Is Being The Shipper of Choice a Rational Buying Behavior?

I once again had to sit through a "shipper of choice" meeting with a carrier and I was as disappointed as I am with every one of these I attend.  First, congratulations to the consultant who coined this phrase "shipper of choice" - you have done a great job peddling this idea and I hope you have made a lot of money with it.  Every presentation I go to is the same so I have to believe they emanate from the same person.

For those who have not been "blessed" by one of these presentations, let me walk you through what they mean.  In a nutshell it is:  "If you (shipper) do everything in the way we want it done, regardless of what your customers want, then you will be a "shipper of choice".  Things such as:

1. Pay your bills on time
2. Give the freight the carrier they are awarded
3. Perfectly forecast the freight
4. Pay above market (or what the carrier will call "fair") rates
5. No window times for deliver - let the carrier deliver and pick up at their leisure
6. Have a luxurious wait room for the driver
7. Don't have the driver do anything when he shows up

Well, you get the feeling. 

What is missing from all of this is what does the CUSTOMER really want?  I raised this question to the trucking company and, honestly, I am not sure they ever had thought about this.  I mentioned to them that we (the shipper) are not the ultimate customer.  We have customers (call them consumers) who are demanding certain things.  We are looking for the freight provider to partner with us to fully understand and respond to what the consumer wants (which, as I pointed out to them, is what each of us wants as a consumer).  So, what does the consumer want:

1. Short order to delivery times
2. Windows (anyone want to sit at home all day waiting for someone or do you want to know that they will come within a two hour window)
3. Be market competitive in pricing
4. Full delivery (White glove).

These are what the consumer wants and these are not things that are being put on the logistics network for any other reason then they are customer demands. 

Of course, there are things that make sense and should be done:  Pay bills on time, if you award the freight give them the freight etc. 

But this idea that we can ignore what the end consumer wants is completely ridiculous.  The challenge for us the shipper and the trucking company is how do we meet these complex and ever increasing demands AND be efficient. 

I wonder when that meeting will occur?

Independent Truckers Pick Up on Mobile Apps

Re-reading a great article from the Wall Street Journal called " Mobile Apps Get Picked Up By Independent Truckers for Better Routes" (Subscription May Be Required).  While I am not sure this rises to the level of "Where is Elon Musk in Logistics" (which I asked in my last posting), I do think it is very instructive to see the growth of Mobile Apps in routing trucks.  I can remember when people were wondering if they should write computer software for independent truckers because, after all, "how many truck drivers have a computer"?

As silly as that seemed, it is equally silly to believe that truckers will not use Mobile Apps.  One of the quotes from the article is from Bryan Beshore, founder of Keychain Logistics:

"I really don’t think that the brokerages serve a huge purpose anymore,” 

Using geotracking, the smart phone and some really good software it is becoming easier and easier for the independent trucker to cut the middleman (read broker) out of the equation.  While this was doable on laptops and regular computers it was just too clunky and hard.  With smartphones, and these types of services, an independent truck driver can get their next load in the time it takes to fuel up.  This could be real disruptive technology.

Here we have "silicon valley" meets the old stodgy trucking industry.  And just like every other industry it is the new upstarts who will "disrupt" the industry because the old guard (big brokers) will cater to the allusion of protecting their  somewhat bloated bureaucracies and infrastructures.

Look out trucking executives... here come the whiz kids from Silicon Valley!

Where is The Elon Musk of the Logistics World?

I am currently reading the book  Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future I highly encourage everyone to read it.  However the book gave me pause to think about our industry. An industry that at one time was filled with innovative giants such as Don Schneider and J.B. Hunt. Now, I have to ask, where have they all gone?

Where is the innovation in logistics and supply chain?  Think of it... with all the technology, education and advanced degrees, we still shut down the West Coast ports.  And when they shut down, supply chains came to a swift halt.

I consistently hear trucking and intermodal company executives talk about "supply and demand" as a driver of price.  They say "Watch out, capacity is low.. prices are going up and you need to be a shipper of choice".  Of course, this is nothing more than commodity pricing.  They are admitting they are out of ideas and they are pricing their service as a commodity.

In my early days in the industry I was able to see huge risk takers and innovators develop the use of satellite tracking for better routing (Don Schneider) and the proper use of trains and the overall development of intermodal (J.B. Hunt).  It was a thrilling time.  Lots of change, lots of risk, great growth and huge innovation.   Today, it appears innovation is either becoming a broker or buying a company.  In some cases, financial engineering has become the innovation of logistics.

I ask, where is our Elon Musk?  Where is our Steve Jobs?  The industry is screaming for someone to innovate.


 

Inventory to Sales Ratio is Not Showing a Pretty Picture - Macroeconomic Monday is Back!

All the data I am seeing is indicating some real softness in the economy. At first, people thought it was the weather and then we went to the port strike.  However, now we are starting to see some real convergence of data pointing to a slower economy:

Inventory to Sales Ratio:

As we can see by the FRED graph, this has been on a climb however the slope has increased.  Essentially, this is indicating that inventory is building in the supply chain and there is not adequate sell through.  Every time this indicator has turned this way, we have seen ultimate softness (as companies work to right size the inventory) and this means softness in the freight markets:

You can see that this is nothing like the spike during the "great recession" however you also clearly can see that when this goes up, recessions do follow (or this is just an indicator of the recession as it happens.

ATA Truck Tonnage Drops in April; Off 5.3% from High in January:

The ATA freight tonnage index peaked in January and has been struggling ever since.  While increasing 1% over prior year, it is down 5.9% against previous month, down 5.3% against high in January and indications are the freight index will stay soft.  This will drive lower expectations for GDP and, once again, our dream of a year above 3% GDP is starting to fizzle.

While the CASS freight index is still showing some healthy gains in pricing, I really attribute that to the successful "fear mongering" of the carrier base.  If buyers of freight truly were objective about the data, they would aggressively be seeking price decreases and not stand for any price increases.  This will utimately turn down once the shippers realize what is happening and once the buyers start getting pressured by their managers to adjust the cost basis to reflect what is really happening.

Manufacturer's Alliance for Productivity and Innovation (MAPI) Adjusts Manufacturing Growth to 2.5% From Previous Estimate of 3.5%.

This is a big movement and they attribute this to four key areas from their report:

1. Oil and natural gas prices collapsed, causing a sudden contraction of the energy supply chain.
2. The strong U.S. dollar reduced growth, a result of cheaper imports to the U.S. and U.S. exports becoming more expensive to foreign buyers, as well as deflation pressure on exports.
3. Consumers spent some of their fuel savings in the fourth quarter of 2014.
4. The inventory-to-sales ratio rose sharply in the first quarter, while the inventory runoff in the second quarter slowed production growth

The interesting item of all of this is in item #3 above.  Where is all the money gone that the consumer is saving due to low fuel prices?  I think it is has gone into the bank or the continued deleveraging of households - meaning people are still not buying.

Without some real big changes, I think we are in for another "sputter" and halt type economy - we are far to used to this now.  

XPO Logistics Buys Dentressangle - Logistics Companies: Yes, Be Afraid

I have been covering XPO logistics for a  very long time on this blog.  In that coverage I have evolved my thought from thinking it was just another aggregator that will fail to it being just a big final mile player to finally saying, "watch out", Bradley Jacobs is coming after you.

Yesterday was the deal of the year (in an early year) showing that logistics companies should fear what is going on at XPO.  Yesterday, XPO purchased the French company Dentressangle in a deal worth $3.56bl.  Now, XPO is clearly a global powerhouse.

At first it looked like XPO was going to be just another big brokerage house. Then came the acquisition of 3PD and rebranding to XPO Final Mile which said they were going to own the delivery from the manufacturer (through brokerage) to your home (through final mile).  The next big acquisition in my mind was that of Pacer which immediately made XPO a leader in intermodal.

Now, with the acquisition of Dentressangle they have become truly a global powerhouse.  If you are a leader of a global supply chain you absolutely cannot ignore doing business with XPO.  The holy grail has been to find a supplier who can do "end to end" supply chain management for your global supply chain and with XPO you most likely have that now.

In all my writings on XPO logistics (which go back to November 19, 2013) I have said they are a force to be reckoned with and now that is clearly come to life.

In full disclosure, I also do business with XPO and I will tell you that the hype is reality.  This is a well run, disciplined and well led / well financed company.  Trust me - you will do business with XPO at some point.

Seeking First to Understand in Supply Chain Design

Well, it has been a long time and thank you for all the readers who stayed close to this.  I have so many thoughts to write about and I realized when I am not writing I get a bit lazy in terms of researching what best in class people are doing.  So, therefore, I need to write.

Today's posting is about "Seeking First to Understand".  As Steven Covey told us, when you are engaging with either your team, customers or your spouse for that matter, you should always "seek first to understand".  God gave us two ears and one month for a reason.  Listen, think and then talk if you have something to say.  

How does this relate to Supply Chain Design?  Simple, when engaging with a customer or one of your team you should spend the vast majority of your time seeking to understand.  Listen to what they have to say, ask probing questions (not yes / no questions but questions that are open ended such as "Tell me More...  "Help me understand...") and then think.

If you are formulating a response in your head while someone is talking then I can assure you that you are not listening.  Despite popular belief, most people and virtually all minds, cannot multitask while communicating.  If you are thinking of your response while the person is talking then you are not listening ... it is that simple.

In Supply Chain design, listening means asking:

1. What are your pain points?
2. What are you trying to accomplish with the brand?
3. What does the client's or the user of the supply chain customers say and think?
4. What does your company want to be known for (for example.. is the competitive advantage being the low cost provider, is it being the high service..i.e. Zappos provider)?

When having one of these sessions you should not respond with immediate ideas but rather with a lot more probing questions.  Then, you think.. and that may take days but you think hard. Only then will you be able to formulate a good strategy.

Thinking is hard work and it is tough because, in general, people like to see action (sometimes any action) and thinking is not an outward action.  But, trust me, it is the right thing to do. 

A Drone Delivers Your Package - Part Deux

Today the logistics world is a buzz with the idea that Jeff Bezos rolled out on 60 minutes last night that a drone could deliver your package.

Too bad 60 minutes did not read this article "A Drone Delivers Your Package" back in FEBRUARY of 2013!

XPO Finds "The Missing Link" in Big Box Home Delivery - Game Over?

Last week XPO Logistics (See other entries about XPO here) made what I consider a ground breaking announcement and acquisition: They acquired Optima Service Solutions.  If you remember, a few months ago XPO purchased 3PD which catapulted the company into the a leading position in big box (Think appliances, home exercise equipment, massive TVs etc.) home delivery.  It was a big and bold move to complete the supply chain (They already had services for inbound, redistribution and this gave it "final mile" capability) for XPO.

However, those of us who have been working home delivery (This was a major focus of mine at a major appliance manufacturer) have known for years that the big struggle in this space is in installation and service along with returns.  The biggest reason people shy away from internet purchasing of big items (for this example lets say a refrigerator) is because it is so hard to coordinate installation and, if something goes wrong, who do you call?  The acquisition of Optima by XPO solves that problem for home deliveries made by XPO / 3PD.

XPO will now have the capability to provide a seamless solution.  Before this acquisition the purchase of the refrigerator went something like this:

1. You buy from an internet retailer who may or may not coordinate the delivery (some just give you a phone number to a LTL carrier and basically you are on your own). 
2. The refrigerator is delivered to your curb (many will only do curbside deliveries).
3. The driver may or may not help you unload (many LTL carriers will tell you that you have to unload the refrigerator yourself). 
4. The driver leaves and now you and your wife stare at this new beautiful refrigerator sitting in your garage and your wife says to you, "What the hell are we going to do with that"?

Now think of the "new world" of big box deliveries (again, our fictional refrigerator) with the  integrated and seamless solution XPO will offer: 

1. You choose an internet retailer specifically because they have the XPO / 3PD / Optima team as their delivery agent (Same refrigerator but this retailer is preferred due to the delivery mechanism).
2. When you coordinate the delivery you tell them you want it fully installed and the installation is seamlessly scheduled for you.
3. When the driver shows up to deliver the refrigerator the installation technicians arrive at the same time and they take over. 
4. Your refrigerator is installed, icemaker tested, etc. etc. 
5. You and your wife look at the beautiful new refrigerator where it belongs - installed and ready to be used. 

This is why this acquisition is so important.  The complexities of buying a big box item over the internet are lifted from the consumer and put where they belong - on the delivery agent.  No one has been able to do this better than Optima and now Optima is exclusively part of the XPO / 3PD network.  

Bradley Jacobs has, in one masterful stroke, accomplished two great things for his company.  First, he has given the company the ability to make a seamless end to end solution for home delivery all the way through delivery and service.  Second, and probably as important, he took the leader of this service, Optima, off the market for other home delivery agents.  Now, if you were a local home delivery agent and behind the scenes you were using Optima, you will no longer be able to do to that as Optima is exclusive to 3PD.  

This is the equivalent of a "Pick 6" in football.  Your great defense not only makes a great defensive play but it also scores a touchdown.  

The last frontier for potentially preventing people from buying big box items over the internet is now just returns - and don't bet against XPO in this space - they will figure it out. 

Rethinking The Core Carrier Strategy - Too Many Eggs in One Basket?

There are two sides of a continuum in procurement strategies for transportation.  On one end is full "auction" type purchasing where you put everything out to bid, almost constantly, and let the market adjust the prices.  On the other end is single sourcing where you don't bid anything and you partner with a core company.

Close to sole sourcing is a strategy called "core carrier".  This strategy has you limit your carriers to a "vital few" and then you work with them.  Sounds great however lately I have seen this degenerate to what is virtually a sole source strategy.  So, what is wrong with this and is it time to rethink it?  It appears Amazon thinks so.

As I wrote on Monday, Amazon is teaming up with the United States Postal Service (USPS) to execute Sunday deliveries.  Sounds great and the possibility of this occurring I wrote about back in 2012 but there may be more to this.   In The Wall Street Journal's "Heard on the Street" column (subscription required) they mention how this may actually be a strategic decision to ensure they have options beyond FEDEX and UPS.

In conjunction with their private fleet for grocery deliveries, Amazon appears to be diversifying and growing their options.  A real strategic risk for Amazon is they become so beholden to Fedex and UPS that they are controlled by them.  This strategy appears to be their attempt to counter that risk.

For the average shipper you should be thinking about this strategy as well.  Initially the idea of sole sourcing or core carrier sounds great - low administrative costs, one point of contact, easy to do business with.  Long term, however, you have to ask yourselves if you are turning the keys to the kingdom over to someone who many not have your best interest in mind.  No fault of their own but their interest will always be in the profitability of their company.   So, here are some actions you should be thinking about to protect the long term ability of your company to execute their strategy:

1. Be careful on too much concentration in one carrier - especially intermodal
2. Ensure suppliers know (and it is believable) that you have options in the market place.
3. Be careful of tying systems together which are core to your business.  Beyond EDI, once their are unique systems integrations you are married (sometimes for life).
4. Think about strategically propping some carriers up to ensure they are competitive.  Think about Amazon and the USPS.  Why go with what is essentially a bankrupt carrier?  Amazon wants to keep them in business and is going to help them.  You may have to do that with some smaller carriers yourself. 
5. Keep options open with private fleet.  By running a private fleet you will know as much or more about running a fleet than your suppliers.  Keep that as a competitive advantage. 

As always, there is a lot to learn from Amazon.  

Behind The 2.5% GDP Number.. Not So Fast

The initial read on Q3 GDP seemed pretty impressive at 2.5%.  That would indicate things are moving along and creeping up to the 3% "benchmark" everyone is waiting for.  However, like all things, there are the numbers then there are the numbers.

I had heard on NPR that the inventory numbers seemed elevated so I did some quick research and sure enough it appears that at least .5% of the GDP number was due to the growth in inventory. Of course, making things and throwing them in warehouses is not a driver of growth.  It is more like a ponzi scheme.

Forbes said the following:

"When you remove inventory accumulation and external trade, explains Capital Economics’ Chief US Economist Paul Ashworth, you get a slowing 1.7% growth rate of final sales to domestic purchasers. Ashworth calls this less impressive metric “a better gauge of underlying economic strength.”

What are the implications for shippers and transporters:

1. The economy is not growing like the front page numbers may imply.  Things are sluggish for the most part with some strength industries - although those are not big freight industries.
2. Due to the growth in inventory, there has been a "pre-positioning" that will have to bleed off.  This means, at some point, inbound freight will slow down dramatically waiting for the inventory to be sold. 
3. Nothing indicates freight will speed up.  This slow freight environment which means demand is decreasing at least as fast as supply will be the "new normal" for at least one year. 

Everything I read and see says this slow "new normal" freight environment will go through 2014 at a minimum.  

Lesson:  Always read "behind" the numbers. 

United States Post Office and Amazon - Sunday Delivery in NYC

Sunday delivery was inevitable (USPS and Amazon team up) and I have talked about this a few times.  In an article titled "Home Delivery Lockers at Wal-Mart" I discussed how Amazon might be able to team up with UPS to fight the "Clicks and Mortars" advantage of Wal-Mart.

But buried in that article I said the following:

"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."

I also said that the United States Post Office could be the big winner in the fight for immediate home delivery as they already have a 6 day per week infrastructure to make this happen.   I wrote an article over a year ago titled: "Could the Post Office Be The Big Winner in Same Day Delivery?"

It appears they have, at least in NYC, started to win this battle.

State of Transportation - XPO Logistics

I have reported on XPO logistics  (Follow this link on XPO to see all my thoughts) a lot as it fascinates me how a company comes out of nowhere and becomes so large so fast.  It also amazes me just how much money a company can lose and still be wildly successful (think Amazon.com).  But, since I am not a financial person I trust Bradley Jacobs understands these financial rules and is using them to his advantage.

The real reason I listen to their calls every quarter is no CEO I know of is as honest, direct, and has as much just common sense as Brad Jacobs.  I had the pleasure of meeting and talking with him a few weeks ago and for someone who has done as much as he has, he really is a down to earth person who knows this business well (especially for someone who is relatively new to the brokerage business) and, something that is refreshing, he is very upfront and honest.  So, listening to what he has to say about the industry is very interesting.

On this quarter's conference call he said three things which really were insightful on the market and match what I have said relative to telling shippers not to engage in the fear trade.  Here they are (Paraphrase):

1. This is a lousy business environment for brokerage companies due to the fact that shippers do not have much of a problem finding trucks.  The reason for this is the market is balanced at best case (for transportation providers) and may even be edging to the shipper.  The shipper has no problem finding trucks (except for unique and specific lanes). 
2. XPO is able to find trucks and is able to "clear their board" relatively early in the day so it is pretty clear that trucks are available.  
3. This is probably the most important: When he was asked if he is seeing any issues with Hours of Service or other regulatory issues he clearly said no.  In fact, he said that the one thing which he hears most is just the transportation companies complaining about it.  

My mind is not made up on brokerage in general or XPO for the long haul.  I still wonder why good transportation departments need a "middle man" but I know there are reasons - I always think of them as back up capacity - but people do use them for their core transportation.  The dream of the internet was to eliminate the "middle man" yet in this space the middle man seems to be growing.  

Having said all that, I listen to the XPO call every quarter as you can learn a lot about what appears to be a strong emerging company and the industry in a very straightforward manner. 

The Fear Trade Picks Up Steam - Don't Be Fooled

One of my favorite songs from childhood is "Won't Be Fooled Again" by The Who and this is my theme for what I have called the "fear trade" in transportation.  This is the time of year when people put their freight out to bid and as expected, and right on queue, some of the major transportation providers are putting out press releases and other statements to start the fear trade - make shippers fearful that truck capacity is magically disappearing and that trucking companies are suffering.

As reported in LogisticsViewpoints, both Schneider and Werner have, on queue and somewhat coordinated, put out press releases and statements saying there is a big problem with capacity, productivity is down and the big bad regulations are making it hard to run their business.  This will, I predict, be echoed by many others over the next few days.  All while earnings at the best run trucking companies are better than they have ever been and OR rates are at record levels (the REAL data in their annual reports).

These statements, of course, are designed to create the fear trade and to get the shippers to buy into a "fear premium" as they go into bid season.  Now, for the real data:

Using CASS data from the October report we see that both expenditures and shipments are down year over year.  In fact in 7 months of 2013 we have seen shipments down year over year which indicates, as CASS rightfully points out, that the economy is slowing and the shippers are finding alternative ways to deal with transportation problems (i.e., network redesigns, packaging, better inventory management etc.).  During these turbulent times it appears shippers have rolled up their sleeves to find innovative ways to solve transportation problems and it appears the transportation industry is issuing press releases.  The graphs below tell the story:

As I reported recently, I told my readers not to overreact to the numbers from September.  They were too strong to be sustained and if you see any other economic indicators you will know that strength was not supported by the underlying economy.  And, this month we find that to be accurate.  They were not supported.

Another interesting statement out of the CASS reporting was that for the first time since 2008 the National Retail Foundation is forecasting a decrease in holiday sales by 2.5% and this is supported by the less than robust holiday stocking.

For sure I am not saying to ignore capacity - if you claim the world is going to end and you live long enough, sooner or later you will be right.  However what I am saying is three-fold:

1.  Let the data speak.  Don't get wrapped up in the fear trade.  Watch this blog, watch the CASS information, watch macro economics and, of course, watch your own sales as a shipper.  These are the most telling indicators.

2. Look at your network and understand your network relative to freight flows.  I have said it many times that transportation is not a homogeneous network.  There are specific lanes (Northbound out of Mexico as an example) that are always under stress.  However, if you ship westbound you should be getting great deals almost always.

3. Understand that there is another side of the equation and that is demand.  Shippers have done an incredible job of productivity enhancements through packaging, product design, loadability studies, and network design which has allowed them to service their customers with higher quality goods at lower costs and lower transportation requirements.  There is no reason to think this will stop.

So, in conclusion, do not get caught up in the fear trade.  Do not think you need to pay a premium now as an insurance policy against future capacity.  One thing is for sure, capacity will flow to where the margins are and even if you pay more now it will not ensure future capacity.  If you pay a premium now you will be in a "Pay me now AND Pay me later" scenario.

Stay calm, stay focused and keep reading the data.

And now, enjoy the Who and Won't Get Fooled Again:

Truckload Strong; Intermodal Weak

I have not reviewed the CASS information for a while but have used other sources which have all told the same story.  Intermodal freight is soft relative to capacity which is putting pressure on rates.  However, the September truckload numbers show strong expenditure increases with shipments staying moderate.  Translate this into higher rates.

To show the issue with the intermodal market right now look at the chart above.  Clearly, going into Q2 in both 2012 and 2013 we see the price index decrease.  However, in the latter half of 2012 it rebounded.  In 2013 it tried but quickly was rebuked.  IM rates are in check mostly due to the capacity situation.

The real question though is whether this is a short term bump (The Christmas "rush") or is this a long term trend.  My belief is to watch it closely but be skeptical of anyone who says this is a long term trend.  Hours of service or none I believe there is no evidence to show the economy picking up or shipments growing rapidly.  Yes, there are bumps up and bumps down but the trend is pretty flat.

Don't get involved in what I call the fear trade.  The fear trade is when your carrier base comes running to you as soon as some data supports higher prices and tells you to "pay up".  Watch the data closely and I think you will find this to be a blip.

3d printing goes mainstream

As my readers know I have been talking about 3D printing for a long time and have been theorizing and brainstorming how this will impact manufacturing, supply chain and the overall method of acquiring goods.  From one of my first posts back in 2012 titled "Don't Reduce Costs - Eliminate Them" through the many others I really believe this is a major change in how goods will get to market.

And, of course, when we were first talking about this topic it appeared to many to be "Star Wars" type conversation but I will tell you it appears to be almost mainstream now.  Many at the recent Council of Supply Chain Management Professionals (CSCMP) Annual Global Conference in Denver were talking about it.  There was even a display!

Now the question is not whether the technology will exist or even if it will be affordable but rather what are the innovative and exciting ways it can be applied.  Unfortunately, the press is all over the fact that people are making gun parts with it.  But here are some revolutionary ways this can be applied to the supply chain:

1. Development cycle times cut dramatically:  Imagine when you can "print" prototype parts immediately and on demand as you build prototype products?  The idea of rapid prototyping  really becomes a reality and this technology drives this.  So, supply chains have to be ready for rapid deployment of new products.  Where supply chains might have had 3-5 years to plan and get ready for a new product to flow, they many now only have 6 months.  The "bottleneck" in new product development may have just shifted. 
2. Batch Sizes decrease to just about 1:  The bane of supply chains is when you can get to 1x1 or batch sizes of one.  By nature, supply chains like huge batch sizes as this helps:
• Inventory
• Procurement
• Shipping (Full shipments)
• Receiving
• Change overs in plants
• Tooling and machinery
Now the question is how will supply chains adapt to true batch sizes of one.  "Make on demand"  will be a reality and people need to be ready to deal with it. 
3. Really small shipments:  People have always talked about the "push - pull" between reducing logistics costs by increasing shipment size (full truckloads - fullest the furthest) and the flexibility and agility of small shipments.  Most want both.  3D printing will bring a lot more demand on smaller shipments and even shipments of "one".  This will really benefit companies such as UPS and FEDEX at the expense of truckload and intermodal.  

So, the conversation has moved from "Can that really be done" to "Looks like it can be done" to "Yes, it absolutely can be done now how do we leverage and exploit the new technology. 

There are a lot more and I look forward to engaging on the other ideas which will develop.  I look forward to any comments you may have.  

Energy as part of the Global Bill of Materials

If I told you there was a portion of your bill of materials which could make up 20% -40% of a major component would you want to know what that was?  I hope the answer would be yes and that element is energy.  I heard a person talk this week (A VP of a car company) talk about the "energy it takes to make a car".  The interesting part of his talk is he was not just talking about the plant where the car was assembled.

Rather, he walked all the way back to the extraction of raw materials, through the various "tiers" of suppliers, to manufacturing then to the final delivery of the finished product.  He discussed energy as a component of the BOM and therefore it needed to be managed.

In transportation, people are just now starting to look at this way and the more enlightened managers see this clearly.  If you look at the "bill of materials" for transportation, energy is about 40% of the cost.  Who would ever not manage 40% of the cost of a BOM?

Between emissions and the actual cost of energy it is clear the time is now to manage energy.  Those who say to not manage it or, worse yet, turn it over to the transportation companies just do not understand how important this element is to their costs and to the security of their supply chain.  What element could disrupt the supply chain worse than the lack of energy?

It is time to step up and take control of this and think like that speaker... thing about transportation as you would manufacturing.  Think about what the bill of materials is and what deserves your attention.  40% deserves your attention.

Economic Gains - Concept or Reality?

Don't want to be a "debbie downer" here but I came across this article in Logistics Management Magazine titled: Economic Gains are Sometimes More of a Concept Than Reality.  I tend to agree with the author on this one and said as much in my Macroeconomic Monday post last week.

Is Domestic Oil Drilling The Right Security Policy for the US?

This is a topic near and dear to logisticians and the overall energy strategy for the United States which then translates into what supply chains can expect for energy policy.  You cannot pick up a magazine, newspaper or watch a news show without the discussion of "energy independence" and how wonderful that will be / is for the United States.  And it is precisely that popularity which causes me to seek out other opinions.

A person once said if two people always agree with each other then probably one is not thinking.  The hoard mentality of energy independence makes me think that there must be another opinion - another way to look at things.  Well, leave it to Charlie Munger, Warren Buffett's great partner, and some may say the brains behind Warren, to give me that other way of looking at things.

In looking at this idea of energy policy he brings us to a core question:  Is it in the United States' best interest to "drain" the US now or should we in fact follow a policy of "drain the rest of the world" first and save our precious resource for the future?  A different way of looking at this problem. In order to believe that you may want to drain the rest of the world first you probably believe:

1. At some point, oil will become a scarce commodity.  This is not a popular view right now as we have moved from "peak oil" to an environment of oil abundance.  But, while we may argue about when, I think it is reasonable to believe that some day oil will be scarce.
2. You have to believe that there will not be a replacement for oil when the scarce time comes. 

If you believe those two items then the right policy is actually quite clear: drain the rest of the world first. While we can afford it and before the world catches on to us we should drain the world, even if it means drilling oil and bringing it to the US just to store then wait and see.  Here are some comments from Charlie:

"Oil is absolutely certain to become incredibly short in supply and very high priced .. The imported oil is not your enemy, it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization. And what responsible people do with a Confucian ethos is suffer now to benefit themselves and their families and their countrymen later. The way to do that is to go very slow in producing domestic oil and not mind at all if we pay prices that look ruinous for foreign oil. It's going to get way worse later ...

The oil in the ground that you're not producing is a national treasure ... It's not at all clear that there's any substitute [for hydrocarbons]. When the hydrocarbons are gone, I don't think the chemists are going to be able to just mix up a vat and create more hydrocarbons. It's conceivable that they could, I suppose, but it's not the way to bet. We should spend no attention to these silly economists and these silly politicians that tell us to become energy independent.

Let me pose a question for you. It's 1930. Oil in the United States is in glut. We have cartels to get the price up to $0.50 a barrel. Everywhere we drill we find more oil in our own country; everywhere we drill in Arabia we find even more. 

What would the correct policy of the United States have been in that time? Well, the correct policy would have been to issue $150 billion of very long-term bonds and cart 150 billion barrels of Middle Eastern oil into the United States and throw it into our salt caverns and leave it there untouched until the current age. 

It's easy to see that in retrospect, but who do you see who ever points this out? Zero. We have a brain-block on this issue. We should behave now to do on purpose what we did on accident then."

This is truly a fascinating position which challenges the common thought of drill in the US first.  He made me think:  Why should we drill now?  Oil in the ground is money in the bank and given that the ultimate price will be a global price to the consumer (i.e, the economy and the consumer see no benefit of local drilling) and that oil drilled in the US will be refined and then probably exported to equalize the global price, the correct policy is probably what Munger suggests - drain the rest of the world.

The only argument against this policy would be that we somehow benefit from local drilling and by the time we are drained there will be some type of substitute so it does not matter.  To this argument I reply with the knowledge of Pascal's wager.

When Pascal was asked why he believed in God he basically said it was an exercise in probability.  Basically he said he believed in God because if it turns out God does not exist than he really has lost nothing by believing in God during his life.  However, if God does exist than it certainly was good he believed and for those who did not, they are looking at an eternity of flames.

So, let's apply this to Munger's ideas.  If he is wrong, we have not lost anything (assuming we did not have to sacrafice mightly to drill the rest of the world).  If he is right, we will have ensured the security of our children for hundreds of years after the rest of the world is drained.

Makes you think.

Ht: The Motley Fool 

Watch the entire talk here:  21st Century annual Conference - ROUNDTABLE III  Charlie Munger starts making his comments on energy policy at about 36 minutes in.

In Memory of A True Visionary - John "Jock" Menzies

Last year at the CSCMP Annual Global Conference I had the pleasure of randomly sitting down with a person I had never met before and his name was Jock Menzies.  I was immediately fascinated as he told me of his organization, American Logistics Aid Network (ALAN).  He told me his story of how he set out to complete reform the logistics and and supply chain of how disaster relief is executed.  And by all accounts he was highly successful.

Unfortunately I was greeted this morning with news of his untimely death.  I ask myself why we seem to lose the great ones far too early and when they have far more to contribute.  But, alas, that is not a question for me to answer.

I just mark myself as part of a very lucky and fortunate group who had the pleasure of having breakfast with Jock and listening to his fascinating story and sharing in his vision.  The works on the ALAN website this morning said it best:

"May we honor his memory - and celebrate his life - by listening more carefully, responding more positively, and living more gently with one another. Perhaps together we can retrieve some small portion of the grace we have lost with his premature passing" 

John "Jock" Menzies will be missed.

Tesla Motors' Supply Chain VP to Speak at CSCMP Annual Global Conference; Closing Session to Focus on Personal Development

Tesla Motors' Supply Chain VP to Speak at CSCMP Annual Global Conference; Closing Session to Focus on Personal Development

A great development and looking forward to this fantastic discussion.  How to design and make a supply chain from scratch!