) have decided the best way to make money from customers is to declare war on them.  Every consumer of air travel knows it does not cost the company $150 to change a flight.  Yet, the airlines charge it because they are exerting quasi-monopoly power.  Because of this there is no trust and therefore the brand is essentially meaningless.

So, don't forget:  The brand is built on trust and as we see here when the trust is violated, the wrath will come down.

The Data Behind The Data on The Housing Market

A lot has been mentioned recently about the housing market and how quickly it appears to be rebounding.  It feels as if the entire country woke up in unison and decided to all go buy a house.  Feels like 2006 all over again right?

Well, not so fast.  It is important to understand where we are coming from and what the possibilities really are.  The graphs below from Northern Trust tell an interesting story:

Home sales, while increasing are still very anemic as compared to the "go-go" days of 2006.  I would never expect it to get back to that level so those who are saying, "when will housing come back" should be asking themselves, "back to what".  Further, you can see existing sales are increasing faster which generally does not have the same multiplier effect on the economy as new construction.

Behind the numbers of the existing sales also includes investors buying homes or blocks of homes to rent.  That element further reduces the multiplier effect.  And, finally, the drag on the economy of incredibly tight lending criteria means it will be a long time, if at all, that we get back to even 75% of the growth days.

Watch this closely, it is good to finally feel good, but don't get burned with unreal expectations.

A Fascinating Discussion of "Vehicle Miles Traveled" (VMT), Implications for the Auto Industry and Implications for Automotive Logistics

It is so interesting that the human mind almost always takes previous history and subconsciously projects it out into the future.  It is a real danger when conducting business analysis.  For example, I have always said to those who say GDP is the best indicator concerning transportation volumes that they should not assume a 1% move in GDP 20 years ago is the same as today.  Why? It is because the make up of GDP is not nearly as "freight intensive" now as it was 20 years ago.  Finance, services, health care etc make up a lot more of the GDP now than does industrial production which is the real mover of freight volumes. 

In reading this article concerning Vehicle Miles Traveled - VMT (for automobiles) I am fascinated by the same type of scenario.  We all think that auto sales will move in roughly the same proportions as it has in the past with GDP.  However, what we really need to be looking at is whether driving behaviors are remaining constant.  Once could easily envision an economy growing dramatically yet VMT actually going down which would put a damper or even downward pressure on automobile sales relative to the economy in general.  Here are some key factors:

• Movement to cities - Less number of miles traveled as people walk and/or use public transportation.
• Smaller households - As families shrink the need for the infamous "third and fourth car" shrinks as well. 
• Move to "shared" transportation  - A fascinating development is the growth of people "crowdsourcing" and borrowing each other's items.  A car stays still for a vast majority of the time it is owned and as people share their assets more, less cars get purchased. 

And, the chart below shows some of this happening:

In the end, it is very possible we could have a growing and robust economy yet have far fewer automobiles on the road.  This, of course, has big implications for transportation in the long run because automotive manufacturing consumes a lot of truck and intermodal transportation miles. 

This will clearly not happen overnight and you may say it won't happen in your working lifetime however there is a good chance it will happen and is already started to happen. One thing I have learned about these types of trends (call them "Mega-trends") is they aren't noticed until it is too late and they generally go a lot faster than you expect. 

Clay Christensen: How Will You Measure Your Life

I am going to use today's posting to refer you to one of the most brilliant people I have ever met and had the pleasure to listen to: Clay Christensen.  When I attended the General Management Program at the Harvard Business School he taught two class sessions for us and was mesmerizing.  Many of you have probably (hopefully) read his various classic books on innovation starting with "The Innovators Dilemma"  (note: if you are in a leadership position in a company and have not read this book, you do so at your own peril).

He has now written a business / life book entitled "How Will You Measure Your Life".  I am attaching two videos here.  The first is him speaking about this book and the innovation topics in a detailed, entertaining and profound talked at the Linkedin Headquarters.

The second video is his much shorter but also impactful "Tedx Talk" in Boston on this topic.

I will be back to logistics later and I wanted to ensure I did my part to share the wealth of this brilliant man.

Blue and Brown Make Green... Sustainability for The Final Mile

I have written before about the complexity of the final mile in the logistics network.  This includes both the final mile of the delivery and also the first mile of the reverse logistics networks created by final mile deliveries (i.e., Customers tend to order one size too big, one too small knowing they can return.. for example).   What I had not thought about was the unique nature of the sustainability challenges of the final mile network.

Thank goodness there are a lot smarter people than me in this world!

The Post Office (USPS) and United Parcel Service (UPS) have partnered together to share information and build out this carbon information for the final mile in the United States.  This is good news and I look forward to seeing more about this in the coming years.  The sheer volume of vehicles possessed by both of these entities and the fact they are working to reduce carbon gives me hope for continued sustainability initiatives.

Wholesale Inventories Climb More Than Expected

I will have more on this later tonight however my fear about inventories seems to be coming true.  Inventory appears to be building in the supply chain which means the "great restocking" transportation companies tend to expect after the holidays may very well not happen.  

Wholesale Inventories Jump 0.6%, Top Estimates

Buyer Beware... of Anchoring!

Sitting tonight watching the news and the topic was the "after Christmas sales".  The story, of course, made me think of transportation but let me digress and tell you what I saw.

The reporter interviewed a young lady at a Chicago mall who was just thrilled with her new purchase.  I paraphrase and here is how the conversation went:

Girl: "I went into a store and the boots were 'regular $900'. I got 50% off, then I got xx% for something I did, then another xx% for opening a credit card... " (you get the idea) "I got a $900 pair of boots for $125!"

Reporter:  "Wow, you did great.  You must be real happy"

Girl: {giggling}: "Yes, I am a very happy girl"

Of course, somewhere there is a merchandiser who popped the champagne bottle and wasn't just giggling but was laughing out loud.  They had anchored the girl and anchored her good.

What never crossed the girl's mind, nor the reporter's mind apparently, is the fact that the boots may have only been worth $5.00.  How do they know?  Why was $125 a "deal?  The answer is simply that they have no idea whether it was a deal or not except in the relative terms to the "retail" price of $900.  The retailer and their all powerful merchandisers had anchored the discussion.  The consumer, the girl in this case, was set up by the merchandiser because they were able to get her to reference her thoughts around the $900.  Anything less than that was a "deal" and certainly $125 was a "steal".

It never occurred to her that the boots were probably made in a factory in Vietnam and cost the company selling them about $5.00 to make.

How does this relate to transportation you ask?  I say: beware of industry "anchoring".   It is that time of year now when the transportation industry executives and the so called "independent" analysts will come out with predictions on what will happen with rates for next year.  They will say "be ready for capacity crunches" and "be ready for at least 5% increases" and they are doing nothing more than, as an industry, anchoring, as a group,  the entire transportation buying community.  By establishing these expectations as "the truth" and giving buyers reasonable cover with what appears to be scholarly articles to reference, the industry establishes "greater than 5%" as the anchor.  Anything less than that appears to be a "deal" and occurs due to the great procurement skill of a buyer somewhere.

I can see the conversations in board rooms now:

Executive: "Mrs. Logistician,  how did you do this year"?

Mrs. Logistician: "Great!  The industry was going to go up over 5% and we were able to hold the increases at our company to 3%"

Executive: " That is great Mrs. Logistician.  You beat the market!  Fantastic!

Mrs. Logistician gets a great bonus and off she goes to Maui for vacation..

Or.. the conversation could end with the Executive asking this:

Executive: "Mrs. Logistician.  How do you know 5% is the right expectation?  The macro economic conditions don't seem to warrant it and with the changes in freight, the lower freight demand, and the fact that we are a very large shipper lead me to believe that you should have actually experienced a rate decrease this year. Shouldn't you have?"

Mrs. Logistician: Gulp!  She wonders if she will ever get to go to Maui!

What the executive did not do is she did not fall for the industry anchoring.  The executive built her expectations from the ground up.  She ignored the arbitrary industry expectation of 5% and started at 0 and then applied good macro and micro economic analysis to build her own expectation.  And, her own was far lower than where the industry tried to anchor her.

The critical lesson here for both the girl buying the boots and the transportation procurement professional is do not fall for anchoring.  Do not allow the industry to set the expectation.  Ignore these predictions and build, from the ground up, what the status and situation is for your own company, your own freight with its own characteristics  what your current pricing situation is etc. etc.  From that you should be able to develop what a very good expectation is for this year, for your situation and many of you will find it is dramatically below what where the industry will try to anchor you.

Holiday Sales Disappoint - Leading to Inventory Issues?

First, Merry Christmas and my wishes for a very happy holiday season.  Regardless of what you celebrate at this time of the year the messages all are the same: Happiness to all of you and your families!

Unfortunately, it was not a happy retailing holiday season.  As ABC and others are reporting, holiday sales have disappointed and have actually had the lowest year over year increase since 2008.  That is a haunting statistic yet not one my readers would be surprised about.  The impact on transportation can be summed up in two words: Excess Inventory.

Normally, after the holiday season the transportation industry prays for an "inventory restocking" cycle. However given the dismal sales, and the fact inventories were already elevated (as measured by the inventory to sales ratio), my estimation is the restocking cycle will not even be noticeable.   Transportation rates will remain somewhat depressed and my predictions of the transportation industry continue to hold:  

1. Rates are somewhat elevated (relative to the true capacity and demand picture) and the buyer who holds their ground should be able to negotiate good contracted rates.
2. The buyer needs not "fear" the capacity issue (which has been discussed since about 1980) until deep into 2013 at the earliest. 
3. Great rates favor those who do their homework, understand these macro trends, and are prepared to discuss them at "the table".

Going into last year, FTR predicted a potential for a 10% increase in rates which was very far off the mark.  I saw some "panic buying" (i.e, shippers accepting large increases using this prediction as justification). Going into this year we continue to hear "this is the year of the capacity crunch" and while shipping conditions are "benign", "shippers can expect to see increases in 2013" (again, have heard that since 1980).  However, the macro economic data, along with the data around the digitization and miniaturization of products, leads me to believe demand is being pulled faster than capacity and shipping conditions will favor the shipper for the vast majority of 2013.

Update 12/26/2012 10:15AM: More reports of slow holiday sales: "This Was Definitely Not A Merry Christmas for Retail" - Business Insider

And A Third Set of Predictions....

I bring you yet another set of predictions concerning supply chain for 2013.  Adrian has a fantastic track record for seeing into the future so I would pay attention to this.  I will not give the excruciating details as you really should go over to the posting "Supply Chain and Logistics Predictions for 2013" at Logistics Viewpoints.  Here is the summary:

1. Big Data, Social Media, Cloud Computing, and Mobile Technologies will continue to dominate the headlines
2. User Interfaces for Supply Chain Apps Will Get a Social Makeover.
3. “Siri” Comes to Enterprise Apps.
4. The Robots Keep Coming.
5. Continued Focus by Retailers and Service Providers on Innovating the Final Mile.
6. Further Blurring of the Lines Between 3PLs, Tech Providers, and Consultants. 
7.  Increased Adoption of Alternative Fuel Vehicles.
8. More Programs and Partnerships to Address the Talent Shortage Problem. 

The themes continue to remain similar except Adrian clearly has a social bent to his ideas which I highlighted in an earlier post.  I can't imagine any of these predictions being too far off the mark. 

Yet, Even More Supply Chain Predictions

It is that time of year again when the supply chain (and other) predictions come out.  The really smart people keep them broad enough so, like a fortune teller, they cannot possibly be wrong which is why I do not necessarily believe in this type of crystal ball.  However, as I said in my previous post on the IDC predictions, it is good to get all this into one area so as you build your 3-5 year strategies, you can incorporate these broad directional ideas.

Today, we get a guest column on Forbes.com from Mark Woodward who is the CEO of E2Open, entitled: 5 Supply Chain Predictions for 2013, The Year of The Network. Given he is a CEO of supply chain technology firm, you can expect his predictions to be both centered around technology and offering up technology as solutions to problems.  Nevertheless, this is a very good list and I reprint it here with some of my thoughts:

1. Fast Data Will Become The New Big Data -   I know I promised not to use the term "Big Data" anymore as it has become the most overused term in the fastest amount of time of any business buzzword I know.  However this is an interesting twist which is big and fast are critical elements of a successful data management plan.  The speed with which you share and collaborate using accurate data is at least as important (and maybe more) as just the shear volume of data.
   
2. The "Social Supply Chain" Will Transform How We Work - Don't confuse your view of "social media" (i.e., your experience with your kids on Facebook) with the social supply chain.  The social supply chain, as written about extensively by Adrian Gonzales (Quickly becoming "the" expert on this topic and wrote this great blog post about why companies were not using social media in their supply chain) is about open collaboration, problem solving and open source dialogue about issues relating to supply chains.  As stated in this article, demand sensing is really part of the idea of the social supply chain.
   
   The one concern here is if companies really do compete on supply chain efficiency as much as they do on the product then we have to ask ourselves how far collaboration will really go in the open social world.  Some firms, like Apple, which consistently get high remarks for their supply chain efficiency are notorious for being closed up like a vault when it comes to collaboration and sharing outside of their own supply chain ecosystem.  A quick posting on this idea of companies competing on supply chains can be found here at: Businesses Don't Compete: Supply Chains Compete.
   
3. Supply Chain Control Towers Will Transition from Concept to Adoption - This I completely agree with and the time is now for this type of operation.  Control towers are a requirement for really dynamic supply chains to adjust to ever changing market and environmental conditions.
   
   This does not have to be a complicated IT solution either.  A great control tower, using lean methods and the idea of visual management can consist of white boards, manual tracking and the use of forward indicators of data.
   
4. Dynamic Cost Will Transform Decision Making - The idea of a static standard cost which gets adjusted once per year is dead.  It is a relic of times gone past when that was all our systems could handle.  Costs and the macro economic environment change far to frequently and quickly to allow you to not have accurate, fast and transparent costs into your supply chain. Transparency of costs is critical to accurate decision making.  The next time a supply chain partner tells you that you do not have to worry about this I suggest you hold on to your wallet.  A true partner would want accurate and transparent cost data so you can make the right decisions quickly and accurately (notice the them on costing:  Fast, Transparent and Accurate).
   
5. Risk Management Will Move From Static to Dynamic - I have written about risk and resiliency a lot recently so I will not rehash it here however suffice it to say the same theme applies in terms of dynamic, fast and transparent.  

As with other predictions, I am not sure if "this is the year for... " or not, however the ideas set forth by Mr. Woodward are fantastic and clearly the ideas all supply chain executives should be thinking about and balancing as they work towards transforming their supply chains to meet 21st century challenges. 

The Math Behind Tracking Packages - Marketplace, NPR

NPR does a very good podcast on the "math behind the packages".  A very fascinating quick story on how the "quants" are taking over logistics as well as finance.  Being able to develop mathematical algorithms is critical to UPS' mapping success.  Their mapping success is critical to the efficient routing of drivers.

Have a listen and enjoy:

Lessons From Kozmo.com for Same Day Delivery

Yes, it is true if you live long enough what is old will be new again.  This, of course, is the situation as it relates to the so called same day delivery wars.  I have mentioned over and over again that I am very skeptical of this beyond being a marketing hype ploy as the density needed (low miles per stop and high number of packages per stop) is virtually unachievable except in very dense cities.  And, of course, in those cities "couriers" have been around a long time so same day delivery is not new.

Now even our friends at the Wharton School of Business have weighed in on this by analyzing what went wrong in the late '90s with Kozmo in a posting entitled " Same Day Delivery: This Time it May Actually Work" - an organization dedicated to same day delivery which went out in a flash of glory - and why this time it may be different.  The basis of this argument?  It is all about density.

The issues remain and the questions continue to go unanswered in my humble opinion.  Some of them are:

1. How will you get the density?
2. How will you overcome the high costs of fuel?
3. Will this really generate incremental sales?
4. What happens when this becomes "an expectation"?  
5. Will this be given away for free and ultimately put pressure on margins?
6. Do people even want it (beyond the procrastinators who are probably not your best customers)?

The answer to number 6 equates to the idea of sticking a knife in a horse to get one last gallop out of it before you run it to death (i.e., What Kris Kristofferson does in True Grit).  Every retailer is fighting over that last incremental dollar as if it will make or break them.  My analysis suggests the amount of money spent to get that very last dollar of revenue probably is not worth it however that is what they are doing as a crowd.  They want that last dollar and appear to be ready to spend a fortune to get it.  

In my next posting on Same Day Delivery, I will propose a solution to this issue and we shall see what they think. 

IDC 2013 Supply Chain Predictions

Last night I sat through the archived broadcast of the 2013 supply chain predictions for manufacturers from IDC.  While it is a little bit of "mom, Country and apple pie" I do think it was a very good presentation as it summarized almost all the key supply chain challenges in one spot.  I would not say this was a "2013" prediction but rather a good primer on what supply chains always have to deal with and what should be in your playbook.  Some years one will be prioritized over another (for example they believe responsiveness and service will override cost in the year ahead) but overall these are the items you are always reviewing as you develop both tactical and strategic plans.

Here are the top 10 as they see it:

1. Resiliency becomes a priority for end users looking to master massive multidimensionality. 
• Prioritize flexibility, visibility and agility
• Mastering this will require you to deal with massive amounts of data. 
2. On the supply side of your supply chain, recognizing inherent cost of long lead times, end users will look at global networks through the lens of both regional and country level sourcing. 
• Finally companies will quantify the effect of long lead times. 
• Trade offs will be made - Most effective sourcing will take over from "low cost" sourcing as companies build tools to quantify the true costs of these activities [ this bullet is my commentary].
3. On the demand side of supply chain, recognizing the need for better service levels and mass customization, end users look again to postponement techniques and data analytics to drive more effective customer insights and smarter fulfillment. 
4. End user IT organizations must support a more productive supply chain ecosystem.
5. Service excellence becomes a strategic priority. 
6. Supply chains optimize omnichannel customer service and cost by enabling trustworthy, efficient and effective supply chains (TEE). 
• The consumer will demand value and trustworthiness (right product, right time, right place, right value).
7. End user supply chains focus efforts to improve collaboration both upstream with suppliers and downstream with customers to better compete in a faster world. 
• Sales and operations planning (S&OP) collaboration will be critical [ my commentary]
• Technology to bind business partners together and to facilitate the flow of information [ my commentary] will also be critical.
8. The modern supply chain gets smarter
• Integration
• Optimization
• Embedded analytics
9. Supply chains invest in technologies that enable visibility, virtualization, and visualization
10. The 'Big Data' era draws dawns for supply chain organizations (what prediction would be complete without mentioning "big data" - my comment)

Those are the 10 and most will say this is what I do all the time as we always are trying to figure out the perfect mix of all of these things.  I would agree.  However, it was very helpful to get it all in one spot and perhaps use a maturity model to rate your supply chain - where are you on each of these dimensions and how important is that dimension to your organization.  

Once you draw that out graphically you can then socialize it in your company and begin drawing out what your 3 - 5 year strategy will look like along with what tactics you may use next year.  

Do You Have a Supply Chain or a Spiderweb?

This question was recently asked by Zurich's "Risk Engineers" and I think it is a fascinating question.  The metaphor we are all familiar with, the "supply chain" connotes a nice set of interlocking rings, probably made of steel, and that are perfectly aligned.  It brings to mind a very planned and organized way to get from point "a" (raw materials) to point "b" (finished goods) to point "z" (The consumer).  We all know the problems recently experienced from hurricane Sandy however this study clearly indicates the issue is deeper and more broader than just a freak storm.

Reality is, unfortunately, many are spiderwebs.  Not made in any particular order, overlapping and easily disrupted with the swat of a hand.  Zurich believes 2013 is the year companies better take managing, or at least mapping, this web a bit more seriously.  A few key statistics:

• 73% of respondents to a survey in 2011 reported at least one supply disruption; 50% reported two. 
• 40% of those who experience extended disruptions eventually go out of business.
• The leading cause of disruptions is IT or telecommunications. 52% saw some or a high level of disruption from these issues. 
• One in five companies said they had one instance where they incurred at least $161M in damages

I had an opportunity many years ago to meet with the people of Zurich about this topic in New York City.  At that time it was an "interesting"topic but not much more.  Today, it is critical.  Terrorism, global warming, reliance on sophisticated telecommunications networks, "just in time" (i.e., lack of buffer stocks) and the web of globalization has not only made the likelihood of a disruption more probable but the consequences of it far more severe. 

Their solution is at least to start mapping out your supply chain through tier 2 and rate it based on likelihood of disruption, financial stability and physical stability.  From there I imagine you can create significant contingency plans to at least have a fighting chance at keeping your business running.  

CNN Story on Natural Gas

An interesting story on the heavy duty trucking industry and natural gas:

Inventory to Sales Ratio Tells a Grim Story

As my readers know I follow this very closely as this ratio tells us whether product is "backing up" in the supply chain or flowing as it should from manufacturer to consumer.  We are already hearing anecdotes of sales not being where they should be for the holidays, slow movements of imports, extended automotive shutdowns and now this... the inventories in the pipeline relative to sales are growing:

Inventory to Sales - Published 12/11/2012

The slope of the line looks very ominous and it certainly looks like it did back in the 2006 time frame.  Of course, we came out of that but only for a short period before we had a collapse.  This clearly leads us to believe freight will be very soft for Q1 and perhaps into Q2 as companies execute the "final mile" by selling what is inventory but not restocking until these inventories get back to normal. 

Some may look back into the '90's and say "we have a long way to go before we get to those levels". To this I say retailers and manufacturers learned their lesson during the "great recession" and I would not anticipate ever going back to those levels of inventory (At least until those who lived through the great recession die off then the new younger hip crowd says "this time is different" and go back to it - it is a generational cycle).

This data, along with the idea that we will have extended automotive shutdowns (at least with GM on the Cruze line) leads me to believe my prediction for soft freight in the first half of the year is very reasonable.  

As always, I hope I am wrong however I truly just let the data speak.