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May 15, 2008 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Fuel Prices - Cry, Panic, or Act?

I really didn’t intend to write another column about this topic so soon, but recent developments and some thoughts from the American Trucking Association have forced my hand a bit.

Gilmore Says:

" My friend, Bill Peterson of Precision Software, wrote a letter saying “The world with $200 a barrel oil will be a very different place.”  I sort of thought so too, but when we are only about $70 away, it’s time to start thinking about what that place is."

What do you say?

Send us your comments here

Not too long ago, we ran two well-received pieces related to this subject. The first were my thoughts on “The Supply Chain and $200 Oil,” followed a few weeks later by some excellent research by Dr. David Simchi-Levi on how reaching that price of oil might impact the optimal supply chain network design. (See Oil Prices and Supply Chain Network Design.)

The initial trigger for those pieces were projections by a Goldman Sachs analysts, and some others, that oil might reach $200 a barrel.

I just didn’t think it would be so soon.

OK, as I write this, it’s at $127 per barrel or something. But it seems to go up every day. While some experts continue to say it’s a bit of a bubble, and we should see a strong price pull back, I am increasingly thinking whatever pull back we get will be small, and again we will hit a higher trough from which prices will rise again.

Amazing considering the current US and, to some extent, global economic slowdown, which in the past has always led to a drop in demand and in the price per barrel. Months into the slowdown, those days are over, it seems.

Finally, various tensions and threats are omni-present in the Middle East. Can you imagine what will happen to oil prices if any of the numerous hot spots there ignites - even mildly - any time soon? In my view, we’ll blow past $200 oil in a heartbeat.

I am to some extent reminded of the excellent analogy of frogs and the boiling water. Though I have heard this - not how it actually works, the story goes that if you throw a frog in boiling water, it will jump right out, but if you put it in cool water and turn up the heat, it will stay in the pot until it cooks to death.

That’s how I feel we are now with fuel costs, both in the economy at large and in our supply chains. We’re being boiled alive, but may not realize it until its too late. The US economy and our supply chains can be very resilient, but at some point in both, something has to give.

Upon my original $200 article, my friend, Bill Peterson of Precision Software, wrote a letter saying “The world with $200 a barrel oil will be a very different place.”  I sort of thought so too, but when we are only about $70 away, it’s time to start thinking about what that place is.

Trying to stick to a supply chain perspective, let’s take some obvious and non-obvious ideas:

  • To have much hope, we will need to take massive actions to reduce transportation miles and costs. If you can’t get a TMS justified now, good luck. If you aren’t maximizing opportunities for consolidation and pooling, and loading your trailers with maximum efficiency, you will be at a huge cost disadvantage.
  • In the obvious category, we need to look at our supply chain networks, with urgency. This is part of the frog analogy. Yes, we all know we need to do this, but are we putting off for another day while the water is starting to simmer? No one knows where this will go, but we need to start doing scenario analysis right now. Does anyone at your company really well understand what the impact and options really are? Shouldn’t you be looking at this immediately?
  • We’ll have to fire some customers. There are simply some customers – more for some, fewer for others – for which rapidly increasing logistics costs will overwhelm their marginal profitability. A quick analogy – I am a bike rider, and often find in small towns we go through thatI can’t buy a USA Today, let alone a Wall Street Journal. Why? Not worth the cost to deliver even a whole bundle to a retail store there. My guess would be there will be more and more towns without a national paper being delivered soon. Economics will now say you should drop a growing number of customers.
  • Will this finally be the catalyst that drives more transportation collaboration, and/or continuous move planning? Despite the enormous theoretical interest, adoption of either practice has just been too hard; shippers, for example, can’t quite seem to agree on how shared savings will be split. At these prices, can’t we find an approach to collaboration that will work?
  • One big question, of course, is whether all this will actually reverse some of the trend to low-cost country sourcing, as transportation expense overwhelms per unit savings. In Dr. Simchi-Levi’s analysis of a real company’s data, at high oil prices, significant volumes did eventually move from a Mexican sourcing location to an Omaha one in the optimal network. Going to manufacture in Western China to chase lower labor costs? Might need to rethink that option.

Finally, this week we reported on the ATA’s proposal to Congress for curbing oil demand as well as increasing supply. (See What's the American Trucking Associations' Answer to the "Fuel Crisis?") ATA executive Mike Cart offered some very good ideas, many of which in a rational (read less political) world could be acted upon rapidly.

Transportation lawyer John Cutler has told me and many attendees at events where he has made presentations that politicians, to a large extent, tune out carriers and their lobbyists, viewing them as mostly self-interested. But they will listen a lot more closely to shippers expressing their concerns.

Right now, carriers and shippers are clearly on the same side. It’s time to get active. That means proactively looking now at the impact rising oil prices will have on your strategy, network, and options, and finding some executive at your company to start working the congressional representatives from your state. Before the pot has fully boiled.

Do we need to take more urgent action both internally and externally to address what is happening with fuel costs and the supply chain? Do you agree that, in many cases, there are things companies know they need to do, like looking at network scenarios, but just aren’t yet finding the time? Should more shippers be joining the ATA in making the case for change? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

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Dan Gilmore


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This Week’s Supply Chain News Bites – Only from SCDigest

May 15, 2008
Supply Chain Graphic of the Week - Trucking Company Failures Rise

May 15, 2008
Supply Chain by the Numbers: May 15, 2008


The market pulled back some last week as the price of oil continued to rise.  For the most part, our Supply Chain and Logistics stock index retreated a bit as well. 

In the software group, Logility was down 6.7%, while Intermec, in the hardware group, pulled off a 4.7% gain for the week. However, the market’s retreat was most evident In the transportation group as FedEx closed the week down 6.7% after issuing an earnings warning, which was attributed to the rapidly rising cost of fuel.

See stock report.


Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
May 13, 2008

Discussion Question

European Retailers and Demand-Driven Supply Chain

Why are European retailers closer than US retailers to achieving the optimal demand-driven supply chain?

Managing SCM Performance
By Kate Vitasek

How Good Is Your Supply Chain Data Quality? Part 2

Start Thinking Data Defect Parts Per Million (DPPM); Facts Drive Improvements in Data Quality


Q. What university created the first industrial engineering degree?

A. Click to find the answer below


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New feature - feedback is also published right on the story page, in near real-time. Take a look! Add your comments!

The Feedback continues to come in at high levels and we're really behind again - bear with us. But keep the letters coming!

Catching up on a variety of letters here. Our feedback of the week is another excellent letter we received on The Real Barriers to 3PL and Contract Manufacturer Collaboration, from Arnold Maltz of the Carey School at Arizona, who agrees with our perspective. We also get an interesting letter from Paul Newbourne on this topic.

Steve Johnson of Johnson Stephens Consulting agrees with our guest columnist Jim Barnes on the value of a straight consulting approach (versus design-build) for distribution automation projects, while Sylvanus Bent loved our summary of RFID activity in 2007, and asks for editor Dan Gilmore’s current assessment – which he provides.

Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week: On Barriers to 3PL Collaboration

This is an excellent summary of what I have seen since I started following the industry in 1990. Consistently, buyers are disappointed that LSPs/3PLs are not more innovative and interested in continuous improvement. Equally consistently, the suppliers are disappointed in the lack of commitment of the buyers to the relationships, with some exceptions, which may or may not endure beyond the first outsourcing manager.

To that, let me add the continuing perception by the internal buying group that they can do as good or better than the 3PL on service quality, so what the 3PL has to sell is information technology (IT development money is hard to get for logistics folks) and lower costs. Hence, the continuing disconnect, and the apparent plateau in 3PL penetration (which, by the way, is extremely hard to gauge. Fluctuations in year-to-year samples mean that public data is very difficult to evaluate over time).

Finally, I am seeing increased involvement by procurement professionals in logistics outsourcing contracts and selection, especially in very large industrial firms, where inbound logistics is critical. As a number of experts have observed, bringing the procurement people along requires education about total landed costs and the nuances of transportation and warehousing operations, at least initially.

In the companies I have seen, this sometimes works out well, and sometimes not. Procurement, like logistics, has to have reasonable forecasts, but they have the additional complication of being measured on purchase price variance for supplies, and that may result in higher logistics costs. In the current commodity-constrained world, having the necessary supplies may be much more important than how much the company pays to move them. And the usual issues around terms of sale get even more complicated when country-to-country differences have to be taken into account.

Arnold Maltz
Associate Professor
W. P. Carey School of Business
Arizona State University

More On Barriers to 3PL Collaboration

The US transportation industry will continue to face a steady combination of 1-2-3 and more punches over the coming years in the form of escalating fuel prices, increasing highway congestion, increased regulatory activity, a shortage of quality truck (Class 8) drivers and ever growing market expectations for better service at a lower cost. In response to these challenges, there has been a growing clamor about the need for collaboration to improve service and efficiency, while helping to mitigate the impact of these pressures.

Collaboration should be treated as a strategic initiative. It is a process that should include a structured plan, be managed with discipline, vigor, and adequate resources in order to deliver the desired measurable results. Towards that end, the following are six steps to establishing successful collaborative relationships. All involved parties should:

  • Collectively agree on and actively invest in the collaboration effort
  • Start with a common understanding of what the relationship is and should be
  • Actively engage multiple levels of all relevant stakeholder companies
  • Establish a plan to drive results and manage to mutual success metrics
  • Quickly identify and prioritize opportunities to achieve mutual “wins”
  • Communicate and build on success throughout all involved organizations

Starting with the first step, you need to decide who you want to collaborate with before you actually start the collaboration process, particularly given the time and investment that a successful effort will require. This means a careful and thorough evaluation of the economic reasons why it makes sense to collaborate, as well as a candid assessment of the cultural alignment of the companies. Once each company has completed these reviews internally, they jointly sit down and candidly share their thoughts and perspectives on their findings. This is the most critical step in the process because it identifies the financial benefits that are available and determines the participant’s willingness to commit their respective organizations to changing management activity to effect a successful collaboration. It is important to remember that collaboration is not for everyone and failure to go through this first step can lead to a disappointing effort.

Each of the remaining steps has a similar series of specific detailed actions and activities that have to be undertaken in order to ensure that the overall process is successfully implemented. Successfully implementing each step will build a solid foundation for a long-term collaborative relationship. While it is not practical to list all of these details in this commentary, this is the type of structured, process-driven approach to collaboration that can deliver meaningful and sustainable results.

Paul T. Newbourne
Vice President and General Manager
Leveraged Execution Providers (LXP)

On Design-Build… or Not

I couldn’t agree more with Jim Barnes about the clear advantages of using an independent consultant for your distribution center design vs. a material handling equipment supplier/design-build approach. Companies should remember that when offered a highly discounted or “free” design that “Nothing is free!" This is the proverbial “fox guarding the hen house."

A recent tactic employed by design-build MHE suppliers is to offer that “we will bid the design to three vendors." The problem here is that the three equipment vendors are the three brands of equipment that the design-build firm installs. This is not a true competitive bid, as the design-build MHE supplier will still, in the end, be the installer of the equipment (and the provider of the equipment bids – all of them!), no matter which brand is chosen from their offering!

While most buyers are astute and can see the difference, nevertheless, to confuse the market, many MHE design-build firms are now advertising themselves as “consultants," so much so that you have to dig deep into their literature and website to realize that they are indeed an equipment supplier first, not an independent consultant. They may have added planning service, but, in the end, they are still in the business of selling and installing their brands of equipment. This is their source of income. The bottom line is the buyer of such equipment will pay 20 to 30% more (we have documented this time and time again) than had they employed a true competitive bidding approach using an unbiased, consultant/client designed solution.

Steve Johnson
Johnson Stephens Consulting, Inc.

On RFID Summary:

I thought Dan Gilmore's summary article "RFID 2007 - Who Did What" was extremely useful.  Would be interested in Dan's thoughts on where RFID is going in the coming years.  How far along the adoption curve are we now?

Sylvanus Bent
Bent Systems Inc.
President & CEO

Quick response from SCDigest Editor Dan Gilmore:

I don’t believe a lot has changed since last year – with the exception that by year’s end, Wal-Mart was significantly revamping its approach in a more “back to the drawing board” way for the start of 2008.

As we continue to report, most of the activity currently is in “closed loop” systems for asset and work in process tracking. There is huge activity in the medical world, and more in manufacturing than we realize for these kinds of applications.

There is also no question that there is a lot more happening in Europe right now than in the United States, and several companies there are moving forward with additional item-level trials or even full roll-outs.

But, in general, still a lot of pilots.

Dan Gilmore


Q. What university created the first industrial engineering degree?

A. Penn State

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