Comments on Macro Trends Impacting the Supply Chain
Mark Wulfraat, President, MWPVL International
In past years, my predictions have been focused on changes taking place within the retail market and new advances in material handling equipment and automation technology. For 2015, my prediction is focused on the topic of human resources and the issues which we will be facing in the not too distant future.
There are three fundamental forces that are currently at play which have the potential to create new market forces that will place tremendous pressure on companies that require a large supply of low cost blue collar labor to support their logistics operations.
1. Changing population demographics: This dynamic is longer term but it is already beginning to create challenges for companies that need to replace retiring workers. The trucking industry is currently the most impacted by a shortage of workers, particularly in the long haul shipping sector as less people are willing to be away from home for days at a time. There are now reports surfacing from the warehousing industry of shortages in the market for available and qualified warehouse labor resources, particularly for night shift and weekend work. In 2015, the U.S. age dependency ratio (ADR) will be 52.5% which means that the percentage of people that are younger than 15 and older than 64 represent 52.5% of the population.
This population is theoretically supported by the taxes paid by the 47.5% of the population aged between 15 and 64. A good ADR is low because there are more workers than dependent people. In 15 years-time, the ADR ratio in the United States is expected to increase to 62.8%. This means that 37 people out of 100 will be working and paying taxes to support the 63 who are not working. The bottom line is that there will be far fewer people available to do the work and when there is a high demand and low supply there is typically one consistent outcome and that is a significant increase in the cost of labor resources.
2. Abusive labor practices are nothing new but in the last several decades it seems as though we have gone full circle on this topic: Concurrent with an overall reduction in the percentage of private industry workers that are unionized, a number of large global enterprises have implement labor practices that are not only controversial, but also a major source of conflict within different markets. For example, the practice of hiring temporary employees from staffing agencies is commonplace for most retailers and distributors as a way to handle seasonal peaks or to provide an evaluation period before transitioning a temporary associate into a full-time employee.
For most firms, temporary employees represent a relatively small percentage of their overall labor force. However in recent years, it has become more prevalent for some companies to hire the vast majority of their blue collar labor force as temporary workers through staffing agencies, not only in the United States but also in other markets such as in Europe. The purpose is clearly to establish an arm's length relationship between the firm and its employees which makes it is easy to quickly eliminate people that are either under-performing or attempting to organize the labor force. In some cases, companies are hiring 3PLs who then hire workers through staffing agencies such that the relationship between the firm and its employees is twice-removed.
There are instances in Europe where people are consistently being released on the anniversary of their third month of employment and then hired back again a short while later only to be re-released three months later. This strategy is to avoid the payment of fringe benefits that must be paid after 3 months of service. All in all, these types of labor strategies are unhealthy for all of us because they are already attracting media attention and you can be sure that the policy makers will looking at this issue in the near future. Ultimately I predict that tougher rules will be implemented and that these rules will negatively impact all of us because a few companies have systematized the strategy of abusive labor practices.
3. Consumer technology proliferation: The days when white collar and blue collar workers were separated by differences in technological savvy are over. Many people who work on the front lines of logistics are comfortable with technology, either because they use advanced computing systems at work or because they own a computer or mobile device at home. This trend is only going to continue and the implication is that fewer and fewer young people entering the workforce will be interested in jobs that require hard work in a noisy and uncomfortable environment. In the past, people were restricted in their career options if they lacked education, but this is changing as younger people embrace consumer technology. In the years ahead, more people will be seeking comfortable office jobs rather than "working in the back" and this will further accelerate the shortage of available labor resources to get the job done on the front-line.
These three forces combined will cause heartburn for companies that are dependent on a pool of low cost blue collar labor resources to support their logistics operations. As demand for labor resources begins to outpace supply, new market forces will emerge which could very well result in an increase in the percentage of workers that are unionized concurrent with a faster rate of wage rate inflation than we have seen over the past three decades. I believe that we are already at the cusp of this curve and I predict that companies will respond by investing in automation to reduce their reliance on human labor. On a larger scale, countries will need to support the growth of industry to remain competitive. This will be achieved through accelerated levels of immigration to provide for the market's demand for labor resources.
Predictions Focused on Energy-Related Issues
David Schneider, David K. Schneider & Associates
Here is some of my thinking on the question, focusing on Energy Related Issues.
With the drop of oil prices energy sector supply chain infrastructures have a chance to catch up in 2015. Investors funding the purchase of crude by rail (CBR) trains and transfer terminals may delay uncommitted investments for 2016, but committed funds will play out in 2015. That will drive the stock prices of these companies lowers, and private money may turn elsewhere. Other pipelines coming on line in 2015 will make the Keystone irrelevant for oil from Canada. However, if the Keystone extends its run from Kansas to the Bakken, it too could influence CBR investments.
Lower fuel costs will impact the adaptation of computer-based route planning. Fuel cost reductions are the main driver most operators to look justify routing software. Fleets will still invest in fuel-efficient engines and aerodynamic packages because these are low investment cost with a known and acceptable return.
Natural gas is a motor fuel is much less attractive as the price of oil drops. Oil prices had to be above $100 per barrel to justify the cost of a fleet implementation. CNG refueling of large captive fleet operations include a substantial infrastructure investment for the fueling systems on top of the engines and service infrastructure. Expect the market for LNG fuel tanks and engines to shrink substantially, as well as a stop of LNG fueling network expansion.
Out on the West Coast, California Title 24 will change the investment cost of a new or retrofit warehouse. Title 24 addresses energy conservation, specifically targeting lighting and climate control. Regulation changes in late 2013 are now being felt by developers and owners of existing buildings. Significant changes in the building, including tenant improvements and material storage systems (think of the racks and shelving) now must comply with the same rules as new buildings. Requirements like daylight harvesting coupled with occupancy sensors drive up the cost of T5 lighting solutions. LED lighting for warehouses now become cost justified when you consider the expense of the light sensors and control systems.
For the supply chain manager, 2015 provides an opportunity to reallocate the windfall savings of lower oil prices. Wise managers understand market cycles, and those same managers will harvest some of their windfall to invest in conservation programs that make sense. Truck fleets should continue to invest in equipment that trims fuel expense. Some managers should look at the opportunities to get key infrastructure in place if they are considering and energy plan. There is a lead time for getting a larger natural gas distribution line installed for industrial application. Managers considering electrical cogeneration or fleet conversion to compressed natural gas should look to scheduling the installation of gas supply lines in 2015. Thereby, when the price of oil rises again, the operator is in a prime position to make the conversion, and harvest a greater return.
Warehouse operators will still face energy cost challenges, as electrical costs will increase. Coal fired operations that don't meet the new regulations will close. The others that do make the upgrades will pass the costs along in the price per kilowatt. Localized natural gas plants may help ease the pressure on the distribution network infrastructure, but the capital needed to improve the transmission network infrastructure may prove to drive up the prices charged for peak load. Smart cold storage warehouse managers are going to look for ways to trim away at electrical costs.
Predictions on Key Supply Chain Trends
Dr. Chris Gopal, Drucker School at Claremont
Key trends that are driving Global Supply Chain Initiatives (not in any particular order of importance):
The first three are from the realization that the Supply Chain drives Customer Retention, Acquisition, the Net Promoter Score and the Brand image.
1. Ease of Doing Business: Initiatives to make it easier for the customer to do business - along the entire Customer Experience Life Cycle from deiciding on a product or supplier through ordering, configuration, pricing, payments, service and returns. An important part of this is the omni-channel fulfillment and "last mile" fulfillment necessary for Ease of Doing Business, Customer Convenience and Costs.
2. Focus on Brand Equity: Corporate Social Responsibility and Good Corporate Citizenship:
Initiatives on increasing and maintaining Brand Equity and Promise. Aside from aspects such as quality and delivery, the intangibles such as good Corporate Citizenship (locating and operating in the communities where sales are made), Corporate Social Responsibility (compliance and adherence to a variety of standards and regulations - environmental, labor and corruption) are now being explicitly targeted as key initiatives
3. Customer Groupings (Segmentation) and Differentiated Service Offerings: The realization that customers today are connected, demand increasing services and personalization is driving the groupings of customers by requirements and geography so that differentiated and separate service offerings can be provided, A key element here is Costs-to-Servea and Profit by customer grouping.
4. S&OP Redux - SIOCP!: Almost a "back to the basics" - a focus on S&OP with new parameters - Inventory, Customer Service - driven by "what-if" analytics to arrive at a robust S&OP plan. Equally important is the integration of Planning with Execution for quick response.
5. Segmentation of Supply Chains:
This ranges from "micro-segmentation" to product-demand based segmentation. What's important to note here is that this is a supply side segmentation which focuses on the product and demand patterns, and typically goes from supplier to fulfillment center. In some cases, where direct delivery is the preferred mode, then it extends to the customer. The driving factors here are Simplicity, Ease of Planning, Increased focus, and the sharing of facilities and cost overhead.
6. Talent Management and "Upskilling: It is being recognized that this is one of the most serious and pressing needs - it is more than just "how do you more efficiently run a warehouse." It includes talent management programs, awareness of the Shareholder Value, P&L, Balance Sheet impacts of the Supply Chain, improving functional operations, impacts on other aspects of the business and vice versa, and managing in a global, complex world.
This appears to be gaining steam, driven by a combination of risk in the supply base, good corporate citizenship and the need to respond quickly to customer needs/changes. The needs for increased control and quality, coupled with increased automation options are also playing a role here.
8. Risk Mitigation: This is now a BOD-level agenda item, and includes a variety of risk factors from supply, geo-political, cost changes, and the lack of control and diminishing internal capabilities from long-distance outsourcing. A further aspect of risk is documentation and adherence in Global Trade. This involves identifying risk elements, likelihoods, impacts, times and cost to recovery, develop early alerts, and incorporating risk mitigation strategies and contingencies into global supply chain strategies and structures.
To assess, see if it's really feasible and what the value will be:
1. Co-Sharing of facilities and shipment capacity, including spot cost and convenience aspects such as"Uber Cargo-type" operations.
2. Re-evaluation of SCM IT Outsourcing in terms of lack of control, elimination of in-house capabilities, response, changes and true costs.
Hope you enjoyed this year's guru predictions.
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