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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Why I am Not Concerned About The "Driver Shortage"

The myth that has existed in trucking for over 15 years is some year we will get into such an acute driver shortage that freight will be at a standstill and you will be lucky if a truck shows up to pick up anything you have to ship.  In fact, many trucking company executives have parlayed that story into a reason why shippers should pay higher than market prices today for freight for fear that when that day comes only those who over paid in the past will be serviced.

That was 15 years ago and the time has yet to come and if you bought into the story you have "overpaid" for 15 years and the crunch (and your perceived promised reward) has yet to come.   Of course, as always, the story has other aspects to it.  I do not doubt that the driver pool is shrinking and people do not want to drive long haul trucks.  However, the good news is the market is taking care of this problem in 4 ways:

Miniaturization:  This phenomenon is everywhere whether it be in packaging, the product itself or the actual and complete disappearance of the the physical product.  I bought a stereo for a new place I have and it consisted of a Jabra® Soulmate and my iphone.  The entire thing can fit in the palm of my hand and it gives off as much sound as a stereo that came in 3 boxes 10 years ago.  This would not be seen if you looked at GDP numbers or sales numbers of companies because from a revenue and profit standpoint, the company did as well as when they were selling massive boxes.  However, from a freight standpoint, they can fit a months sales into 3 trucks. Or, better yet, it is all sent via UPS.

Of course, we all know this is happening in packaging and other aspects of the freight.  And, the disappearance of freight is becoming very real with iPods, Kindles and now 3D printing.

Focus on Profit v. Revenue Growth of Shippers:   I keep hearing that once the GDP gets to 3% we will have a massive shortage and I am not convinced.  If you look at the financials of the major shippers you will find they are doing very well (as are the transportation companies).  Why are they doing well? It is generally not a growth in product sales / revenue story but more of a growth in profit story. They are managing costs and increasing prices (despite the Government telling us there is no inflation).  This means you cannot equate a great quarter to increased freight.  It is not as connected as it was at one time.

Intermodal:  This, of course, is the grandaddy of them all.  The movement to intermodal continues and seems to be picking up speed.  Shippers who were afraid of it just two years ago have capitulated and even segments of supply chains (i.e. inbound) which historically shunned this mode are now buying into it.  Bottom line:  This is the major counterweight to any type of driver shortage.  This is gone beyond a nice "substitute" for truck freight and has now become the "category killer" for truck freight.  Acceptable length of hauls (LOH) are decreasing (one bid wanted intermodal rates on lanes 400 miles or greater), service is increasing and overall people are moving so much freight over to intermodal that truck is really just catching the local P&D and interplant moves.  P&D and interplant moves are nicely served by local niche players and the need for a nationwide network for a truckload carrier diminishes dramatically.

Economics 101: This is the final reason I am not worried.  If the driver shortage becomes very acute and the demand exists driver wages will increase bringing more drivers into the market.  I am a firm believer in market equilibrium and market clearing prices.  Yes, driving is a hard job.  However, as we have seen in the oil fields in North Dakota, people will do hard jobs if the pay is right.  So, bottom line is, no need to pay "extra" today because if needed, you will absolutely have to pay extra tomorrow.  And any sales person who tells you that because you paid extra now you won't have to pay extra later is either lying to you or just does not understand economics.

My conclusion:  Watch the economy, watch the market, and watch your freight but do not buy into the scare of "pay up now" to be serviced later.  It makes no economic sense and it makes no sense given the current situation of transportation companies.