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!

Macroeconomic Monday® - The Demographic Shift to Multi Family, City Dwelling is Real

For those reading this today, Saturday, I normally write this on Saturday then post on Monday.  But, I figured if you want to read on Saturday why not?  However, the name remains the same.

So, last week was an incredible week for economic news and the stock market.  I remind everyone who may think the financial sky is falling that the S&P is still up close to 18% this year so I would not fret too much (Unless you are a late comer to the party then you may wonder what happened).  From a purely financial point of view this week was bound to happen.  Call it reversion to the mean, a short correction or whatever you want the bottom line is stocks cannot just keep going up forever.  The curve is not smooth and if you want it to be smooth then you are involved in the wrong business.

But, there were some very interesting dynamics.  First, retail spending continues to be softer than the analysts predicted.  Sometimes I wonder if the analysts are really forecasting or are they hoping - I have said all along that until unemployment changes significantly (i.e. at 6% or below), retail is going to suffer.  Yes, there are some "must have" items which hit a replacement cycle (Cars and appliances) that you just have to replace no matter what.  But, the discretionary is where consumers just are not going to spend their money.   The graph to the right outlines the anemic changes in retail sales and it shows a very variable and anemic growth for retail sales. My readers know I do not buy into this "weather" blame game people make for why this is adjusted.  The bottom line is it just looks like people are buying essentially what they need.

The other big event was the move in the 10 year note.  This graph is even more telling about what is going on in the economy where you can see the interest rates are spiking fast.

The 10 yr T-Note of course is what a lot of mortgages are tied to which drives the housing market.  This is another "KPI" I monitor for the economy.  If the 10 year T-Note gets above 3% watch out!

Yes, I know and have heard many say that these are incredibly artificially low interest rates and so going above 3% is more of a reversion back to the mean or the norm.  My response channels the blog posting I made recently about Nate Silver and the idea of "out of sample".  Yes, in normal times the 10 Year T-Note should be at 3.5% to 4% and we should be able to live with it.  However these are not normal times.  We are above 7% unemployment, we are coming off of the worst recession (some say depression) since the 1930's and even for those employed many are dramatically underemployed.   So, imagine a scenario where you have 7% or above unemployment AND interest rates above 4%?  That is not a good indicator for the economy.

Finally, this leads to the behavior of the home buyer.  They are not buying.  What they are doing is moving into multi family dwellings. While multifamily dwellings increased over 26%, the building of single family homes declined by 2.2%.  On average people spend more money on other things (think lawnmowers, curtains, a lot more furniture, nicer appliances etc. etc.) when they move into single family homes rather than when they move into multi family homes.  This will be a net drag on the overall consumer spending numbers even though it will keep the builders busy for a short period of time.

So, in summary, we have a situation where the consumer has closed their wallet, interest rates are rising, single family homes are in decline.  All speaks for a sluggish economy with some bright spots (autos for example).  Freight will remain low (especially after these retail numbers) and hopefully the continued rise in 10 Year T-Notes will not choke off any semblance of recovery we may have going.

Wal-Mart Guides Lower - Sales Weaker

Reporting this morning, Wal-Mart is describing slow sales, and it has guided the street lower for the remainder part of the year.  This is not good news but not unexpected for my readers.  Until unemployment gets to 6% or lower you can expect to see a slow tough slog on consumer goods and that will deflate the demand for trucks. If you have to continue to look at one economic number which ultimately will drive the demand for transportation, look at unemployment.

If Wal-Mart guides down 1.5% to 3%, which is roughly what the news is saying this morning, that is a lot of empty trucks and containers on the road looking for freight.

Consumer durables appears to still be a strong point in the market but overall the story of a tough slog continues to hold true.

Application of "Signal and The Noise" to Predicting Freight Volumes

I am deep into reading Signal and The Noise by Nate Silver - This is the guy who almost perfectly predicted the outcome of the last election, state by state, while virtually all of the talking heads and big public polling houses go tit all wrong. I have not finished the book yet but so far it is a fascinating read.

So, why discuss this on a transportation, logistics and supply chain blog?  As many of you know, I am a closet forecaster.  I use my data I observe and report on in my Macroeconomic Monday feature to try to determine what will happen in the transportation markets.  I have my ups and downs and so far, however, I would say I have been far more accurate than the official transportation pundits (Magazines which are essentially paid for by the trucking industry, analysts who "cover" the industry but in reality are just trying to push stock prices up.. etc.) who have, for the last few years, reported a dramatic speed up in freight, a dramatic drop off in capacity and a huge inbalance driving rates up.  I am sure they will be right one day but for now, if you had listened to them instead of me three years ago, you would have been paying far higher rates than you should have been.

Nate Silver describes a phenomenon in the book which I think is one of the core reasons why some of my predictions have been just a bit more accurate.  The concept is that of being "Out of Sample".  What this means is people will apply previous history to future results yet they will not realize enough data has changed which causes their examples they are using to not be representative of the current situation.  So, the general belief that when the economy "heats up" there will be a problem with capacity fails to account for:

1. Growth in intermodal
2. Smaller packaging and product
3. Movement of people to cities
4. Software and collaboration models
5. 3D printing
6. The fact that more and more of GDP is not product driven but services and financial driven

And I am sure a lot more.  My point here is that those who just extrapolate previous history to the future are doomed to have a failed prediction - my predictions seem to be a bit better because I am accounting for changes the external environment and accounting for them in my models.  

To be clear, this may and most likely will change however for now I say (as I have for almost two years now) say that capacity / demand is fairly balanced and you should act that way.  In the words of John Maynard Keynes, "When the facts change, I change my mind".  I will keep my eye on the facts and will change my mind but one thing I will continue to work on is making sure I do not succumb to being "out of sample." 

Why You, The Logistics and Supply Chain Manager, Need to OWN Your Sustainability Program

Many companies have sustainability offices or offices for Corporate Social Responsibility (CSR) and because of this many logistics and supply chain managers acquiesce their obligation to sustainability to these offices.  The offices do not have the staff to really do the job at the execution level (they are great at setting high level goals and making press releases) and therefore much of a company's sustainability program is thrown over the wall to external "validating" agencies.

Looks like a good strategy right?  After all, if you can say you are working with LEED or Smartway isn't that enough?  Well the answer turns out to be no and the supply chain manager who does this does it at her own potential peril.

In a recent article the New Republic highlighted an example of this as it relates to LEED certification of the Bank of America building in New York.  In this case, the investigative journalist found the building, while certified when it was empty, in practice is not very "green" at all.  Read:  In the EXECUTION of the sustainability program, it failed miserably.

Also notice the headline had Bank of America prominently displayed.  The brand under attack in the headline was not the LEED brand (although deep in the article it did not fair well) but it was the actual company brand. This is important because one of the critical success factors of all sustainability programs at the execution level is brand protection. Imagine this scenario:

1. Your CEO is out on the speaking circuit touting the sustainability and social responsibility of your company.  Indeed, she is making this a cornerstone of why consumers should deal with your product. 
2. You feel like you are doing your job because your distribution centers are LEED certified and you at least ask your carriers if they are in the Smartway program. 
3. Someone now takes an inventory of what is really happening and they find out many of these "certifications" are so general in nature that they cannot be used to determine anything.  A true and real inventory shows not much progress in truly reducing greenhouse gas emissions.
4. An aggressive reporter or investator starts questioning your CEO about this - she looks perplexed

At that point the brand damage is done.  All you are doing is playing catch-up to the damage and hoping time and some counter communication will work.  You can find yourself with a real problem at this point.  

Here are some recommendations to ensure this does not happen to you or to your company (and of course to your CEO):

1. Take Ownership of Your Supply Chain Sustainability Program - The corporate office sets targets and high level goals and may be the location you send reports to but you must own the supply chain performance of this.  Not some other office in your company and not some external agency. 
2. Employ external expertise as needed - This may sound contradictory but it is not.  When I say use this external expertise I mean to actually dive in and inventory.  This external agency should have no vested interest in the outcome beyond inventorying your GhG emissions, consulting with you on programs to reduce, developing road-maps and re-inventorying.  They have a fiduciary responsibility only to you.
3. Put goals and targets on performance appraisals with equal weight to other items - This is not and either/or as it relates to a sustainability program v. financial performance - it is a both.  You must evaluate people on the actual performance of the program or they will only see it as a sideshow. Sideshows lead to results shown above. 
4. When conducting your inventory do it at a very detailed level - There are a lot of generic databases out in the public domain which say, essentially, "on average" this is what the emissions are for a company doing what you do.  However, a lot of people have drowned in streams that "average" 3 feet deep.  You must inventory at the truck, fleet and fuel level.  Real consumption data for energy is a must.  The higher you generalize the more likely it is your CEO will be surprised one day. 

If you do not take ownership of your supply chain sustainability program with the same vigor and thoughtfulness you put against financial performance I can assure you someone else will... and that will not be the best day of your life.  

If you still do not believe me think about how your company deals with safety.  If someone asked you who is responsible for safety in your company would you really respond, "The safety office"?  I think that makes my point.  

XPO Logistics Starts a 8m Share Secondary Offering

The company says this is to help finance the previously announced acquisition of 3PD.  As I said in a previous post, this acquisition seems to be more about taking 3PD public than synergies.

I don't pretend to be a financial genius but I am always suspect of selling part of a company and diluting earnings to current shareholders.  Seems like if you really believe in the pro-forma you would want to keep as much as you can for yourself. 

Can We Finally Get on With Life? HOS is Upheld

Today it was reported that virtually all of the provisions in the hours of service (HOS) rule-making were upheld in court (again).  We should now be able to just get on with life, stop enriching the lawyers, and start planning our supply chains better.

What Does 1.7%GDP Growth Mean for Transportation?

This week the first look at Q2 GDP came in and the number was 1.7%.  Headlines were anywhere from "GDP Crushes Expectations" (Set  the bar low) to "GDP Hardly Booming but no swoon in sight".  The key factor for which headline you believe is what were your expectations to start with?  Personally, I am in the camp that regardless, 1.7% is very anemic growth rate, it will not solve our unemployment problem and it will keep our economy somewhat mired for a long time.

But, what does it mean for transportation?  I believe this is just another indicator to show demand is very tepid and will remain that way for some time.  Revisions for GDP growth in Q1 were revised downward which means my experience meter seemed to have a better handle on GDP than the experts (I just look around and talk to people - Q1 was clearly worse than people had said).  The Q1 number was revised down from 1.8% to 1.1%.  Last three quarters have been less than 2% growth in each quarter.

For transportation this translates into lower demand and while there may be a little bit of capacity issues due to hours of service (HOS), demand is going down faster than capacity so net-net we are at balance or, in fact, slightly over capacity.  In total we are seeing real overcapacity in intermodal as the big rush to get into that space has caused a huge container growth at the various IMCs.

The story from the transportation economists a few years ago was when you see 3% GDP growth that is when transportation rates will start going up.  Of course, they have now changed that tune since 3% isn't anywhere near possible in the near future so the fear game is on hours of service.

However, my advice continues to be:  Those who do not allow emotion, fear and "the government regulation boogey man" get to them will use real data to determine what is really happening.  They will find capacity is there, rates are steady and in some cases going down, and for the foreseeable future that will be the story.

Keep calm and be diligent about your data analysis and you will find, while low GDP is not what we want for other reasons, this is probably a good time to be a buyer of transportation.  If you stay calm while your competitors panic, you really can pick up some competitive advantage points during this period.

XPO Logistics Records a Wider Loss Year over Year

I continue to follow this company closely as should anyone in the brokerage and now final mile business (see acquisition of 3PD).  However, I am also fascinated at how much money can be lost in the quest to make money.  I really question whether this is in the best long term interests of the company as they lost $1.00 per share or $18M dollars versus Q2 of last year when they lost $5.9M or .54 cents per share.

Bradley Jacobs, CEO, continues to say they will be EBITDA positive in the 4th quarter of this year but a lot of that (probably all of it) will come from the acquisition of 3PD.  Is it really accretive or has he just bought profits?  Time will tell and this business model is not for the faint of heart.  I guess it works really well in silicon valley where companies that make no money sell for $1bl but I am not sure it works in logistics.

What Supply Chain Needs is Long Term Thinking

We all know there is a conflict - a push / pull relationship if you will - between delivering current results and looking out to the long term.  The story goes that the short term are the "table stakes" meaning you have to deliver those in order to earn the right to think long term.  This makes sense.  After all, you would not want your company to go out of business in the short term just to ensure some long term plan is in place.

However, I do not believe that is our problem.  Actually, the issue is the other way around.  Very rarely do I see real true long term thinking.  How could you identify if your organization is spending too much time on the here and now versus setting up your strategy for the long term?  Here are some indicators to look for:

1. Do you have any projects which span multiple years?  This is really a key indicator of strategic versus tactical thinking.  Tactical thinkers believe that somehow, magically, the whole world changes at the beginning of every year.  This, of course, is not true and therefore a strategic thinker is one who delivers todays results while working on a multi year strategy.  Very few real strategic plans and projects can be done in one year. 
2. Does your bonus plan involve a strategic component?  If you are paying bonuses to your employees, especially senior manager and above, only on a yearly basis (they start and stop in a year) than you must likely are too entrenched in tactics and are not thinking strategy.  A way to ensure some strategic thinking is occurring is to provide bonuses based on some kind of 3 year (or maybe even 5 year) result.  Why?  Imagine you want to create an incentive to your team to redesign your supply chain network for the future.  This is at least a 2-3 year project to get it installed then, most likely, another year or two to find out if it actually works.  If you provide bonuses to hit timelines and finish tasks then you are not paying for performance rather you are paying for activity.  Pay for activity and you will definitely get more activity - just not sure that is what you want. 
3. Every performance appraisal should have multi year projects on it.  Remko van Hoek (Twitter handle @remkovanhoek - Global Procurement Director for PwC and Visiting Professor at Cranfield School of Management) stated in an exchange that he has always had multi year projects on his goals for the last 3 roles he has been in.  This is the sign of a very strategic organization.  He also suggested said in a response to my tweet:  "Begin and end with the customer, think supply chain holistically, not silo, individual or quarterly gain".  Good advice and if you follow that you are pretty well assured that you will be thinking long term. 

Finally, I would like to address the issue of longevity in roles.  One of the big strategic problems is the speed with which people move around.  How can you ask someone to be strategic when they will be measured on just what they do this year and, if they do well, they will get promoted and move on.  For key roles (such as VP of Supply Chain) you have to inform them they will be in the role for 5 years and they will be measured on a 5 year performance cycle.  The first year or two are set up, then the last year 2 -3 years are execution.  Then and only then will you know if they did well and if they thought of and implemented a great strategy.  

If they come into a role, do some quick fix (slash costs) then get promoted I can assure you it will be a disaster.  

In the end, how you set up your culture and your rewards system will determine if you have a great strategy or just a bunch of disparate tactics. 

Warren Buffett once said (paraphrase):  Our business is not based on the orbit of the earth around the sun - meaning they do not set arbitrary targets and deadlines based on when January 1 comes along.  You should avoid doing that as well. 

Continue the conversation on Twitter using hashtag:  #Thinklongterm

XPO Logistics and 3PD - An End Run Around Coyote Logistics?

Back in November of 2012 I reported on XPO Logistics and their "insane" growth pattern.  The company, and its CEO Bradley Jacobs, seem to have no lack of money or desire to expand and acquire. In that post I said you should watch this company and time will tell. 

Today supported my claim I made back in November in a big way.  They have purchased one of the premier home delivery or "final mile" companies in the Country - 3PD.  This puts XPO in an entirely different league than most brokerage houses because it puts them squarely in the middle of a growing trend:  Final Mile Logistics. 

I have reported on FML extensively as well and now it appears there is a marriage made in heaven.  It will be interesting to see if the two can be brought together.  One thing this acquisition does prove is XPO logistics is not just about "dialing for diesels" but rather they want to get into the heavy lifting of logistics.  I think it also shows incredible foresight as the mega trend story for sure is the massive growth of this final mile segment.  Will a broker model win out over an asset based model?  Do they serve the same customer?  Can XPO overcome the inherent high costs of home delivery?  

All of this is yet to be seen and I can say however it appears that if anyone can do this right it will be XPO Logistics. 

Now the question is where does this leave the fast growing upstart, Coyote Logistics and the old guard of brokerage C.H. Robinson?  Coyote has grown rapidly and shown a great skill set in putting new and innovative technologies to use.  However, this move by XPO Logistics appears to be an "end around" around, over, and through Coyote's model.  Does this leave Coyote to be just "another broker" while XPO logistics is now branching out into more innovative services?  The initial reaction would be yes however I do think time will tell.

As far as C.H.Robinson is concerned, I think they will continue to be the "broker to the stars" - meaning a big brokerage house for huge industrial shippers.  I am not sure they will compete in this space with XPO Logistics or even want to.  

Finally, I must say the reaction of the market is ludicrous.  If I were a gambling man I would short the hell out of this stock.  Right now we are talking about a company (XPO) that is losing money and losing a lot of it.  Even with this purchase and even if 3PD is wildly profitable it does not change the fact that the base business is losing money.  Further, there is a real question if there are any core synergies between a truck brokerage company and 3PD beyond the fact that they do not own assets.  I just cannot in my wildest dreams comprehend how this purchase could or should add 15% to the value of the company.  

But, again, as I am fond of saying... we shall see. 

Read into The Earnings Statements - Freight is Soft - Beyond the Hype

I found something very intriguing for shippers in the JB Hunt earnings release and it had to do with the ICS (Integrated Capacity Solutions) earnings.  Essentially, the group is a broker so they act a lot like an actual shipper.  They have loads and they go to the open market to procure those loads.  Here is what the results say:

• Revenue - $132M up 20%
• Operating Income - $4.2M up 113%

That is telling as the OI is increasing at a dramatic pace over the revenue.  Why is this?  In their words:

"Operating income increased 113% over the same period 2012 primarily due to increased revenue and improvement in gross profit margin. Gross profit margin increased to 11.8% in the current quarter vs. 10.6% last year. A softer carrier environment contributed to the increase. " [Bold is mine]

So, those who are closest to the market are telling you there is a soft carrier environment out there.  A good line to have when a carrier comes in to tell you how tight the market is and why they need a rate increase.  With Revenue in a quarter of about $130M that makes this entity a $520M shipper - many shippers have a lot more freight than that and should be able to get the same results.

I am not picking on JB Hunt here, they are an incredible company, I merely use these results and statements to show what is really going on  - beyond the hype. 

Carbon Offsets Should Be Part of a Sustainability Program

When I talk sustainability, either individually or in groups, the same consistent theme comes from middle management:  We will do it if it also makes economic sense (i.e., immediate payback) but we will not do it if it "costs" us.  Very few companies and people today will execute sustainability projects purely because it is the "right" thing to do.

The problem with this however is that it is tough, if not impossible, for the free economic market to put a true cost on environmental issues.  The "cost" is down the road and the "benefit" of destroying the environment is now and that leads to distorted ideas and distorted business decisions.  I heard a person say a the Alternative Clean Transportation (ACT) conference this week that our minds would adjust if we thought:

"Rather than thinking we inherited the earth from our parents, we should think like we are borrowing it from our children."

When you think about borrowing the earth you think about what state it will be when you leave it regardless of whether there is a cost now.  And that leads you to build out a very detailed sustainability practice regardless of the immediate payback.  And this leads us to this great post about carbon offsets.

Yes, as Marc Gunther mentions, carbon offsets are so 2007.  Essentially the idea was you would either voluntarily or involuntarily (through mandatory carbon offset markets) buy into offset projects to help mitigate the long term damage any action you take may have on the long term of the environment.  This led to the EU carbon markets and now the California Carbon Exchange.  The problem right now is the price of a ton of carbon is far too low.

Some point to the fraud which naturally was part of these markets as proof they did not work - kind of like saying because people get murdered in Chicago it is proof the laws against murder are not good for society.  This is a ridiculous argument.  The fact there is fraud says more about the general business community than it does about the markets.

In the end, to build a true sustainability program you have to invest beyond the hear and now from an immediate business case, you have to acknowledge the markets do not properly price issues like carbon emissions, global warming, rise of sea levels etc. etc., and you have to be willing to do something about it.  I am not saying you have to bankrupt your company in the defense of the environment but I am saying you have to realize that the market does not price 400ppm of carbon in the atmosphere properly. The carbon which brought us to 400ppm was catastrophic (see where some say 350ppm was the tipping point) and the marginal cost should have been astronomical. But, alas, it was not; it was essentially free.  That is a market which is not working properly.

Will Monday Morning, July 1, be Y2K All Over Again?

The fear mongering that has gone on about the hours of service (HOS) changes taking effect on Monday remind me a lot of the Y2K fear.  For those who were around then remember the TV networks showing every major city in the world as Y2K hit?  The idea was to see if the lights all turned out, the computers shut down and some sort of Mad Max - Beyond The Thunderdome scenario would start?

Well, here we are again.  The transportation industry believes the world is coming to an end when the hours of service are installed on Monday.  And, as in Y2K and in CSA, it will be a big thud as it relates to the scare tactics.  I have heard everything from 10% capacity reductions to almost 0 so even the "experts" appear to be making this up.

And, of course, all estimates assume perfect productivity today, perfect execution today and that there is no way for the transportation companies to improve productivity - through efficiency - to offset any reduction due to HOS.  They essentially assume perfection and tell the shipper to be ready to pay up.

As one example of how ridiculous this argument is, this blog claims it will mean "15 minutes of lost productivity per driver per week" as if this is a catastrophe.  Is our industry really working at such efficiency levels that we cannot possibly overcome a 15 minute loss in productivity?

I have said this before and I will continue to say it - our industry seems to have lost the desire and ability to drive productivity.  Part of this is because we blame all these external issues for our problems. Stop looking at the externalities and start looking for ways to improve.  Once we change our mindset to actually look at what we can do we may be surprised that we can actually make dramatic, 10x level changes in productivity.  

For those who still think this is a train wreck and continue to predict the ruin of civilization as we know it due to hours of service, I offer you a scene from Mad Max:

What Can Logisticians Learn from Emergency Room Doctors - The idea of "Thin Slicing"

I have read a lot about "control towers" and "big data" lately as I am sure many of you have.  This has led me to ask myself, "What will I do with all that data"?  More so, I also ask myself, "does more data really result in better decisions or does it get in the way  - create so much "noise" that I cannot even see what is really going on"?  In previous times we would ask ourselves if we could see the forest through the trees?

Back in 2011 I had actually wrote about the idea of control towers and said I was a big fan - as you can see my ideas and thoughts are "maturing".

As I thought about that question I was also, luckily, listening to the audiobook called Blink by Malcolm Gladwell ( of Tipping Point fame) and he talked about how too much information can, indeed, get in the way of good decisions.  In an example of the Cook County (Chicago) emergency room he talked about the idea of "thin slicing".  Thin slicing is the idea of taking just a few critical points of data and using those to make swift and accurate decisions.  Let's follow his example of the emergency room.

Before thin slicing, if a person came to the ER with chest pains (a very common issue in emergency rooms around the country) the doctors, nurses and technicians would run a battery of tests - height, weight, blood pressure, etc. etc.  Tons of tests and the idea was to get as much data as possible - Big data".  However, the success rate of diagnosing whether those chest pains were in fact a heart attack or were they just something else less important was not very good.

So they tried something different.  What they did is reduce the amount of data the doctor saw.  They realized most of the tests and the data coming from those tests were just noise and were not pertinent to the decision of whether the chest pain was a heart attack. In Gladwell's own words:

One of the stories I tell in "Blink" is about the Emergency Room doctors at Cook County Hospital in Chicago. That's the big public hospital in Chicago, and a few years ago they changed the way they diagnosed heart attacks. They instructed their doctors to gather less information on their patients: they encouraged them to zero in on just a few critical pieces of information about patients suffering from chest pain--like blood pressure and the ECG--while ignoring everything else, like the patient's age and weight and medical history. And what happened? Cook County is now one of the best places in the United States at diagnosing chest pain.

By reducing the amount of data provided, the doctors actually were able to make better decisions.

What does this have to do with logistics?  I am consistently inundated with requests and ideas on Big data, collecting tons of data, control towers to see "everything", full visibility etc. etc.  and I ask myself, do I really need all that data and if I had it what would I do with it?  Then I come back to this example above and see the real secret in all this is not big data but pertinent and actionable data.  In fact, I am starting to think big data may be a front for intellectual laziness.  Because a logistician can't figure out what they really need they just say "let's capture everything".  And, of course, software providers are quick to jump on as Big Data translates into Big Sales and Big profits (first few hits on google when I queried Big Data and logistics were from SAS and Oracle).

My lesson is this:  Take the time up front, a lot of time, to determine what you really need, what will really give you the signal you need to determine what is going on, and what you need to actually do something.  Take the rest of the data and throw it away - not only is it noise but because it is so noisy and full of static it will actually slow down your decision making rather than speed it up.  Big data may actually not only be a waste but it could actually be harmful.  So much data will drive you to be parallelized versus taking action.  The article I cited above about control towers brags about collecting "mountains of data". - I don't need mountains, I just need the vital few.

It turns out, we logisticians have a lot to learn from emergency room doctors.

More on Crude By Rail

As I said on my last post I would come back to this topic as it truly has become the most interesting transportation topic to come up in a while.  Not only are there articles being written about this but tonight on Mad Money Cramer talked about it.  He thought the Union Pacific was to become the big benefactor of this operation.  Really interesting and starts putting meat on the bone for those who are shipping retail products.  If Cramer is right, UP resources will turn to CBR and they most likely will leave your freight at the side of the track.

I am not saying this will happen. What I am saying is anyone using these rail lines should keep very close to this development and ensure you have a contingency plan if your freight is no longer seen to be competitive to the CBR freight.