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October 31, 2014 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet MIT's Caplice and the Three Myths of Transportation 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 Winners Announced bullet Trivia      bullet Feedback
bullet New Expert Insight and Supply Chain by Design bullet Videocast/On Demand Videocasts
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Supply Chain Graphic of the Week:

The Rapidly Declining Costs of Solar Energy

HP 3D Printing Breakthrough?
China May be Creating its Own Robot Bubble
US Truckload Rates Continue to Soar
Goldman Sachs Says Oil Prices to Keep Falling


October 8, 2014 Contest

One of Our Greatest Contests Ever

See Who Took Home the Prize!

Holste's Blog: Uncovering Hidden DC Efficiencies Requires Vision & Perseverance



Weekly On-Target Newsletter:
October 29, 2014 Edition

Last Chance Cartoon, JDA Rebrands, Mexican Customs, Solar Power Rising and more

Mexico Facilitates Trade Across Its U.S. Border

by James Giermanski,
Powers International, LLC

Three Supply Chain Lessons from the book Scaling Up Excellence

by Dr. Michael Watson


Dr. John Gattorna of Australia is generally credited with coining what term with regard to logistics outsourcing?

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MIT's Caplice and the Three Myths of Transportation


One of my favorite supply chain academics is Dr. Chris Caplice, executive director of MIT'S Center for Transportation and Logistics, because he leads research that is in the end highly practical and usually quite relevant for real supply chain professionals. He also adds to that an ability to articulate that research very effectively - both qualities not so common in academia.

So we were very pleased to have him as the keynote speaker during our recent Transportunties on-line conference and exhibit, and I had a good time doing a video interview with him for that event on "Three Myths of Transportation Management."

It was very good, so I am going to take the easy route this week and summarize Caplice's presentation.


"Truckload transportation is simply not a pure commodity as is often thought, he added, with every shipper having different needs and requirements, while the market backdrop is also changing a lot through the year."


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Number 1: The Myth of the Market Rate: This one frankly surprised me a bit. Of course, there is great interest by shippers in identifying a "market rate" for a given lane, because naturally enough they want to know what they should be spending for that move. In great summary, Caplice says shippers are often largely wasting their time.

My first question to Caplice was whether market rate means an average type rate or the best rate, and he said that can be a little fuzzy depending on the company. In general, however, while many would like to identify the best rate, most firms would be happy to just know the average. Many sign up to various benchmarking services out there to try to glean that intelligence, or do research work on their own.

The first challenge, Caplice said, is that it is actually very hard to find enough data. Caplice and some others received full transportation details from 100 companies, and across all those shippers, amazingly, only 3% of lanes had data from more than two companies at the 5-digit zip code level. It was better at the 3-digit zip level - 25% had more than two shippers - but still the matches in general were too few to really draw strong conclusions.

Confidentiality agreements with carriers serve as another barrier, Caplice says, but the real challenge is simply that "the market rate doesn't exist." To prove that point, he showed analysis from one lane for which there were about 10 shippers participating, with a total across them of some 3000 moves a year.

As you can see in this chart below, across a full year the average rate across all these shippers varied dramatically. While the full year the average was $2.93 per mile for the 450-mile haul, during the year the average at any point in time ranged from a high of about $3.03 in February to a low of less than $2.80 in September. So what is the market rate?

Caplice showed it gets worse if you plot rates over this period by individual shipper. Some are consistent across the year in rate paid, some vary wildly up and down, some suddenly have their rate drop substantially (a new bid event?), etc.

"Every single lane looks like this," Caplice said. "It almost looks like a blood splatter."

Truckload transportation is simply not a pure commodity as is often thought, he added, with every shipper having different needs and requirements, while the market backdrop is also changing a lot through the year.

The bottom line: don't spend too much time, energy or money trying to identify a market rate for a lane when that just doesn't really exist. Benchmarks may provide some intelligence at times, but really should serve as just as one input into a complex equation as to what any given shipper should be paying.

Number 2: The Myth of Combinatorial Auctions: This was a hard one for Caplice - he had actually done his doctoral dissertation on the opportunities from this approach, and touted the potential through much of the first decade of this century.

What does this involve? The theory is that if carriers can bid simultaneously on a bundle of lanes, they can offer a lower total cost because of the resulting network and asset efficiencies a given bundle would generate for them.

The problem, Caplice said, is that while the benefits are there in theory, in practice the concept falls apart, for a variety of reasons.

First, few carriers actually submit such combination lane bids - less than 25% of carriers in fact to those shippers using this combo approach. Even those carriers which do submit combo bids usually do so for just a few lanes, or even just one combo. Second, 50% or so of the combo bids involve a simple out and back - to a destination and then back to origin. That is much more basic and simpler bundle than the combo method envisioned. While there were a few bids that involve multiple moves in a sort of tour that would end back at the origin and other more exotic moves, these were in fact very rare.

Then there is the practicality of even these simple roundtrip moves. The carrier and shipper are betting that these out and backs will be there on a timely enough basis to make it work sometime in the future on a consistent basis. Anyone want to wager on that one? Now try making that work in even more complex combos. Not going to happen.

On top of all that, these combos are rarely even less costly than just bidding out individual lanes. Almost unbelievably, in the data set Caplice used, the combo bid was only less expensive that the individual lane bids from the same carrier 16% of the time. We can thus infer that carriers presenting combo bids rarely win them.

Logically enough then, in the rare cases when a carrier does win a combo bid, shippers rarely tender a set of loads in a way that matches that combination.

To be clear, there is value in doing carrier bid optimization using fancy tools at the lane level, but extending that to combo bids, as should now be clear. is unlikely to deliver any real value.

I will note as an aside that all this is also what is behind the great challenge shippers have in doing collaborative shipping with others, another concept that makes great sense in theory but is devilishly hard to get to work in practice.

Number 3: The Myth of Optimized Transportation Plans: Ok, this isn't so much a myth as a set of questions and observations, which I will summarize like this: Is it better to build in "robustness" into a supply chain and logistics function, to minimize the chances of disruptions, or to go to a leaner (and lower cost) model and be very good at reacting to problems when they arise? Planner versus responder.

What a great question, which is at the heart of risk management, isn't it? Yet, how many companies really analyze and quantify it along this dimension? So, as an easy example, you could build a large dedicated or private fleet that insulates you from most capacity type issues that at various times plague others using all common carriers, but likely at higher total cost.

MIT did a project for Walmart a few years ago trying to optimize that balance between robustness and cost, and Caplice implied many other shippers have similar opportunities. The "myth" aspect of this is that many shippers probably think they are getting this right today, without really having thought about it much at all.

MIT is working on models that will provide guidelines for shippers relative to managing this tradeoff - not sure when we will see it, but it looks like very interesting and valuable work.

I am out of space. Really good stuff from Caplice. The Transportunities show is still up on-demand, and you can watch Caplice's keynote here.

What is your reaction to Caplice's three myths? Agree or disagree? Let us know your thoughts at the Feedback button (email) or section (web form) below.

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Catching up with some feedback from a few weeks ago on our First Thought column on "Consumer Goods Companies are from Mars, Retailers are from Venus."

Received a few good emails, including our Feedback of the Week from Andre Martin of JDA Software. You will find them all below.


Feedback on Best Cartoons Column:


I agree with everything you listed but what has been missing until now are two things.

1. The retail supply chain is interdependent whether we like to admit it or not and Jay Forrester from MIT proved it all the way back in 1958 when, working with a bunch of PhD students, he modeled a complete retail supply chain on a Univac computer. The results: a 10% increase in sales at the store level in January cascaded down to the supply chain and amplified to a 40% increase on the factory six months later. This demonstrated the retail supply chain was naturally linked regardless of what we think and regardless if we collaborate or not. Changes in consumer demand at store level will impact the entire retail supply chain and there is nothing we can do about it.

Retailers and manufacturers have but two choices to deal with this:

a. They can ignore the natural linkages, end up carrying more inventory than they need, wait until the changes hit and bear the added costs.

b. They can collaborate, anticipate, plan the expected changes and share in the inventory savings and associated operating costs.


2. Retailers and manufacturers then need to spend a certain amount of time understanding and educating themselves on what are the root causes of changes up and down the retail supply chain. This is not rocket science and can be quickly understood if only people take the time to do this.

Then they need a way to create a model of how they wish to do business together. The model should consider the following:

a. The retail store is truly the beginning and the end of the retail supply chain: it is the beginning of information flow and the end of product delivery.

b. The model must be built on a simple truth: NEVER FORECAST WHAT YOU CAN CALCULATE. People need to spend time understanding what that really means then acknowledge it as a basic fact to be considered in creating the model they are building.

c. Applying this basic fact now enables trading partners to conclude they must collaborate and agree on ONE UNIQUE STORE/SKU SALES FORECAST TO DRIVE THE ENTIRE MODEL

d. Agreeing to this will greatly simplify the way retailers and manufacturers will flow products from the factory to the store shelf. Then the balance of the retail supply chain become a mere calculation that ultimately will consider all their existing business rules, inventories, in-transits, modes of transport etc.

e. Finally, retailers & manufacturers should jointly look at the resulting model and see if they like what they see. Is product flowing from the factory to the store shelf the way they want? If they do not like what they see (initially they will not) then tweak it until they are happy with the expected flow projections.

f. Update the model. Keep it up to date with ongoing business decisions and conduct business through the model going forward.

Let me end with this statement: There is no guessing anymore in how to best manage a retail supply chain and flow product from the factory to the store shelf. What is now needed from retail and manufacturing executives is a genuine desire to take some time to learn how this has become a science today.

It has taken a long time to get to this point but we have arrived. The enabling technologies are finally available but what is now needed is the will to do it. The financial benefits to retailers and manufacturers are absolutely huge and it is now in their hands to make it happen. Those who do it first will definitely create a competitive advantage for themselves.

Andre Martin

JDA Software


30 years ago I worked for a major computer manufacturer. I had started in the stockroom and progressed to a planner position for nuts, bolts, screws, cardboard and skids. This position lead to a more senior planning position where a team would go out to the field each quarter to do a sales force sensing. We had four regional sales units and this process was repeated in each unit.

We would go to each of the sales force centers and meet for 30 minutes with each sales rep and discuss their impressions of the market for the next 8 quarters. W had a specific list of products to discuss including some [as yet unannounced or unreleased] products. The products selected covered a majority of the component parts that needed to be manufactured or procured. We manually collected this information from each sales rep and at the end of the day had a manual spreadsheet and a discussion with the Sales Unit Manager.

The SUM would review the numbers and make suggestions for revisions at the aggregate level. On the last day we would roll all the regional data and have it reviewed by the Regional Sales Unit Manager. Again minor adjustments would be produced.

Armed with the smoothed information, the four sales unit forecasting teams would gather and combine their information. There were always some anomalies and these would be worked out in the meeting. The forecast was then used as a tool to determine not only production [including signals to vendors] but manpower needs, facilities planning [construction or decommissioning], manpower forecasting, training, and financial forecasting, both internal and outward facing to the stakeholders.

Move forward 20 years. The company has implemented a Customer Resource Management package. The module they are most proud of the one that contains the ability for the customer to directly input their forecast and essentially a purchase order directly into the system. The new module delivered reports to all the potentially impacted groups listed above for them to take immediate action. Each of the respective groups would constantly reforecast their data.

Another feature of the module was the ability for the customer to go in and revise a forecast without a financial penalty. Because there were many changes made in any reporting period the nuances of discrete demand for an individual product would be missed. A rumor would start in the press or financial markets and customers would go in and place orders as a hedge to be able to meet their own forecasted needs. The company needed 5 years and $5 billion in construction to meet expanded needs and triggers would be sent through the system. Multiple meetings would be held and announcements would be made in the community about potential new construction and personnel requirements.

The reduction in requirements were slow to be acknowledged. The forecasters did not want to withdraw their upward forecast for fear their original work would be questioned. Many hours were spent on the forecasting and potential implementation due to the addition of the CRM Customer Input Module.

Was there a cost in the earlier model? Certainly. With application automation the forecasting and purchase order group was able to claim significant savings. Was there really a total savings in dollars and company image with the change? Probably not.

I worked for a large truck dealer. One day I knew I needed to order 25 small size low dollar parts and I put in the order with the supply house. My boss got a call to verify that we really wanted 25 high value large size items due to the fact we had never ordered that part before. I had transposed 2 numbers on the parts order and we were able to make the change before shipment. Better to have one phone call and make the change than to suffer the issues involved in arranging for returning the incorrect parts and not being able to serve the customers that needed the original part.

Automation is not always free.

Howard Pierpont
Greeley, CO


I think you have really hit the nail on the head with this one.

The fundamental problem is that retailers and manufacturers see the problems and opportunities differently. And that is a very large chasm to overcome.

Add to that since the retailer is the customer, and that means in the end they are going to call the shots.

Retailers have certainly gotten a lot better in supply chain, and that has made a difference, but even saying that they do not think about it the way a manufacturer does.

Great insight - thank you.

Adrian Gibson
Huntsville, AL



Q: Dr. John Gattorna of Australia is generally credited with coining what term with regard to logistics outsourcing?

A: "4Pl," meant to characterize an outsourcer hired to manage other outsourcers, an approach common in the automotive sector, for example.

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