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  Newsletter Archives                  Can't View In E-mail? February 17, 2011 - Supply Chain Newsletter


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February 16, 2010 Edition

Last Chance Cartoon, Overlooked Keys to WMS, Ops Rules Excerpt, ERP and Value and more



Transportation Tsunami Coming Again?

Are we headed back to a another crisis in transportation, or more specifically, trucking?

At one level, it is hard to really well recall the trucking tumult we had in the 2005-06 era. Rapidly rising rates, oil prices, driver shortages, congestion, etc. - it was a dominant supply chain theme for almost two years.

So much so that we launched a contest to summarize these woes with an acronym, since so many conference presentations were all starting with a recitation of the same set of transportation woes that everyone already knew were here. My idea was just to remind everyone if we must of all the troubles in a single slide, not 5-7 of them, as was common at the time:

 

GILMORE SAYS:

"The primary question from that may be what a shipper can do to avoid this tsunami, but at minimum the message is to start preparing your management now for what may be coming - and consider what the steps are that shippers can start taking now."

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I started with this acronym offering: RISCED:

Rates (rising)
Infrastructure (lousy in the U.S.) Service demands (customers keep raising the requirements)
Capacity (who has got a truck?)
Energy ( I needed a vowel, and used this instead of fuel)
Driver shortages

We then had an SCDIGEST reader contest to improve on this, which was won by Greg Andrews, then of Adtran, now at Georgia Tech, who submitted CRISES:

 

Capacity
Rates

Infrastructure
Security
Energy
Shortage of drivers

Why bring up all this past? Because we seem to be here again, but a bit more stealthily. Many logistics professionals do not yet see it coming.

We all know what is happening to the price of oil and diesel fuel. Oil is now approaching the $100 per barrel oil, not long ago seen as cataclysmic, in a period of lukewarm economies (and hence demand) in most of the developed world. In the run up to the skyrocketing oil costs of 2008, by contrast, the global economy was cooking (if somewhat rotten under the surface).

Now, we are at these oil price levels before a broad based economic recovery, and with turmoil to say the least in the Middle East. This week, famous oil industry analyst Charles T. Maxwell said that oil prices are on a march from today's levels to $300 per barrel by 2020. That's only nine years away, and means we'll be at $200 before too long if he is correct. Wow.

More recently, my new friend Mike Regan of TranzAct Technologies has been telling everyone he can that there is a looming "War on Trucking."


I am not quite sure that is the right way to phrase it, but Regan is on an interesting and consequential track here, and it seems likely that we are going to again see a confluence of factors putting tremendous upward pressure on trucking costs and travails.

I will get to the details of that in a second, but Regan says that "Today we are witnessing early warning signs that may very well result in a "Supply Chain Tsunami." Shippers who ignore these warning signs may see their transportation costs go up by as much as 10% to 20% within two years."


The primary question from that may be what a shipper can do to avoid this tsunami, but at minimum the message is to start preparing your management now for what may be coming - and consider what the steps are that shippers can start taking now.

So, what are the forces that are combining to cause the earthquake that may be result in a trucking tsunami?

Combining our thoughts with some of Regan's, it lines up something like this:

Fuel Costs/Surcharges: Covered above - right now we have highest costs per a barrel of oil ever in a February, and there are many reasons why prices may head further north.

CSA 2010 Rules: The implementation of the Comprehensive Safety Analysis Program in 2011 by the Federal Motor Carrier Safety Administration (FMCSA) is likely to have a significant impact on the size of the truck driver pool (down) and therefore trucking costs.
In short, CSA implements a new series of programs that track and rate the safety record of drivers and carriers in much greater detail than today, and will drive even greater visibility to a driver's safety record before hiring by a carrier.

Whether this is a good thing or not we could debate, but there seems near universal consensus that this is going to have a big impact on the pool of truck drivers that carriers and private fleets will be able to hire, with a consensus that the driver pool will be reduced by about 15%. That inevitably will push wages and rates up.

From another view, at the CSCMP 2010 conference this past October, John Smith, chairman of CRST, said the carrier recently tried to hire 30 new drivers. Out of an applicant pool of 300, only six passed the drug test or otherwise were deemed qualified. Of the 6, only two passed the CSA safety screen.

"You can't find drivers," he said in the midst of 9%+ unemployment, even well before the full CSA 2010 impact is felt.

Smith also said it turned out CRST's independent driver of the year for 2010 would not make it past CSA screens today for some traffic violations in the past.

Hours of Service Changes Again: As many should know, FMCSA is currently proposing new hours of service (HOS) rules, even though there seems to be no compelling public safety benefits from doing so. (See Proposed New Hours of Service Rules a Lump of Coal in Trucking Industry Stocking, ATA Says).

The proposals, now open for comments, could reduce driver availability and therefore carrier capacity by some 12%, substantially impacting the supply-demand balance in truckload carriage. As just one of a growing number of examples, International Paper has lately moved to a dedicated fleet to protect itself against looming capacity shortages it foresees.

Carrier Asset Discipline: For perhaps the first time in history, carriers by and large are showing tremendous discipline in keeping capacity low in the face of a generally improving freight volume environment. Major carriers such as JBHunt and Schneider National are increasingly focused on integrated intermodal service, rather than straight truckload carriage.

In its truckload segment, for example, JB Hunt had a total of 2,588 tractors at the end of 2010 in a period of economic and freight recovery, versus 2,861 at the end of the dismal 2009. Market shares gains are out, margins and returns on assets are in at most carriers.

Infrastructure Spending: There is a level of consensus that the US needs to spend more on its logistics infrastructure, especially roads and bridges.

In the past week, the US Dept. of Transportation proposed a new six year, $556 billion surface transportation bill. There are many questions about whether this makes sense, does it have the right priorities, etc., but one thing is for sure - the money will need to come from some place.

Gasoline and diesel fuel tax increases are a hugely likely target, driving trucking costs up.

I need to wrap it up here, but we can add to the above list:

  • Some form of tax on carbon (direct, "cap and trade," or EPA fiat) that will increase transportation costs generally and trucking especially. Legislation in unlikely through 2012, but the EPA is a wild card.
  • Federal policies that will in general favor rail transport over trucking
  • Something called the Taxpayer Responsibility, Accountability and Consistency Act of 2009, which would make it harder for carriers to treat owner-operators as independent contractors, and thus raise the carriers' cost structures.


Add it all up, and Regan says "If you are a supply chain or logistics executive within your company, what would happen if you presented a budget to your CEO that showed transportation costs had increased by 20% from 2010-12?"


We're out of space, but there are two takeaways:

1. Shippers should become more educated about these changes and trends, and prepare management now for what may be coming soon.

2. If the face of a "tsunami," one should naturally move to a "logistic higher ground" to avoid the flood waters.

What does that last point mean? More on that soon.

Do you agree that there could be a new trucking crisis looming? Or is it overblown? What would you add to our list of issues? Are shippers prepared? Let us know your thoughts at the Feedback button below.

 

Dan Gilmore

 

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THIS WEEK ON DISTRIBUTION DIGEST

HolsteHolste's Blog: Are U.S. Distributors Falling Behind The Automation Technology Adoption Curve?



Top Story: The Overlooked Keys to Warehouse Management System Success
Top Story: New Products from Crown Equipment Offer Potential Path to Higher Distribution Center Productivity
 
 
SUPPLY CHAIN TRIVIA
Q: What famous logistics event occurred during a severe ice storm in Louisville, KY in 1986?
A: Answer can be Found at the Bottom of the Page
 

YOUR FEEDBACK

Just a few quick letters this week, including a few on our piece on ASNs and the Supply Chain. That includes our Feedback of the Week from Howard Hoyle of Nike, who says 100% levels of ASN accuracy are possible - but at a price.

Also some feedback on our piece on new procurement skill requirements, including one manager who says it was timely information for an upcoming performance reviiew!

Find these good letters below.


Feedback of the Week - on ASN Accuracy

I think what the average shipper is missing is what it takes to produce 100% accurate ASN's, and the cost savings (claims, chargebacks, etc) that occur if they do that. Have worked for Vendors that never, ever had ASN inaccuracies (100% match to what was shipped), but that took a total buy-in from Sales, Customer Service, DC Operations and IT - to streamline, simplify, and not touch things manually (because it doesn't do any good to have a 100% accurate ASN if it doesn't match the Customer's PO). Was way more of a business process change than it was a systems investment. The issue at large companies is that typically DC operations are measured on volume, not on accuracy, and are not held accountable (financially) for that accuracy.

It is usually corporate level support groups dealing with the fallout (Claims, Product Support, etc). Without a group being financially motivated to drive accuracy, it is not going to happen. Can drive that down to the micro level, attaching to performance ratings of the order picker, or, (more easily) drive at a corporate level by Sales Reps & Customer Service groups having to budget for Claims/Chargebacks..and therefore be motivated to use their budget dollars for projects to plug the holes and drive accuracy.

It is a lot of work for a Vendor to drive to 100% accuracy, but in the end they have a much better business process. It will slow down the order picking and shipping processes, but that accuracy will drive a lot of improvements elsewhere, and vastly improve Customer Service. Is about speed to selling floor, and it takes 100% accurate ASN’s to drive towards automated cross-docking processes. Getting there is a true competitive advantage for a Vendor.


Howard Hoyle
ICC - EDI Partner Integration
Nike



More on ASN Accuracy:

 

Agree that ASNs are critical, and that accuracy is a must. But (I know it depends on the industry, modes used, and who owns what and when), if you look purely impact to bottom line costs number one should be inventory reduction. You sort of reference it in your number two, but the ability to see what is coming, when it is expected to be there, and then measure actuals against plan will enable companies to see what inventory target buffers they need to match their service levels.

Which leads to my number two, freight costs. With ASNs they can make better decisions with their suppliers around mode (air, ocean) when issues do arise in the supply chain. Mapping inbound delivers to purchase orders, and freight invoices is key to freight payment and liability. Did they ship on my behalf, or was the supplier responsible? And some side benefits are around carrier performance. Shipped it two day air, but it took 4 days, so I am only going to pay for 4 day service...

Anyway, good article.

 

Chris Stroop
Intel


Feedback on New Procurement Skills:

 

Thanks for good inspiration for preparing my next employee development meeting with my Global Sourcing Manager.

I would expect Supplier Risk Management including handling of Corporate Social Responsibility to be focus areas in 2015 (but maybe included in Supplier Relationship Management?)

 

Anders Holm

Category Manager, Global Sourcing

FOSS




This one is excellent list but I feel the following will probably also help in managing efficiently & effectively category management

Marketing side of our own product e.g. it is seasonal or demand will go up if some major player disappears or joint venture by competitor.

Accounting side how is one's own companny's cash flow? What is strategy of our customer payment v/s our supplier payments?

Understanding of our manufacturing capabilities, its limitations & strengths.

Skill sets level in our own organization, our customer & supplier. It's really important because if at any one level have not enough knowledge of how chain works then it ends up with more time for others or re=work & ultimately cost.

 

Mehul Pandya
Buyer
AWARD WINDOWS & DOORS



 

 
SUPPLY CHAIN TRIVIA
Q: What famous logistics event occurred during a severe ice storm in Louisville, KY in 1986?
A: UPS, which operates its huge, major air freight hub in Louisville, decided local employees would simply not be able to make it in for work that day (though it considered how it might get them there) and instead flew workers in from other parts of its network into Louisville using its own planes to keep the parcels moving.
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