sc digest
November 21, 2014 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet What Would You Tell Accountants about Supply Chain? bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic & By the Numbers for the Week bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Continues bullet Trivia      bullet Feedback
bullet New Stifel Transportation Weekly and Supply Chain by Design bullet New Videocast/On Demand Videocasts
FREE Calculator: Inbound Shipping Variability
Impact on Expensive Safety Stock


first thought


Supply Chain Graphic of the Week:

Q3 2014 US Carrier Operating Performance by Mode

UPS Bulks Up for 2014 On-Line Orders
Levi's to Offer Low Cost Loans to Asian Vendors
Maersk Says It May Cut Money-Losing Contracts
ILWU Takes Long Pause in West Coast Port Negotiations


November 4, 2014 Contest

See The Full-Sized Cartoon and Send In Your Entry Today!

Holste's Blog: Shippers Look To 3PLs For Innovative Logistics Solutions On A Global Scale


FREE Calculator: Inbound Shipping Variability Impact on Expensive Safety Stock


Weekly On-Target Newsletter:
November 20, 2014 Edition

Cartoon, WMS and Sorter Response Times, LTL Q3 Review , Top IoT Apps and more

Stifel Transportation Weekly for Nov. 17, 2014

by John Larkin
Managing Director and Head of Transportation Capital Markets Research
Stifel Financial Corp

The Myth of the Market Rate and Network Design Projects
by Dr. Michael Watson

What Economic Impact Will the Amazon Sortation Network Have on UPS and FedEx?
by Marc Wulfraat
MWPVL International, Inc.


Please match the following EDI transaction types to its ANSI transaction number:

ASN, Purchase Order, Shipment Status, Load Tender, and Invoice


204, 214, 810, 850 and 856.

Answer Found at the
Bottom of the Page

What Would You Tell Accountants about Supply Chain?

So, if you were to have the chance to present to a large group of accountants, what would you tell them about supply chain?

That was the question I had to answer for myself this week, as I gave a presentation to a big meeting of the tax and audit professionals at accounting firm BDO in Orlando.

Well, what is it they would like to hear about? That was naturally my question when I first discussed the gig with the BDO event organizers a couple of months ago. I would not say the mission was exceptionally well defined, except that they wanted to know what supply chain issues and trends were top of mind right now for the CEO/CFO. This would help them first just be more conversant in an important topic area, and BDO also does some more general consulting and this might help them scout for these opportunities at clients.


"I began with the famous Dupont model of enterprise value, actually developed all the way back in the 1920s and which is so classic I assumed nearly all of these accountant types."


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That left me a rather wide landscape to work with, didn't it?

So, here I will describe what I wound up saying, which may actually be enough to stretch into two columns' worth.

So, I began with just a sort of definition of supply chain, using the SCOR model that defines the meta process models of plan, source, make, deliver and (later) return some 20 years ago (with on-going revisions). The graphic I used illustrated that those core processes within a given company need to be designed and executed within the context of the plan, source, make, deliver and return processes of trading partners both up and down stream.

Under the SCOR model graphic, I illustrated that all this happens within the three key flows of supply chains: materials, information, and cash. But I noted that the reality is that for most supply chain professionals, the cash part of it is really not much of a consideration, though that is changing a bit. I also noted that the need to tightly sync material and information flow is one of the reasons some supply chain software - notably WMS and MES - are often really challenging to implement, though I am not sure my audience well understood that point.

But I then observed that the problem with that SCOR view of things is that it presents the supply chain as being some basically linear process, indeed a chain, whereas in reality for most companies today it is far from linear - more like a "supply web." I had a nice illustration for that, with all the various potential partners and flows. Like the New York City water system, I noted, no one person knows how it all works at a given company, yet somehow the goods like the water generally wind up where they are supposed to be within the time frame needed.

But to show the challenges, I referenced the 2012 Wall Street Journal article detailing 3M's "supply chain hairball," in which to make a picture hanger that cost just a few bucks 3M moved materials and WIP several times over many hundreds of miles, from adhesive plants to label factory, assembly and packaging.

It seemed like the logical answer to this not very efficient supply chain design was to move everything to the Minnesota area where the final assembly was being done, but was it? Perhaps the adhesive plant in Springfield, MO serviced lots of other customers besides 3M internal business and was located there for a very good reason. Perhaps Hallmark in nearby Kansas City was a large customer. So what do you do? Optimizing the answer to that question and many more like it is a big part of what supply chain is all about, I said, noting that similar "hairballs" are somewhat common in companies that are big suppliers to themselves.

In general, so far so good.

After that introduction to supply chain, it seemed to make sense to connect supply chain performance to shareholder value, a topic I have dealt with many times on these pages and which I assumed would interest accountants.

So I began with the famous Dupont model of enterprise value, actually developed all the way back in the 1920s and which is so classic I assumed nearly all of these accountant types would be well familiar with it - yet it seemed to me I was getting a lot of blank stares when I suggested such to the BDO crowd, though I can't be sure.

Anyway, as you see below I noted how supply chain greatly impacts many of the key areas of the Dupont model, starting obviously with cost of goods sold, but also general overhead (where most distribution costs go) accounts receivable (supply chain issues can cause delayed payments), inventories, and "buildings," which are impacted by supply chain design and insource/outsource decisions). To the good or bad, if you can outsource a process that both reduces costs and allows you to get rid of assets (plants, DCs), that drives a lot of shareholder value, per the model.

I noted that this model was really important for both sides to understand, meaning for finance to better grasp the supply chain levers available to impact shareholder value, while these supply chain finance concepts are increasingly being taught to SCM professionals so they can better connect in theory and practice what they do to driving shareholder value.

Then, as I have done here in the past, I summarized the work of Gerry Marsh, a California finance man who has worked with many of the greatest companies in the world. He has a proprietary but very compelling model for how increases in free cash flow - often derived from supply chain improvements that lead to inventory reductions - have a great and often not well understood impact on shareholder value.

I have seen charts from him using real companies and results comparable to the generic example you see below, in which the difference in market capitalizations between two companies with the same basic earnings per share (EPS) and growth rates can be explained by differences in free cash flow generation.

The savvy "buy side" analysts reward the company that spins out more cash per dollar of sales, even if that advantage doesn't show up directly in earnings per share that the "sell-side" analysts focus on.

So I think that is where I will end it up this week. It also occurs to me this is all is just as relevant for supply chain managers too, not just accountants.

Finally, my good friend Gene Tyndall wrote an article a few years back on supply chain for some accounting journal that was very good and also relevant here. I will chase it down by next week.

Week after that, actually - no main newsletter next week due to Thanksgiving, but there will be an OnTarget on Tuesday. Would love your thoughts on all this.

What would you tell accountants about supply chain? Any reaction to what Gilmore has said thus far? Let us know your thoughts at the Feedback button (email) or section (web form) below.

View Web/Printable Version of this Column

Townhall Meeting:

Townhall Meeting! Is Flowcasting Really a Game Changer in the Consumer Goods to Retail Supply Chain?

Claim is that Store-Level DRP and New Approach to Forecasting Deliver Big Gains - Does It Stack Up?

Andre Martin , Flowcasting Inventor, JDA Software, Kevin Smith of DePaul University, Parag Jategaonkar of Accenture and Fred Baumann of JDA Software.

Tuesday, Dec. 16, 2014

Upcoming Videocast:

Why Now Is the Time to Close the 3PL "IT Gap"

How Leading Logistics Service Providers Can Move to the Next Level of Technology Enablement to Win New Business and Get More Strategic with Clients

Gene Tyndall, former VP of Supply Chain Solutions at Ryder, SCDigest's Dan Gilmore, and Todd Johnson of JDA Software.

Thursday, Dec. 4, 2014

On Demand Videocast:

The Impact of Vendor Lead Times and Variability on Inventory Levels

Introducing the New Lead Time/Inventory Level Calculator!

Mark Krupnik of Retalon, Kevin Harris of Compliance Networks and SCDigest editor Dan Gilmore.

Now Available On Demand


Catching up with some feedback from some First Thoughts columns over the past few weeks.

That includes an outstanding email that's our Feedback of the Week on our First Thought column on The Coming US Logistics Cost Crack-Up? from long-time transportation sector executive David Goodson.

It is detailed and long enough we will just let it stand on its own - good insight.

Feedback on Logistics Cost Crack-Up:


While I have no doubt logistics costs are going up, a 22 percent increase is doubtful. Any significant price increase will force shippers to change practices to help carrier mitigate cost increases. Also, if rates go up substantially, expect more capacity to enter the market to bring supply and demand in line. However, it takes 1-2 years for additional capacity to come into the market, so there could be some eye-popping rate increases in the short term, which will recede over time.

The article did raise some interesting points worth commenting on, and I will end with my own prediction of cost increases.

$70,000 pay for drivers is not needed to solve the truckload carrier driver shortage. This is the level of pay needed to attract the quality of driver carriers' wish they had. Moaning about how driver use to be is a staple of conversation in the trucking industry. If an average wage of $46,000 attracts enough drivers to result in at most a 5% shortage of drivers, than a 20% increase to $55,200 would surely produce enough additional drivers to fill all the trucks. We are probably looking at a 10-20% increase once demand heats up.

So far as I know, private fleets and local trucking operations don't have as much of a problem attracting drivers as truckload carriers. Still, if truckload wages go up, the increase will ripple into non-truckload carriers. So no fleet is immune.

Werner raising wages 14% means little as they have always lagged the industry in pay rates. A long time ago they adopted a high driver turnover model of training students and then paying them a low wage rate for the first few years. Most fleets used to require 3 years of over the road experience, so the students were somewhat stuck. Now carriers are only requiring six months experience, so I suspect that Werner was having trouble-keeping students long enough to make the cost of training worthwhile and is now seeking experienced driver hires.

The Teamsters are not going to organize any mega fleets in our lifetime with the exception of FedEx. After bankrupting almost all for-hire union carriers, the teamsters have never organized anyone of significance. Trucking companies who employ owner operators such as Swift, lease those drivers in states with the most favorable laws to minimize the risk of contractors ever being deemed employees. Long Beach is an exception to that rule, but drayage costs are a very small component of overall logistics costs.

The only healthy mega carrier where Teamster labor is the dominant force is UPS. So the Teamster dream of getting the other half of the small package duopoly organized. However, there have always been thousands of employees drivers at FedEx the Teamsters could have organized a long time ago, so I doubt their ability to do so now. Even if it occurred, UPS and FedEx are already jacking up rates as fast as the market will bear. So it is hard to make a case that rates will go up any faster if they both operate under the same labor contracts.

A carbon tax has no chance of passing congress. While Obama has pushed the limits of what a president can do through executive orders, he still cannot order new taxes. On the flip side, a president who promotes domestic oil production could dramatically bring down fuel costs. As most rates are still tied to a fuel surcharge, lower fuel costs will automatically result in logistics costs going down. This is one of the mitigating factors I mentioned, as a 22 percent increase in logistics costs would have shippers screaming to congress for relief, and fuel costs are the obvious place to start.

Electronic logging will have a much bigger impact that 2%. (I really don't know how any trucking company could detect a 2% change in productivity due to single factor.) Paper logging has always been the fudge factor that mitigates the loss in productivity of new regulations.

Example, if a driver sleeps overnight in a customer yard, an electronic logger starts the 11 hours driving cycle when he moves the truck to the dock. With a paper log, he probably wouldn't log driving until he leaves the shipper gate, a lost of at least a 1/2 hour of driving time. Fueling, a 20-minute activity is now counted against the 11 hours of driving time. If the driver is on an overnight run, he is going to want to bed down at least a 1/2 hour before the 11 hours are up as there is no wiggle room for error with an electronic logger. No matter how efficient shippers and carrier become, it is hard to mitigate productivity losses like these.

My guess is a 10% loss of for-hire capacity not currently electronically logging and not receiving a local terminal exception. If 1/2 of for-hire trucking capacity falls into this definition, than I expect a 5% capacity loss, which will lead to a short term spike in truckload rates. If you think I am overstating the case, you haven't been around enough over the road drivers.

As truckload drivers are paid per mile, lost miles due to the decrease in driving hours will force a 10% wage increase just to maintain a $46,000 average driver wage. Factor in another 10-20% to fill all trucks we are looking at wage increase of 20-30%. If driver labor represents 41% of logistics cost, we are looking at a 8-12% increase. That is probably the worse case, and only for heavy truckload shippers.

Even at the lowest level, I would not want to be one trying to justify an 8% increase to a CFO. When fuel drives logistics cost up, it is fairly easy to explain why to anyone who recently filled a car's tank. You cannot quickly explain to anyone why going to paperless logs has increase costs, not lower them.

David Goodson



Q: Please match the following EDI transaction types to its ANSI transaction number: ASN, Purchase Order, Shipment Status, Load Tender, and Invoice against 204, 214, 810, 850 and 856.

A: ASN - 856, Purchase Order - 850, Shipment Status - 214, Load Tender - 204, and Invoice - 810 .

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