From SCDigest's On-Target E-Magazine

Jan. 24, 2011

Supply Chain Guru Predictions for 2011 - Full Text Comments.

Tyndall, Langley, Regan and Other Experts Share Their Thoughts on the Supply Chain Year Ahead

Supply Chain Editorial Staff

For the fourth straight year, SCDigest Editor Dan Gilmore asked a number of Supply Chain pundits to make predictions for what is likely to in supply chain and logistics management in 2011. Gilmore summarized the highlights of those predictions the last two week in his First Thoughts columns, which can be found here: Supply Chain Guru predictions for 2011, Supply Chain Guru Predictions for 2011 Part 2 .

Here, as promised, our the full text prediction of our guru panel.

Gene Tyndall

EVP

Tompkins Associates

With the increasing popularity of making predictions the past several years (doesn’t every one now do it?), I have observed that few ever come true 100%, unless they are so generic as to be obvious (e.g. “the economy will tend to improve”). It reminds me of sales forecasting, where perfection is impossible, and “hope is often the strategy”. Are we ready to accept that we really have no idea about a year ahead, and thus we should expect the unexpected, prepare for surprises, and try to somehow balance degrees of optimism and pessimism?

With this philosophy in mind, I will suggest five (5) topics that might be characterized as “wishful thinking” for 2011. Yet it seems to me that these represent trends that, if the majority of supply chain managers around the globe could improve on, the value of supply chain excellence would escalate to executive agendas and thus advance the Global economy and our profession with them.

#1: A better understanding of true Supply Chain costs. Too often people misrepresent total supply chain as those of logistics and transport. In fact, supply chain costs include all costs associated with PLAN, BUY, MAKE, MOVE, STORE, SELL, and RETURN. In companies that do all these processes, the total supply chain costs will represent 80% or so of the total. Just because something is complex does not mean we should misrepresent it.

#2: Simplification of Complexities. Of course we know that global supply chains have become more complex, in all the processes, virtually all the functions and activities, and the choices we make every day. Unless we can learn to better simplify these, however, we will get mired in paralysis, misunderstandings, and errors. The art of synthesizing recognizes complexities, but presents them in accurate and actionable summaries.

#3: More effective Supply Chain Organizations. More and more leaders have come to recognize that despite impressive strategies, clear processes, and powerful technologies, unless the organization, people, skill sets, and culture are all world-class, supply chain performance will be mediocre. Organizational alignment and excellence, and change leadership, are taking front seats now.

#4: Supply Chain people and skills are changing. Closely aligned with the above are the needs of today’s supply chain managers. Engineers, analytics, and software savvy skills are very important, but so are the abilities to interact with peers, those in other Processes, executive, suppliers, and customers, on a business level. Watch how the Supply Chain Universities and recruiting firms deal with this trend, because every company is concerned about its talent gaps.

#5: Better understanding of how Supply Chains should contribute to stakeholder value. Many know that I have promoted this trend for years, and it is finally becoming more evident. Cost efficiency is important, but Value Creation is really about improving Free Cash Flow, which comes from both revenue growth and cost management. Supply Chain managers are stepping up more to this role and will need to learn it.

Maybe these are not predictions per se, but I submit they are trends that will get more attention in 2011. The best Supply Chains will result from those companies that get these goals right.

Dr. John Langley

Penn State University

A few thoughts here that might be useful …

Information Technology: We have now reached a point where the supply chain technology sector has created significant types of capable functionality … and the big challenge now is for the users of what has been developed to commit themselves to improving their planning and operations through the use of what is available. Whether it relates to TMS, WMS, global trade management, sourcing, EDI, visibility, etc. … there are numerous opportunities for smart users and providers of logistics and supply chain services to “pony up” and becoming meaningfully involved in improving their supply chains through the use of appropriate IT.

In some cases the result will be an enhancement to a particular company or supply chain … while in others the end results will include the ability to be competitive, or maybe even to stay in business. Also of consequence in the supply chain IT market is that the big ERP providers (e.g., Oracle, SAP, etc.) have now seriously entered the markets for supply chain functionality. This creates two benefits for customers: 1) a new, capable source of needed IT applications for supply chain and logistics; and 2) the (reportedly) ease of integration with ERP systems. Both of these have the likelihood of being of great value to customers willing to become invested in these ways, and so we are likely to see a very robust market in 2011 for supply chain software.

Governmental Interference: I am tempted to be nice and refer to this as government “involvement,” but the truth is that governmental organizations at all levels are finding ways to increasingly impose themselves on the functioning of the business world, and thus to “interfere” with the ways that companies and markets conduct themselves on a continuing basis. Whether it be taxes, health care costs, energy taxes, etc., companies are trying to deal with significant uncertainties in terms of how the government will next choose to control the private sector. The natural result of this is that companies have no choice at times but to be as conservative as necessary, so as to protect financial and other types of assets that are essential to the future of the businesses.

This situation will likely improve if and when the government sends signals that it truly believes that the success of the private sector is a key to enhancing our overall macro-economic picture. While there are some signs that the federal government in the U.S. will become less “anti-business” than it has been for the last couple of years, there is always the possibility this could be the behavior of a “wolf in sheep’s clothing.” Only when business and government have a mutual respect for each other, and recognize that neither can succeed without some meaningful level of cooperation and working together … will there be a significant movement for companies to give a bright “green light” to investment and innovation.

Global Challenges: Given that supply chains of all types have become global by their very nature, it is only natural to look toward world events as a key to understanding where supply chains are headed for 2011 and beyond. Essentially, the globalization of business has created significant, new opportunities on the demand and supply sides of many businesses … but this has also created an imminent need for planning and control capabilities that span the globe. So, we are seeing great interest in achieving shipment visibility throughout increasingly complex supply chains, and this visibility is necessary to be a legitimate and profitable player in the global marketplace.

Also, considering the global threats and conflicts of which we already well-aware, and those that are yet to declare themselves … supply chains are faced with very significant pressure to be able to transform themselves in very short periods of time. As a result, this will place added emphasis on designing supply chains and capabilities that are agile, flexible, responsive, robust, etc.

Jim Barnes

President

enVista

Here are my predictions for 2011:

1. SaaS providers specifically in the area of TMS will continue to make traction in 2011. Companies are gaining confidence in their ability to utilize SaaS solutions to run mission critical business functionality. We will continue to see evidence of this in 2011 for ERP, WMS and Labor Management Solutions. Supply Chain Centric, even fortune 500 companies are effectively utilizing SaaS solutions that are hosted in the cloud… Look for major shifts in software centric companies strategies. Case in point Microsoft is making major moves to move a number of solutions to a SaaS model. Microsoft will more than move the needle they will shake up the space.

2. The cloud is here to stay and is not just another buzz word….. Software providers are building solutions that operate in the cloud. Amazon’s EC2 (Elastic Compute Cloud) are allowing companies to utilize virtual computers on demand when increased computing, storage and memory is required. The high scalability is perfect for e-commerce companies with demand spikes. Why buy when you can lease….. Why run 100 servers when you can virtualize the severs using solution like VM Ware and reduce your TCO to support your business.

3. Specialty retail is climbing out the recession but it is specific to geographical regions (Sun Belt, and South East). Retailers in Western States (California, Oregon, Arizona and Nevada) will continue to struggle in 2011 due to state budget deficits and lack of confidence. This is primarily due to real estate values and mortgage foreclosures.

4. Supply Chain Centric organizations will increase their spending in 2011 and I predict software sales to be on par with 2007. Many companies are coming to end of term or maintenance contracts with their software licenses. End of term (life cycle) and maintenance contract plus renewed faith in the economy will motivate companies to replace legacy POS, ERP, WMS and TMS solutions.

There are always the same ole same ole: hire great talent, relentless cost reduction, globalization etc… but the reality is companies are making investments after a two year doldrum..

Mike Regan

CEO

TranzAct Technologies

Thanks for giving me the opportunity to participate in this project. With respect to my predictions/projections for 2011, I have categorized them under the following headings:

• Shock and aw(ful);

• Welcome to the wonderful world of compliance; and

• The Continued War On Trucking

Shock and aw(ful)

Shippers will see freight costs (rates and the fuel surcharge) rise over the course of the year by as much as 6% to 8% as they are reintroduced to the concept of a "seller's market." The actual percentage of increase in costs will be determined by two variables: the desirability of the shippers’ freight and the extent to which there is an economic recovery. Coupled with the increase in fuel prices, which will mean higher fuel surcharges, it is entirely possible that shippers could experience a double digit increase (10% - 12%) in 2011.

For the past four years shippers have had the upper hand in their rate negotiations with their carriers. They have used this as leverage to extract pricing concessions that today are considered to be the “norm." In 2011, shippers will see that the tide has turned. The cumulative impact of carriers having rationalized (a.k.a. reduced) capacity for the past three years, the difficulty in recruiting and retaining drivers, and the fact that it costs a lot more to run a trucking company these days means that carriers will ask for, and get, significant increases in their rates.

Very few shippers are actually budgeting for increases of this magnitude. Consequently, they will likely be shocked by the numbers they see in their financial statements, which will result in awful meetings in which they scramble to explain the ‘unforeseen’ variances/increases to management. Shippers who think this is an unlikely scenario are not paying attention to what has been happening in the fuel markets. Many shippers rely upon the Energy Information Administration's annual projected fuel cost to determine the impact of fuel surcharges. In November 2010, the EIA projected that the cost of diesel for 2011 would be $3.14 per gallon. Today at the start of 2011, the price of diesel is $3.33 per gallon and it is likely to go up from here.

In our interviews with carriers, they are confirming that this is the strongest pricing environment since 2004 - 2005. The sentiment that we have picked up from the carriers is that they are "no longer building the church for Easter Sunday,” and that they will not put additional equipment on the road until they are confident that it will yield satisfactory financial returns. Add it all up (rate and fuel increases) and you can see the real potential for an 8 to 10% increase in transportation costs.

Welcome to the wonderful world of compliance

The second reality that shippers will confront in 2011 is the impact of regulatory compliance. The CSA initiative, which had been talked about for two years, is now a reality. There is no shortage of information about the CSA program, yet it is surprising how few shippers are changing their processes to mitigate the risk associated with using a carrier with an unacceptable rating. Just one accident involving the wrong carrier will provide shippers with a very costly education.

Additionally, while relatively few companies have incurred fines under the ISF program, there are indications that the CBP will be more aggressive in levying fines for non-compliance in light of the fact that shippers have had sufficient time to bring themselves into compliance. The good news is that many companies are ISF compliant, but companies will still have to closely monitor this area. And let's not forget the issue of air security. This year shippers dodged a bullet when the shipment of toner cartridges from Yemen was discovered. But make no mistake about it, the push for enhanced screening will continue in 2011.

What does this mean for shippers? What you don't know can in fact really hurt you. Our government will continue to introduce rules and regulations that can and will affect your supply chain.

The Continued "War On Trucking"

Finally, there will be no abatement in the continued war on trucking. On the surface, the recently announced proposed changes in the Hours of Service (HOS) were not nearly as bad as they could have been. A closer examination reveals that these revisions could have a significant impact an impact on trucking companies in 2012 and beyond (since the earliest they could become effective is November, 2011). But in 2011 shippers need to make their voices heard on the proposed regulations or face the consequences in 2012. HOS is only one of the issues on the table. Whether it's the proposed new rules for EOBR's, the qualification for drivers, diesel emissions, or the battle with CARB at the Southern California Ports, or the battle over the independent contractor issue, or the ... well I think you get the idea, there are lots and lots of issues that will affect the trucking industry. And let's not forget we still don't have a Highway Transportation Bill that could be the topic of a separate essay in and of itself.

The American Trucking Association will have their hands full dealing with issues that will make it more costly to run trucks, but this is not a battle that the ATA can fight alone. In 2011, shippers will have to become and remain engaged with the truckers to make sure that our legislators and government officials understand the vital role that transportation plays in the functioning of our economy.

As we head in to the new year, here are some helpful tips.

1. Go back and revisit your freight budget for 2011. If you have budgeted for flat or minimal increases from your carriers, you may want to develop a contingency plan to explain unfavorable variances.

2. Second, if your company has reduced its transportation staff to the bare bones, consider lining up some outsides resources to support your compliance initiatives. In particular, pay close attention to the carrier selection process to avoid any nasty surprises.

3. Finally, now more than ever, you need to be in active dialogue with your carriers about how you can become a model customer.

Have a great 2011.

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