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