This week in SCDigest:
Cap and Trade - It's Here!
Supply Chain Graphic of the Week and Supply Chain by the Numbers
Cartoon Caption Contest Continues This Week!
SC Digest On-Target e-Magazine
This Week In "Distribution Digest"
New Expert Contributor: Discrete Manufacturers Focus on Labor to Become High Performance Operations
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  Newsletter Archives                Can't View In E-mail? October 27, 2011 - Supply Chain Newsletter

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Supplier Social and Environmental Performance"


Supply Chains in Motion: Driving Adaptability, Flexibility and Visibility

Part 3: Building an Actionable Visibility Platform in the Food and Consumer Goods Industries

Featuring Greg Goluska, VP & CIO, DSC Logistics and Tom Kozenski, Vice President of Product Strategy, RedPrairie

Wednesday, November 9, 2011


The What, Why and How of Vendor Scorecards

Part 2: Effectively Executing the Scorecarding Methodology

Featuring a Simulated Retailer-Vendor Scorecard Meeting - with SCDigest editor Dan Gilmore Playing the
Role of the Vendor!

Tuesday, November 15, 2011


Multi-Objective Optimization Technology To Address Options for Flexible, Customer Centric Supply Chains

How to Leverage Network Design and Sourcing to Create the Ideal Value Chain for Your Customers, Partners, and Organization

Featuring Dr. Michael S. Watson, Ph.D., Optimization & Supply Chain Team Lead, IBM

Wednesday, November 16, 2011

This Week's Supply Chain News Bites
Supply Chain Graphic of the Week: Freight Rates Continue to Rise

This Week's Supply Chain by the Numbers for Oct. 27, 2011:

  • Ocean Shipping Rates Plummeting
  • Amazon Keeps Building DCs
  • Yuan Value is Right, China Says
  • FedEx Says E-Commerce Driving Rising Volumes for Christmas Season


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October 18, 2011 Contest

See The Full-Sized Cartoon and

Send In Your Entry Today !


Weekly On-Target Newsletter
October 26, 2011 Edition

Cartoon Contest Continues, 3PL Study P2, SRM Success, Keys to S&OP and more

Holste's Blog: Hands-On Management Practices From Industry Leaders That Will Boost DC Productivity
Top Story: Automation In The Workplace Is Inevitable -- The Question Is: Are We Smart Enough To Plan For It?
Top Story: Annual Third Party Logistics Study Review and Comment Part 2

Vendor News: Voxware Inc., Announced That it is the First Warehouse Voice Vendor to Support Android


By Shawn Lane
Vice President, Discrete Manufacturing RedPrairie

Discrete Manufacturers Focus on Labor to Become High Performance Operations

Q: According to the just released 16th annual 3PL study, what percent of total logistics spending in North American companies is done through outsourcing/3PLs?
A: Found at the Bottom of the Page

Cap and Trade - It's Here!

In what I believe is a far under-reported story, California as required a 2006 law unveiled this week a carbon emissions reduction program supported by a new cap and trade regime.

California represents about 12% of the US economy, more than 50% more than its nearest rival Texas. It has often started trends that move nationwide. And this happening not long after many were (correctly) writing obituaries for cap and trade or other carbon emissions programs on a national level in the US and on a global level for at least some years. Now have a true cap and trade program going on-line in the Golden state just next year.


"So that means if you have a factory in California that isn't "carbon efficient" right now, you are already behind the eight ball."


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The supply chain impact could be huge.

In 2006, the California legislature, with then Governor Schwarzenegger's signature, passed the Global Warming Solutions Act, also known as AB 32, which called for the state to reduce carbon emissions to 1990 levels by 2020 - an incredibly tall order. We reported on that law then and occasionally over time, but in my mind now nearly not enough.

The law has unleashed dozens of programs and actual or soon-to-be new rules, but the cap and trade program is the one element of the total program that has generated the most interest and business concern. With no carbon emissions law coming out of Washington, California is going it alone (though supported by the EPA, which has been in effect legislating its own carbon emissions program nationally through a series of regulations).

The new rules announced this week come after the program survived a statewide vote last year to delay execution of the rules until unemployment levels in California dropped, and also pressure by some environmental groups to have a direct tax on carbon-based fuels rather than a cap and trade regime, which delayed implementation by about one year.  In the end, cap and trade won out.

One thing I have learned is that getting actual details on anything government related is very difficult, so I have spent a good chunk of the last few days trying to get my arms around this.

Here is what I am pretty confident is true:

Beginning January 1, 2012, 350 California businesses representing approximately 600 facilities, will be covered by the program. Those businesses will be electric utilities and large industrial facilities and will need to comply in 2013. Distributors of transportation, natural gas and other fuels will need to become compliant in 2015. So, you will be impacted if you have a large production facility (don't have the details), or use fuel. Think that is most of us.

Importantly, the cap for 2013 emissions, which will drive the number of "allowances" created, was set at 2% below the forecast for 2012 emissions. This is highly unusual. In Europe, for example, the cap was set at some level of predicted future emissions, so that businesses would have time to adjust. But I guess if you are trying to get to 1990 levels by 2020 (which of course will never happen, by the way), you have to be more aggressive.

The statewide caps will decline another 2% in 2014 and 3% each year until 2020 and beyond. Holy carbon emissions Batman! That's an aggressive goal.

Under the program, "allowances" will be initially created based on current carbon emissions levels. The California Air Resource Board (ARB), which developed and approved the program, says that allowances for each industrial sector will set at about 90 percent of average emissions, based on a benchmark "that rewards efficient facilities." Distribution of allowances will be updated annually for industries according to the production and efficiency of each facility.

So that means if you have a factory in California that isn't "carbon efficient" right now, you are already behind the eight ball.

Some 90% of these allowances will be distributed to businesses at no charge. Each allowance equals one ton of greenhouse gas emissions.

The other 10% will be sold on the open market. Estimates are these allowance sales will generate as much as $500 million. Unlike the recommendations of even many environmentalists, these proceeds will not be "revenue neutral" for California citizens. Many believe that the rising costs in energy and purchases consumers will experience as a result of cap and trade or carbon tax programs should offset by returning the revenue raise back to the citizens as a tax rebate or something.

Not happening in California - the state will keep that money to fund other environmental programs.

Businesses will be able to use "offsets" for up to 8% of their annual emissions allowances (planting forests, etc.), but those offsets must be executed in the US and must be independently verified (smart business idea - start offsets verification business right now, kind of like a home inspector for tree plantings).

Rain forest projects in Latin America will not be considered (as I believe they are in the European program). As an aside, doing these offsets projects elsewhere was in part how Al Gore justified his mega-electricity bill at his mansion when it came to light a few years ago.

As their individual caps are decreased each year, businesses must either reduce their emissions, or compete in the exchange for allowances. As caps are reduced, the allowances will become more valuable and the price will go up.

How high? Well, that's among the challenges with a cap and trade plan. You really have no way of predicting. A really hot summer requiring lots of air conditioning could cause allowance prices to skyrocket. (A carbon tax, for example, would have a cert clear cost impact that could be better planned for).

This means energy efficient companies that can already operate at less than their caps produce can sell their extra allowances and make a tidy profit. The theory also is that as the allowances become more expensive, more and more companies will find it makes financial success to find some way to their emissions rather than pay for more allowances, of which there will be only so many to go around.

In other words, no company will be directly forced to limit greenhouse gas emissions. But there will be an increasing financial penalty to not do so.

The capped industries must continue to report emissions annually, which they have been required to do since 2008. These industries must also register with ARB to participate in the emissions trading market, and will be subject to Independent third-party verification of reported emission levels.

Of course, the trading in allowances requires setting up a giant exchange, where these permits will trade like pork bellies at the Chicago Mercantile Exchange. Someone will make a lot of money there. The ARB says RFPs are going out soon for someone to develop and manage the allowance exchange. The LA Times says as much as $10 billion in allowances could be traded in such a market by 2016.

The first auctions are set to be held in August, 2012 - less than a year away. This requirement is coming like a freight train.

So, what do to?

1. Get educated. We are doing more research, and will provide updates soon, so SCDigest can help, but I would talk to local experts for sure.

2. Recognize that there will be increases costs, and choices to make. Relooking at your network design will be critical. Will it make sense to move current facilities in California to somewhere else, or simply close them down at make more at existing facilities? Maybe - and part of that will have to involve looking at different scenarios relative to how much these allowances will cost over time. Some network design software tools already support carbon emissions costs in their models. It is important to note, though, that if you are very efficient right now at a factory, you could make some money for awhile selling allowances.

3. Similarly, it is not just you - carriers, 3PLs, contract manufacturers and other service providers will also be impacted. Will a move to LA/Long Beach to the Port of Tacoma or Houston make sense, for example? It just might.

4. Consider that outsourcing may be the smart move even if you stay in California - let someone else worry about direct compliance, and make it easier to leave the state later if costs get too bad.

5. Understand the details. For example, the Orange County Register warns non-utility businesses could get really screwed. That's because by law utilities have to provide service, and they can include the cost of the allowances in their rate structures. The point is they may buy the majority of the allowances, leaving few (and therefore high prices) allowances for everyone else.

This law could also result in some odd scenarios. I am going to verify this, but I believe, for example, that the impact on diesel fuel prices will only be felt for fuel that is purchased in California (meaning, I don't think the law envisions somehow tracking miles driven in the state with fuel purchased elsewhere). So, will the instruction to truckers coming into or out of the state be to minimize purchase of fuel in California itself, making sure you stop in Reno or whatever city is just across the border in Arizona or Oregon to fill that semi to the brim? The delta in diesel costs could be huge.(Of course, consumers will realize this too for their gasoline).

We can debate the reality of global warming, the merits of cap and trade, etc., but to me there are only a couple of things that are clear in this right now:

(1) The impact on supply chains could be seismic (an appropriate term for an action taken in earthquake prone California).

(2) The only ones that should be really happy about how this is scheduled to progress are really strong environmentalists - and the people in Texas.

We will keep you informed.

What's your reaction to this California law? Do you agree the impact can be huge on supply chains? Is your company knowledgeable on the details? Let us know your thoughts at the Feedback button below.


Dan Gilmore


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Just catching up on somegoods Feedback odds and ends we were't able to publish here when they were sent in in late summer.

Topics should be clear from each letter. That includes our Feedback of the week from Marc Wulfraat of MWPVL Interational, with some thoughs on our article on Labor and the Supply Chain.

Feedback of the Week: On the Labor Supply Chain


Your article (The Labor Supply Chain) and the statistics on  unionized labor in the U.S. were very informative -- thank You.

By way of feedback, the strength of unions in the retail distribution sector still remains quite powerful, particularly in the Grocery sector in the NorthEast, Chicago, California and other parts.  This has created a tremendous competitive disadvantage for established regional grocery retailers who have to compete against Wal-Mart’s non-union labor force. Wal-Mart is now the largest grocery retailer in the U.S. by a long shot.   In 1980 Wal-Mart wasn’t even in the Grocery business and today the company is not only the number 1 Grocery retailer in the U.S., they are twice the size of the number 2 company.

I consult for many companies who pay upwards of $60-100,000/year (wages + benefits) for unionized forklift labor.  In most cases , the unions have forced many of these companies into accepting so many restrictions that any attempts to improve efficiency requires a monumental effort in politics.  This is taking place in an industry that is the most labor-intensive in the world and which has to exist on razor thin net margins in the 1 - 2% range.  It’s been like this for decades and the result has been the demise of over 20 regional grocery firms during this time.

One needs to take a look at what some companies are doing to defend themselves against unions which in effect is reducing the union’s power base:

-- Full blown automation of large grocery distribution centers has reduced up to 70% of the direct labor force in a number of large facilities now operated by Kroger, SuperValu, Sobeys and believe me, more are on the way.  Despite the significant capital investment required to deploy a fully automated distribution center, we can expect to see companies move in this direction, particularly where unions are militant and labor rates are excessive.

-- Outsourcing to wholesalers/3PLs.  Witness the explosive growth over the past 20 years of C & S Wholesale and its ES3 subsidiary; and SuperValu its Advantage Logistics subsidiary.  Many grocery retailers have decided to get rid of their distribution centers and all of the union headaches that go with it.  I’m thinking about:


Giant Foods Landover which was recently announced for closure so that the operation can be outsourced to C & S

Kroger which has outsourced in my estimation about 6.7 Million sq. ft. or about 1/3 of its distribution network to 3PL companies

Loblaws in Canada that has outsourced numerous facilities to 3PLs to eliminate hundreds of UFCW jobs

Shaws Supermarkets, Safeway, A&P, BI-LO, Bruno’s, and the list goes on, there’s a dozen more companies I could mention here. 

A significant Wal-Mart competitive advantage has always been is its non-union distribution center labor force and this helps the company squeeze costs out of their supply chain to better compete on retail price.  This competitive advantage has literally forced competitors to seek ways to cut costs to survive.  Given that warehouse labor expense represents a massive portion of a grocery company’s controllable expense structure, this is the most obvious place to look for savings. 

The bottom line is that it’s time for the unions to wake up and smell the coffee-- this isn’t about union bashing.  It’s about macro-economic changes that are forcing long-established firms into survival mode.

Marc Wulfraat


MWPVL International Inc.

Feedback On Using Inventory Attributes for Safety Stock Planning:


I have long been a proponent of inventory segmentation as being a key factor to improving inventory performance.

The correlation between degree of segmentation and actual plan compliance reported in your column is most heartening. What is surprising to me is that only 10% of the companies are doing segmentation annually at the business unit level. There are tools readily available that combine demand-driven ABC analyses with inventory segmentation not only at the business unit level but also by location, product line, commodity, supplier, etc.

Why stop at the business unit when inventory investment and performance can be measured and managed at the planner and buyer levels of accountability? This has been the primary principle of the Inventory Quality Ratio (IQR) logic for over 20 years so it is not new but it is way cool.

Gary Gossard

Feedback On Building a Performance Culture in Distribution:


Mike Gregory's and Jim Chamberlain's points are spot-on; yet they do not go far enough. The quest for motivating staff is the oldest pursuit in business for complex organizations. Yet, too often workforce motivation initiatives get their start from someone desiring the latest features of an LMS or management's inclination to create a metrics-driven culture. Sadly, this thinking can -- and often does -- miss the point.

Frederick Herzberg, considered one of the fathers of human motivation theory; claims in his Two-Factory Theory that there are clear distinctions between what do and do not motivate people including: a sense of achievement, recognition, and responsibility for doing a job well done, among others. Amabile and Kramer in their recent Harvard Business Review article revealed that what really happens on a good work day is -- progress -- getting stuff done. This outranked doing important work, collaboration and getting support. Not surprising, their work confirms work done by Herzberg.

To be sure, these theories can be incorporated into any workforce motivation program to make it more successful. In fact, we find that starting with this perspective helps organizations clarify their thinking and build resilience necessary to overcome the unavoidable frustrations that come with integrating an LMS, solving complicated engineering challenges, and leading change.

Jeffrey Boudreau
XCD Performance Consulting


On Expanding Supply Chains Globally:

I believe that business expansion should lead to a thorough review of the design and coordination mechanisms in supply chain. The increase in complexity, especially for the international expansion of the insertion of the environment organization, is to assume the qualitative and quantitative growth of the information necessary for adaptation to the environmental imperative. In this context, the global forecast of demand is the main internal consolidation of data collected in different regions.

Under this view, the service level of coordination of efforts in the chain depends on the adequate expansion of the system informations. This system should include, at the same time, a permanent monitoring of the situation and a specific framework for global and local contingencies. So my position is that the growing importance of information management in the channel along the value chain.

Celso Van Leeurven
Supply Chain Specialist


Q: According to the just released 16th annual 3PL study, what percent of total logistics spending in North American companies is done through outsourcing/3PLs?
A: 38% - a figure much below that seen in Europe (44%) and Asia (47%).
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