Welcome Back Wal-Mart - We Missed You Over the Last 5 Years.

I hesitated writing about the Amazon purchase of Whole Foods as many have written about it already and much is not yet known about how Jeff Bezos is going to use Whole Foods in the continued growth of his retail empire.  One thing for sure is whatever he does with it will be completely different than most people think.  That is what makes Bezos so brilliant and why no one has been able to beat him.  In some ways, only he knows what he really is doing.

But then I re-read an article I posted in March of 2013 titled, "The Battle for Retail is Really The Battle of Supply Chains".  In this article I opined that the big retailers are all essentially selling the same products, many of which have been or very quickly are commoditized.  This means the real value add of a retailer is in their supply chain.

I also concluded in this article that Wal-Mart should be able to kill Amazon as they already have the bricks and mortars along with the capability of great e-commerce.  Finally, I concluded that due to the age old issue of The Innovators Dilemma which was created by Clayton Christensen in his seminal book of the same name.  Unfortunately, for the last 4 years, and for Wal-Mart,  my prediction came true.

The good news is Wal-Mart, like the sleeping giant, has now been awoken.  With its purchase of Jet.com it admitted it needed great e-commerce and, in the same transaction, admitted it could not do this on its own.  The big behemoth could not innovate so it had to buy.  That is OK as it is at least now on the path to competing with Amazon.

But then a funny thing happened.  Amazon admitted it could not grow bricks and mortars fast enough in the grocery space to compete so it made a bold purchase.  In this purchase, Bezos is essentially admitting he wants to move a little more towards a Wal-Mart model and also showed, in this purchase, the only reason Wal-Mart has not crushed Amazon is due to lack of execution and lack of strategic foresight.

Well, no more.  I believe Wal-Mart truly has awoke and they are starting to adjust their supply chain very quickly to mirror a "be where ever the customer is" retailer.  This means if you are out and need something quickly, you can pull into your Wal-Mart and get it.  If you want to order on line and have it shipped, you can do that.  If you want to avoid shipping charges, you can buy on line and pick it up in the store.  Basically, any configuration of how the consumer wants to interact to get the products she needs, Wal-Mart will be there.  Wal-Mart can ship from DCs or from any of its 4,177 stores of which 3,275 are super centers.  Wow!  Wouldn't Amazon love to have that footprint.

If Wal-Mart executes they have a chance of beating Amazon.  I recently used Wal-Mart on line to buy a UPS for my computer.  It was a great experience, shipped fast and was less expensive than Amazon.

I do think the speciality retailer is dead.  Consumers want the "endless aisle" that Amazon and Wal-Mart provide. They do not want to bounce around to 100 different websites to find what they want.

Wal-Mart can do everything Amazon can do (or they should be able to do it) yet Amazon cannot come close to all the capabilities of a Wal-Mart.  If I were investing, the only stock I would buy in the retail space is Wal-Mart.  I would then go to their shareholders meeting and scream two phrases:  "Wake Up" and "Execute"!

Welcome back Wal-Mart - I missed you!

Definitions of Terms Must be as Your Customer Sees It

I am sitting on a plane right now, on the Tarmac, moving nowhere.  This reminds me of another aspect of a truly customer centric supply chain: Define terms as your customer sees them and not for your own internal metrics.

So, the airline app says I have "departed" and in their mind, I am sure I have. But in my mind, I am sitting in a tube, on a tarmac, going nowhere. I, the customer, consider departed to mean I am up in the air and heading to my destination. 

Lesson:. Define terms from a customer lens, not from an internal lens. When you do this, you will be on your path to customer centricity. 

Start with The Customer - Ensure Profitability

Supply chain design is all about two things:  Provide extraordinary customer service through fast and full fulfillment AND do this profitably.  As a company, you will not survive if you cannot do both of these things simultaneously.  Sound simple?  Sure, but then why do so many supply chain professionals only do the back half?

As I work with companies I continue to emphasize that it is important for our supply chain to drive revenue.   Great supply chains (Read: Walmart and Amazon for example) are core to the company's revenue strategy and not just an evil cost to reduce.

But, there is this pesky thing called "profit" that also has to exist to make a world class supply chain complete.  The question really is what do you do first?  My view is you take care of the customer then figure out the cost.  If you are designing supply chains you are in a war with your competitors and the weapons of that war are speed and availability.  Customers, whether they be industrial, commercial or consumer are asking for the same thing:  They want what they want, when they want it, in the right quantity at the right price.  Those who figure all this out will win.  Those who do not will perish.  What are some things you should do now to get on the path to figure this out?  A few ideas below:

1. Start with the Customer:  Don't lift a finger to design a supply chain until you have personally interviewed, visited with, surveyed and embedded yourself into the customer.  This does not mean asking sales their opinion.  Sales is a first derivative source.   Go right to the customer.
   
2. One Size Does Not Fit All:  Design with the idea of multiple supply chains to service specific groups of customers.
   
3. Use Pricing to Give The Customer Options: You need to probe what customers are willing to pay for and what they are not willing to pay for.  Amazon is a master at this.  Do you get next day delivery?  Yes... Do you pay for it (through Prime)?  Yes...   Do most people spend more on Prime fees then they get back in avoidance of shipping costs?  Most likely.  The key here is to not say no to the customer, just provide options.
   
4. When In Doubt, Provide The Service Then Figure Out The Cost:  Many times there just is not enough time to ensure everything is perfect before you decide which direction to go.  But, once you are confident you are "close enough" to figure out the cost, launch!  There is no better way to ensure you have pressure to lower costs.  This is not a "ready, shoot, aim" strategy but rather it is one that avoids a supply chain being stuck in a conference room for years.
   
5. Constantly Reevaluate:  The industry is moving too fast to design a supply chain every 10 years.  You must constantly reevaluate where you stand relative to customer demands and competitive forces.  

This all sounds simple but I can assure you that if you really do this at your company you will be in the top 5%. Most try this but then just revert to the cost equation. The good news is you can win with this model.  In the words of Nike - Just Do It!

Jacksonville Florida is a True Logistics Hub

This is a bit of a plug for my hometown but I felt it necessary.  This article titled Work Wanted: Good Jobs in Logistics are Abundant in Jacksonville tells the story.  To be a true logistics hub every location needs to have natural infrastructure and Jacksonville has this with JaxPort.

Then you need rail networks, highway networks (Jax joins I-10 and I-95 - two may corridors with 10 being East - West and 95 being North - South), good employment and space for warehousing. All of this has to be wrapped around a good business climate.

Jacksonville Florida has it all and more!  What is the more?  Jacksonville is the gateway to one of the most populous states and fastest growing states.  What better place to be for logistics then to be where the people live.

It truly is a great logistics hub.  Congratulations to all who have helped make it the true "Gateway to Florida".

If You Expect Your 3PL to Invest, You Have to Commit

I have been doing a lot of thinking lately on the state of the 3PL industry.  I have not worked in the industry for a number of years but I have been a consumer of it and I have stayed very close to those in the industry.  What always amazes me is the turnover in 3PLs.  They are used, bid out, then discarded at a moment's notice.  I also hear over and over again from customers of 3PLs that the 3PLs they use do not invest in technology and people as much as they should. This caused me to ask why?

This feedback has been around for ages on 3PLs and I always wondered why it has not been addressed.  In fact, I would say the industry has really run away from what was true 3PL work and the brokerage industry has co-opted the term 3PL for itself.  3PLs today are mostly just brokerage houses.

So, why all this talk of "partnerships" yet bidding still happens at a torrid pace to reduce costs. A consumer of 3PL services should ask themselves the following questions when looking for cost reduction:

1. How will value truly be created?  Remember, taking money out of one pocket and putting it in another does not add value to the extended supply chain.  This activity will just merely reallocate the value which is already there.
   
2. Is the value truly sustainable?  For example, building cost reduction from paying below market wages is simply not sustainable.  Something will give.  Yet, I hear consumers of services say things such as " I don't care how they do it, just do it".
   
3. Are the governance structures supporting the relationship aligned with the overall goals of the program?  Too many times I hear the terms "partnership" and "vested relationships" yet when you look deeply at the contracts and the governance structure, it becomes clear the relationship does not support overall value creation.  

I am sure most reading this will say "not me..." but reality is that this covers 99% of the relationships which exist out in the industry.  How do we know?  Just look at portfolio turnover of the 3PL and look at duration of contracts.  Both suggest that what I am stating above is true.  

So, what can a consumer of 3PL services (warehousing, transportation brokerage etc.) do to ensure the 3PL you are working with is going to be a true value added partner?  Here are a few ideas:

1. Make contracts long enough for the 3PL to recover investments.  We ask the 3PL to invest in huge amounts of capital (technology, buildings, automation) yet we write the contract for 3 years. Imagine how expensive this is if the 3PL has to recover this investment in 3 years!
   
2. Build a payment structure that allows the 3PL to gain from applying innovation.  If the payments are fixed, why would the 3PL invest in innovation?  They need to benefit from this and there are payment structures which allow that to happen.
   
3. Build a management governance structure which ensures the 3PL can survive.  For example, in fast growing wage environments, do you really want the 3PL to keep wages low and thus attract the not so best employees?  That is what they will be forced to do if you do not have a structure which allows for real business decisions such as raising wages and everyone sharing in that cost.  

The bottom line is apply all the same values and principles you have in running your company to the 3PL.  I think you will find the 3PL will invest, will apply innovation and will, in the long run, add huge value.  If you bid every few years you are not partnering and not adding value, you are just shifting money from pocket to pocket.  

Schneider IPO Price Set Between $18 and $20. Big Pay Day for Family

Three things to know about the Schneider (SNDR) IPO (JSonline):

1. The family remains firmly in control - in fact the company will still be considered a "closely held" company. 
2. Family will net about $230M
3. $359M to the company of which roughly half is used to pay down debt and 1/2 to buy chassis.

Macroeconomic Monday® - Inventory to Sales Ratio

Goes to show, I should never take a break from blogging.  "While I was out", the inventory to sales ratio in the economy has made a very nice move.  While not even close to the post recession area it is starting to move down which indicates the bleeding off of inventory has begun.  Of course, for transportation to tighten, and rates to go up, this will need to tighten some more.

While there is optimism, February retail sales at .1% definitely slowed this movement.

There is also the wild card of autos.  Ford has already warned on inventory and slow sales which means a lot of capacity becomes available as the automotive industry adjusts (read: idles plants).

More to come but let's call this a "good sign" if you are on the capacity side and an "early warning" if you are on the shipper side.

 

Inventories to Sales Ratio

The Stay at Home Economy and Its Supply Chain Impacts - Part 1: Definition

I have noticed a bit about my own behavior and started looking to see if it was just me or was it a "trend" (I am not usually "trendy").  The behavior is simple:  I just stay at home more and I have made my home a bit of a "Disneyland".  Rather than go out for entertainment, I have it brought to me. Instead of going out to buy things, I had them brought to me.  To listen to music, for example,  I merely plug into an amp and headphones and through the power of Amazon, Spotify or Pandora I have just about every song ever recorded at my fingertips.  This is The Stay at Home Economy.

The Stay at Home Economy (SAHE for now on) is something that has huge impact on how our supply chains work.  First, lets explore why this is growing:

1. Technology: I have written a lot about how technology miniaturized or digitized just about everything and it continues at a rapid pace.  My music, my video and my books are all digitized so I get them on demand and in digital devices.  No need to shop or go to a central place to watch or listen.  In fact, my home theater and home audio equipment rivals that of professional locations.
2. Customization: Because virtually everything is available with the touch of a button, I essentially customize my experience to an audience of one - me.  Before, I would have to compromise and listen, watch or do some activity that perhaps was not exactly what I wanted to do.  Now, I do exactly what I want to do. 
3. Control of the Temporal Aspect of Activity: I do what I want (see #2 above) when I want. I no longer have to worry about "start" times or what day of week I am doing something.  I do what I want and when I want to do it. 
4. Food Delivery: This is the last bastion of home delivery e-commerce and it is coming. It is far more complex but with companies building "Meals ready to eat" (No, not the MRE's from the Army days but companies such as Blueapron) and with your local supermarket delivering, the last "big" reason to go out is starting to go away.  
5. Security: This is an unfortunate part of life these days but it is a fact - the more the aggregation of people occur at events, the more risk there is.  Why take that risk?  When I am at home I feel far more secure. 

All of these reasons lead to the idea of "Mass Customization" which has been a dream for a long time.  No longer do you have to produce a product, service or experience for the "masses" but rather you can offer a large amount of individual items and let the customer aggregate these things into the experience they want - when they want it.  

This is the SAHE and you can already imagine the impacts of this on your supply chain.  If you are not letting people customize experiences or products or you are not building a really compelling reason why someone should leave their home to go to your location, you are going to lose.  

This is also the much bigger reason why Amazon is winning - they have built out an experience, a catalog and customization capabilities for the SAHE.  One might even say they are the store for the SAHE.  It is not just a fancy website and big warehouses.  They are actually building out an ecosystem which supports the SAHE. 

Jim Cramer reported on this on his Mad Money Show and said (from Seeking Alpha):

"When Domino's Pizza (NYSE:DPZ) crushed earnings and Target (NYSE:TGT) got hammered, Cramer is convinced that the stay-at-home economy is getting strong. 

The comparisons between these two stocks are perfect metaphors for the current environment. Stocks such as Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Domino's allow people to stay at home and save money as well. Domino's delivers pizzas to you at home while Target requires you to leave the house. 

The bricks and mortars are losing in a world where consumers see stay-at-home as an advantage. This also means that companies like Home Depot (NYSE:HD) and TJX Companies (NYSE:TJX) are rallying as they make the home better. 

Netflix, Amazon and the likes have made entertainment reach home, when you want, how you want it. Gaming companies create engaging video games which people play at home. With social media, consumers are aware what's going on and do not need to leave the house. It's just that things are different now compared to how they were 10 years ago. The stay-at-home economy is touching every aspect of people's lives and it's not going to change soon."

I think it is clear the SAHE is here to stay and it is dramatically changing how people behave and shop.  My next entry will be on the implications of your supply chain - Hint:  If you are not working to support the SAHE you are quickly becoming obsolete.


  Note:  I am not making any value judgment pro or con on the SAHE - that is for social scientists and psychologists to develop.  I am merely reporting what is clearly happening and the impact on supply chains.  

What is a Supply Chain To Do In Age of Global Disruption?

I have been following the election and subsequent transition for a long time now and of course have opinions on a lot of items.  However, as I keep seeing the "Tweet" storms relative to imports, global supply chains, and re-shoring I keep thinking about the supply chain implications.  So, I ask the question, "What is a Supply Chain To Do"?

The proposals being made would fundamentally change the economics on a lot of business decisions relative to the development and build out of supply chains.  One example is the proposed "Border Tax" which could be as much as 35% on imports.  As the Wall Street Journal pointed out, President Elect Trump is even threatening a foreign company, BMW, with a "border tax" if they move production to Mexico.   The Wall Street Journal reports toy manufacturers are struggling with what should they do in this age of the popular uprising against global supply chains.  And, even Constellation Brands is "bracing themselves" for this tax.

For those deeply involved in global supply chains the question being asked is just exactly what should they do in 2017?  Do they develop supply chains as if this is not happening? Do they retreat and prepare for this tax by re-shoring? Do they automate (keep plants in the US but eliminate people?  All of these questions are up in the air and the uncertainty of whether the threats are real or just political positioning will cause supply chain investment to slow down.

Companies can do one of three things:

1. Stop major investment and wait for more certainty.
2. Continue to invest and "take a bet" where this will land
3. Ignore it and fight it - risking one morning that the CEO wakes up one morning and finds their stock down 10% due to a pointed tweet. 

So far what I think we are seeing is number 1 in action.  When Ford decided to not move production to Mexico it really was not about moving jobs back to the US but rather about stopping production, leaving the investment half done and just using the current facilities they have. 

When Carrier said they would not move production they did say they would automate.  This has the same effect as moving. 

In conclusion, I think a couple of things (non political, just economics):

1. Global supply chains are here to stay and no one can stop them or revert them.  How can toy manufacturers all of a sudden make affordable toys in the US?  The infrastructure for the global supply chains have already been built.  They are not changing. 
2. Any time you introduce economic distortion (i.e. a border tax or favoring one industry over another) you risk abnormal behavior in investment.  Eventually this falls apart and a collapse occurs. 
3. When you threaten major disruption you force things to get put on hold until clarity emerges. 

So, I believe 2017 could be a year of a standstill in terms of capital investment.  Far more clarity is needed before major investments can be made.  The job of the new administration will be to give that clarity sooner rather than later and this will allow supply chain experts to move on and continue to develop sophisticated and global supply chains. 

What is The True State of The Supply Chain Industry?

As we look at the profession of managing supply chains we tend to spend a lot of time working on specific areas such as S&OP, Six Sigma, Lean, Labor management etc. These are all part of what we would hope would be an incredibly efficient supply chain. So, given all the spend in technology and all the work in these areas, it is fair to ask ourselves how are we doing?

By two very macro metrics, I would say as an industry, we are not doing great.  Lets first look at inventory.  As we all know, inventory at rest is waste. We also all like to engage in case studies of companies such as Zara and Dell (former Dell) where inventory management is legendary.  But when we look at the macro numbers, we just are not doing that well. 

The Government publishes an inventory to sales ratio which tells us how much inventory exists for the level of sales that are being produced.  The below graph shows the most current:

As you can see, our inventory relative to sales is about where it was in 2002.  We bottomed right after the recession (when companies just slashed) but since then, even with all the studies and technology, we still grew inventory.  This is waste in the system (and also explains the reason there is excess transportation capacity - especially in ocean).

Now, let's look at cost and for this I go to the CSCMP report "State of Logistics".  The key metric here is logistics cost as % of GDP.  Using the newer calculations prepared by AT Kearney it shows last year we were at 7.85% of GDP.  In 2011 we were at 7.88% so with all of this work, we have improved our cost efficiency by 3bps.  Not a stellar performance.  

So, by these two measurements certainly this industry has a "cold".  One could argue that we have become a lot more efficient but we "consumed" that efficiency by increasing service dramatically (more next day and same day delivery for example).  That is possible and certainly deserves study. However, in total, we do not seem to have made much progress. 

The Schools of Experience - Developing Yourself and Selecting Talent

During holidays I really like to spend time with a good book and this Thanksgiving was no different.  I am reading (and re-reading) Clayton Christensen's book:  How Will You Measure Your Life?  This book is a fantastic read and it uses models of operation to help guide you in both your personal and professional life.  I may call on this in future postings but today I want to discuss his chapter on selecting talent called: The Schools of Experience.

In this chapter, Professor Christensen discusses how one should look at their careers and subsequently how someone should look at hiring talent.  The old model of climbing a ladder is no longer useful in a "flat" world (using Thomas Friedman's analogy and applying to corporate America).  Most organizations are extremely flat - especially relative to years ago - and this means it is a collection of experiences which will both drive your career and should drive your selection of talent.   He has many examples but let me provide two from my own career:

Transition from the Military:

The military was a fantastic place to both give back to the Country and also to accumulate many experiences:  Leadership, operating in stressful environments, fast decision making, and I could go on.  Truly, I cannot imagine any civilian business giving better experiences at those situations than the military.

However, the military does not provide a lot of financial experience, profit and loss experience or business competition experience (There is, after all, only one Pentagon!).  So, when the opportunity presented itself, I moved into the business world.  In that world I have experienced all the items I mention above.  Was it a "promotion"?  If measured by wages, true cost of living, or titles it could have actually  been considered a demotion.  If measured by gathering huge experiences which I could not get in the military, it was a huge promotion!

Transition from "Big Company" to Entrepreneurial Company:

The skills required to work in a big company with large well established processes are completely different than those required in the small and entrepreneurial world.  So, using the theory of "experiences" I decided I wanted that small experience even though I was in a well established executive position at a great company.

Using supply chain metrics, was it a promotion?  I went from managing 14M square feet of warehouse space to 6M square feet.  I went from $300M+ of transportation spend to $80M.  To the stereotypical person, this could be seen as a "lesser role".  Trust me, it was not!

I quickly learned the skills used in a large company are close to useless in a small, everyone does the work, entrepreneurial and "scrappy" company.  The experiences I gained at this smaller company could never have been attained in the larger, well established company.  And, if I were to just do what I did in the large company in the entrepreneurial company, I would have failed.   I had to adapt, learn, gather new experiences and apply them to the unique issues.

What does this mean for talent acquisition:

Even today with the sophisticated human resources (HR) departments I still find people rely on the "ladder" model versus the "experiences" model. For example, if you were hiring for a start up company would it matter that someone become a SVP in a multi-billion dollar company?  That person has incredible experience (and has been successful) in delegation, building staff, using sophisticated ERP such as SAP etc.

What this person lacks is start up skills.  Can they do a lot of the work themselves?  How will they perform without "staff"?  Etc.  The "ladder" model shows that this person is a great pick but the "experiences" model shows the person to be lacking in a number of major areas.

Conclusion:

We can use the "experiences" model to guide both our careers (choose experiences over perceived promotions) and we can use it in talent selection.  It tells a different story when this is applied versus the "ladder" model.  My advice for those starting their careers is to work to get many different experiences and work to stitch together a set of skills, acquired by experiences, that will serve in you in a multitude of settings. This will ultimately serve you better than "climbing the ladder". 

The Amazon Effect

For anyone who runs a warehouse and has Amazon "come to town" you know, at a very micro level, about the "Amazon Effect".  The entire labor and transportation capacity situation in your town changes in an instant.

However, it is bigger than that from a nationwide perspective and I had the privilege of listening to a very insightful presentation given by  Eric Johnson (Twtr: @AmShipEric), research director and IT editor at American Shipper at the Jacksonville CSCMP roundtable event in October.

He had some very good insight into what Amazon is trying to become and what they are not trying to do.  My conclusion, after listening to Eric, is Amazon wants to "own the customer".  Now, of course the key question is what does this mean?

If you think about "owning the customer", it really covers about 5 major touch points:

1. Own the order experience (The first point to gain loyalty for any product).  This drives all sorts of information technology.
2. Own the delivery experience (Appointments, delivery, right to how the customer is greeted). 
3. Own the post delivery experience (solve issues etc)
4. Own the payment experience (whether they sell it to you or not).
5. Own the customer ecosystem (Alexa app, ECHO and DOT). 

If your company is not investing heavily in all of the above you most likely are going to be displaced by Amazon at some point.  This is why I published: "What Exactly is Amazon... 3PL? Retailer? IT Company? Delivery Company? - Answer: All of the Above" back in October of 2015!".  

Bottom line:  The story has not changed.  Amazon is coming for your business regardless of what you are doing so be ready to compete.  And, for those who think it is just a matter of time before they are crushed by the weight of costs, think again.  They have entered into a new space and as this article from back in February reminds us:  They are winning the race for the smart home, and no one is noticing. 

October Results are Not encouraging for Transportation Providers

It may not be a complete "Happy Thanksgiving" for people who manage 3d party transportation.  After some very large decreases in the last few months, the CASS Transportation index decreased again in October.  The transportation index dropped 1.4% in October.  While this is better than the drop of 2.8% in August and 3.5% in September, it still shows that there is over capacity in the transportation industry.

The Intermodal index rose, YoY for the first time since 2014 by 0.4%.  This, I would call a "rounding error".  Let's call it flat.

Source:  CASS Transportation

Source: CASS Transportation

As I have discussed for many years, there is a fundamental shift in the way freight is moved in the US and I am wondering if even the metrics are wrong?  Should we be so tied to this freight index and does this really tell us about the economy? Today, the economy seems to be moving fairly well but transportation continues to decrease.  The issues:

1. Miniaturization of product
   
2. E-Commerce (reduction of movement of product to stores
   
3. Digitization of product - more product delivered electronically (Books, newspapers, inserts, music etc.).
   
4. Localization of suppliers - This is very interesting because it is a function of transportation costs getting out of control a few years ago. As more finished goods / component mfgs localize, transportation requirements decrease dramatically (Better cube utilization when shipping raw materials v. shipping finished goods or components).
   
5. The Borrowing Economy:   I will write more about this and the impact to supply chains but this is real and it is impacting how much we buy.  Think about how many items you have that sit and do nothing most of the time.  If people start aggregating this in a borrowing economy, the total amount of product bought and shipped will be reduced dramatically. 

So, the macro trends fully support this reduction in transportation even though the economy seems to be moving along quite nicely.  

Marc Althen at Penske Logistics - Leading by Example and Empowerment

A great article about a great leader titled "Leading by Example and Empowerment".  Congratulations to Marc Althen.. .well deserved

CASS Report from September is Somewhat Grim - Macroeconomic Monday

OK, I am late to the party on this one, sorry but when I read it I thought I had to write, albeit, late.  The Cass Freight Index Report from September had virtually no good news in it.  The best thing they had to say was (actual quote), "... the YoY contraction [in expenditures] appeared to be less bad [than August]".  When all you can say is "It is not as bad as last month", you know it is bad.

On To the Numbers:

• Shipments were down 3.1% YoY
• Expenditures were down 3.8% YoY

And the industrial recession is on.  I think they rightfully state that the culprit may be the contraction in inventories.  I have written many times about the growth in inventory relative to sales and I think companies have realized they need to get rid of those inventories.  This means most product is already here and in the warehouses / stores and this reduces the need for transportation immensely. Why buy new product when you are so dramatically overstocked. 

Destocking takes bps out of GDP

This graph, from CASS, tells the story that destocking, while slowing down, is still a drag on the economy.  CASS says they are continuing to be concerned about too many autos, elevated inventory relative to sales and the fact that the consumer has not really dove in with both feet (or open wallet).  

Now, the key issue will be whether the Fed increases interest rates in December as everyone expects them to.  That will be a real problem as the economy, even if you think it is good, is truly running on just about one cylinder. 

What does this mean for shippers and providers:

I think the data is clear, and has been for at least two years now, and it is telling us that the shippers are in control (especially in ocean freight) and will be for the foreseeable future.  Of course, this is nothing to write home about as this means the economy is soft.  However, if you are shipping and you have a nice business you should take advantage of these soft times.  Believe me, when it swings, you better duck.  And, as all my readers know, you will not get benefit because you overpaid in a slow environment. 

Actions:

• If you have not bid freight in a while - do it now. 
• Lock in rates for two years if you can - a nice hedge
• Move to a market based fuel system to take out any fuel fluctuations in the rating structure
• Watch tender turn down rates.  This will act as a great "early warning" telling when / if the tide turns (don't expect this until 2018)

An Update on Drones and Drone Delivery

I wrote about Drones first in February of 2013 after watching a Nova episode called "Rise of the drones".  This was almost a full year before the infamous Jeff Bezos 60 minutes episode where he somewhat stunned the world discussing using drones as delivery vehicles.  In one way we have come a long way and in another, it is amazing how slow it has taken to commercialize this.

Two updates to report.  First, at the CSCMP Annual Conference I was able to attend the "Educators Conference" and watched a great presentation by Professor Dr. James Campbell, Professor and Chair, Logistics & Operations Management Department,  College of Business Administration, University of Missouri - St. Louis.  He discussed the use of the "Truck - Drone" hybrid which entails trucks moving to central locations with product.  At that location, the drones would be launched and conduct deliveries.  A fascinating topic which made more sense as things such as battery life and laws about flying out of vision will make launching them from central DCs almost impossible for the near term.

He also had a nice graph showing the cost per delivery and Amazon can get this cost down to $1.00 per package.  That is amazing.  There was a lot more in the presentation and it is clear thought leaders such as Dr. Campbell are making large strides.

Second, I checked in on Missy Cummings who, in 2013 was the star of the Nova episode. Remember, she was one of the first F/18 pilots for the US Navy and a graduate of the US Naval Academy.  She now runs HAL - The Human Autonomy Lab at Duke.  She continues to study the use of bigger and bigger drones and believes these will be used for delivery.  She also has an interesting twist (See video below) on the human interaction of drones.  That is becoming the topic as the technology is no longer "futuristic" but rather it is known and can be implemented.  The question is how will we interact with drones.

If you have not seen the original NOVA episode, even though it is 3 years old, you really should watch it (Below).  I have also included a recent speech Missy made.  She is truly brilliant in this field.

Mary "Missy" Cummings Gives Talk at Duke

PBS NOVA - Rise of the Drones

A Balanced Summary of Where The Trucking Industry Stands

Fleet Owner summarized the FTR Transportation conference with an article about the headwinds facing the transportation industry.  They are real but they are what every business faces - uncertainty. That is what makes a business a business.  Certainty is what utilities have.

Usually the press out of this conference is designed to scare the shippers into paying higher rates than they need to but, at least within this summary, it appears they are becoming more realistic.  Here are some key points:

• 2% GDP growth for the next two to three years (A number I have used for many years now). This is significant because virtually all the transportation executives I know say the real capacity crunch comes at 3% GDP growth.
  
• Eric Starks states the industry will flat in the foreseeable future.  Flat means leaders tend not to know what action to take; what bet to make.
  
• Mark Rourke, President of Schneider claims they have a 4% to 5% productivity decline due to electronic logging devices (ELD) and they have not recovered from this since.  This I will never understand and wish someone would explain.  How can ELD's cause a productivity decline unless you are not already following the Hours of Service (HOS) laws. I would think this would make them more competitive as it will ensure everyone follows the laws.
  

I also think one of the biggest issues facing the trucking industry is just the nature of the "new freight".  With freight now going to central and very large DCs and then parceled out to the consumer, the entire leg of freight going to the store is being eliminated.  Think of this:  Rail gets it to the DC and the part that was truck (DC to Store) is being eliminated.  As leases run out, more and more retailers will close stores and go to on line.  This will have a huge impact to the trucking market.  

Perhaps this outlook (grim as it is) is what is driving the Schneider IPO?

Schneider Seeking IPO

A fascinating development from the Frozen Tundra.  I just read they are seeking to do an IPO for part of the company.  I was there when they did this the last time... It crashed and never happened.  Let's see what happens now. 

More evidence that I think the Schneiders want little to do with trucking.  Don Schneider used to say the decision to go public was only a finance decision to get access to capital.  In this day with interest rates as low as ever and with free money everywhere, one wonders why you would go public now.  It cannot just be an "access to capital" question.

Fundamental Supply Chain Shifts Kill The Idea of a "Surge"

I have talked a lot about the inventory to sales ratio and how it is such a great predictor of what will happen in the transportation industry. Back in April I was sending a warning sign in my post "Inventories Continue to Grow" and I even signaled this all the way back in 2012 in a post titled "Inventory to Sales Ratio Tells A Grim Story".  It appears the Wall Street Journal now agrees.

In an article today titled "At Ports, A Sign of Altered Supply Chains", they discuss the muted growth (or at least not shrink) of the trucking and ocean business.  The cause?  You guessed it - the fact that inventories are high, the consumer is moving to on line purchasing, and the more disciplined approach to inventory management.  There are some key shifts happening:

1. Demand Sensing Supply Chains:  These have finally come into their own.  Companies are much better at identifying the purchase trends and immediately shifting inventory purchases to adjust.  If the consumer slows (or moves from apparel to electronics for example), Demand Sensing Supply Chains adjust almost in real time.  Gone are the days of huge inventory buys "just in case".
   
2. On Line Purchases and The Death of Excess Inventory: Anyone who has managed inventory knows these key tenets of inventory management:  As you move inventory out and disperse it among stores or other storage points, your forecast accuracy decreases, your errors increase and the likelihood you will "orphan" inventory in the network increases dramatically.
   
   To solve these gaps in information, you generally overbuy inventory to keep "in stocks" high.The inventory benefits of on line are clear:  Far fewer inventory points (probably 4 at most) result in much higher accuracy which translates into far fewer inventory dollars to service the same consumer base.  This, of course, translates into much less transportation needed.  Those who say it does not matter, we are selling the same amount of stuff, do not know how the "laws of inventory" work.
   
3. The Growth of The Supply Chain Data Scientist:  This is an entirely new field in supply chain and is different than just being an analyst.  This is deep diving into data, pulling "fuzzy" data points together and identifying trends.  These people see changes in buying patterns far earlier than ever before and provide that information to management which responds far faster than ever before.  Inventory buys can be shut off in a nano second. 

These factors are resulting in a far more disciplined inventory management process.  We have been in an "over inventoried" position, in the aggregate, for a very long time and I have been predicting this will keep the demand for transportation services muted.  This is what is happening. 

Source:  Wall Street Journal

The New Transportation Technology Ecosystem is Shaping

Developing the future is messy.  It always appears it cannot be done and individual technologies, when looked at in isolation, look like they will never work.  However, I submit this is short term and to borrow a Star Trek phrase, is "Two Dimensional thinking".  Let's think about this in "three dimensions - think about the ecosystem and the connection of this ecosystem.

Let's review some key technologies being developed or deployed now:

1. Electronic logging
2. In cab cameras that go beyond just filming but rather sends signals to centralized managers who make real time decisions.
3. "Uber" type applications for booking, managing, and tracking freight
4. Autonomous vehicles and the "Otto" type technologies. 
5. On line immediate economy (hour type delivery)

All of these technologies have advocates and enemies when looked at in isolation. However, I submit that you have to think of this in "three dimensions"; you have to connect the dots. All of these technologies need to come together to build the infrastructure of the future for transportation.  They all point to one thing:  A driverless truck.

The core to this is the autonomous vehicle - which probably explains why Uber buys Otto.  But then, once this is solved, there are other things that have to come into place for this new ecosystem to work:  You have to book the freight easily (enter Uber), you will want to see what is happening (especially at delivery and pick up points) (enter cameras), you will need to track where the truck is and what it is doing (enter E-logging).  

The one thing I cannot figure out is how the truck will fuel and perhaps that leads to a futuristic truck stop which caters to the autonomous truck. Perhaps the biggest issue with this entire ecosystem is how will the truck stops like Pilot make money when there is no one to go into the C-Store to buy stuff.  

So, when you look at the entire ecosystem of the future, you can see it taking shape, albeit messy, with all the technologies being developed.  If you look at them in isolation, solving an old problem (i.e., Does E-Logging really solve driver logging or does it prepare us for having no driver?) then you will wonder "why do we need this".  If you look at them together, building the new transportation ecosystem, then you say, "Got it!".

Those who look at these developments individually make me think of Khan and his two dimensional thinking: