As we are wont to do, I thought it would be fun to look back on the first six months of 2008 from a supply chain perspective.
It was a rather tumultuous half of a year.
Obviously, the big story of the year so far has been the unprecedented rise in oil and therefore diesel fuel costs and transportation expense.
How bad was it? Certainly 2007 was a tough year too, but on January 1, the average retail price for No. 2 diesel in the US was $3.34; on June 30, it was $4.64 cents. That’s a rise of $1.30, or an amazing 39% increase in just six months, after big price increases the previous year. Ouch. Also of note, a dramatic slowdown in Russian oil output reported in the Spring contributed to global supply problems – and gave “Peak Oil” theorists some additional supporting data.
It’s no surprise, therefore, that when Rosalyn Wilson and CSCMP delivered the annual State of Logistics 2008 report in June, it found logistics costs, at 10.1% of US GDP in 2007, had risen to their highest such level in 10 years. Total logistics costs rose 7% despite a slowing economy, clearly demonstrating you are not alone – logistics costs have been eating up the profits of many companies not only in the US but across the globe.
| Gilmore Says:
"That’s the supply chain and logistics news that mattered in the first half of 2008 from our view. It’s fun to take a look back – we forgot half this stuff ourselves, and we do it for a living."
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In early May, the American Trucking Associations presented to a Congressional committee a multi-part plan to mitigate what it calls the “oil crisis,” and the ATA ideas made good sense to most of us. Of course, little or nothing has happened in Washington since. Around this time, we also heard about the huge number of trucking firms, both large and small, that were exiting the business – with capacity ramifications down the road. Supposed plans for an independent trucker strike in April never really materialized, however.
Oil wasn’t the only commodity on the rise. In fact, almost every other commodity was up strongly as well in the first half of 2008: natural gas, metals, agricultural products, oil derivatives, etc. The end is not in site. As we reported, major iron ore producers raised prices to steel manufacturers around 75% earlier this year, which obviously will have inflationary pressures on a variety of products and costs.
Huge numbers of companies – Starbucks, Kraft, Kodak, etc. – blamed rising input prices for disappointing earnings. But after taking the rising input prices in the shorts for awhile, many manufacturers started raising prices in 2008. Steel manufacturers have been adding general “surcharges” to each ton of steel – in what came as a surprised to many companies that thought they had fixed price contracts, but which turned out only to set a “base” price.
Dow Chemical was among the companies that led the charge here, raising prices some 20% on average a couple of months ago, then an amazing 25% more in the past few weeks.
The big supply chain news in the Spring was Dell’s announcement that it was fundamentally altering its existing supply chain strategy, under supply chain chief Mike Cannon’s leadership. The revered “make-to-order” model was being de-emphasized; a legendary Austin area PC factory shuttered; much greater focus on selling through retail channels, and plans to produce a lot more machines offshore.
We took this as a watershed supply chain event, as Dell and its supply chain were for a decade simply the altar to which most supply chain observers bowed. Many respondents to SCDigest said Dell was simply reacting to a changing market, and we agreed, but to us an era was clearly over.
More recently, DHL made big news when it proved the rumors true that it was going to significantly revamped its North American network, announcing in June that is was closing its huge Wilmington, OH air hub, totally outsourcing airlift operations to UPS, and moving many more additional local deliveries to the US Post Office. The rumor mills have been flying, with some predicting this actually presages a larger global deal between UPS and DHL. We’ll see. In any case, parcel shippers need a viable third alternative to UPS and FedEx to maintain some balance of negotiating power.
The North American Material Handling Show was held in Cleveland in April, the off-year show from the Material Handling Institute that rotates with the larger ProMat. SCDigest Materials Handling Editor Cliff Holste and I were glad to see some true innovation for the first time in a while, and we noted that “the robots are coming.” There were innovative “robots” for use in distribution from Kiva Systems, Seegrid and others.
After Mattel and other quality problems in 2007, concerns about Chinese quality issues soared again after Baxter International had major issues with its drug Heparin, which appears to have been caused by defective raw materials from some Chinese suppliers. All the exact linkages are unclear, but hundreds of people world wide were sickened and a 20 or more thought to have died as a result, leading to calls for greater regulation of Chinese imports.
Early in the year, the National Surface Transportation and Revenue Study Commission released a report calling for major investment in US transportation infrastructure, and smartly called the need for such a matter of economic competitiveness. But where will the money come from? The report said that additional funding for logistics infrastructure over current investment projections to the tune of almost $200 billion dollars will be needed through 2020.
Wal-Mart, after announcing it was dramatically rethinking its approach to RFID in late 2007, decided to make a stand as – for the first time – it announced in January penalties for non-compliance with its Sam’s Club RFID mandate. As the initial requirements are at the pallet-level only, it probably won’t get too much pushback from suppliers for now. Later planned mandates for item-level tagging may be a different story.
Finally, in one piece of good news, the falling dollar has triggered a surge in US exports, which have been rising for the year much faster than imports for the first time in many years. That actually has triggered a run on outbound containers, which often are not placed in the Midwest and other heavy export areas – causing headaches for outbound logistics managers, and in some cases actually causing companies to lose sales for lack of a container.
That’s the supply chain and logistics news that mattered in the first half of 2008 from our view. It’s fun to take a look back – we forgot half this stuff ourselves, and we do it for a living.
What is your reaction to our list of the top supply chain stories in 1H 2008? What would you add? Do you expect the last half to be equally tumultuous? Let us know your thoughts at the Feedback button below.