CRESTING THE HILL

THE STATE OF LOGISTICS – 2019

On June 18, the Council of Supply Chain Management Professionals (CSCMP) released the “30th Annual State of Logistics Report”. This year’s report was entitled Cresting the Hill. The SOL report was launched in 1988, by the late Bob Delaney, one of the leading supply chain experts of that time; and after his death carried on by Rosalyn Wilson until 2015. Since that time, A.T. Kearney has performed the research and published the results. The complete report can be found at www.cscmp.org, and is free to members of the organization. Since non-members are charged $350, this week, I wanted to publish a brief summary of the report for those who might not have a chance to see it otherwise

2018 business logistics costs totaled $1.6 trillion, or 8% of Gross Distribution Product. Expenditures were up 11.4% y/y, and the percentage of GDP was slightly higher than last year’s 7.7%. At the same time, GDP grew about 2.9%. Expenses for every category were up, ranging from 6.4% for administration to 14.8% for inventory carrying costs.

2018                                              y/y %

Motor Carriers                                    $668.8 B                                            10.1

Rail                                                            88.4                                                12.9

Parcel                                                      104.9                                                 8.7

Airfreight                                                 76.5                                                  9.2

Water                                                       45.7                                                12.8

Pipeline                                                    53.0                                                12.7

Inventory Carrying Costs                    493.7                                                14.8

Administration                                     104.4                                                  6.4

 

ATK chose the title of this year’s report considering the fact that spending and consumer confidence have increased since end of 2018 declines, but an economic slowdown is expected as the year progresses. E Commerce is expected to continue its growth and Amazon continues to lead the pack in setting customer expectations. One of the more interesting developments involves Amazon’s relationship with its carriers. As Amazon continues to increase its own provider capability, the more traditional carriers such as FedEx and ABF have begun to curtail their activity with Amazon.

More motor carrier capacity is now available and rates are settling in at more normal levels.

Other key analyses in the report covered:

Parcel and last mile. Competition remains frenzied with Amazon continuing to set the bar for customer expectations.

Precision Railroading is driving rail profits, but in some cases, service has suffered. Improvements are needed, but hopefully, not at the expense of profits.

Warehousing rates continue to increase, but at a lower rate than in previous years. Demand is still high, as is the need for increasing automation. This is not only to gain operating efficiency but to compensate for the shortage of warehouse labor.

Logistics Service Providers are continuing to play a key strategic role. Technology is the important differentiating factor. According to the report, “despite the role’s importance, most outsourcing relationships remain at tactical levels rather than deep partnerships. “

No recent supply chain report would be complete without some mention of Blockchain.  According to ATK, the major hurdle is participation – not technology. The only way blockchain can succeed is through a large number of companies that are willing to collaborate. Last year, the report indicated that a lack of common standards was the major issue, but the current thinking is that blockchain can only be beneficial with a more open view toward sharing.

Finally, this year’s report mentioned 5G which appears to be the standard for the future. We will see major improvements in speeds of data transfer, AI-based tools, tracking, and other important supply chain functions.

This has been only a brief review of the 65-page report, and a full reading would be worthwhile. It is available at www.cscmp.org.

Written By: Clifford F. Lynch

THE CUSTOMER ISN’T ALWAYS RIGHT

At least FedEx doesn’t seem to think so. Last week, with great fanfare, FedEx announced it would not review its US Express contract, scheduled to expire on June 30. This is only the air contract, and other FedEx/Amazon contracts will remain intact – at least for the time being. In making the announcement, FedEx indicated it would “focus on serving the broader e-commerce market.” Presumably, that includes companies such as Target and Walmart, with whom FedEx also has contracts.

Financial firm, UBS indicated that 80% of FedEx total business is part of the express contract, and 7.8% of FedEx packages in the U.S. originate with Amazon. In minimizing the move, FedEx attributed only 1.3% of its total 2018 revenues to Amazon; but according to UBS, Amazon generated a total of 5.4% of FedEx Express’ domestic revenue. Whatever percentage you are inclined to use, the total revenue that will be lost is $716 million, according to UBS>That is a considerable amount of revenue to transfer to a competitor – quite possibly UPS.

There is precedent for a logistics service provider (LSP) to sever relationships with a good account, but this has been more prevalent in the warehouse sector. Some warehouse firms have found themselves with as much as 50 – 60% of total revenues produced from a single contract. As painful as it might be for the LSP, this is a problem that needs to be remedied, ideally through a significant extension of the contract and a major effort to secure more business – but not for 1.3%, or even 5%.

I am not sure we know the real reason for the move. It could be that FedEx simply does not want to have a relationship with a customer that is also a competitor. As Amazon expands both its air and ground capabilities, it is sure to divert some delivery fees from FedEx to its own coffers. There is always a frisk that if the contract were renewed, Amazon volume could become significant enough to cause heartburn to FedEx if Amazon cancelled the contract later. There certainly is precedent for that. Recently, a firm, widely thought to be Amazon, cancelled a contract with XPO Logistics, expected to cost XPO about $600 million in revenue

I suspect the real reason might be price. Moody’s estimates that Amazon packages moving through the FedEx network only produced about $15 in revenue, compared to the overall average of $18.50 per package. If FedEx can fill the void left by Amazon with higher revenue business, the mov e makes very good sense. Less widely known, is the fact that some LTL carriers are quietly cancelling their contracts with Amazon for the same reason.

The big question is, who is going to pick up the Amazon business being rejected by FedEx and others. UPS is a logical assumption since according to a recent study, Amazon already is contributing 10% of revenue and 15 – 20% of UPS volume. If Amazon threatened to pull this business, UPS may be a little more receptive to lower rates than FedEx.

Everyone needs to keep in mind that Amazon already has significant transportation capability of its own and could pick up much of this volume. This could be consistent with Amazon’s goal to remove every firm between it and its customers. While I do not think we will see this any time soon, it would be a mistake to underestimate them, given their accomplishments to date.

Written By: Clifford F. Lynch

THE BATTLE OF THE TITANS

There was some good news in the so-called trade war this week when President Trump said the U.S. would lift the steel and aluminum tariffs on Canada and Mexico imposed last year. This wasn’t so much a surrender as it was a move to encourage Congress to approve the USMCA (U.S. Mexico Canada Agreement), the successor to NAFTA. Whatever the reason, the step was welcomed by many U.S. manufacturers, particularly in the auto industry. Since the tariffs were imposed, the “Big 3”, Ford, GM, and Fiat Chrysler have seen their costs increase by tens of millions of dollars.

Presumably, this will lead to the elimination of the retaliatory tariffs imposed by Mexico and Canada. While this was good news, the elephant in the room is the ongoing battle between the U.S. and China, our largest trading partner. Last year, the U.S. levied a 25% tariff on $34 Billion of imports from China, with airplane parts and farm implements the hardest hit. China immediately imposed tariffs on soybeans and automobiles. The soybean levies have been particularly hard on Midwest farmers who sell large amounts of soybeans to China.

The U.S. came back with a 10% levy on $200 Billion in Chinese imports which was increased to 25% last week after a session of trade talks concluded with no agreement. Washington negotiators felt an agreement was close, but China backed out at the last minute. Trump has now threatened to put a tariff on the remaining $325 Billion of imports from China.

How did all this get started? It began in February, 2018, when the U.S. implemented “global safeguard tariffs” on solar panels and washing machines. Tariffs were seen to be a solution to an ongoing problem with China – the theft of U. S. intellectual property and the practice of making those wanting to operate in China relinquish their intellectual property. The U.S. also would like for China to discontinue the subsidization of Chinese manufacturers.

But will it work? That remains to be seen; and in the meantime, the battle seems to be escalating. President Trump, some time ago, tweeted, “Trade wars are good and easy to win.” Many economists disagree and often point to the failure of the Smoot – Harley Tariff Act of 1930. Seen as a protection for the U.S. its major contribution was an extension of the 1929 depression. The auto manufacturers mentioned earlier saw their costs rise dramatically, and the Trade Partnership estimates that the sanctions levied so far are costing a family of four about $750 annually.

So, the big question is, “Who will win?” Certainly, we should try to protect our intellectual property, but could it have been done through negotiation or some other less disruptive method? More often than not, no one really wins a trade war. Usually the parties penalize each other until one simply gives up. That might not be so busy in the current battle, however.  The U.S. has an aggressive, impulsive, protectionist president who will go to great lengths not to lose. In Xi Jinping however, he goes into the ring with who Time magazine says “has consolidated power in China on a scale not seen since Mao.”

In the meantime, what can a supply chain manager do? There are so many possible outcomes to this issue that it is difficult to know. The best course of action seems to be to remain as flexible as possible while making no sudden moves until either Trump or Jinping cries, “Uncle”. At the same time, we should develop possible scenarios for our companies that will enable us to move quickly and effectively when and if the right comes.

Written By: Clifford F. Lynch

INTRODUCING A NEW WORD INTO THE SUPPLY CHAIN

It will come as no surprise that the major supply chain news last week concerned Amazon. First reported by FreightWaves, Amazon’s freight brokerage is now live. A visit to www.freight.amazon.com will show an offering of freight brokerage now available in Connecticut, New York, New Jersey, Maryland, and Pennsylvania. Freight will move in truckloads utilizing 53-foot dry vans. According to FreightWaves, but disputed by Amazon, market prices are being cut by as much as 26 to 33%. This of course, is no major surprise for the industry as Amazon continues to extend its tentacles into all segments of the supply chain.

This recent move does not bode well for the remainder of the brokerage industry; and as the Amazon offering expands, it will put pressure on the competition. Benjamin Hartford of Robert W. Baird & Company, stated on Aril 29, “Amazon’s launch of Full Truckload Services is a net-negative for investor sentiment on incumbent domestic U.S. truck brokers, and adds to what we expect to be gradual erosion in industry gross margins over time.” He further pointed out that since Amazon introduced Prime Member Two Day Shipping in 2005, UPS domestic margins fell from 15.7% in 2005 to 8.9% in 2018.

What does Amazon have to say? This is where I learned a new (to me) word – disintermediation. As defined by Webster, disintermediation is “the reduction in the use of intermediaries between producers and consumers”. And Amazon has a disintermediation strategy. Simply stated, its goal is to remove every company or function that stands between it and its customers. In doing so, it is expected to deploy massive amounts of capital at little or no margin until it captures the market.

Many industry watchers believe that the building of a logistics service provider network will not be far behind.

As if this were not enough, the company also announced it would spend $800 million in the current quarter to reduce Prime member delivery service from two days to one. During the last few years, two-day service has become an industry standard, with competitors following Amazon’s lead. This latest move however, is sure to produce some serious heartburn in the industry. For all competitors, it will be challenging. For some it could be disastrous.

The big question is, “WWWD?” (What Will Walmart Do?). Generally considered to be Amazon’s strongest competitor, Walmart is almost certain to react. They currently operate 156 distribution centers, primarily in urban areas, and are in the best position to be a major threat. According to Supply Chain 24/7, Walmart research indicated that only eight additional distribution facilities would be necessary to offer one-day shipping.

As is supply chain managers were not under enough pressure, it now appears we must be concerned about being disintermediated. If your supply chain role requires more than a passing interest in Amazon, I recommend a reading of “The Everything Store – Jeff Bezos and the Age of Amazon”, by Brad Stone. It gives some interesting insights into the Amazon mentality and is available at where else? or Barnes & Noble if you prefer.

Written By: Clifford F. Lynch

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