THE RULE OF 7

Twenty-two years ago, Supply Chain Management Review published an article entitled, “The 7 Principles of Supply Chain Management.”. The authors’ insights then are remarkably relevant to the modern supply chain, and companies that have follower these guidelines, or variations thereof, continue to find them valid and timely.

In the event you have never read them, these principles were:

  1. Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.
  2. Customize the logistics network to the service requirements and profitability of customer segments.
  3. Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.
  4. Differentiate products closer to the customer and speed conversion across the supply chain.
  5. Manage sources of supply strategically to reduce the total costs of owning materials and services.
  6. Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives a clear view of the flow of products, services, and information.
  7. Adapt channel-spanning performance measures to gauge collective success in reaching the end-uses effectively and efficiently.

While the state of the supply chain concept has changed drastically since 1997, particularly in a technological sense, the guidelines are as appropriate today as they were then.

We have seen other rules of 7 since then. For example, the late Steve Jobs, formerly CEO of Apple and arguably one of the most brilliant management minds of recent years, said:

  1. Customer comes first. Cost cutting comes second.
  2. Set impossible targets.
  3. Prioritize actions based on importance.
  4. Adapt process view of organization.
  5. Simplify products and process’
  6. Make radical al changes when necessary.
  7. Enhance relationships via face to face meetings.

Naturally, in today’s environment, the usual question is, “What about Amazon?” For that answer, we turn to Jeff Bezos’ seven philosophies.

  1. Put yourself in customers’ shoes.
  2. Don’t be distracted by the competition.
  3. Keep an eye on the ball.
  4. Go the extra mile.
  5. Plant seeds and watch them grow.
  6. Learn to improvise.
  7. Build the dream team. **

While none of these principles are exactly the same, all three lists emphasize the importance of the customer above all else. While I won’t be presumptuous enough to add my own rules of 7 to this distinguished list, I do think there are several other things besides customer orientation we can learn from these experts. We should be technologically literate, process driven, collaborative, flexible, and risk takers – not afraid to make the hard choices.

** Bezos’ dream teams are small. He has said if it takes more than two pizzas to feed them, they are too big. Often there will be an empty chair at the table, representing the customer.

(Sources: Supply Chain Management Review; Supplychainopz.com.)

Written By: Clifford F. Lynch

THE ONGOING BATTLE FOR THE LAST MILE

In an earnings call on March 19, FedEx president and COO Raj Subramaniam, when asked about Amazon, said, “We have been clear this is not a threat to our business because Amazon represents less than 1.3 percent of our total revenue, which is substantially lower than what our largest competitor (UPS) carries, nor is Amazon a threat to our future growth.” In another related comment, Fred Smith, Chairman and CEO said., “Amazon is a retailer, we are a transportation company”. This delineation may have been true five years ago, but Amazon is beginning to look more and more like a third-party logistics service provider, with both a strong distribution center and transportation network. Amazon’s infrastructure is developing so rapidly it is difficult to define it accurately; but as of last fall, it consisted of 40 aircraft, several thousand truck trailers, 396 domestic distribution centers and 452 in other countries. As an added touch, they also have on order 20,000 Mercedes Benz delivery vans (many of which are already in service) and utilize 6000 storage lockers from which customers can retrieve their purchases.

In my wildest dreams, I cannot imagine that Amazon would put FedEx out of business, but do believe (along with others) that long-term, the E Commerce giant is more of a threat than FedEx would have us believe. The battle for the last mile can only get more heated. While Amazon represents only a small percentage of FedEx revenues, as Amazon refines its delivery network, it will not only be able to reduce that percentage; but their capability could be very attractive to other retailers that might want to outsource their own operations.

According to Transport Topics, the loss of Amazon business (which was insourced) played a role in the recent bankruptcy of New England Motor Freight, a regional LTL carrier. In another major move, the largest customer of XPO Logistics (reported to be Amazon) is curtailing two thirds of its business with the provider, resulting in an upcoming loss of $600 million in revenues.

Smith is correct when he says Amazon is a retailer, but what he fails to say it that it is also a third party provider of both warehousing and transportation services. Some analysts believe that it will continue to grow in this area, and in a few years will be a dominant third party. In order to provide same day or next day deliveries, Amazon has opened distribution facilities in most major U.S. markets. This reduces the cost of the smaller customer deliveries since the “last mile” is relatively short. By locating centers closer to the customer, much of the freight expenditures are for longer lower-cost inbound shipments. There is no question about their ability to compete effectively in the major population centers.

Notwithstanding this, UPS and FedEx are not sitting by watching, nor are competitors such as Walmart that is expanding its own distribution system. FedEx recently purchased GENCO, a major logistics service provider, enabling them to compete in the warehouse operations outsourcing market. FedEx has tried this before, with limited success. This time however, the purchase of an existing, well-respected LSP will give them a solid base on which to build. UPS is expanding its operations in this area, as well.

FedEx also is testing a last-mile robot which can make home deliveries. These battery powered messengers are equipped with software and cameras to aid in avoiding obstacles as they make their rounds.

Is the “Amazon Effect” going to permeate the entire industry? I do not think so, but it would be a serious mistake to underestimate Amazon’s logistics competency. Amazon is far more than just a retailer, and I believe is moving toward being a formidable third-party competitor. Jeff Bezos, CEO of Amazon has been quoted as saying, “If I can conceive it, Amazon can achieve it.” I guess time will tell.

One interesting footnote to this competition is the fact that FedEx has recently added Amazon to non-compete agreements for its employees.

Written By: Clifford F. Lynch

SITE SELECTION FROM A TO Z

Fifty years ago, when you wanted to expand your distribution network and build a new distribution center, you didn’t call an industrial real estate broker; you called a railroad located in the area in which you wanted to expand.

Most large companies shipped their product – whether it was cases of consumer goods or rolls of carpet – by rail, which meant they needed access to a rail siding.  At that time the railroads owned a significant amount of raw land, much of it located along the rail rights of way, thanks to government land grants handed out in the mid-1800s to encourage development in the nation’s heartland.  And the railroads were only too eager to sell off plots for nominal amounts in exchange for a contractual promise of an agreed upon number of carloads of freight.  Depending on the level of potential traffic involved, they sometimes included other concessions such as extended rail sidings, rate discounts, and extra services.

But those days have gone the way of the steam locomotives and cabooses. Today’s selection teams want to know about a site’s access to highways, not railroads. In fact, very few distribution centers today even have rail sidings. While transportation availability should be at the top of everyone’s list, these teams must also be concerned about such things as labor supply, tax incentives, quality of life, and zoning.

Each firm’s requirements will be unique, but there are certain factors that should be considered for any project. Here are some factors to consider.

– Availability and cost of labor

-Availability of community services, i.e. commercial, churches, commercial

– Availability of extra land for expansion

– Availability of industrial support services

– Availability of special financing

– Building restrictions, if any; i.e., height, setbacks, landscape requirements

– Education facilities in the area

– Fire codes/protection

– Foreign Trade Zone availability

– Land or building availability and cost

– Location and volume of customers to be served

– Origin of products and materials flowing into warehouse

– Sustainability requirements; i.e. water retention

– Tax incentives

– Tax structures – property, income, inventory sales

– Telecommunications availability and cost

– Transportation access – rail intermodal yards, motor, package carriers

– Unemployment rate

– Union environment

-Unique Transportation Requirements

– Utilities, availability and cost

– Zoning regulations

While each of these is important and requires a critical review and close scrutiny, municipal and state incentives can be particularly important. Many areas have so-called PILOT (Payment in lieu of Taxes) programs which will provide tax reductions in exchange for new employment opportunities. Economic development incentives may also be available. The amount will depend on what benefit the new company might bring. Iowa and Mississippi in particular, have very attractive incentives for the right firms. For example, in several cases, firms interested in a Memphis location have been lured just across the state line by Mississippi incentives.

Be aware however, most of the incentive agreements will have “claw back” provisions whereby the incentives must be returned to the granting body if the recipient does not meet its contractual commitments.

Wherever you decide to locate, land and construction costs are such that the construction of a new distribution center or plant can be an expensive undertaking; and proper due diligence will be critical to its success.

Written By: Clifford F. Lynch

ABOVE ALL, STAY CURRENT

As the supply chain and its management become more complex, it is becoming more difficult for supply chain practitioners to keep up with what is happening around them. Add to that the influx of technical, analytical types who have mastered the necessary technology but know very little about the basic supply chain; and you have a management group that often lacks either rudimentary knowledge or struggles to keep abreast of new developments. One tried and true method of obtaining such education is through professional certification.

Certification is not a new idea in our industry. During the regulatory years, the Interstate Commerce Commission granted to those non-attorneys who passed a rigorous exam a certification that gave them the right to practice before the ICC. The American Society of Traffic and Transportation (later to become American Society of Transportation and Logistics (AST&L) was founded in 1946 and began certification in 1948. This widely recognized certification also required the passing of a comprehensive group of exams. APICS was formed in 1957 and began to offer its well-known certification in production and inventory management.

In 2011, the Council of Supply Chain Management professionals announced its SCPro ™ certification. CSCMP describes it as “a rigorous three – level certification which offers supply chain professionals a concrete way to fully demonstrate a broad range of skills that command competitive salaries and titles while giving hiring managers an independent barometer of a candidate’s commitment to and success within the supply chain management profession.” The certification requires the passage through three levels, i.e. Cornerstones of Supply Chain Management, Analysis and Application of Supply Chain Challenges, and Initiation of Supply Chain Transformation.  Entrance to each level is contingent on satisfaction of the previous one. The last level is particularly interesting in that it requires a great deal of hands on, practical application, which should prove extremely valuable.

In 2015, the American Production and Inventory Control Society (APICS) announced a certification in logistics, transportation and distribution. This new designation or certification (CLTD) is earned by passing just one exam; but it contains 8 modules covering subjects from Order Management to Reverse Logistics. In July, APICS published 850 pages of study guides and materials, so this one will not be a cake walk, by any means. Along with the other APICS certifications, fulfillment of these requirements will yield an excellent supply chain education. According to APICS, the “CLTD designation will equip individuals with the essential knowledge they need to reduce costs, increase customer satisfaction, and achieve recognition.

Recently, APICS announced a name change to the Association for Supply Chain Management, possibly to “turn up the heat” a little on CSCMP.

For many of us the first question will be, “Do I really want to do any of this?”  I would say, “Probably so”, particularly if you are new to the industry, do not have a solid supply chain background, or simply want to stand out among your peers. The second question no doubt will be, which certification do I want to acquire? That is a tougher question and depends on both the specific needs of the individual and the precise content of the exams. For those of us who are strong in the basic supply chain functions, I suggest we choose the program that will give us the best technology information. If you are strong in technology, concentrate more on the more basic functions. I believe that to really succeed in the supply chain field as it has evolved, it will be necessary to be well qualified in both.

Written By: Clifford F. Lynch

THE LONG AND CRUMBLING ROAD

When Donald Trump was running for president, one of the major concerns he identified was the horrible condition of the nation’s infrastructure. If elected, he said, he would deal with the problem swiftly and effectively. The condition of our roads and bridges was not a new subject. For several decades, there has been discussion of the country’s deteriorating infrastructure. There have been hundreds of articles (including several by me), discussions, and legislative actions, yet we seem to be no closer to a solution than we were fifteen years ago.

Prior to the president’s first State of the Union address to Congress, we were looking forward to learning about his plans for improving the infrastructure. Unfortunately, he simply restated what he had said before, “I will be asking Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States – financed through public and private capital – creating millions of new jobs. Crumbling infrastructure will be replaced with new roads, bridges, tunnels, airports and railways gleaming across our beautiful land.” He devoted only 139 words out of a 5006-word address to this critical issue. As President Obama did before him, he was suggesting funding through public/private partnerships (referred to as P3s) That of course, translates to “tolling our interstates” which is illegal under the legislation that authorized the system in 1956. Concurrently with all this,   Congress has refused to raise the fuel tax, which has not changed in 24 years. Most industry organizations and experts such as the American Trucking Associations and U.S. Chamber of Commerce have advocated an increase, but Congressional leaders apparently would rather have a root canal than raise fuel taxes. This is in spite of the fact that recent surveys have shown that 79 percent of adult Americans approve of infrastructure spending.

For two years we have been waiting for something to happen, and excited rumors prior to the recent 2019 State of the Union address suggested that this time, a plan would be presented. What was presented was far from a plan. President Trump stated, “Both parties should be able to unite for a great rebuilding of America’s crumbling infrastructure. I know that Congress is eager to pass an infrastructure bill – and I am eager to work with you on legislation to deliver new and important infrastructure investment, including investments in the cutting-edge industries of the future.

This is not an option.

This is a necessity.”

This bland 69 words (out of 5540) was even less definitive than the 2018 verbiage.

In the meantime, states continue to increase their fuel taxes to pay for their own projects – 27 at last count. In short, the entire problem has gotten out of control. Many of our needs will not be attractive to investors, and there still is no sign of an overall plan for the necessary improvements. Where we might get private investment in roads and bridges, the financial returns for the investors will be passed on to the users. We could easily find ourselves paying tolls and user fees, plus increased state taxes, leaving us in a worse position than we would have been if Congress had taken the action that they should.

And, far as the “new roads, bridges, tunnels, airports and railways gleaming across our beautiful land” good luck on that one.

Written By: Clifford F. Lynch

WANTED: RISK TAKERS

Once again, there is a futures market in the works that the organizers believe will add some stability to the transportation market. The recently announced venture proposes the trading of transportation capacity futures to protect pricing and availability. Citing the capacity shortages that have often plagued shippers, advocates of the futures market are promoting the idea as a hedge against risk. Buy it now and use it later when you need it. If you don’t need it, sell it to someone who does.  I have written about similar ideas that have been advanced in the past when capacity was short in the industry, with the presumption that a firm could lock in future pricing and capacity. These efforts were unsuccessful; and while I am by no means an expert in the futures market, I am skeptical of the current plans, as well. I am concerned that we will get lured into the commodity trap. While the idea might sound good, we need to keep in mind that what works for soybeans and pork bellies might not work for transportation. Many would have us believe that transportation is simply a commodity, but I do not agree.

In its purest form, a commodity is an item that has value and is produced in large quantities with uniform quality. Whether it is something tangible like oil or intangible like electricity, a commodity is a homogeneous, undifferentiated product. When it is traded, it is solely on the basis of price. Some would argue that transportation service fits that category. As they see it, transport service is just a way of getting something from point A to point B. It doesn’t matter who provides the service, as long as the product gets there.

I am concerned that this kind of thinking can get shippers in trouble. As those in the business know, there is much more to transportation than simply hauling something between two points. It’s also about on-time pickup and delivery; it’s about planning and satisfying shippers’ needs in a mutually satisfactory way. Most important, it is about relationships.

Granted, there is a futures market for ocean capacity, but I believe that is quite different from domestic truck capacity. First of all, there is less variability in the product. In ocean service, standard sized containers move over standard routes on pre-determined schedules. Although there may be some serve variability due to weather or unforeseen circumstances at ports, most of the time container movements are fairly predictable. This is a far cry however, from the type of capacity needed to move a shipment of hair dryers to Wal-Mart and deliver it within a two -hour window.

If the periods of capacity shortage have taught us anything, it’s this. When he or she is between a rock and a hard place, the shipper who comes out on top – the one who manages to find a carrier when it needs one – is not the one who wins a bidding war, but the one with the best relations with the carrier. In study after study, it has been confirmed that during these trying periods, those shippers who had fared best were those who had developed collaborative relationships with their carriers. They were the ones who gave carriers timely projections of future shipments, who held regular meetings with their carriers, and who tried to be better customers in general.

It is important to remember that a shipper and a carrier have basically conflicting objectives. True, both want (or should want) their customers serviced well, yet they also want to maximize their own profits. Working through these conflicting objectives to everyone’s satisfaction requires some careful relationship building.

Managing today’s global supply chains is quite complicated. Managers are encountering new technology, new cultures, new currencies, and in some cases new modes of transportation. I have a great deal of respect for those who introduce new ideas into supply chain management, but I also firmly believe that transportation is, and will continue to be, a relationship business.

If you want to trade something, try pork bellies – that market looks a little less volatile than the one for feeder cattle.

Written By: Clifford F. Lynch

THE BLACK HOLE OF E COMMERCE

Unless he or she has just returned from an extended visit to a deserted South Pacific island, every supply chain manager (and everyone else for that matter) realizes that consumer buying habits have changed dramatically over the past few years. Electronic commerce, or on-line buying has increased from problem ridden sales of $42 Billion in 2002 to a whopping $526 Billion (estimated) in 2018, and now represents about 10% of total retail sales. While total retail sales rose only 3.7% over last year, e commerce purchases increased 16%. By 2020, on-line buying is expected to exceed 12% of retail sales.

We have come a long way since bright, young, technology-driven entrepreneurs, with plentiful sources of capital, were designing attractive web sites touting a variety of products delivered right to your door. What they failed to understand was to meet the demand, responsive and efficient distribution systems had to be in place. In most cases they were not, and the next few years were conspicuous by their delivery failures. But as Little Orphan Annie sang in the musical “Annie”, “The sun will come out tomorrow”, and it did. Other bright technology savvy systems designers stepped in to develop the systems necessary to meet the demands. They planted the seeds for the technology that has improved our supply chains so dramatically.

Amazon, as we all know, has become the primary trend setter – a long way from their 1994 entry into on-line book sales. The phrase “Amazon Effect” has become a common term in the industry and describes the environment in which many of us are operating.

But what is the Amazon Effect? The Seattle Times described it as “huge company uses the internet to sell stuff cheap, wiping out the competition”. Amazon describes it as “a way of doing business with your customer that provides positive customer experience before and after the sale in order to drive repeat business, customer loyalty, and profits.” Other firms have tried to emulate this philosophy; but in doing so, along with Amazon, have encouraged a troublesome post sale activity – product returns. It is not uncommon to receive free shipping of the items you order, but also the items you return. Just paste the seller- provided label on the package and send it back. Today, about 30% of all items ordered on line are returned, compared to about 8-9% returned to brick and mortar stores. The reasons are not surprising. According to a recent report by Investcpr.com, 20% of last year’s returns were due to damage, 23% of the items were not what was ordered, 22% were not what the buyer expected, and 35% were for various other reasons.

In my opinion, the major reason for many of the returns likes in the fact that it is too easy to do. About 50% of retailers offer free returns, and 67% of buyers check the return provisions before placing an order. Many consumers, called “serial returners” in the industry, will order items in different colors or sizes, fully intending to send back what they do not like.

Distribution centers are customer focused and their primary reason for being is to ship orders to their customers. It is not difficult to imagine how products “swimming upstream” can be disruptive to the orderly flow of shipping activity. Pulling items back in, inspecting them, refurbishing, disposing, or restocking them is costly and adds an extra burden to both operations and costs. Many sellers have turned to third parties to handle returns, and this has proven to be a huge load off the shoulders of the sellers. Regardless of how they are handled however, internally or by logistics service providers, returns represent a major cost to the sellers and are disruptive to distribution operations. As long as buyers find it so easy to abuse the system, the situation is not likely to improve; and the cost must eventually find its way to the price of the products.

Written By: Clifford F. Lynch

IT’S NOT JUST ABOUT RETAIL

If you are not a retail industry supply chain manager, you might not be paying much attention too the world of on-line orders, same day deliveries, or the Amazon Effect. In fact, all the developments in retail marketing and distribution might make you thankful you are in another business. If only that were true. The fact of the matter is that the pressure the retail industry is exerting on the entire supply chain is affecting us all.

One major impact, already being felt is the growing shortage of industrial space in the metropolitan areas. As we mentioned in our last blog, Amazon has established several hundred distribution centers around the country to deliver rapid service to its customers. In an effort to compete with that, competitors have rushed into the metro areas, attempting to establish their own last mile positions, driving costs up and placing pressure on space availability. This of course, affects all firms that might be trying to secure industrial property. Some retailers are turning to their stores as distribution points. Target, for example, is remodeling 1000 stores over a three-year period, according to the latest issue of Supply and Demand Chain Executive. The utilization of retail stores for last mile deliveries can be a good solution, but it is likely to present some inventory management challenges.

Not all retailers have stores than are suitable for shipping more than a few orders a day, and some of them are looking to logistics service providers (LSP) for a solution. The more progressive LSPs have established so called omnichannel operations and are servicing E Commerce customers, as well as their more traditional clients. The increased cost of doing so will no doubt be spread across their entire customer base, resulting in higher prices for all. I believe the use of reliable LSPs is the best answer to competing with Amazon and other large on-line sellers. According to the recent 2018 State of Retail Supply Chain report, 36% of the respondents plan to rely heavily on LSPs over the next three years. Here again, this will put pressure on the non-retail segments of the LSP users.

Keep in mind however, it is not always necessary to locate right on top of your customers unless you are trying to provide same day or same hour deliveries. Most non-retail customers seem to be satisfied with next morning delivery, and this can be accomplished by serving large cities from outside the metropolitan areas, where costs and congestion will be less. For example, delivery from Cedar Rapids to Chicago can comfortably meet next day requirements.

Another major issue is the effect on motor carrier service, rates, and capacity. Already a problem for some, as shipments get smaller, more trucks and drivers will be needed; and the problem will be exuberated. Up until now the driver shortage has been primarily a truckload, over the road problem. Recently however, with the ever-increasing number of small shipments, we have seen problems in the LTL sector, as well.

Finally, I believe we will see increasing pressure from non- retail sectors on LSPs, carriers, and suppliers. Even when product lines may differ, faster service is always good. It usually results in lower inventories, reduced warehouse costs, and other economic benefits. At some point, some progressive supply chain manager is going to stand up and say, “Hey, you did it for them. How about us?”

Written By: Clifford F. Lynch

NINE FOR NINETEEN

It is that time of year when pundits attempt to predict what will happen in the year ahead; and every year or so, I try it myself. Sometimes I have been right, and other predictions have fallen flat. For example, I really thought this would be the year for the Dallas Cowboys, but that no longer looks promising. Other predictions are starting to surface in blogs and postings, i.e. rates are going up, they are going down, capacity will Be an issue, then again, maybe not; but I believe there are several developments that will result in some fundamental changes in the way we currently, or will manage our supply chains. Some are new. Some are a continuation of those already begun.

  1. Tariffs and Trade Wars (?). We should be concerned about tariffs and possible trade wars, particularly with China. President Trump seems to be determined to impose tariffs on foreign goods which he believes will protect U.S. manufacturers. Most economist believe that no one ever “wins’ a trade war in the end. In 2017, the U.S. imported $505B worth of good from China. We exported to them only $130B. This does not seem like a war we can win, but one that could affect our supply chains – everything from facility locations, product origins, to rates.

 

  1. “Amazon Effect.” We have all heard of this one. I liked a Seattle Times definition, “Huge E Commerce company uses the internet to sell stuff cheap, wiping out the competition.” On a more serious note, driven by the aggressive customer techniques of Amazon, the term has come to stand for rapid and dependable service, often same day deliveries, free shipping, and instant visibility. To accomplish this, Amazon has established hundreds of distribution points in the country from which their shipments are made. So-called millennials are making 54% of their purchases on line, and Amazon provides over 50% of that. For a retail competitor, supply chain management will become even more challenging in 2019. (Amazon will also keep us on our toes with threats, or patents of squadrons of delivery drones, distribution centers in the sky, and skyscraper warehouses.)

 

  1. Industrial Property. To compete with Amazon, a mad dash to industrial property is creating a shortage of available sites, and when they are available, prices are significantly higher. According to CBRE, availability decreased over 7% in the second quarter of 2018. The age of many buildings is becoming a problem as well, since they are ill suited for modern distribution operations.

 

  1. Robotics can operate in small spaces more efficiently than humans, and we will see companies turning to smaller buildings to control real estate costs. This savings can be devoted to robotics. In larger buildings their use will be increased significantly to supplement manpower.

 

  1. Infrastructure, or the lack thereof, will continue to be an issue with little action expected from the Federal government. States are realizing that if they need infrastructure improvements, they must provide it themselves. Look for increased state fuel taxes and/or tolls to fund these.

 

  1. One of the interesting findings to come out of the “2019 Third Party Logistics Study” was that more shippers are realizing that they do not have the technology to reach their objectives, and are turning to their third-party partners to provide this. Already, 93% of shippers feel that technology capabilities are a necessary part of 3pl offerings. Technology is expensive, and as these offerings increase, expect rates to increase to cover the expense.

 

The last three actually began in 2018, or before, but will be with us for the foreseeable future unless we see a significant downturn in the economy.

  1. Driver Shortage. This condition has been with us so long, it seems like business as usual. However, as shipments get smaller, more trucks will be needed, as well as men and women to drive them. The shortage has existed primarily in the truckload sector, but it could spread to LTL in 2019.

 

  1. Capacity Issues will increase, not because of equipment shortages, but due to the lack of drivers. I do not see autonomous vehicles as a solution for several years.

 

  1. Transportation Prices will rise, and 2019 will demonstrate just how the economic principle of supply and demand works.

 

Notwithstanding some of our current management challenges, keep in mind that things could be worse. Stay calm, focused, keep an eye out for lost delivery drones and have a happy and blessed 2019.

Written By: Clifford F. Lynch

TIME FOR A SECOND LOOK

As 2018 draws to a close, it is clear that the country will not see the improvements in infrastructure we have been promised for several years. Most recently, President Trump decided infrastructure improvement was a high priority and one of the first problems he would address when he moved into the White House. In May of 2017, Secretary of Transportation Elaine Chao said “the infrastructure plan is coming soon.” For whatever reason – Congressional stagnation, lack of leadership, or both – nothing has been done at the Federal level. Some states, out of frustration and/or critical need have increased state fuel taxes and used the funds for their own infrastructure needs.

It also seems clear that the truck driver shortage persists and is expected to do so for the foreseeable future. While some improvements have been made by increasing salaries and bettering working conditions, the American Trucking Associations (ATA) projects the current shortage at 50,000, expected to increase to 175,000 by 2026.  The ATA says that these shortages and rising fuel costs are still the major concerns of motor carriers. A JLL report indicated that C.H. Robinson truckload rates were up 21.5% during the first quarter of 2018.Underscoring these issues are the continuing capacity shortages in the industry. In some cases, these result from increasing expense or lack of equipment, but many serviceable tractors have been parked due to the shortage of drivers.

Meanwhile, many of us have been faced with the most significant change in the supply chain since 1980, the year rail and motor carriage were deregulated. The popular term for the development is the “Amazon effect”. Others call it the “Now Economy” However you choose to refer to it, it represents a momentous change in consumer buying habits and the services necessary to accommodate them. Last year, E-Commerce sales totaled $447M, and are expected to exceed $500M this year. By 2022, the total is expected to surpass $700M. Not only are more consumers buying on line, they are demanding more rapid deliveries – sometimes same day – and Amazon not only is accommodating this, they are encouraging it. Competitors are struggling to keep up and maintain their share of this huge market. On the surface it would appear that the challenge is limited to the retail industry, but that is not the case. The increase in small shipments is straining an already declining LTL capacity, increasing prices.

Obviously, if sellers are going to provide same day deliveries, distribution centers must be closer to the markets. Already, this has driven up real estate prices in major markets. A considerable amount of time and effort is being devoted to strategizing about how to handle these “last mile” deliveries efficiently and economically, but we cannot ignore the inbound movements. The truckload industry is feeling the same pains. If you have not done so, it may be time to take another hard look at intermodal. Service is far better than it used to be – faster and more consistent. It is less expensive than truckload; and during the past four years, railroads have made $442M in capital improvements.

Secondly, be cautious about the rush to the increasingly expensive major markets. As long as you are close enough to provide the necessary customer service, your real estate and labor costs will be less. Whatever you do, do not get overwhelmed by a problem that may have an easier solution than you think.

Finally, as you reflect on 2018, and plan for 2019, take some time to enjoy the holidays and be thankful for what we have.

Written By: Clifford F. Lynch