Awakening the Sleeping Giant - Crude by Rail

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

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

Why Benchmarking In Its Current State for Transportation is Dangerous

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

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

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

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

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

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

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

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

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

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

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

They convince you and you pony up.  All the while this is going on they are negotiating with the carriers and their story is something completely different.  Why?  Because your goals are not aligned!  The 3PL in this situation has a goal to expand the spread between what they pay for the transportation and what they resell it to you for.  While it appears they are giving "advice" to you what they are actually doing is working to improve this spread.  What are you to do about this as a shipper. A few things:

1. As I have said before, I highly recommend you do not get into this situation in the first place; keep procurement in house and let the 3PL execute.
2. If you have already outsourced procurement, work hard to insource it!
3. If those two do not work then become extremely smart in what is happening in the transportation market.  The 3PL cannot be your trusted advisor because they have another set of incentives.  You need to build that expertise in house.  For example, when they talk about "capacity shortfall" ask them:
• In what lanes is this shortfall prevalent?  Do I ship in those lanes
• What about mode conversion?
• What  are you doing to reduce my fuel costs and make my fuel costs more aligned to what you are actually paying for fuel?
• What is your carrier base?  Have you looked at regional carriers?
• What are you doing to leverage your spend to keep my rates down?  (if you are hiring this expertise you expect they will not just perform at market but below market - remember, market price is what you get without even trying)

In the end you can see this type of relationship actually causes more work rather than saves work.  You will not only pay for the outsourcing but you will also have to employ a "shadow" organization just to ensure you are getting a competitive deal. 

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

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.