Fuel Prices

The idea of limited oil is an idea which needs to be reevaluated.  As drilling technology gets more advanced it appears oil and natural gas reserves will continue to grow. 

So, why the fuel price increase?  It does not appear to be a result of what normal economics would drive.  It is far more about speculation and fear which is the reason fuel must be managed.  If you are unwilling to take an active role in managing fuel you will generally be subject to the "whipsaw" effect of the marketplace. 

Keep an eye on fuel drilling capacity, production capacity and the import/export imbalances to decide if there truly is a fuel shortage.  Right now the United States is exporting a lot of refined petroleum products.  I am sure this increase will cause the continued move to intermodal and rail movements.  It should not be an all or nothing move however.  A good "multi modal" strategy is one which protects capacity and allows for adaptations to the current economics. 

T. Boone Pickens Responds to President Obama's Natural Gas Plan. A "Victory Lap"

POTUS Pushes for Natural Gas Trucks

For those looking for a single solution to solve the world's problems, this will disappoint.  However, for those who understand it is the proper mix and application of multiple sources of fuel which will solve our need for energy, this will really excite you.

President Obama has made it a centerpiece of his work to incent the movement of Class VIII trucks to natural gas.  This is absolutely the right call.  It is abundant and clean.  Further, the technology is much further along than people realize.  With the announcement of multiple distribution agreements and the build out of NG fueling stations, this is an idea whose time has come.

The question of CNG (Compressed Natural Gas) or LNG (Liquified Natural Gas) is one of application.  Both have a role.  Generally speaking CNG is easier to distribute and does not require the cryogenic freezing of LNG (It is liquified by freezing the NG to -260 degrees F - Read more about LNG here).  However, LNG does allow your truck to go further.  Read:  One is probably great for short haul, out and back type of applications (CNG).  One is better for over the road (LNG).

One drawback to LNG for those who look at the entire distribution supply chain:  LNG has to get to the station via truck.  A lot of trucks on the road to distribute LNG.  So, while the end truck may be powered by clean LNG you have to ask yourself how it go to your distribution point.

CNG moves in pipelines and is compressed at point of use so this issue above does not apply.

I am personally very excited about these opportunities.  We are heading in the right direction for sure thanks to some very daring and exciting people such as T. Boone Pickens and Aubrey Mclendon. 

Predictions on Fuel

Predicting fuel prices is a tough game and one where the house almost always wins.  However, predicting the macro trends with good data and facts just requires hard work.  Derik Andreoli in this article on oil and fuel trends hits it on the mark.  This is a "must read" and a "must keep" as you plan how you will navigate your way through these dangerous and unstable waters in 2012.

2012 Rate Outlook: Flat…for now - Article from Logistics Management

2012 Rate Outlook: Flat…for now - Article from Logistics Management

General outlook in this article is freight rates are stable, economy is going to grow slower than expected (what else is new.. people's appetites are always bigger than they can consume), and low inventory levels are here to stay. The article also says ocean freight lines are looking to increase rates. My belief is with all the new capacity coming on that will be unlikely. They still discuss "driver wages" however I have not seen one carrier who is increasing driver wages so it is hard to claim costs are going up when the carriers apparently refuse to raise that particular cost.

While I agree fuel prices are going up that is not a hard prediction to make. Summary:

1) Rates relatively flat

2) Inventories stay low (don't bet on a massive restocking)

3) Driver wages remain stagnant - carriers appear to support lowering capacity versus refilling at higher cost

4) Fuel prices continue their macro trend up.

That is it for now!

Should a 3PL Understand the "end" Customer

This is a key question I think all 3PLs should ask themselves.  Their customer (the person who pays the bill) may be a big manufacturer or retailer.  This manufacturer or retailer may have a set of needs they articulate to the 3PL but the real need they have is to add value, through their supply chain, to the customer of their customer - usually the consumer.   If a 3PL can add value to that supply chain, in the eyes of the consumer (The person who pays the ultimate bill) then I am sure the customer (the manufacturer or retailer) will be happy with the 3PL.  Given this statement, why do so few 3PLs really know the consumer's needs, wants and desires?

If you are a 3PL you can do two things:  1) You can require a detailed statement of work, hundreds of pages including convoluted metrics and then you execute against this document.  Does the consumer (again, your customer's customer) see value in what you are doing?  Does that value accrue to the manufacturer or retailer and add real value?  In this situation, the one most 3PLs play in, the 3PL does not care.  They are executing "to the contract".

In the second and preferred situation the 3PL really takes it upon themselves to fully understand the needs of the consumer.  From this they formulate a plan in conjunction with the manufacturer or retailer which outlines what services are needed to add value and have that value accrue back to the manufacturer or retailer.  This is the preferred method.  This is the method some sub-assembly providers give to auto companies;  they help shape the business and not just do what they are told.

The analogy to this situation is what your mother most likely told you when you were young:  If so and so told you to jump off a bridge would you?  Unfortunately, a lot of 3Pls will jump off the bridge if they are told to.

I submit 3PLs need to spend time doing market research and living with the consumer of the products of the companies they are servicing.  Once they do that they will truly not what is needed and not just wanted. 

Use of Lean Techniques in The D.C.

A great article over at Logisticsview Points concerning use of lean tools in the distribution center.  The article is written by Carl Fowler of Menlo Logistics.

I will not repeat it as you need to go there and read the entire piece.  I will say I agree 100% and it makes the simple yet effective case for everyone to implement lean in the D.C.

Unemployment Claims Plummet

The singular biggest metric to watch for business activity (IMHO) is the first time unemployment claims number.  This number is going down consistently which means business activity will pick up.  Unemployed people will begin working and employed people will feel more confident.

The graph below from Northern Trust tells the story:

Since September we have been going straight down with the initial claims.  Don't let the naysayers fool you by saying "people are dropping out of the market".  These are first time claims so just about everyone files their initial claim.  Firing slows way down and therefore we know the economy is stabilizing.

Good news for everyone and especially trucking and logistics firms.  More workers, more confidence, more buying, more freight.. it is that simple.    

Why You Want to Manage Your Suppliers' Social Responsibility

If there ever was an argument to manage social responsibility of your suppliers, this I think puts the argument to bed:

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When Your Suppliers Tarnish Your Brand - Apple "Cry for Help"

I consistently talk about sustainability within your supply chain.  Most companies look inward on this.  But as this article, Apple's Cry for Help, calls out, you have to also look at your suppliers and even their suppliers.  Nothing kills a brand faster than a T.V. camera in Foxconn showing the nets they have to put under the windows to keep workers from committing suicide.

The New Face of Brokerage

I have really stayed away from endorsing certain companies just because I want to discuss more macro issues in the logistics industry however I will break with tradition for this post.  I am seeing a trend develop with brokers where it is not your "father's broker" anymore.  They truly are becoming logistics experts who do more than just "dial for diesels".

One such company I have talked to many times is Coyote Logistics. This company is young, aggressive, extremely smart and a leader in technology.  They listen and understand your needs then formulate solutions.

I say this because people who have been in the industry a long time (include me in this!) have a mindset of "no brokers".  We remember the days of brokers just calling and wanting your freight but taking no ownership in true logistics solutions.  They were "brokers" in ever sense of the word:  matching up buyers and sellers and that was it.  After meeting Coyote I can tell you the model I described above is dead.  Long live the new generation of brokers!

As a shipper you may want to look at companies such as Coyote to manage certain segments, certain promotional events, moves or even your full transportation needs.  It is not a one size fits all and there are reasons to use these new breed of brokers and reasons not to.  However, I would tell you that if you still have the mindset of "brokers are bad" I highly suggest you call Coyote and see if this new breed can change your mind.  It certainly did mine.

Why Sustainability?

Unfortunately, I think sustainability is starting to get a bad rap.  First, there are political overtones which people just can't seem to get over.  However, what is more troublesome is the "greenwashing" which is going on.  Many companies are now using it as a "marketing tool" and do not really believe in the idea of sustainability.  As if to show how prevalent this is in the industry, Greenpeace actually has a web site dedicated to stopping greenwashing.  The title is "Clean up your Act not your image".

I personally believe doing "good things" for the earth can be done while also being responsible to stake holders for a company.  You have to just believe that statement or you will go down the rat hole of "pay back" periods, EVA and the other tools accountants dream up to "engineer" their finances.  At the end of the day we either take sustainability seriously or we will have it imposed on us. What good is it to have an energy efficient product for example with "sustainable packaging" if the product arrived at the store on a truck spewing fumes into the air, idling and wasting fuel and using imported fuel?  Makes no sense to me.

John Pattullo, CEO of CEVA Logistics said in 2010, "In today's economy, many customers are unwilling to pay a premium for green transport [however] the logistics industry must support change towards sustainable services."  I could not agree with him more.  Sooner or later we have to make the change and I hope it is sooner. 

So, I implore all those in the logistics field:  Do not take such a serious topic as sustainability and turn it over to the marketeers.  Your customers and, most important, the public will see it for what it is, and ultimately, you will tarnish your brand.

December Cass Index report shows signs of improvement but points to slow Q4 growth overall - Article from Logistics Management

As I have predicted for a while, freight was very soft in Q4. Shippers have reset inventory levels at very low points and unless they see a large swing in macro economic indicators, I doubt they will increase volumes (Don't pray for a "restocking" initiative).

I believe also shippers are starting to take advantage of improved technology driving actions such as back haul sharing, co loading and other joint initiatives. This, of course, takes sophisticated software. There may be a convergence going on: Sophistication of software and the willingness of shippers to accept a bit more complexity to offset the higher per unit costs. Key metrics to measure will be:

Loaded revenue per mile, revenue per tractor / trailer and the amount of idle equipment.

While everyone is complaining about the driver shortage, no carrier that I have seen has been willing to raise wages. The "windfall" of revenue due to tightened capacity appears to be flowing to company bottom lines and not to the driver.

December Cass Index report shows signs of improvement but points to slow Q4 growth overall - Article from Logistics Management

The Coming Capacity Crunch. Y2K All Over Again? UPDATED: Added Former Government Officials

I must admit I do believe there is a capacity crunch coming but I am also starting to get very skeptical.  Does this sound like the "Y2K" scare all over again?  There is a cabal of vested interests in creating this scare.  Too many people are profiting from the scare. Here is my quick inventory:

1) Carriers:  By scaring the hell out of people they are trying to raise rates in advance of costs.  Carriers will say they want to raise rates to "protect capacity" but then when you look to see what is being done with that money, it is essentially being pocketed.  Driver wages have not moved one bit.  I might understand if the money was going to driver wages but it is not.  Where is it going?

2) Consultants:  Lots being built on this just like the consulting of Y2K.  Create a crisis then charge a lot of money to help solve the crisis. 

3) Leasing Companies:  The story goes that the capacity crunch is on and so you will want to look more to dedicated fleets. Voila!  We have a solution for you if you will just lease these trucks for 5 years. 

4) Trade organizations:  Their story is in order to stay in front of the capacity crunch you have to join and pay fees to attend special seminars like "What to do when the capacity crunch hits".  There are thousands of these seminars and they do not amount to much.

5) Former Government Officials:  This is the best part of the entire cabal.  There are former government officials (Link is provided as an illustration of the revolving door between government appointee then consultant.. I do not personally know Mr. Burnley) who are directly complicit in forming the laws which most likely will cause an artificial capacity constraint (i.e, tinkering with the HOS rules).  They then leave government and make a lucrative career out of consulting on how to deal with the problem they helped create in the first place. 

Unlike Y2K where the narrative was a technical issue (turned out not), this issue is purely economics.  The key question is at what point will capacity come back to the market and what will be the market clearing equilibrium price for services.  Further, what will be the alternatives and when will the costs get to the point where alternatives are used by the shippers. 

I am not saying this is not real but like most things it probably is getting very over-hyped as an entire industry appears to be building around the anticipation of the event rather than the actual event.  

I also wonder, from an antitrust standpoint, how much of this is the carrier base "signaling" to their competitors of intentions.  They clearly are publicly signaling their intention of decreasing capacity and raising rates.  Something perhaps someone should look in to.  

Transplace Industry Blog - Domestic intermodal volume remains strong

Intermodal volume about the same as last year however I am very certain the container count is up in the overall fleet. This would mean excess capacity.

Transplace Industry Blog - Domestic intermodal volume remains strong

The "Softer Side"...

Fitting on my first day back my thoughts went to leadership and the "softer side" of logistics.  An article written in December from Kate Vitasek talked about this issue directly.  As logistics leaders we are very good at measuring the performance of our networks but how are we at measuring the performance of our people in terms of leadership and engagement?  Do we believe these are important qualities?

What I am finding is the "technical" side of logistics and overall supply chain can be trained or, in most cases, the young and very good talent are coming to companies with the technical skills needed.  What the universities cannot train is the leadership aspect.  The more responsibility you have means you generally are going to spend more time on motivating, engaging and setting up people for success rather than on the technical details.  So, how does young talent get that type of experience so they are ready when they reach the higher levels?

You must find the opportunities and they are out there.  Even if they are leading a small team, get them into that leadership position early and often.  Further, if you are lucky enough to have large groups (i.e., shifts in a distribution center) make sure they get to lead those groups.  Reinforce the importance of doing this early and often in their career.  I know most college graduates do not aspire to lead the night shift but they have to have that experience early in their career.  

Also, ensure leadership is a fundamental skill one must acquire to get to higher levels.  Leadership can be "practiced", learned and improved upon.  Just like any other skill however, you must do it over and over again to get better at it.  Make sure your younger folks are given these opportunities. 

John Bogle, founder of Vanguard Mutual funds says, "not all things that count can be counted and not all things that can be counted, count".  Leadership is one of those things which cannot be counted very easily but probably "counts" more than anything in logistics. 

Price of Fuel Going Down as Supply Increases? Don't Bet on It.

It is arrogance to assume the US can control the worldwide price of oil and refined petroleum products (PP).  It is also delusional to think the oil companies will do anything other than what is in their best interest.

Practically, what those two statements mean is 1) Petroleum products, regardless of where they originate, will flow to the most economical location - it is fungible.  2) Oil companies could care less if the US is dependent on foreign oil or not (see 1. above).

We now have the interesting situation where US demand for petroleum products (i.e., gasoline) is lower than the supply.  The narrative has been when this occurs, prices will go down and that will spur more demand, a new "market clearing" price will emerge and all will be fine.  Of course, this assumes the US is a closed society and the only thing the oil companies can do (or want to do) is dump the excess oil /PP on the US market.  But, we learn, they have a second option.  They can export it to countries where demand is growing the price is higher.

This puts us into an odd situation: The US is now a net exporter of petroleum products.  The excess supply did NOT lower prices or wean us off of foreign oil.

So, if you are a trucker or shipper thinking all that shale gas and oil will ultimately lower your operating costs you may want to think about a "plan B".  It will merely get exported.

Thoughts on Economic Distortion

In transportation I have heard shippers say they do not want to negotiate too "hard" with carriers because they want to treat them as "partners".  I have always wondered what that meant.  What does "negotiating hard" mean and what does being a "partner" mean are key questions for both the buyer and seller of transportation services?

I submit they mean the same thing and tend to be emotional statements.  What I prefer is to work with transportation providers as an extended supply chain.  After all, unless one side is trying to get unfair or undo leverage on the other side we should be working together as a single entity for the common good of the ultimate customer.

What this means is there cannot be economic distortion in the discussions.  Economic distortion exists when one side has information pertinent to the discussion the other side does not have - some call this information asymmetry.  When economic distortion exists there is bound to be an outcome which is weighted to one side or the other in terms of value.  When that occurs the sub-optimum solution is obtained and it will ultimately lead to mistrust and a dissolution of the relationship.

I go from the premise that eventually all information will become known and will be available to both sides.  As soon as one side realizes they were disadvantaged by the other side not disclosing pertinent information the disadvantaged side tries to fight back and so begins the war of distrust and trying to "one up" the other side.

So my warning to the buyers is do not think you are somehow out maneuvering the transportation provider.  Ultimately, the real situation will be discovered and when it is you will be hit back and hard.  You may get a short term gain but at a long term price. To the suppliers / logistics providers: If you are thinking you have a long term sustainable business model by taking advantage of your customers by not disclosing proper information (costs, operational efficiencies etc) you are kidding yourself.  Sooner or later what you thought was secret will become known and when the customer realizes they have had the wool pulled over their eyes, they will dump you.

In the end, American business could save a lot of time, money and extraneous resources if this little dance did not need to be played out every time an arrangement needed to be made between buyer and seller.

This may not be a 10X idea but it certainly is a 10X program if properly implemented.  If a company and its suppliers really took this to heart I believe both sides would see dramatic improvement in productivity and efficiency thus driving the 10X change that we seek.  Lots of people talk about this, few if any actually do it.

Assume all relevant information will become available and save a lot of time by trying to take advantage of short term economic distortions.

US To Be A Net Exporter of Petroleum Products in 2011

For you transportation professionals who bought into the idea if we drill and produce more oil, prices will go down.  Think again.  This article in Seeking Alpha shows the US will end the year as a net exporter.  Yes, the prices are not going down, the fuel is just going out.

Final HOS Rule Released and Sec. LaHood is on Santa’s Naughty List! - Article from Logistics Management

Final HOS Rule Released and Sec. LaHood is on Santa’s Naughty List! - Article from Logistics Management

Dodged a few bullets but the total work hours are down from 82 to 70. What is interesting, quite amazing and important is this gets phased in over 18 months. That is a lot of time for shippers and carriers to get ready and for lobbyists to get it overturned. Ok, I am a bit cynical but as the article points out, if there really was a "crisis" of safety on America's highways would we wait 18 months to implement a resolution?