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June 26, 2008 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

The Supply Chain Perfect Storm

Throughout most of 2005 and early 2006, most of us in the business could not escape the constant barrage from media, consultants, vendors and various other sources about the so-called “Perfect Storm” that had developed in transportation. At the time, companies were suffering from an extremely tight capacity situation, rising freight rates that came with the demand-supply mismatched, terrible port congestion, fuel prices that were just starting their long rise, and a handful of other maladies.

Gilmore Says:

"I am back with a new Perfect Storm, and it goes way beyond just transportation. You really have to ask: Has the supply chain environment ever been tougher than it is right now?."

What do you say?

Send us your comments here

I am back with a new Perfect Storm, and it goes way beyond just transportation. You really have to ask: Has the supply chain environment ever been tougher than it is right now?

Here are some of the key “fronts” that are creating the new Supply Chain Perfect Storm:

  • Oil prices of course are at mind-boggling levels, about $130 per barrel as I write this and driving diesel to $5.00+ a gallon. An unrelenting rise, like bike riding all week into a wind that never ends. Higher highs and higher lows. Goldman Sachs’ predictions of $200 a barrel oil sometime in 2009 – and certainly sooner if anything explodes in the Middle East.
  • An unhinging of world and US oil prices for the first time from US demand changes. Prices have spiked this year even as US consumption of gasoline has dropped rather steeply. This is an entirely new historical phenomenon. The US still uses the most oil, but not enough to really matter any more, with growth worldwide, China, India, etc. sucking up any drop in US demand and more.
  • Other energy costs are also on the rise. Natural gas costs are on the march; coal prices have about tripled in the past year, meaning higher operating costs across the board for energy to run our factories and DCs.
  • Commodity prices are also defying historical gravity, from metals to unbelievable “Agflation” in farm goods. Week after week, companies from Kodak to Starbucks to Kraft announce weak earnings and forecasts blamed largely on rising input prices. Prices for iron ore increased an astounding 70% or so this earlier year, which will lead to huge increases in steel costs. Dow Chemical this week announced a similarly astounding up to 25% increases in chemical prices after raising prices 20% just a few weeks ago. This is simply without precedent.
  • Normally in an economic slow down, the labor situation gets a lot easier to deal with. But distribution operations continue to have a hard time retaining workers. The blue collar workforce is aging. When the economy picks up, this situation will continue to deteriorate by most estimates. Bring on the robots.
  • Increased dynamics - the changes are more unpredictable than ever. Even a bad trend, if consistent, can usually be reasonably managed. But should you plan for $200 a barrel per oil or $100 or a return to $70? We’ve heard Procter & Gamble is running network scenarios at $5, 8 and $10 per gallon diesel. What will happen in China? Place your bets, and takes your chances.
  • China is not only a supplier - the Chinese “dragons” are coming after your business. The is substantial over-capacity in virtually every manufacturing sector – except of course oil refining, agricultural products, and other commodities. The competition is brutal, and companies can’t raise prices to match cost increases.
  • Supply chain complexity is growing. In the face of rising competition, companies chasing revenue continue to add products, markets and other complexity-inducing strategies, as ex-Rubbermaid president John Mariotti so well articulated in his recent book on The Complexity Crisis. Complexity is a cancer to the supply chain and profit killer to the corporation.
  • New markets – not only is global competition fierce, it is being waged increasingly in developing countries where the price points and logistics processes operate in a totally new environment. Tata Motors and others plan on selling $2500 cars into emerging markets. It won’t stop at cars.
  • Wall Street pressure is worse very year. “Supply chain, please bail us out” as usual. Sacrifice long term benefit for short term earnings “saves” as required. Getting needed headcount to actually run the supply chain well is simply not in the cards (see Dell 2005-2007). This is the story I hear all the time.
  • Risk mitigation fever – everywhere I go, including a global supply chain meeting at a medical device company I attended just yesterday, risk mitigation seems to be near the top of everyone’s To Do list. And that’s a good thing. But mitigating risk often means adding cost and complexity. Between mitigating risk and battling the daily fires, who has time to do sufficient proactive planning?
  • Regulation around the globe is getting heavier, not easier. Expect more - times 189 countries. We are approaching a regulatory choke hold, or at least a half-Nelson.

I could add a few more, but you get the idea.

My friend and SCDigest contributing editor Gene Tyndall recently said “The world isn’t just flat. It’s fast, cheap, and out of control.” That had a nice ring to it, but it’s taken a few months for the reality of the thought to really sink in. He is absolutely right.

Is this really about the toughest it’s ever been in the “modern supply chain era?” The 1990s, when supply chain thinking really took off, seem like “the dead ball era” (baseball term) now by comparison. The good news is that it makes the supply chain more important than ever, and as Dave MacEachern of executive recruiter Spencer Stuart keeps noting, the demand for supply chain talent continues to outstrip the supply.

But it makes the day-to-day awfully tough. Will it get better? Or are we just at the start of even more tumult and pressure? Unfortunately, for my money, the global changes that are driving this latest Perfect Storm have a long way to run. If we get a breather for a time, use it to prepare for the next “N’orester,” as they say in Boston.

Are we in some type of Supply Chain Perfect Storm? Or is this just all business as usual? Do you expect things to get better, or is this environment going to be a permanent condition? Most importantly, what can supply chain managers do?

Let us know your thoughts.

Want a printable version? Go to:


Dan Gilmore


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Featured Megatrend:
Push to Pull

Watch Gilmore, Tyndall, Collins Discuss and Debate the Issue

View Supply Chain Megatrends Focused Web Page, Download the Executive Brief


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

June 25, 2008
Supply Chain Graphic of the Week - Rising Logistics Costs

June 25, 2008
Supply Chain by the Numbers: June 25, 2008


It was rough traveling down Wall Street last week as all economic sectors saw a decline; however, our Supply Chain and Logistics stock index emerged from the week with mixed results.

In the software group, both Descartes and SAP slipped 2.8%, while Logility gained 15.8%.  In the hardware group, both Intermec and Zebra were down (2.9% and 0.5%, respectively).  In the transportation group, FedEx fell 6.3% following its first quarterly net-income loss in 11 years, while Yellow Roadway gained 12.2%.        

See stock report.


Each Week:

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

Weekly On-Target Newsletter
June 24, 2008

-Voice Picking

It Always Comes Down to the People in Voice Deployments

Addressing the human side of the equation boosts the success of voice deployments.

Discussion Question

What's the Impact of $10 a Gallon

Truckers Going out of Business, Airplanes Sitting Idle, and Scores of Restaurants and Stores Shutting Down?

The Executive View

By Gene Tyndall

Complexity is Daunting, but Leaders Excel in Costs, Speed, Quality, and Risk Management

Tyndall Offers Three Key Steps to Achieve Global Logistics Excellence


What Logistics legend started the annual State of Logistics report in the late 1980s?

A. Click to find the answer below


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As always, catching up on a variety of letters this week, on several topics. Remember, we now include Feedback below each article – please read and share your perspective.

Catching up as always on a variety of Feedback this week,across several topics.

Our Feedback of the Week is from Jason Richardson-White, who writes on our piece on “To get a Lean Supply Chain, You’ll Likely Need a Little Yokoten” and shares some thoughts on how to make this Lean philosophy around continuous learning actually work.

Brad Coroddi offers some excellent observations on The Barriers to Inventory Optimization, and we also have comments on our articles on Fuel Prices: Cry, Panic, or Act, and Digitization and the Supply Chain.

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 Yokoten:

I see the natural competition among different business units/facilities having “overlapping” product lines as a serious obstacle to Yokoten. In fact, the distinction between "natural competition" and "Yokoten" suggests a kind of tradeoff analysis for corporate management.On the one hand, corporate may prefer to allow (encourage?) natural competition, as this creates performance incentives for local management, but on the other hand local management is less likely to share information if doing so means losing position vis-à-vis their "competitors". I've seen this in more than one company, and it is even worse when the "competing" facilities are in different countries, where cross-cultural differences exacerbate the sense of competition.

One may prefer not to see this as a tradeoff, instead preferring to eliminate the "natural competition" altogether, in favor of "Yokoten". In this case it becomes necessary somehow to guarantee a safe arena in which falling behind an internal competitor results not in losing face but in a sense of collective failure for all differential outcomes.But, in turn, this suggests that corporate management has a responsibility to share information with local management, so that differential outcomes that are the result of (say) market forces (such as new actual competitors) rather than local performance are made available to shield failing managers from undue loss of face when the fault was not theirs.

Put another way, I do not see Yokoten as being effective unless it is integrated vertically as well as horizontally within an organization (especially within a supply chain). Standards of openness and sharing can be defeated when even one "cheater" still exists. Truly, the idea of Yokoten requires a thorough change in corporate culture (if not human nature).

Jason Richardson-White

On Barriers to Inventory Optimization:

I would agree that in many companies, inventory levels are a consequence of other decisions made elsewhere in the organization, often without much information about what the downstream impact on things like inventory might be. For instance, a decision to run more of one product versus due to an unplanned outage at a plant, or a decision to promise a customer a shorter order lead time ‘cutoff’, or even a decision to serve a customer from a different warehouse. The impact on inventory can be a difficult question to answer, however, as the tradeoff between service level and inventory is non-linear, and is highly dependent on parameters that may be uncertain (e.g., variability in plant yields, transport times and demand levels).

The unfortunate result is that many people in many different functions end up directly or indirectly using inventory to ‘hedge’ their own areas of accountability (e.g., the plant manager that keeps a bit extra of a critical raw material so they are never caught short, no matter what the supplier’s policy says, the sales manager that pads the forecast to ensure he is not left without a sale due to lack of product availability, etc).

The big leap that most organizations need to take is to separate the decision on _policies_ from those of _execution_. Policies are what service levels are what the company chooses to promise – both to its end customers, and internally from procurement to production and from production to product/sales. These are inherently strategic and cross-functional, and need to be taken in the context of substantial tradeoffs between costs and revenues, taking explicit account for the variability inherent in the future environment. Once policies have been set (and a process agreed to adjust them on a periodic basis) then the accountability for execution can be pushed down to the functional ‘experts’ – e.g., it is up to production to figure out whether to buffer with capacity or inventory in order to meet an output product policy based on an input service policy, it is up to product/sales to recoup the projected revenue associated with an improved service policy, and it is up to procurement to find suppliers that can meet both component cost and delivery service levels. Inventory becomes an explicit planned cost, a central part of the policy-setting decision process.

Too often, companies blur the questions of policy and execution, trying to make decisions at the level of ‘how to prioritize orders’, ‘who is responsible for the forecast’ or ‘how do we somehow reconcile what we can produce with what we think we can sell this month’. At this level of horse-trading, all of the organizational incentives lead each functional area to ‘hoard’ in order to get the better of the negotiation each month in terms of their own objectives. It is not until organizations make holistic, fact-based policy setting the foundation of the way they hold each of the many functions accountable that they will be able to make rational decisions on the inherently cross-functional decision of how much inventory to hold where.

Bradley J. Corrodi

On Fuel Prices – Panic or Act:

We've had 30 years of leadership vacuum concerning a viable energy policy. The lack of a coherent energy policy and a realistic path to "energy independence" for the US is the root cause of most all of our economic and international problems today and for the years to come.

We should have "energy bonds" just like we had war bonds in WWII as a means to support R&D into this critical sector.

Our biggest problem is our biggest opportunity. Once we figure out what to do it is likely manufacturing processes will have to kick in to gear to assist with the conversion. A great way for some of our excess capacity to be put to use..that is until we outsource everything...But it will buy us some time while we re-orient our workforce.

Dave Rivers

I just read your article on oil and it's affect on supply chain, particularly transportation. The other part of the supply chain and procurement dilemma with respect to oil is for those manufactured products that contain oil or resin...those prices are skyrocketing as well.

Lorraine Santoli
SVP, Business Development
Procurement Analytics

With regard to your recent article on the price of oil…..

For our customers that deliver in “milk-runs” using their own fleet, I am seeing heightened interest in smaller, local distribution facilities stocking high movers with slow movers being trucked (trunked?) in daily and cross-docked out with the orders. This decentralized (hub-and-spoke) design has been in vogue at times in the past, but seems to make more sense than shipping out of a centralized facility in longer routes. Of course, it means building and equipping more distribution facilities and having the ability to fulfill one order from multiple centers.

Bruce E. Welty
Scenic Technology Corporation

On Supply Chain and Digitization:

Great Article, of which I agree with many points. My comments are along the line that my customers are less concerned about the when and if concerns but more along the lines of how do we proceed and where is the thought leadership, the experience, the best practice and the references. Nobody wants to "bleed".

Lastly I would comment that all this has a huge impact on copyrights and in the future, patents. We have already seen this in the music and entertainment industries with the fight to control distribution and secure revenue leakage. But with patents now we can determine the usage of the delivery mechanism and see who is infringing on them.

Michael W. Meissner
Programme Director/Solutions Architect



Q. What Logistics legend started the annual State of Logistics report in the late 1980s?

A. The late Bob Delaney of Casss Information Systems, who later brought in Rosalyn Wilson to help, and she now authors the report.

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