Schneider Enters The Final Mile Battle - A Very Late Arrival

An interesting development over the last few weeks which I needed to digest was the entrance of Schneider National into the Final Mile foray.  My readers know I have followed the growth of final mile for many years (See where I showed XPO's acquisition in 2013 was "game over").  I was an "early adopter" of how important this segment was to the overall logistics network moving products to customers.  One thing we know is Schneider cannot be seen as an "early adopter" of anything - they are very disciplined and careful in investment.  So, this is why their entrance is so important.

The service is called Final Mile+ (JB Hunt has had Final Mile Services for many years - confusing branding by Schneider) and it appears to be a direct competitor to the XPO story of owning the supply chain from raw materials through manufacturing to retail then to the customer's home.  They acquired both an operating company, Watkins and Shepard, and a technology company, Lodeso.   The key will be whether Schneider is successful at stitching this together to give the customer a seamless view from the beginning to the end.  To this point, few companies have been able to do that and it has been tough for 3PLs to make the case that "one stop shopping" really adds value.

I personally believe the model is getting a bit crowded at the integrator level and very sparse at the operating level.  Remember, all these companies (XPO, Schneider etc.) are really just brokers to a final mile courier service.  It is at the bottom level where the problem exists.  We need more people actually doing the hard work of pick up, delivery and installation.  I don't believe we need more integrators.

JB Hunt Final Mile differentiates itself because, for the vast majority of what they do, they use their own trucks and drivers.  I think that ultimately will be the competitive advantage.  While today it may be cheaper to integrate many couriers, I think in the long run service will be the key element and the way to get that service is to own the assets.

How Lack of Same Day Delivery Saved Me

This is a logistics story in reverse.  Rather than discuss the benefits of same day delivery I am going to review with you how lack of same day helped this hapless consumer.

I was out wandering as I tend to do on Saturdays.  Usually I shop with my wife and while she looks for things I look at things and wonder how they got there and why someone would buy this stuff.  My eyes wandered to a "Big Green Egg" in Ace Hardware.  Ok, this may need some explaining.

A "Green Egg" is a ceramic outdoor cooker / smoker / grill.  A fascinating device which looks cool, people swear by the food it produces and costs a ton of money (Do I really need a $1000 grill)?  Of course, like all good products, once you buy the base produce there is a wall of "accessories" which can bring the full cost to $1300+.  They have learned well from the Iphone!

Ok, back to logistics.  I spent a lot of time looking at this device and two questions came to mind:  1) How would I get this home (I have cars not trucks) and 2) How would I get it to the back yard (it is very heavy)?  Those were the final two questions the sales person had to "sell" me on and I probably would have made this impulse buy.  Unfortunately, there were two answers he gave:

1) Earliest they could get it to me was next Wednesday (I live 5 miles from the store, he could have brought it in a pick up truck during his break).

2) They only do "curbside" delivery - I had to get it to my back yard and he agreed that was not easy.

I looked at him and said "let me think about that and I will get back to you".  Suffice to say, I never got back to him.   What happened?

Whatever the chemical is that causes a person to impulse buy started to go away and the "rational" chemical took over.  As my wife and I drove home we asked ourselves:  1) Do we really need a $1300 grill?  2) Who would move it if I had to move it again from the original location?  3) Wouldn't a $60 weber grill do a good enough job?

The answers came back:  1) NO,  2) Who knows and 3) Probably yes.  Therefore, no purchase and I went on my way (For the record, I did not even buy the Weber grill).  So, what are the lessons here:

1) If he had same day delivery I most likely would have bought it.
2) If he was willing to bring it around to my backyard (or even just help me) I definitely would have bought it.

The key lesson here is same day delivery makes a difference!  It is a differentiator and it drives sales.  Not only did I not buy this on this day, I most likely will never buy it.  Too hard.  Make it easy for the consumer and make it fast and you have a sale. Allow the consumer to think about it, and you could easily lose the sale.

This lesson is learned in reverse by the people who hawk timeshares in Vegas.  I once went to their pitch to get free show tickets (I had no intention of buying one of these).  I asked the sales person, trying to be polite, to let me look at the information over a few days and I would get back to him.  He said to me, "No one will buy these if we let them look at the information...".  Wildly honest but what he realized is the ability to deliver same day (in this case, same hour) took advantage of the adrenaline rush going on during the sale process - it assures a sale.  They delivered it same hour by having all the paper work ready, the financing there on site, the keys etc. etc.

You may ask, well does same day delivery really help since the person can just return the product once the urge is lost?  This question ignores both the normal inertia that exists in a consumer and the high desire to tell their friends, spouses, and themselves that they did not make a mistake and it was actually a brilliant purchase.

Ever hear someone defend buying a timeshare?  It is almost laughable listening to them try to explain it but, alas, they do.

Speed and ease of delivery drives sales - it is plain and simple.

As a consumer though, I was rescued by ACE not having same day delivery!

Inventories Continue to Grow

For those who read this blog regularly, you know a key metric I track regularly is the Inventory to Sales ratio.  The reasons I do this are threefold:

• As a supply chain professional and one who takes pride in our industry I feel this one measurement is a core metric to how the industry is doing.  Of course, inventory is built when information is less than optimal and therefore we miss forecasts or we feel the only solution to this problem of lacking information is to build inventory stocks. Finally, we all know inventory ties up working capital, has the problems of obsolescence, damage and shrinkage and consumes resources.  All of which is bad for business.
  
• It is an early warning indicator of economic issues.  As either consumers stop buying or business start overproducing (due to irrational exuberance to borrow a phrase) inventories build.  So, it is a signal that one of those two things are happening and sooner or later either the consumer has to come raging back (highly unlikely given the wage situation) or businesses will start cutting back.
  
• It is an indicator of pricing in transportation.  As inventories build, inbound will start slowing, transportation capacity will become in excess and ultimately prices fall for transportation.  It is, in fact, that simple.
  

As we look at the latest Inventory to sales ratio we see continuation of a troubling pattern:

Inventory to Sales Updated 4/2016 Data through February 2016

What we see is inventories have increased pretty dramatically since 2012 and do I dare say this - they are almost at recession levels.  

This is not a good indicator for the economy or for transportation in general.  Perhaps the wild bull is coming to an end. I guess we shall see but one of two things has to happen - consumers better start buying or businesses better slow down.  

Pricing Declines in Both Truckload and Intermodal

The promise of "pay me now so you don't have to pay me later" continues to be a mirage.  With the release of the March CASS reports we saw that pricing actually declined in the truckload sector YoY for the first time since 2010.  Intermodal continues to be a problem as well with significant price declines.  Intermodal declines were 3% YoY in March and 2.2% in January YoY and 3.8% in February YoY.

This all stems from the fact there is overcapacity.  Further, as shippers get far smarter in terms of network design, designing products for efficient shipping and inventory management, the problem of overcapacity is being exacerbated.  Avondale partners believes the "risk" is to the downside of 1% to 2%.  The overcapacity in rail can be attributed to the sharp decline in some commodity shipping such as oil.   The other part playing havoc on transportation is the Inventory to Sales ratio which I will discuss in my next posting.

At the end of the day, this continues to behave as a commodity market.  The idea that you should "pay up" during overcapacity months / years so you are protected when the market "turns" is a fools errand.  Of course, you should always be a good partner, you should always work to turn drivers fast, make their life easier and work with your carrier partners to balance demand.  But those are things a good business person does anyway.  Just makes sense.

But, to think you should "pay up" to be a "shipper of choice" is crazy and will only put you in a position of uncompetitiveness relative to your peer group.

Another Year of Dashed Hopes for Trucking

Well, another year starts off with the "this is the year for trucking" story and it is starting to look like it is another year where it is going to fizzle.  I am traveling a lot this week so it will be tough to get into the details here.

Having said that there are clearly two big data points.  As the Wall Street Journal pointed out in an article titled "Trucking Stocks Tumble on Downgrade, Pricing Outlook", the bid season has not gone well for truckers.  This generally means there is excess capacity and that is driving lower prices.  An interesting quote (which blows apart the "shipper of choice" boloney over the last few years) is the following from a Stifel report lead authored by John Larkin:

"Many shippers have effectively elected to toss to the wayside any talk of partnerships, relationships, cooperation, collaboration, etc.,” the report read. “Shippers are under enormous pressure to cut transportation costs and seem not to be satisfied with the massive fuel surcharge reductions racked up over the past year and a half.”

If you don't believe that then use the trucking companies' actions to tell you what they think.  FTR reports Class 8 Orders at Lowest Level since 2012.  Having worked in the trucking sector I know as soon as the trucking executives see a prolonged slowdown the first thing they do is cancel truck orders.

Back to the future....

Class VIII Orders source:  FTR

Supply Chain Talent As Competitive Advantage - Traction

I recently published a posting about the Ascendency of Supply Chain and the proof point I used was Amazon suing Target over "poaching" of supply chain talent.  20 years ago no one cared about hiring someone from supply chain.  Now it is seen as "stealing competitive secrets".

Well, the good news is the Wall Street Journal has caught on to this and after my post, Loretta Chao wrote her own well written article titled: Supply-Chain Lawsuits Mount Amid Drive For Logistics Talent.  You should read it.