While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In the initial posting of this Predictions Score Card series, we looked back at both Prediction One- global supply chain activity during the year, and Prediction Two- trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three- the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four- wide multi-industry interest in Internet of Things.
We focus this commentary on our prediction for industry specific supply chain challenges.
2015 Predictive Five: Noted Industry Supply Chain Challenges
Self-Rating: 3.5 (Max Score 4.0)
Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.
B2C and Retail
In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.
A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.
Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.
Consumer Product Goods
Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.
Our prediction was that Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel that were expected in 2015 would likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.
We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.
Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.
At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.
While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.
Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.
In our next posting in our look back on 2015, we will review Predictions Six through Eight
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
We provide a contextual follow-up to our ongoing Supply Chain Matters observations and insights regarding the current holiday focused surge period among retail supply chains. This week, The Wall Street Journal observed (paid subscription required) that unsold goods and added inventories are piling up on retailer’s shelves possibly making it challenging for some retailers to hit their earnings targets in this critical quarter of performance.
We have previously called attention to the implications for this year’s expected online fulfillment volumes, a recent consumer sentiment survey indicating shoppers may elect to shop earlier this season, and the important technology enabling considerations for the rapidly changing Omni-channel world.
The WSJ report cites supplier sources and industry watchers as indicating that some department stores have experienced an overhang of inventories in anticipation of the coming holiday period, and beliefs that with far lower energy prices and higher employment levels, consumers will spend more on gifts in the upcoming holidays. The publication indicates that specialty stores and apparel manufacturers are each experiencing a “build-up in inventories beyond the natural increase ahead of the holidays.”
Separate reports this week indicate specific retailers such as Macy’s and Wal-Mart specifically stepped-up inventory buying activity to offer more attractive promotions and selection for consumers. Earlier this week, Cowan and Company published a warning to investors indicating that inventory is above sales growth across the retail industry.
Amidst this collective optimism among many retailers, the WSJ observes that industry executives are beginning to question whether this year’s sales predictions have been too optimistic. While the gap is reportedly not as wide as that in 2013, it is concerning, since new inventory brought in for the holidays must compete with unsold inventory overhang, some as a result of last year’s U.S. West Coast port debacle which had holiday goods arriving after the holiday period had passed.
The implication remains that retailer’s, and their associated customer fulfillment teams will need to promote and fulfill merchandise orders earlier in the holiday period rather than later. The upcoming Thanksgiving holiday and the days leading into early December will be critical determinants of whether inventories will be sufficiently depleted among both online and physical stores, and whether sales and profits will meet business expectations.
The ability for sales and operations teams (S&OP) to quickly assess multi-channel sales volumes, remaining network-wide inventory levels associated and profitability outcomes will likely differentiate winners from losers, especially when considering that online fulfillment costs may be prove to be more than traditional sales channels. Waiting to discount merchandise later in December could be troublesome because retailers will likely be aggressively competing among themselves for limited consumer interests in categories such as apparel, footwear, jewelry and home goods vs. electronics and gadgets while risking added or peak-period shipment costs among parcel carriers.
Supply chain wide visibility, analytical and intelligent fulfillment capabilities have never been as important as they are for this holiday surge.
In a previous Supply Chain Matters commentary we questioned whether newly announced surcharge and standard rate hikes among the major parcel carriers would impact their business models that have so much reliance on the continued growth of B2B/B2C online commerce. As we enter the full blown kickoff of the 2015 holiday surge fulfillment period, both Fedex and UPS have provided further important data regarding expected volumes and perhaps why rates were hiked as aggressively as they were.
In conjunction with its financial earnings report today, UPS third quarter results reportedly missed Wall Street estimates as a result of a reported decline in overall ground shipments. According to business media reports, revenues were further impacted by lower fuel surcharges and the negative effects of foreign currency. Of more concern, UPS executives pointed to a slowing industrial production as now impacting overall B2B shipment volumes.
In our Supply Chain Matters Newsletter released this weekend, we also pointed to a disturbing decline in overall global supply chain activity which is rapidly approaching contraction. This morning, noted CNBC stock analyst Jim Cramer went so far as to declare that recession has occurred in the manufacturing sector.
Reflecting on the upcoming holiday surge, UPS forecasted an incremental 10 percent increase in package volumes over that experienced in last year’s holiday period. Waiting further on UPS is that its pilots have authorized a work stoppage vote at an undetermined time, no doubt timed for maximum pressure and uncertainty for the coming surge. UPS executives have downplayed the threat citing ongoing negotiations and reminding investors that a work stoppage is subject to the Railroad Security Act.
Earlier this week, FedEx forecasted an incremental 12.4 percent increase in package volumes in the period between the Black Friday and Christmas holidays. The carrier further indicated that it is planning for three spikes in volume, coming on Cyber Monday, and the first two Mondays in December.
The picture is now getting clearer as to why the major parcel carriers elected to again boost fuel surcharges in time for the holiday surge and to increase rates in 2016. They had little choice since economic forces are impacting network infrastructure business models.
All the chips are on growth in B2C online fulfillment both this year and in the future. That is significant.
Despite a muted first-half of retail sales, the National Retail Federation (NRF) has predicted that retail sales in the November-December period will increase 3.7 percent to $630.5 billion. Online sales are forecasted to increase 6-8 percent to $105 billion, yet the NRF points to trends of a more prudent consumer. NRF’s recent Consumer Shopping survey found nearly half (46.1 percent) of holiday shopping will be conducted online, up from 44.4 percent last year and the highest recorded since NRF first surveyed holiday shopping intent in 2006. For the 14th year in a row, NRF’s holiday spending survey found that approximately 40 percent of holiday shoppers say they begin their holiday shopping before Halloween, while 41.5 percent say they begin their holiday shopping in November, and 18.7 will begin sometime in December. That trend was reflected in 2014 when a majority of online shopping had completed by mid-December. Thus, retailers will be concentrating online promotional efforts now and through November and parcel carriers will experience network surges in November.
The Black Friday period has never been more important for online retailers as well as to parcel carriers and retail supply chain teams. There remains retail inventory overhang from last year’s U.S. West Coast port debacle not to mention financially distressed China suppliers who have offered more attractive pricing of holiday-focused goods.
Yet, we wonder aloud how consumers will respond to higher shipping charges, or whether online retailers will elect to absorb increased shipping costs or seek alternative delivery models. The Free Shipping option and Amazon’s Prime program will be important factors in whether online retailers meet their margin and profitability goals, and indeed whether major parcel carriers meet their profitability goals.
The takeaway for B2C focused supply chain teams will be a requirement for robust, proactive inventory management and very strong ties with online marketing and merchandising teams, as well as parcel carriers. Similar to last year, online retailers will need to accurately forecast expected daily shipment volumes or risk being locked-out bt parcel carriers whose networks might reach peak capacity.
As we further pointed out in our previous commentary, the rising costs of logistics and transportation are now important factors in insuring required business profitability. All forms of predictive or prescriptive trending of expected online shipment volume will be important determinants to assessing whether online fulfillment activity is tracking to plan and whether margin and profitability goals will be met.
As we approach the annual peak period of global transportation over the next three months, there are additional troubling signs related to global transportation trends, trends that indicate more excess capacity remaining in ocean and air cargo, but continued restricted capacity within U.S. trucking.
Ocean Container Segment
Drewry Maritime Research recently reported that a the half-way point of 2015, east-west container trade was flat, and that the firm will likely be downgrading its global container traffic forecast for 2015 from 4.3 percent to roughly 2 percent in growth. Drewry pointed to some optimism related to Middle East traffic as a result of the possible lifting of economic sanctions related to Iran, causing the need for increased goods volumes. Keep in mind that many global ocean container carriers were previously forecasting global container volume increases averaging three to four percent, while adding more mega container ships to the global fleet. In August, ocean container carriers were motivated to significantly cut back on scheduling. The Wall Street Journal reported that freight rates at the time between Shanghai and Rotterdam barely covered carrier operating costs, hence the announced cutbacks. The WSJ noted that carriers were significantly reducing capacity to insure higher freight rates, in spite of dramatically reduced fuel costs. During that same period, industry leader Maersk Line revised its estimates of global container volume down to a range of 2-4 percent from the previous 3-5 percent growth estimate and vowed that it would defend and even expand its industry market share position.
The Drewry forecast downgrade comes in midst of the National Retail Federation’s (NRF) Monthly Import Tracker report indication that import cargo volume at the nation’s major retail container ports is expected to increase 1.2 percent this month over the same time last year as retailers head toward the holiday season. The Tracker reported that import volume was up 2.9 percent from June and 8.1 percent from July 2014. The Tracker indicated that inbound container volume for the first-half of 2015 totaled 8.9 million TEU’s, up 6.5 percent over the same period last year. That may be an indicator that retailers elected to position holiday inventories much earlier, given last year’s port disruption. The NRF further reports increased inbound U.S. volumes for September through November, but that number may be skewed by last season’s U.S. West Coast port slowdown. The NRF additionally notes that U.S. retailer inventories are “plentiful’ and that “Shoppers should have no worries about finding what they’re looking for as they begin their holiday shopping.” By our lens, reports noted above are an indication that ocean container volume will indeed level off for the remainder of this year.
Air Cargo Segment
On the air cargo front, the International Air Transport Association (IATA) indicated a decline in air cargo demand in July. IATA reported that disappointing July air freight performance was symptomatic of a broader slowdown in economic growth, most likely caused by a slowdown of activity in China and other Asia based countries. The news comes as passenger airlines continue to add more air freight, as IATA indicates that in July, available air cargo space expanded by 6.7 percent.
IATA’s CEO noted to The Wall Street Journal:
“The combination of China’s continued shift towards domestic markets, wider weakness in emerging markets, and slowing global trade indicates that it will continue to be a rough ride for air cargo in the months to come.”
On the U.S. surface trucking front, the American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.5% in June, following a revised gain of 0.8% during May. The soft June volume number was attributed to flat factory output and falling retail sales. However, the June, the index equaled 131.1 (2000=100) somewhat below the all-time high of 135.8 that was reached in January of this year. During the second quarter, the index fell 1.7% from the first quarter but increased 2% from the same quarter in 2014.
The ATA recently extended its U.S. Freight Transportation Forecast to the year 2026. The report forecasts a 28.6 percent increase in freight tonnage and an increase in freight revenues of 74.5 percent by 2026. However, the not so good news for industry shippers is a forecast indicating that the number of Class 8 trucks in use will grow from 3.56 million in 2015 to mere 3.98 million by 2026. That current demand-supply imbalance does not bode well for trucking cost projections. Factor the current building wave of acquisition activity among non-asset and asset based transportation and logistics providers and the picture becomes far more troublesome for industry supply chains that do not plan accordingly.
How different can the clock speed of industry business change occur- consider the current plight of the U.S. railroad industry. Last year, the industry was booming, and was strategically placed to take advantage of the explosion of new oil exploration methods occurring throughout North America. Crude transport by rail was the new phenomenon that restored profits and expansion for U.S. railroads.
The continued plunging global based cost of crude oil and sudden glut affecting global commodity needs has changed that dynamic dramatically.
Union Pacific, a major U.S. railroad recently disclosed that 2300 workers are currently on temporary layoff or alternative work status as that railroad initiated efforts to adjust its current cost structure toward lower transport demand needs. UP’s shipping volumes are down 4 percent year-to-date with reported declines in chemical, agricultural and industrial goods segments. Industry rival, Burlington Northern Santa Fe (BNSF) is now part of Berkshire Hathaway, and it may be some time before similar news leaks out regarding the effects of the declines in crude-by-rail shipments.
Reports concerning other U.S. railroads indicate similar trends with hundreds of idle tank cars now parked and idle after recently being utilized to transport dedicated crude-by-rail trains. Railroads are now reportedly pushing-back on end-of-year regulatory mandates regarding positive-train control and tank car safety upgrade initiatives. The U.S. rail industry now has a capacity imbalance related to commodity transport, the bread and butter of volume and profits.
Thus, as we approach that last three months of 2015, different capacity dynamics across global transportation lead to a similar impact and concern that being far more turbulence in global transportation circles in the months to come. Rest assured, these different imbalance situations will be included in our 2016 predictions for industry and global supply chains.
We want to hear from our readers on these trends. Is your organization currently concerned and is your organization actively planning contingency scenario? You can email your comments and feedback to: feedback <at> supply-chain-matters <dot> com.
The following Supply Chain Matters commentary is our annual reflection on the Annual State of U.S. Logistics Report. Normally, our postings typically average 350-400 words of blog content for reader benefit. Rather, this is a longer length advisory report to educate our readers that will be also be made available for separate complimentary downloading in our Research Center within the next few days.
The 26th Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released last week (free for CSCMP members and can be purchased for $295, both options available on the CSCMP web site). This report, the latest which reflects on 2014, has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and procurement professionals. Since our inception, Supply Chain Matters has provided specific commentary and our view of the key takeaways from the report. With the latest report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.
Our editorial commentaries for both the 2012 and 2013 State of Logistics reports expressed concern towards a continued trend for increased logistics, transportation and inventory costs. The latest report depicting 2014 activity is no exception.
The report summary begins: “Total logistics costs increased only 3.15 percent in 2014.” The underline and emphasis of the word “only’ is ours since we were astounded by such use depicting normalcy. Considering the low rate of inflation, interest rates and the dramatic reduction in the costs of crude oil in 2014, from our lens, an overall 3.1 percent in the cost of logistics in the United States should remain a concern for industry supply chains. These total costs have now climbed beyond the peak level reached in 2007, prior to the global recession. In theory, U.S. logistics efficiency and productivity should be trending positive.
We first call attention to the report’s references to U.S. GDP values as a point of reference comparison. The report authors have utilized nominal GDP as a consistent baseline as compared to real GDP. Nominal GDP includes all the changes in market prices that have incurred during any year including inflation or deflation, while real GDP is reported as a percentage increase from a specific base year. To provide our readers a sense of the difference for 2014, nominal GDP growth for the U.S. was reported as 3.9 percent while real GDP averaged between 2.6-2.9, percent, depending of which cited source, over the past six quarters. For the 2010-2014 recovery period from the severe economic recession, The World Bank reported annual real GDP growth as averaging 2.2 percent annually. This difference is significant when reporting and charting logistics costs as a percentage of GDP.
Lesson in economics aside, we advise readers to pay close attention to specific logistics and transportation cost increases. As an example, total U.S. logistics costs rose by nearly $43 billion in 2014, compared to a $31 billion increase reported for 2013. For the period 2010-2014, U.S. logistics costs have risen 18.2 percent or $223 billion, almost 7 percentage points higher that real GDP growth in that same period. Factor whatever GDP growth number you want but the takeaway message should be one of concern and diligence to the trends of why such increases are occurring.
Other highlights and some observations of the latest 2014 report are noted below.
- Inventory carrying costs in 2014 rose another 2.1 percent, compared to the 2.8 percent increase reported in 2013 and the 4.0 percent increase reported for 2012. Overall business inventories were reported as rising by $52 billion or 2.1 percent in 2014. The second and third quarters were noted as high water marks for 2014 and that obviously reflects the impact of the U.S. west coast port disruption, as industry supply chain teams increased safety stock levels in anticipation of contract labor talks. Manufacturing inventories were reported as down slightly. Interest costs remained well below 1 percent and thus increased costs for taxes, insurance, warehousing, depreciation and obsolescence occurred. The cost of warehousing rose 4.4 percent, reflecting near capacity utilization rates.
- Overall transportation costs were reported as rising 3.6 percent, with the largest component, trucking, up nearly 3.0 percent. The current fragile state of the U.S. trucking industry was again highlighted. The report cites anecdotal evidence indicating that loads are heavier and more trucks are moving near full capacity. Cited are estimates from the American Trucking Association (ATA) estimating the current truck driver shortage as being between 35,000 and 40,000 drivers, which should remain of concern.
- U.S. rail costs were reported as increasing 6.5 percent on top of a similar percentage increase reported for 2013. Total carloads were up 3.9 percent, the highest since 2006 and overall rail traffic was reported as increasing 4.5 percent. The U.S. railroad industry operating remains operating at near capacity, despite the addition of 1300 new or rebuilt locomotives and nearly 4500 new rail cars put into service.
- Costs for water based transportation rose 8.9 percent in 2014, the second highest reported growth sector. U.S. East Coast ports were noted as experiencing the biggest percentage gains in traffic pick-up because of the West Coast port disruption. Another challenge that manifested itself in 2014 was the impact of the larger, mega container ships calling on U.S. ports, and resultant disruptions related to the availability of container truck chassis, along with the time required for unloading and re-loading. One rather important trend noted was that the monthly average number of containers imported from China was more than 10 percent higher than average monthly shipments for the last four years. From our lens, that seems to be a reflection of even more freight being routed by ocean container vs. air. Air freight revenues were reported as declining 1.2 percent with international air freight down 3.6 percent.
- The revenue growth trajectory of U.S. non-asset based services and Third Party Logistics (3PL) providers continued in 2014. Revenues pegged for the third-party logistics (3PL) sector were reported as $157.2 billion, an increase of $10.8 billion or 7.4 percent over 2013. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 20.5 percent in 2014, on top of the 7.2 percent growth reported for 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones. We continue to believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.
The Looking Ahead portion of the 2014 report provides another important takeaway for our readers, one that we have already reinforced in our predictions for this year. The report specifically states:
“The capacity problems that emerged in 2014 will continue to worsen for at least the next two years before they begin to improve.”
The report later summarizes:
“To summarize, most of the problems that the freight logistics industry will face in the next three years will boil down to capacity issues.”
Thus, our 2015 Supply Chain Matters Prediction for a turbulent year in global transportation more likely will take on a multi-year context.
Supply Chain Matters submits that the overall takeaways from the 2014 State of Logistics are once again dependent on the reader frame-of-reference.
If you reside anywhere in the transportation and 3PL logistics sector, your reaction is likely positive. Business is very good indeed. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding added investments in capacity and delivery of services. Distribution center operators and real estate interests are included, especially in light of the pending shift of more ocean container traffic in favor of U.S. East Coast ports, as well as the dramatic changes in distribution flow-through and drop-ship footprints required by more online customer fulfillment needs.
If your frame of reference involves a constant diligence for controlling overall transportation procurement, 3PL and supply chain related operating costs, we again submit there are troubling areas that should motivate concern, constant analysis and attention.
Once again we offer the following insights:
- Procurement, supply chain planning, B2B business network and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of 2014 data is to insure that the cost, service and inventory benefits derived by contracting services with respective 3PL’s outweighs the continuing pattern of increasing 3PL services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s will have to invest more in technology and services, adding more motivation to increase fees.
- Approaching transportation spend as the singular dimension of cost reduction remains an unwise move, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes. The data for 2014 indicates that more and more supply chain teams are exercising strategies to assure consistent and reliable transportation capacity and logistics services.
- Similarly, we again encourage S&OP teams to re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point and fulfillment center trade-offs and costs of carrying inventory. Today’s global logistics environment remains dynamic and complex. Decision-making data must reflect this state, along with the assumption that overall logistics costs are trending higher.
- In order to reduce overall cost and asset investments, senior supply chain leaders in certain industries have contracted more and more services to 3PL’s and other service providers. Insure that your teams are continually analyzing cost and benefit tradeoffs. Maintain periodic reviews of costs and benefits on a more frequent basis.
- Both FedEx and UPS initiated dimensional-based pricing on ground shipments effective in 2015, and initial financial results from both of these carriers indicates positive impacts in revenues. This area continue to have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy for certain classifications of products. Be watchful of this area.
- Last year’s Supply Chain Matters commentary reflecting on the State of U.S. Logistics observed that the U.S. economy showed more promising signs of manufacturing growth. The latest report of 2014 activity paints a more cautionary picture regarding manufacturing and logistics growth. The logistics industry must tackle troubling capacity and productivity constraint trends along with their impact on customer costs. There has also been too much of a tendency to maintain fuel surcharges and fees to boost revenue and profitability levels even higher.
We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication on supply chain objectives and needs.
©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Of late, Supply Chain Matters has highlighted new industry supply chain challenges related the current high value of the U.S. dollar in relation to other foreign currencies. That challenge now extends to the flow of recycled materials emanating from the United States to other geographic regions.
The Wall Street Journal reports that for sellers of scrap metal, used paperboard and other recycled waste, headwinds are more described as a hurricane resulting in a current glut of scrap materials. (paid subscription required). The WSJ cites data from a unit of McGraw Financial indicating that prices of shredded scrap steel have plunged 18 percent thus far this year, and our down an overall 41 percent since 2012. Likewise, the price of used corrugated cardboard has fallen 27 percent this year. Noted is that Turkey, whose steel mills had been a able buyer of U.S. based scrap, have been buying more from Russia and other sources. China’s demand is also reported as having slowed dramatically. One beneficiary of the current slump is reported to be U.S. based Nucor, which makes most of its steel from melted scrap. Tht could provide Nucor the opportunity to move up the supply chain into scrap processing.
Recycled materials shipped from the U.S. to other regions were able to take advantage of available surplus capacity on container ships. With the current economics fueled by the higher value of the dollar, scrap materials inventories are building across U.S. distributors. Further, the cost of municipal waste collection contracts are often offset by the value of the scrap and recycled materials that are sold. The economics of that waste stream are now subject to disruption and potentially added costs for U.S. cities and towns.