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. 

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!

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.

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.

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. 

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.

The Boom Box Replaced By The iPod

The anchoring continues by many transportation executives where they publish all sorts of comments that say "if" this happens and "if" that happens then prices will go up.  As you know I have been arguing for a while that while capacity has decreased what has been missed in almost all the analysis is the miniaturization of product resulting in, of course, far less truckloads needed.  

Well, it appears there is some enlightenment... albeit a bit late.  I read a comment from an industry executive who said that the ipod replacing the boom box is causing the demand for loads to decrease at about the same clip as the capacity decrease. 

The ipod was rolled out in October 2001 - it is now May 2013 -  better late than never. 

Vacation Got the Best of Me - Maersk Looks into A Dim Future for Containers

Ok, just for my regular readers, I am back.  Took a bit of a vacation and toured around Europe for a while.  Sorry for the lack of posts and I will begin getting back to my normal cadence.  Now on to business and the first one will be the state of ocean freight.

A recent article in the Wall Street Journal cited Maersk warning of subdued demand in ocean container traffic.  And, of course, I have been warning and talking about this and about the lousy economics of this industry since I published "The Sick State of Ocean Freight" back in March. An industry which is far over capacity is now launching new Mega ships and increasing the overall fleet size - not a formula for success.. unless.....

Maersk says they are overcoming the excess capacity by increasing rates.  Huh?  This is one of the few industries which, dare I say, colludes, and everyone knows it.  In fact, it is quasi legal so when you are negotiating don't necessarily expect the laws of economics to work.  We have all learned when supply exceeds demand prices go down.  According to the Wall Street Journal:

"Excess tonnage, estimated at 10% above current demand, has kept rates under pressure and all but seven of the biggest 30 players lost money in 2012. Cumulative losses over the past four years have run to about $7 billion."

It goes on to say that Maersk has said:

"Still, Maersk posted a better-than-expected first-quarter net profit as it pushed through higher prices to customers. It expects container transport demand to remain subdued this year amid challenging conditions.

Essentially Maersk is saying the customer will pay for empty ships through higher prices.  I am sure if they were under capacity and over demand they would say you will pay higher prices to "reserve a spot" on an already oversold ship.  Apparently the story goes not matter what is happening in the market place you will pay higher prices.

If you remember my multiple discussions on "Anchoring" you will see this activity in action.  They are, through these public statements trying to anchor the buyers thoughts.  Essentially start all conversations with the premise that rates are going up in some fashion and now it is just a question of how much.

Don't fall for it.  As i have said over and over again use the laws of economics, understand your lanes and understand the economics of your lanes and then use that as the starting position.  You will have a much better outcome.

Reshoring - New Balance - Who Kept Significant MFG in US - Has Thoughts

I just listened to a fascinating Podcast from Bloomberg with President and CEO of New Balance Shoes, Robert DeMartini.  He maintains a significant manufacturing presence in the US and is one of the last shoe makers to do so.  Along with Allen Edmonds, he bucked the offshoring trend and now appears to be proven right.

When asked about why he stays in the US much of his answer has to do with supply chain.  Let's break it down:

1. Through lean manufacturing he has brought the labor content in a pair of shoes to 2 minutes per shoe v. in Asia manufacturing it is 20 minutes per shoe. This "factoid" is one a lot of people do not think about when they go overseas.  Rather than try to find "cheap" labor you may be best to find efficient labor.  This is the "best cost" versus "low cost" thought process.
2. Mr. DeMartini also talks about cycle time which is one of the major downfalls of overseas manufacturing.  You can go into a New Balance store, order a custom made shoe and have it in 5 days.  Virtually impossible if it were made in China. 

This is the sign of a very balanced (no pun intended) CEO. He has thought clearly and precisely about this topic and has found a very easy way to analyze and ultimately decide to manufacture in the US.

He also discusses 3D printing (written about extensively on this blog) and the fact that they now have the capability to make one shoe at a time.  

As a side note, I found it also fascinating and refreshing that he has no intention on taking the company public as he does not want to fool with the silliness of Wall Street.  Keep an eye on this man, I think he will grow this company dramatically.

Here is a live interview with him from September:

Sustainability is Good Business - Global Companies Sign on To A Climate Declaration

Be careful if you think demanding action for climate change is just the purview of the crazies; many Fortune 100 companies are taking this very seriously.  Sustainable Brands reported 33 large multinational companies have signed on to a declaration asking for a coordinated action with Washington on making a positive impact on the climate.  The graphic below shows the companies who have signed on:

At this site (www.climatedeclaration.us) you can also sign on as an individual.  It does not say certain things have to be done but it is an acknowledgement that climate change is real, there are things we can do to stop or slow it and that it is a worthy cause for companies to engage in. Companies can "do good while doing good things". 

See the announcement:

The Incredible Shrinking Freight

PCs replace mini and mainframes,  Laptops replace desktops, tablets replace laptops, smartphones replace tablets...  and so the saga goes.  The incredible shrinking freight.  PC sales are horrible.

Is The Failure of Ron Johnson at J.C. Penny a Sign Anchoring Wins?

I posted an article about Anchoring a while ago.  For a refresher, anchoring is all about the seller trying to establish a starting price for a product or service.  To put it in transportation terms we see this all the time.  When an executive at a transportation company publicly states "rates are going up because capacity is going down" they are, very strategically, anchoring the conversation he or she will have with a buyer.  They are hoping, going into the conversation, the buyer will start with the premise above then they work from there. 

The alternative, as I advocate all the time,  is "should cost" modeling which means the buyer goes into the conversation with no preconceived notions established by the seller.  The only thing the buyer brings to the table is cost data down to the lowest level possible.  That starts the conversation.  If the seller ignores this data and just goes back to supply and demand dynamics then they are effectively establishing themselves as a commodity. Which is a place I am sure they do not want to be.

Ron Johnson tried "should cost" on the consumer side with a twist.  Rather than create artificially high prices (see the transportation exec comment above) he tried to tell the consumer exactly what the every day price is based on cost and a reasonable mark up - profitability.   Unfortunately, the consumer would have none of it.

The consumer, by leaving Penny in droves, signaled to the sellers (the retailers) that they would rather have the retailer anchor the discussion at a ridiculously high price then they can play a silly game of "how has the biggest coupon" to get to some equally artificially low price. 

In the end, the consumer loses big in this.  The consumer is saying they would rather be played by sophisticated sales manipulation techniques.  A sad day for the consumer.

Ensure, as a commercial buyer, you do not fall into the same silliness.

Cass March Freight Index - Surge in Freight; Not So Much Rates

The March Cass Freight Index is out and while freight showed a marked increase in march ( 5.8% Feb to Mar and 4.2% YoY) the expenditure increase can almost totally be attributed to the increase in freight - meaning rates are staying fairly steady.  What this does not show is things soften in the first week of April, which I fully expect to see in this month's report.

Expenditures rise right in line with Shipments - rates relatively flat

Right now freight volumes are relatively balanced and shippers should not be experiencing  overall pressure on rates (except for very specific lanes).  There is just enough good news to give some hope however as I have reported in other postings the macroeconomic trends still show a very reserved economy.  I still believe the shipper who works with good data, "should cost" information around driver costs, truck costs and fuel costs, and who can segment their network will be far more effective at procurement than those who "wing it" with emotion and buy into the fear game. 

For truckload volumes, rates are down down (month over month) for two months in a row:

Retailers Compete on Supply Chain - Part Deux

I have talked for years in speeches and in advising companies that the supply chain will become the competitive advantage for those trying to move products to market.  Especially if you are a retailer, you compete on supply chain in a major way.  In a blog post recently, titled Execution IS a Strategy I also talked about how great execution, more and more, differentiates the different retailers.  The same product is on the shelf and it is just a matter of who executes better. 

Adrian, over at Logisticsviewpoints highlighted the new service from Sears called "Fulfilled by Sears" (Posting titled: In Logistics, Somebody has to Own The Assets) which is an interesting development following my theory above.  Essentially, Sears is leveraging their fantastic Sears Logistics Services to become a world class 3PL in fulfillment services.  This follows the same developments at both Amazon and Wal-Mart. 

The question is why would a retailer dedicate talent, capital and executive time to opening up their logistics networks to anyone who wants to sell?  Wouldn't this be considered a distraction (especially since Sears at least is in the middle of a fight for pure survival)? The answer is twofold:

First, the simple economics are that each of these companies have to make huge infrastructure investments to keep their own business alive.  If they can leverage this infrastructure cover the variable cost of adding new clients and also contribute some to covering the fixed cost then they will be helped financially.  This is the same reason 3PLs have multi-client facilities - leverage the fixed costs.  Essentially, anyone selling through these networks is actually helping these retailers cover the cost of their huge logistics networks.

Second, they are basically saying they are the best 3PL in the nation and you should use them for that purpose.  They are competing  on logistics and supply chain strategy.  Once they get you into the fulfillment services they can sell you more and more logistics and supply chain  services. 

The group which should be very interested in this development are the true 3PL organizations.  For the vast majority of these networks, the "big 3" use their own labor and their own buildings along with, for the most part, their own software.  This is a play right out of "Porter's Five Forces" where a customer goes upstream and takes business from their suppliers. The buyer clearly is holding the power and the suppliers (i.e. 3PLs ) should be concerned with what Porter calls "Buyers threat of backward integration".    More on this interesting development later.

The Jobs Report Relative to Logistics: Families Enjoy Life More With Less?

The major economic news yesterday which, for a short period of time shattered the markets, was the jobs report.  Some key statistics from the Bureau of Labor Statistics (BLS) press release:

• Employment up 88K (Far below estimates)
• Long Term unemployed remained constant at about 4.6M
• Unemployment rate ticked down ever so slightly 7.6%

However the big number people were concerned with was the level of unemployed people who have dropped out of the labor market.  This number was a whopping 496K.  And of course this brings huge concerns to those of us (logisticians) involved in moving goods to market.  If the market shrinks then there are less goods to move to market - it is that simple.

What this jobs report reinforces are two major headwinds to the economy:

• Level of unemployed is staying relatively flat 
• Those who are employed will continue to feel restrained as they feel their employment could be at risk. 

Both of these mean that demand will continue to be stubbornly low and freight volumes will continue to be restrained.  Having said that, what I am most concerned about is the graph below:

 

This graph highlights the issue of those who have dropped out of the employment market.  As you can see we are bouncing around a bottom but the number is around the level we were at in the mid 1980's.  Two causes for this and both are a headwind for logistics:

• People cannot find employment - restrained spending
• People do not want to find work - A major societal shift. 

 Of these, I am most interested in the second one which could have long term and structural consequences to the economy and to the freight enviornment.  To be clear, this is not a judgement and I am not saying these are freeloaders.  What I am saying is just like companies have now become used to producing more with less, families have now realized they can enjoy life more with less.   Families that felt it was necessary to buy a lot of "things" and thus demanded two incomes have found out one income with a lot less "things" is actually pretty enjoyable.

No matter which way you look at this, we know this is not a good sign for a robust freight recovery. 

Is The "Final 3 Feet" The Most Important Logistics Leg?

I have talked a lot about "Final Mile" logistics especially since so many are trying to compete in this area.  From next day delivery to same day delivery to "crowd sourcing" delivery just about every retailer is trying to get an advantage over the other through a more efficient final mile delivery network.

However, 90% of shopping is still done in retail stores and the final 3 feet are the most important part of the execution of in store logistics.  Most logisticians are experts at lean and in plant logistics - getting parts and components efficiently to the assembly line to ensure a very lean and efficient manufacturing process.  But how many apply the same kind of rigor to the final 3 feet - getting product from the store room to the actual retail floor.  After all, if the product is not on the shelves it will be tough for people to buy the item they need.

In an article titled "Walmart Customers Say Shelves Are Empty" the Business Insider describes what appears to be a growing problem in Walmarts - product stacking up in back store rooms and no real system or staff to get it to shelves.  A tightly wound supply chain gets it to the 3 yard line but cannot bring it into the end zone.

Perhaps in store logistics needs to be elevated as a discipline especially as stores become larger and are managing more SKUs and product categories.  Goals of this should be:

1. Keep shelves always stocked without appearing to be stuffed
2. Keep product out of the aisles (nothing worse than aisles being used as storage space
3. Much like Disney where you never see anyone empty trash, yet it is always empty, you should figure out how to restock shelves out of the view of the customer.  
4. Have a detailed planograph for every store shelf / floor spot, have a method to measure fill rate at that point and have a detailed plan to restock. 
5. Start every day with 100% fill at the shelf level.  You will have a running start in keeping the day going well. 

The model below is a quick drawing I did on my iPad to illustrate the point:

Sorry for the quality but I needed to do this fast so I drew it with my finger as I could not find my stylus.  What the graph on the bottom shows is the level of "lean" at each stage of the supply chain from raw material extraction through conversion to the store (store room) then to the retail floor.  It is your typical bathtub effect.  We lean the heck out of the process through conversion and in distribution but then this article claims the final 3 feet is full of waste and piled up product.  

This article blames it on staffing levels and I do not know enough about the staffing levels at Walmart to either support or deny that hypothesis (although the graph below makes a compelling case) I do believe the need to concentrate and develop a solid in store logistics plan is necessary for all retailers.  No sense in having an incredibly lean supply chain if the product never makes it to the location where a customer can actually buy it.  

The Battle for Retail Sales is Really The Battle of Supply Chains

I continue to believe the battle for retail sales is really all about the underlying supply chains rather than the actual store.  The "store experience" is losing its importance to the more broader "order fulfillment" experience.  The backbone of this order fulfillment experience is the underlying supply chain efficiency of the retail company.  The key metrics for consumers include:

1. How easy is it to find what I want on your site / store?
2. Is the product readily available? (final three feet logistics which I will write about later)
3. How quickly can you get that product?
4. Is it packaged in such a way that the product can survive the entire trip (from MFG to DC to store to your house).  Of course, the store part is increasingly being eliminated.
5. How easy can it be returned?  Here I think of packaging and labeling so if I buy the product and decide to return it the process is simple for me to repackage it and put it back in the supply chain stream to get back to a returns center
6. Is it low cost?
7. How easy is it to pay?
8. How quickly do I get the credit back if I have to return it?

All of this is enveloped by world class customer service (Think Zappos) which makes you feel great and enjoy the entire experience.  Think about how Disney World makes you enjoy what is essentially waiting in long lines.  This is what the order fulfillment customer experience has to be like. 

The battle is increasingly being waged between Amazon.com and Wal-Mart's on line brand.  I will not pretend to judge who wins in this case although I think it is clear if the game ended now Amazon would win.  What is not clear is whether they can continue winning given the massive head start Wal-Mart has had in developing its supply chain.  For expertise, Wal-Mart can just hire a bunch of Amazon people so I am not overly worried about the talent pool.  

Challenges facing Amazon now include the high cost of building out a massive infrastructure (which Wal-Mart already has), the change in sentiment for sales tax collection (plan on paying sales tax on all on line purchases soon) and the high cost of final mile delivery which is required for Amazon but not necessarily required for Wal-Mart (see my posting on Wal-Mart testing out a locker system and crowd sourcing their deliveries).

The problem for companies like Wal-Mart and other retailers is they are losing the "branding" war.  The name "Amazon" is becoming synonymous with on line shopping.  People I talk to really do not "shop" on line they just go to Amazon to buy what they want.  It is becoming what Marissa Mayer (New CEO of Yahoo) calls a "daily habit".  As a consumer, you decide whether you are going to go to a store or buy on line.  If you decide to buy on line you go directly to Amazon.  I am sure Wal-Mart has all sorts of statistics that try to pat themselves on their backs but reality is Amazon is building a brand which equates to on line shopping - The Amazon brand is to on line shopping what the term "Xerox" is to copiers.  If this hole gets too deep, Wal-Mart may not be able to dig out.  

For years, Wal-Mart has been known as the world class supply chain company.  However, they could be at the cross roads where their supply chain is so tightly wound and so tightly integrated to a "bricks and mortars" experience they cannot adapt to the on line requirements.  This would not be the first time a well managed and world class supply chain became trouble for a company.

Think Dell and how incredible they were in a tightly wound and highly efficient supply chain designed to build desktop and tower computers. A funny thing happened:  The consumer moved to laptops.  While no one wanted to look at desktops before they bought as most were under your desk hidden away (lending itself to a build to order, direct buy model) everyone wanted to look at laptops. Laptops are a visible appliance.  This meant a need for retail space.  Further, the build to order did not need factories.  Go to an Apple store or Best Buy, buy a laptop and right there they will upgrade memory, install devices etc. etc.  Dell's huge competitive advantage with towers and desktops became a competitive disadvantage in the move to laptops.  Due to their size, retailers were willing to display them as they did not take a lot of shelf space or store room space. Essentially the entire model for buying computers changed in what appeared to be an overnight transformation. Dell was not ready and cold not change quickly enough. 

If I were advising Wal-Mart I would study this well to ensure they do not make the same mistake relative to on line purchasing and competing with Amazon.  

In the end I believe Wal-Mart and the other big retailers can and should be able to beat Amazon.  Just like Dell could have and should have beaten Asus and just like Sears could have and should have beaten Wal-Mart.  One thing we do know is due to the Innovator's Dilemma big companies tend to get crushed eventually by small start ups .  What is fascinating is how these small start ups, once they become big, make the exact same mistakes and eventually get crushed.  This is phenomenon is described in detail in Clayton Christenson's seminal book titled "The Innovator's Dilemma" and why some big companies cannot see what is clearly in front of them is described in detail in the book "Denial" by Richard Tedlow (Both professors I had at HBS).  Should be required reading and I have put a link to those books below (Yes, through Amazon).

Crowd Sourcing Logistics Comes to Wal-Mart

We have heard of crowd sourcing when it comes to many areas and specifically, mostly, in IT work.  Essentially you allow the "crowd" to do the work for you and a lot of times it is free.  Think "open-source" type work.  Everyone donates, everyone helps and everyone can become a worker for your entity.

Another big area where this is popular is in crowd source funding where just about everyone can be a mini bank and provide micro loans to entrepreneurs.  While this has been a niche area in logistics, Wal-Mart now announces they will test this for home delivery. 

Remember what I have written about which is the last mile / final mile / home delivery is the most expensive part of the logistics chain getting products from production to a consumer.  One reason why stores exist is because it allows a company to aggregate the product and you, the consumer, essentially handle the final mile to your home.

Now imagine you are checking out at Wal-mart and the following interaction occurs:

• YOU:  I am checking out and paying for my product..just as I am about to leave the cashier turns to me
• CASHIER:  I see you live on Smith Drive in Springfield.  I have a customer who just ordered some items and their house is only 1/2 mile from your house.  Would you mind delivering the product for me?
• YOU:  [GULP!]  Huh?
• CASHIER:  Yes, it is only this small bag and I will give you $10 off your purchase if you do this for me.
• YOU: [Still thinking this is odd yet intriguing] - Really?
• CASHIER: Yes, really (channeling Austin Powers).
• YOU: [As odd as it seems you think what the heck] OK, sure.

Wal-Mart gives you a $10.00 discount and off you go to deliver your product, get your $10 off and the home shopper gets very low cost home delivery.

Of course, there are all sorts of security concerns and other issues (What stops you from taking the product and never delivering it) but this is such an interesting idea I think it is worth investigating and perhaps this is the beginning of a huge trend in "Crowd-Source Logistics".  

There is a company which has a very interesting model called Zipments.  This is a fascinating idea which I must apologize I had not seen before.  Zipments matches required shipments with approved and screened couriers in big cities.  This is a little different as it is probably closer to independent contractor courier services than true crowd sourcing however it does appear this model is going to be very disruptive, in some form, to the normal delivery method. 

I could actually think about this going one step further in a Wal-Mart or Target.  I could see them having your credit card number and using the chance of a penalty charge ensuring you make the delivery and also a "load board" on the wall so even non customers could come in, see deliveries needed, and taking them.  

Everyone has a smartphone so getting a signature and passing that signature back to the company is easy.  I could even see, rather than a load board, a live APP existing where you could see what is being offered at multiple stores, bidding on the delivery, and building efficient routes all within a simple APP. 

Everyone can be a final mile delivery person!  Watch out Amazon.. Something like this will work.  

Does Re-Shoring Mean a Return to Industrialized America?

I really like the article Kevin O'Marah wrote over at SCM World entitled: Re-shoring is a Red Herring.  He rightfully points out that while re-shoring is great for a variety of reasons we should not hold out hope for the whole scale re-industrialization along with the many jobs it brings.  The days of just graduating high school and going to work at the local plant are over even if manufacturing returns.

One of the reasons this is true was described in a Logistics viewpoints' prediction for 2013 where Adrian Gonzales identified "the robots keep coming". Also, back in February I wrote  a post titled: "Robots and Other Supply Chain Trends" about an interaction Kevin and I  had about the idea of robotics and how robotics is a key factor of what will allow re-shoring while not employing a lot of people.

Bottom line: Re-shoring is great for America, great for supply chains and great for the consumer (Lower cost, higher flexibility) but is not the dream people are making it appear relative to jobs and the middle class economy.

"Home Delivery" Lockers at Wal-Mart

In another twist to the race to home delivery and the attempt to de-throne Amazon, Wal-Mart is now testing lockers in their stores.  Along with a beefed up web presence Wal-Mart will try to entice you to order through the web (capture the web based buyer) however avoid the huge costs of the final mile.

This is the dilemma all of the retailers have and ultimately will have to solve:  The logistics costs of the final mile (delivery to your home) are a huge part of the total costs of logistics when you deliver to the home.  In fact, if you just measure the variable cost of sending one unit of something to your home virtually all the cost is in that final mile delivery.

If Wal-Mart is successful they can leverage the huge advantage they have in store delivery logistics while not incurring the costs for that final delivery - or they may be able to appropriately segment in the consumers mind the differential cost of delivery to the store v. delivery to the home.  This is an area Amazon cannot compete in (they have no stores).  As a consumer, because their is no option, when I order from Amazon I will accept a delivery charge.  However if I am presented with a "free" to pick up at store and $6.00 to get to the home I may think twice about the $6.00.

So, what issue do the lockers solve?  This solves the final "three feet" of the purchase experience.  I do not want to interact with a sales person or wait in line to pick up my goods.  Now I will be able to walk into the store, find my locker, get my products and leave.  It is very compelling.

I probably overstated my position above saying Amazon could not compete with this although they would need a partner.  The UPS store seems like the logical partner as it solidifies the use of UPS for the package delivery and there is one on just about every street corner.

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.  We shall see how this ever changing landscape is developed.  Stay tuned.

I have two labels you can come back to for reading all the news on both Same Day Delivery and Final Mile Delivery.  If this is your topic, come back early and often for updates to these labels.

Guest on Talking Logistics - Fun and Interesting Conversation

I was thrilled to be a guest on Talking Logistics last week with Adrian Gonzalez.  My commentary is below and hope you enjoy!

Execution IS A Strategy

At Logistics Viewpoints Adrian Gonzalez writes a post titled: "Forget Innovation, Just Execute Better" and I found this to be extremely interesting on two fronts.  First, it is interesting that "flawless execution" does not get the respect it deserves and if you dedicate your life to this you are somehow working on something "less" than strategy.  The top performers deal with strategy and all others deal with the day to day execution - or so the top consultants will say.

Of course, while that is a highly held belief of HR departments and other strategy people what we find in real life is it usually is the execution portion of the business that makes or breaks the company.  As Adrian rightly points out: does anyone believe HP needs different strategies or innovation?  No.  It is a company which just executes very poorly.  While the "big 3" were trying to innovate and develop high level strategies (Remember Jacque Nassar at Ford rolling up junk yards under the Greenleaf subsidiary - Ultimately a failure.) Toyota was focusing on execution and doing it really well.

Second, more and more it is execution which differentiates companies.  Does the product sold at Wal-Mart really differ that much from Target or J.C. Penny?  They are buying from the same vendors and even when they have an "exclusive" it usually is a SKU number change versus a true differentiation.  So, what makes the experience different between these stores for the consumer?  Execution is what makes it different.  Items such as:

1. Low Cost
2. Availability
3. Easy in and out
4. Presentation
5. Customer Service
6. Web availability

These are all execution actions and they truly differentiate these companies (I will leave it to the reader to determine which does it best / worst).  

To further the study of this topic, I highly recommend everyone read: "Execution: The Discipline of Getting Things Done" by Larry Bossidy and Ram Charan.  This book really talks about the importance of elevating the discipline of "getting things done" to a very high level - at least to a level equal to strategy and innovation.  Remember, innovation is not always just new products but if you can innovate on ways to execute tasks that could reap huge rewards (Think about all the innovation of basic processes like "checking out" which makes an Apple store such a great place to shop) you may find huge competitive advantage. 

Here is how Bossidy and Charan define Execution: 

1. The missing link
2. The main reason companies fall short of their promises
3. The gap between what a company's leaders want to achieve and the ability of their organizations to deliver it. 
4. Not simply tactics, but a system of getting things done through questioning, analysis, and follow-through. A discipline for meshing strategy with reality, aligning people with goals and achieving results promised.
5. A central part of a company's strategy and its goals and the major job of any leader in business
6. A discipline requiring a comprehensive understanding of a business, its people and its environment.
7. The way to link the three core processes of any business - the people process, the strategy and the operating plan together to get things done on time. 

I highly recommend the book and you can buy it here:

The Sick State of Ocean Freight

I do not spend a lot of time on ocean freight and I probably should spend more.  Suffice it to say I know it is in a dramatic over capacity situation and has been for a few years.

Recently, I read an article over at Supply Chain Brain titled: Economics 101: Did Ocean Carriers Miss The Lesson and it really brought home just how "sick" this industry is right now.  The critical fact is capacity is growing by about 7% and demand may grow by 1% if we are lucky.  The ships are already underutilized, new "mega ships" (like the Maersk 18,000TEU "Triple - E" ship) are coming on line and demand does not seem to be growing.  Add that they have parked what they can and have "slow steamed" as much as they can (short of just drifting in the current) and I think you see this is the makings for a bad industry.

The good news is if you are in procurement for ocean freight you should be delivering great results to your company bottom line.  Oh, and those GRI's which seem to pop up every now and then - you can ignore them thank you.  They cannot possibly stick.

If you have a minute.. watch below as the behemoth is being built:

Total Business Inventory to Sales Ratios

Somehow last week got away from me, perhaps too much sun in Florida the week prior, so I did not post this on Thursday as I would have liked.  On March 13, 2013 the census bureau released the numbers showing the total business inventories to sales ratio for January.  If you remember, I posted the wholesale numbers a few days back at this post and said I was getting concerned about the inventory levels backing up in the supply chain.

This number did not fail me and as you can see by the chart above, the ratio continues to climb albeit ever so slowly.  The bottom line is either sales are going to have to pick up dramatically or the production machine is going to have to slow down.  And, of course, the latter is not good for the transportation industry as a whole. While it may be good for those in the procurement roles trying to get capacity I think everyone would say they would rather have a robust economy.

Of course this data is for January and much has happened since then.  It certainly does appear either the economy has truly started to pick up or anticipated euphoria is at least moving the stock market forward.

One item I would watch closely however is consumer credit.  While sales may be picking up in February and March (numbers next month will show us if this is a trend as I anticipate it will be) we are seeing a large growth in consumer credit again (7% growth in January as reported by the Federal Reserve).  This means the consumer, for the most part, is starting to leverage again and we all know this cannot sustain itself.  The recession caused the consumer to "de-leverage" a lot and now it appears the consumer is back to being willing to leverage themselves.

Beware the borrowing!

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Supply Chain and Sustainability

Greenbiz and Supply Chain Insights conduct a survey on the different thoughts of supply chain organizations and sustainability organizations in a company.  This is very telling since I truly believe sustainability should be embedded in the operations of Supply Chain.  One certain way for sustainability to fail is for a company to believe it is the job of some "office" in corporate headquarters.

The chart to the left shows how disconnected the two are in many areas including supplier training and 3rd party audits.  While I think the audits are very good and should be used I find it very insightful to see that the sustainability offices believe industry consortium's are of more value than the supply chain individuals.

All of this has many facets to it and can be argued one or the other however the key message here is the two groups, sometimes within the same company are not aligned as to a strategy on how to execute against sustainability goals   When this alignment fails to occur you can almost be assured the goals themselves are in jeopardy.

Sustainability must be embedded in the 5 key areas of supply chain:

1. Extraction / procurement
2. Conversion
3. Distribution
4. Use
5. Disposal

If the operators of each of these areas are just going about their business and expecting a message from "on high" to tell them what to do I believe they are mistaken.  In each case, the operators must execute within the context  of the overall sustainability goals of a company.  This, of course, does not just mean carbon reduction but includes:

1. Fair trade type practices (not allowing child labor, bad work conditions, conflict minerals etc.)
2. Zero waste
3. Replace (if you have to extract, how do you replace to make a greener environment)
4. Reduction of all green house gases
5. Design of product so the use of the product will be sustainable
6. Renewable energy
7. Re-usable packaging and product

Of course there are a lot more and I just wanted to show that this cannot be done waiting on an expert.  Each and over operator must embed these ideas into their operation.  

The Rush to Brokerage

Much like the early '80s there appears to be a rush to brokerage going on in the transportation industry. While I still feel eventually the asset players will rule (eventually someone has to provide a truck or container) I do think this new breed of brokers is something to watch.

In reality, as I have written before, they are not really brokers in the old sense of the word.  While they are not full 3PLs (because most strictly deal with transportation) they are starting to get more into the over all supply chain management beyond just calling for trucks.  Some shippers are sole sourcing to these new breed of brokers as a way to essentially outsource their transportation.

One which bears watching (and I highlighted back in November of 2012) is XPO logistics and Seeking Alpha just published a great review of this company (XPO Logistics Has Huge Ambitions but Wall Street Has Real Doubts)  along with some interesting statistics about the industry.  Some highlights on the industry:

1. A $40bl - $50bl industry
2. Growing at twice the pace of GDP
3. Very fragmented with over 10,000 (brokers) and the top 25 companies have less than 40% of the revenue. 

This last statistic is the reason XPO is essentially trying to grow incredibly fast through both "cold starts" but also a lot of acquisition.  My guess is there will be a lot more acquisition in the near future for this company which, as Seeking Alpha states, makes it very interesting and very risky.

The biggest risk I see in this strategy (beyond running out of money, being leveraged and what happens in a downturn) is the risk that the acquisitions will come too fast and data will be missed.  Echo Global logistics is now suing over this where they purchased a company and now believe data was misrepresented.  Also, we all know the Hewlett Packard story.  

Time will tell if this strategy is right and as I have said for a while now that the truck brokerage business is far more interesting than it has been in a long time.  However, at the end of the day, someone has to own and operate a truck which tells me this idea of "everyone being a broker" model cannot sustain itself long term.  

Perhaps we should call this what it is which is essentially the outsourcing of shipper transportation departments.  

Companies Mentioned in this Post:  

XPO Logistics

Echo Global Logistics

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Shiny Happy People...

Well, after last week we should all be entering this week very shiny and happy and ready for another great week of commerce.  To celebrate, I give you R.E.M and their famous video "Shiny Happy People".  It is impossible to not be happy watching this...

Have fun and make it a great week!

(And yes, for those new to this video that is in fact Kate Pierson of the B-52's - one of my other favorite college bands)

The Week That Was - Wow!!.. But Will It Translate into Physical Goods?

Well, this was the week we have all been waiting for if you are one of those who did not abandon the market after the last downturn, stayed the course (Borrowed from Vanguard®), and rode the wave to new heights.  If you are one who did abandon the market, well, I guess this was not such a good week.

The scorecard:  Dow up 307.41 points and up 9.87% for the year. 

As always however I like to look at things through the eyes of logistics.  What does this mean for logistics (i.e., freight movement and storage) in this country?  When I look at it through that lens I see a lot of other data which continues to support the idea that the production and movement of goods is still very lackluster. Let's look at a few:

Monthly Wholesale Inventories Relative to Sales:

This number (Unlike the Total number reported on earlier) climbed 1.2% which tells us that inventory is beginning to back up at the wholesale level and will ultimately either need to be sold or production will have to slow down.  Most of this increase is in the durables number and represents an increase from a revised December number and a significant increase over January 2012.  Interesting that sales of durables are up however the inventory has grown faster than sales.

McDonald's Same Store Sales were Down:  Of course the company blames this on the lack of the extra leap day and that could be true but, I generally dismiss these types of excuses.  At the end of the day if they are that close then they are flat at best.  I use McDonalds as a barometer for world spending because it is just about everywhere and almost everyone goes there.  If you are out shopping, you probably will stop at a McDonalds sometime so it is a good measuring stick.  I know, not very scientific but these types of indicators generally work.

Personal Income and Outlays:  This was down 3.6% in January (released March 1) which again is an early indicator of not much activity in the economy which will be good.

Countering this type of news was the great news on the unemployment rate going down to 7.7%.  This is fantastic however I report it with one caution and that caution deals with the sequestration.  Most government agencies will be dealing with budget cuts via furloughs and not lay offs.  This means while the unemployment number may appear relatively unscathed during this time people's spending will decrease as they have less disposable income and are less secure.

Of course, these statistics reported in March for January are all at least 1 month old and it is theoretically possible the market is acting as a leading indicator on the physical economy rather than the financial economy.  But I doubt it.

While my meter is up and I am hoping this is the beginning of a massive boom in the physical economy I think the data says this is a financial economy activity.  Companies, while selling the same or less, are making a lot more money, have a lot of cash and the alternative investment, treasuries, barely keep up with inflation.  For these reasons I believe the market is skyrocketing and may well continue.

The question is will it translate into physical goods.  Right now the data says... Maybe.... .(OK, my meter may have moved just a bit to the right from absolutely no to .. Maybe)

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February Cass Freight Index Supports 10xLE® Predictions

The February Cass Freight Index has been released and it continues to support and is right in line with what we have been predicting here at 10x Logistics Experts.  The market is soft and continues to bounce around the bottom which is holding rates flat for the data bases procurement experts.  The market continues to predict a 2% price increase at recent investor conferences this is what the transportation companies are planning for.

There are two interesting developments which are mentioned in the press release for this data which I believe should be mentioned (and which we have discussed for months here at 10xLE®).

First, we are seeing a bit of a divergence in truck ton miles versus expenditures which, as is stated by Ms. Wilson is due to "...Most likely...the average weight of a shipment rose during the period".  One of our counter balances we have discussed to the driver shortage is the "miniaturization" of goods which includes packaging.  You can move the same freight in smaller packs and thereby reduce the need for trucks.

Second, the increase in the type of activity in the economy which is driving what appears to be a rather robust economy is not the type of activity which translates to freight and transportation.  As I have said for many months, the magical "3%" GDP number is not the same 3% number from 20 years ago.  It does not translate into a lot of freight.  Google and Facebook don't move a lot of goods (physically that is).

Finally, in the report it is discussed the GDP prediction is still for a "Low, probably less than 3%" GDP number.  I am far more in the camp of a 2% GDP number with 2.5% being on the high side.

The bottom line for transportation procurement professionals:  If you had followed the 10xLE® procurement model and held your position you would not have paid "insurance" against capacity shortfall premiums last year as it has yet to materialize.

If you did buy into the hype and pay the premiums my recommendation is you try to identify the amount and get it stripped from your rates.  We still hold, despite promises, you will not get "benefit" later in the cycle for paying premiums now.

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Inventory to Sales Ratio - Will March Change the Curve?

One of my favorite measurements of business activity which actually relates to transportation volume is the Inventory to Sales Ratio.  As I get ready for January's numbers to be released I remembered I did not comment on December's numbers.  And, they tended to move as I would expect:

What we saw in December was that there was barely a move down which indicated the sales season for Christmas was not very good - which I had predicted since around September.  This, as is known for those procuring transportation services, led to excess capacity and very favorable procurement activities.

The key question is what will January show us.  My guess is not much and while we may get down to the 2010 / 2011 levels we will, most likely, not see enough of a change to effect the dynamics of the transportation capacity equation.  Companies continue to favor strict inventory management and good cash flow management over just about every other aspect of the balance sheet and income statement.  In the end, companies have learned it is better to miss a few sales than to be stuck with inventory.

The real interesting number will be released in April then May when February / March numbers are released.  Right now there is a lot of excitement in the economy and whether this will translate into a lot of buying activity is yet to be seen.

Right now all the data continues to hold that the transportation network is in balance at best and probably favors the shipper community.

The Value of S&OP in Logistics

I have been talking a lot at various events recently on the value of Sales and Operations Planning to the logistician and specifically to those managing transportation.  I have found many so called "great" S&OP processes stop at the end of the factory and just assume unlimited capacity and capability from the distribution arm of the supply chain.  Very few look holistically at the entire chain from raw materials to the consumer and most just look at their particular part of it with some input from upstream and downstream suppliers.

This should and must change. The S&OP process is critical to the proper execution of the logistics' plans of a company.  It is also vital to give your carriers a decent forecast on the capacity needed at a time in the future.  I will remark more on this later in a post soon however I do want to remark on Kevin O'Marah's comments relative to the core aspect of S&OP - Trust.

Even the core of Vested Outsourcing  is built on trust.  In S&OP Gotcha: Bad Collaboration, Kevin discusses how egos and the desire to "win" ultimately can kill a good S&OP process.  Before entering into a true S&OP collaborative process across the virtual enterprise (this includes all participants in the supply chain) you have to agree on core principles and on trust.  If one is trying to get "leverage" over another then I truly believe it is a waste of time to enter into a S&OP process.  Just understand the situation you are in and make the best of it.  The core ideas to S&OP are:

1. Each trusts each other's data.  If you feel data is manipulated or hidden, you are starting at a weak point right from the beginning. 
2. Each agrees the "solution" is what is right for the ultimate end user - the consumer. 
3. Each agrees the "solution" has to be profitable for all.  No one will stay entered in a relationship if it is not profitable.  There is nothing wrong with this.  Where it goes wrong is where one side withholds information or changes information to gain profits at the expense of the other. 
4. Each agrees to open book sharing.  If key data is withheld then it just will not be possible, long term, to maintain a solid S&OP process. 

For the logistician, the output of this has to then tie to capacity requirements, possibilities and constraints of the logistics network.  One cannot assume whatever the outcome of the core S&OP process can be executed without constraint.  That is a recipe for failure. 

Logisticians need to force their way into the S&OP process of a company and make their voice known.  

BNSF to Test Natural Gas

Just received a number of alerts about the BNSF testing natural gas. Seems they believe this will be a large opportunity to switch which I fully support.

However, if fuel costs are not adjusted to the shipper then the economics of selecting intermodal over truck will not change. There has to be transparency to this decision and the current dominant fuel cost adjustment mechanism does not do the task well.

Mapping The Carbon Use Chain to The Value Chain

I am starting to do a lot of work and study on the impact of the complete value chain on the environment.  I think the argument over whether there is climate change occurring is absolutely over.  It is clear our environment is changing and changing rapidly.  The only question left is how much of this change is due to human interaction and how much is just natural cycles.  The answer, of course, is that it is due to both.

Given that I believe it is due to both I have to ask why would we ignore the portion we can impact just because there is a potion of it we cannot impact?  Further, if we know an activity is causing environmental issues why continue that activity?  Why not try to mitigate the impact of the activity or moderate our engagement in that activity?

A simple example is in fuel mileage of automobiles.  If we can get automobiles to 50mpg or higher (whether by better engineering of the internal combustion engine or moving to another energy source like electric) why not do it? The obvious answer is if there were some functionality we absolutely needed that the 50mpg car could not provide but I find that is few and far between.  Most users of large trucks (i.e.., Pick up trucks and SUVs) are using them because they "like big" more than any real functional use.  Some will say it is for better use in bad weather but as someone who drives a hybrid in Wisconsin during severe weather I can tell you I see as many big trucks / 4wd's in the ditch as I do anything.

So, the answer is we should do whatever we can to effect positively our impact on the environment.  In order to do this we first have to map out our impact (end to end) on the environment.  The best model I have seen (adapted from the Greenhouse Gas Protocol)  breaks it into the following segments:

1. Extraction of raw materials
2. Production of product
3. Transportation and distribution of product
4. Use of product 
5. Disposal of product

It is important that the entity which conducts the "pull" in this value chain be the one to impact the actual conduct of the entire chain.  We know the consumer is essentially the entity which pulls all the way through however the consumer is too fragmented to be able to make a consolidated impact.  This must be at the producer of the product level.  This leads us to the 3 Scopes which product producers need to measure if they are truly going to understand the environmental footprint of their product and their company.  

Some may ask why this "burden" should be put on the producer of the product and I think the answer is threefold.  First, virtually all the activities upstream would not occur if they were not "pulled" by the producer.  No one would mine for coal if there were not users who wanted to buy the coal to use.  It is really that simple. 

Second, the user of the product (downstream) does not have enough information to know the art of the possible.  They can conduct good comparisons of products which exist but it is hard for them to know what could exist and therefore they are working with imperfect and incomplete information.  The producer has that information. 

Third, the consumer of the product cannot impact end of life disposal beyond doing the right thing based on societal infrastructure.  For example, I can send my products to a recycle center but I do not actually recycle the product.  Knowing whether the product packaging and end of life product "carcass" is capable of being recycled is beyond the consumer's capability.  This must be put on the producer to execute. 

Ultimately, the cost will be put on the consumer and products will compete within a "sustainable" sandbox.  The choice to operate outside of the sustainable sandbox will very quickly disappear.  

In looking at the totality of the business case we see there are clear cost reducing and brand enhancing reasons to look at your entire value chain, map it it to the environmental / energy supply chain and make impact in each area. 

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