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The State of U.S. Logistics is Once Again Troubling

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The 24rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released earlier this week (free for CSCMP members and can be purchased for $295, both options available on the logistics_nanjin_portCSCMP web site). This report has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics and transportation professionals. The current report that tracks 2012 activity notes a continued trend for increased logistics, transportation and inventory costs.  In our view, this should be of concern to manufacturers and retailers and their associated supply chain and product management teams, especially since these trends continue to manifest in 2013.  Similar observations were noted by Supply Chain Matters concerning last year’s annual report.

The report authors and some business media have positioned the primary takeaway headline for this year’s report with statements that overall logistics costs are growing at about the same rate as U.S. GDP. We caution our readers to not be lulled by that takeaway, since by our analysis, the numbers reveal rather troubling implications that warrant additional management attention. Long-time report author, Roaalyn Wilson poses a question to readers: “Is This the New Normal?” We certainly do not hope that this is the case.

Highlights and some observations of the latest report numbers are noted below.

The cost of the U.S. business logistics rose 3.4 percent in 2012 to $1.33 trillion, an increase of $43 billion from 2011. Logistics costs as a percent of nominal GDP were reported to be 8.5 percent, roughly the same as in 2011. This and last year’s report stress that the overall U.S. economy continues to exhibit lackluster GDP growth. From 2009, the previous low point of U.S. economic recession, to 2012, GDP grew by roughly 12.5 percent during the three year period. However, the cumulative total of logistics costs increases from 2009 to 2012 increased by roughly 21 percent, reflecting an overall increase of $230 billion.  That should be a cause of definite concern for the supply chain management community, since logistics costs over these past three years have increased at twice the rate of GDP growth. The report includes a chart that tracks U.S. business logistics costs from 2003 to 2012.   The visual of that chart makes clear that U.S. logistics costs have now reached levels incurred in 2008, and if the trends continue, could surpass the peak year of 2009. With a lackluster U.S. economy, that is not a healthy trend.

As was the case in 2011, both inventory carrying and transportation costs rose in 2012.  Overall inventory levels continued to rise despite the advent of advanced inventory management practices and historically low interest rates.  Inventory carrying cost rose 4.0 percent in 2012 while business inventories rose in all three out of four quarters, ending the year at 3.9 percent higher than in 2011. Once more, retail, wholesale and manufacturing subcategories of inventory all climbed during the year. According to the report authors, higher inventories combined with historically low interest rates led to a 6.9 percent decline in the interest component of carrying costs, and with normal interest rate conditions, the change would have been in the other direction. The culprit to increased carrying costs, by our view,  is reflected by a 7.6 percent increase in the cost of warehousing in 2012.   If you combine the reported 7.6 percent increase in carrying cost reflected in 2011, with the 4.0 reported for 2012, there has been a two-year increase of 11.6 percent.  That is far higher than any interest rate increase, and should be another area of concern, especially if money interest rates begin to rise. The report author concludes that inventory management has made great strides in the last year. Supply Chain Matters respectfully disagrees and cautions supply chain and business executives to not be lulled.  While major supply chain disruption events and increased risks have been clearly on the increase, it should not be a cause for aggregate inventory increases. We have more sophisticated inventory planning and management tools available, which leaves an open question on management practices and effective use of these tools.

Transportation costs were reported as up 3.2 percent in 2012.  That is on top of the 6.2 percent reported in 2011. Report author Wilson concludes that the lower rate of increase in 2012 was because of weak and inconsistent shipment volumes and strong pressure to hold rates. In the report, she points to the same structural trends affecting global transportation that we at Supply Chain Matters have raised in a number of commentaries throughout the year. Ocean container capacity jumped by over 7 percent as shipment demand fell sharply, resulting in 7 unsuccessful attempts by carriers to increase rates during 2012. Air freight revenues increased by 3.1 percent but total tonnage declined over 2 percent.  The report acknowledges chronic overcapacity and deteriorating yields in the air freight sector. The report quotes an Armstrong and Associates source indicating that freight forwarder costs, representing non-asset based freight service providers and 3PL’s, rose by 5.4 percent. On the positive side, the cost of rail transportation increased by only 4.9 percent vs. the 15.3 increase reported in 2011.

 

Supply Chain Matters submits that the overall takeaways from the 2012 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 may be positive. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding delivery of services. Distribution center operators and real estate interests are included.  If your frame of reference involves a constant diligence for controlling overall transportation procurement and supply chain related operating costs,  we again submit there are troubling areas that should motivate concern and attention. In one year alone, the imbalance of forces affecting global and domestic transportation have magnified, making the long-term contracting for transportation services a difficult and fluid effort. 

Procurement, supply chain planning, B2B 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 consistency of service, deeper levels of business process collaboration delivered at a competitive cost. Procurement teams approaching transportation spend in the singular dimension of cost reduction is also not wise, 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.

 Similarly, S&OP teams must re-concentrate efforts to manage overall inventories with a keener eye on the overall stocking point trade-offs and costs of carrying inventory. With more sophisticated tools available to manage and optimize end-to-end supply chain inventories, the open question may be in the quality of the data that is fed into these tools, especially the realities of increased carrying costs. Teams are not fooling anyone by allowing data to remain static.  Today’s global logistics environment is not static, but rather highly dynamic and complex. Decision-making data must reflect this state.

We again re-iterate a point made from our commentary  regarding last year’s report. Benchmarking logistics costs to a pre-recession level of 9.9 percent of GDP in 2007, the termed precipice of logistics activity is defeating for manufacturers and retailers.  It is a benchmark more appealing to logistics and transportation providers.  We suggest that the most important report aide for manufacturers and retailers be the current chart (noted as slide 7) that tracks logistics costs as a percentage of GDP by major geographic region. The report authors should consider expanding this chart to report the trending of major geographic business costs by region, by year, from 2008, the start of the global economic recession.

The U.S. economy continues to show promising signs of manufacturing renewal and now, export recovery.  All of this is dependent on a business logistics infrastructure that demonstrates world-class competitiveness. If there is a clear learning from the past three to four years, it has been on reality that supply chains exist and are now dependent on a global network of business logistics. The major decisions related to supplier and product manufacturing sourcing is now more vested in the tradeoffs of global logistics and transportation costs.

We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication toward shifts in global sourcing, and implication on current operations planning and procurement management processes.

Bob Ferrari

 

©2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


Evaluating Technology Vendor Capabilities to Enable Supply Chain Control Towers

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In late May, Supply Chain Matters posted a commentary regarding the building of supply chain control (SCCT) capability.  Our primary takeaway from that commentary was that in your organization’s plans for building SCCT capabilities, it is rather important that you spend time in assessing the B2B network platform that will form the all-important foundation of these capabilities. Enabling SCCT is not about ripping out existing IT investments but rather building-out enhanced decision-support capabilities from more streamlined sources of planning, execution and fulfillment information.

In this follow-up commentary, we outline the various approaches that the broader community of technology vendors will undertake to enable various aspects of supply chain control towers.  We will declare up-front that this commentary is not to be considered in in any shape or form as judgmental, but rather to provide an aide toward helping your organization assess which approach makes the most sense for your business and your particular business outcome needs.

Our foremost recommendation is that before beginning to engage with any vendor, take some quality time to assess the following: What is the prime or immediate need for your organization’s supply chain wide decision-making? In turn, what are the more long-term needs?

A.     Is the business need primarily focused on end-to-end planning and bringing supply chain planning and execution processes together into a contiguous process that includes more predictive and insightful decision-making capabilities spanning product demand and supply?

B.     Is it primarily focused on B2B or B2C operational fulfillment synchronization that can support, daily, hourly or near real-time decision-making?

C.     Is it primarily focused on B2B supplier based decision-making where product demand and supplier responsiveness processes are continually monitored and managed in a controlled and more predictive environment?

D.     Is the business need to ultimately enable all three (A, B & C) of the capabilities noted above over time?

We declare up-front that in our view, no vendor can deliver (D) right now, but that does not preclude consideration that that any particular vendors are in better position to deliver all over a reasonable time period. 

There are three broad categories of technology vendors positioning to support SCCT capabilities.  They are:

  • Supply chain best-of-breed or specialty vendors
  • Cloud-based B2B
  • Enterprise ERP or Business Intelligence

The supply chain best-of-breed vendors respond to SCCT needs from their position of business process functionality support strength, whether that is supply chain planning, response management, supply chain execution or fulfillment synchronization. The planning vendor will tend to extend and integrate supply and demand planning with supply chain execution flows, including order fulfillment, transportation, logistics and inventory movement.  Planning and response management vendors have also extended their capabilities in scenario-based planning and execution, along with more predictive supply chain business intelligence.  Supply chain execution best-of-breed vendors take the opposite approach, building on their core strengths in execution and extending into deeper planning and decision-making support.

As noted in our previous posting on this topic, a cloud-based B2B platform vendor builds out from the B2B platform utility, integrating various planning and execution information to support both predictive and context-related decision-making capabilities for both the customer-facing and supply-facing aspects of the end-to-end supply chain. Some cloud-based vendors add social workplace capabilities to support team-based decision-making.

ERP or enterprise vendors tend to approach SCCT enablement as some form of extension to existing supply chain planning, execution or business intelligence software applications.  The approach, in our view, reflects an add-on perspective vs. a holistic set of capabilities that were designed around the specific needs of SCCT. While ERP and enterprise vendors may be in a better position to support the most holistic aspects as noted in option (D) above, it may take these vendors considerable time to both re-design existing applications and build-out required extensions. 

Regardless of what family of vendors your SCCT technology selection team ultimately decides to partner with, we at the Ferrari Consulting and Research Group advise that you consider a technology checklist of capabilities that will be required.  That checklist should minimally include:

  • Multi-organizational and trading partner connectivity, visibility and collative decision-making support
  • Near real-time integration of events and information flow vs. batch or periodic refresh
  • Integration of supply chain planning, fulfillment, execution and B2B/B2C decision-making needs
  • Support for scenario-based, what-if and/or simulation decision-making processes
  • Advanced visualization, drill-down and/or heat-mapping
  • Augmented information discovery tools

The framework for enabling Supply Chain Control Towers requires a holistic set of required capabilities that span organizational, people, change management and enhanced technology dimensions. It is not about ripping-out existing systems but rather building enhanced more time-sensitive and extensible decision-support capabilities. Invest in an up-front framework and do your research. 

Finally, you cannot assume that the broadest end-to-end supply chain control tower capabilities can be delivered in one implementation, but rather in manageable segments that are designed to accommodate business flexibility and scalability needs.

 If we can be of assistance in your efforts, call or email.

Bob Ferrari

© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.


IDC Reports Fourth Quarter Tablet Shipment Actuals with Some Surprises

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Industry analyst firm IDC published actual Q4-2012 worldwide tablet shipment numbers (paid subscription required or free metered view) which should be of interest to B2B and B2C fulfillment teams. Supply Chain Matters readers might recall our late November commentary which contrasted the latest IHS teardown analysis of various Tablets to supply chain strategies addressing the desired business outcomes.

According to IDC, worldwide shipments of electronic tablets grew by 75 percent to a fourth quarter record, thanks to lower selling prices and new product offerings.  Tablets were also high on the holiday wish lists of global consumers. Nearly 53 million tablets were shipped, up from a near 30 million shipped in the previous quarter.  That is quite a hockey-stick uptick and kudos to the supply chain fulfillment teams that managed this surge in product demand.

This author does not subscribe to any notion that supply chains may be failing- quite the contrary.  Supply chains and fulfillment teams, for the most part, have successfully responded to unprecedented challenges related to economic uncertainty, supply disruption, volatile markets and more demanding customers.

Getting back to the IDC numbers, as Supply Chain Matters previously noted, shipments of Apple’s iPad tablets grew 48 percent from a year earlier, boosted by the introduction of the iPad Mini. This was accomplished in a mainly supply constrained period where demand stayed ahead of supply. However, IDC notes that Apple’s overall market share in the Tablets market actually slipped roughly three points, which brings home the severity of market competition.

Samsung’s shipments almost quadrupled on a year-over-year basis, shipping upwards of 8 million combined Android and Windows tablets in the quarter. We previously called for due recognition of Samsungs supply chain prowess and consistent fulfillment capabilities. IDC names this vendor as second in overall tablet sales.

One of the most anticipated questions for this blog prior to the holiday buying season was how would Amazon, Barnes and Noble and Microsoft tablets fare in the quarter? It turns out that Amazon shipped more than 6 million of its Kindle line of tablets.  IDC notes however that Amazon market share slipped over 4 points.  This author was candidly surprised to read of that number.  The Nook family from Barnes and Noble shipped close to a million units, also suffering a significant market share decline.  Rounding out the top five players was Asus and its Nexus 7 line which IDC notes as experiencing the highest year-over-increase of the top five players, but also slipping 2 points in market share.

IDC reports that Microsoft’s Surface tablet shipped just shy of 900, 000 units. In our view, the Surface suffered from a late introduction to the market, a tepid response to the Windows 8 operating system and limited channel distribution leverage.  Microsoft purposely limited production and distribution because of the sensitivity to its existing hardware partners who did not take well to the company’s direct market entry. Considering that Microsoft’s strategic purpose was perhaps to make a credible market presence, more work may be required.

I don’t know about you, but reviewing these market results leads to this author’s conclusion that the competitive stakes in the Tablet and the impacted PC markets have dramatically accelerated, and synchronized planning, response management and fulfillment are mandatory just to stay in the game.

Congratulations to all teams in their accomplishments in this dynamic market.

Bob Ferrari

 


Apple’s Q1-2013 Quarterly Results- A Supply Chain Matters Perspective

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By far, the largest attention of business media this week was on Apple and its reporting of December ending financial performance.  By now, many of you have probably viewed the headlines and bylines.  Being designated as one of the most valuable companies on the planet comes with rather high, or perhaps, insatiable expectations.  The majority of reporting seems to have tended toward disappointment, and Apple stock literally lost $50 billion in value overnight. Then again, the results in our view, were not all that bad, considering the supply chain lens.

In terms of the highlights, Apple reported new records in total revenue and for iPhone and iPad sales. The problem was that total revenues came in at $54.5 billion vs. a Wall Street expectation that was just a bit higher. Sales of the company’s flagship iPhone grew 78 percent over the September ending quarter. Equity analysts are also expecting in excess of 20 percent revenue growth in 2013. Gross margin at 38.6 percent seemed to also disappoint, given Apple’s margins of 44.7 percent a year earlier, but then again, Apple had a lot to deal with in its traditional holiday surge quarter. Cash on-hand now stands at $137 billion, which is not at all shabby.

In terms of unit volumes, Apple shipped a total over 47.8 million iPhones, an average of 3.7 million per week, compared to an average of 2.6 million per week a year ago.  As of December, the iPhone 5 is now distributed in 100 countries., the fastest global product rollout, ever. The company also shipped 22.9 million iPads, an average of 1.7 million per week, along with 12.7 million iPods. In addition, Apple shipped 4.1 million Mac computers.

During the earnings briefing, CEO Tim Cook specifically refused to address any specific rumors related to supply cutbacks but did address the complexities of having a supply chain with multiple supply sources, manufacturing yield challenges, supplier performance and inventory shortages.  By our view, the very fact that Mr. Cook, who’s background personifies a highly experienced operations and supply chain executive, has mentioned these challenges is a good indication of what Apple’s supply chain was actually dealing with during the December quarter.  Supply Chain Matters has featured and highlighted a number of previous commentaries related to each of these challenges being either rumored or reported to have occurred.

Another important factor has been the ongoing strained relationship with arch competitor Samsung, as result of both company’s ongoing patent infringement litigation. Samsung happens to serve as a key strategic supplier for the iPhone processor chip and other display components, and indeed tends to source a good majority of its own smartphone components internally with its components division.  Samsung recently disclosed that it had shipped more than 100 million of its Galaxy S model smartphone since 2010, and further indicated that its new model may include up to eight processing cores.

Of the many articles and commentaries circulating around Apple latest results, we would call reader attention to a commentary penned Darren Hart, Apple Disappointed In Part Due to Supply Constraints, featured on the Seeking Alpha web site.  Hart cites specific statements made in the briefing and provides a candid assessment of broad supply constraints across the supply chain. For the iPhone, he notes a continuous supply constraint throughout the quarter and candidly states that Apple sold less iPhones than anticipated due to a lack of inventory or “supply constraints’. He specifically references the relationships with Samsung, and notes various other blog and media commentaries that seem to reinforce that Apple may be turning to global semiconductor chip fab producer TSMC as a new source for ARM processor chips.  Supply Chain Matters also noted these indications in early January. Hart also reinforces challenges in ramp-up of the iPad Mini, again noted in our commentary in November 2012.

Hart also hones in on Apple CFO Peter Oppenheimer’s statements that Apple expects to invest $10 billion in capital investments in 2013, $9 billion of which may be utilized to purchase production equipment placed in partner facilities. Hart speculates that some of this capital may be destined for new chip manufacturing equipment at TSMC. In April of last year, Supply Chain Matters also speculated that Apple’s cash could be utilized for major investments in more production robotics within Foxconn, its prime contract manufacturer as well as other supplier facilities.

Thus, from the global supply chain lens, Apple’s latest results were not so much a surprise, but rather a reinforcement that Apple’s supply chain continues to deal with noteworthy challenges.  They relate to sourcing, supplier performance, labor cost and social responsibility needs, inventory and other dimensions.  The fact that Apple’s supply chain teams delivered the noted results in the December ending quarter is a testament to resiliency and responsiveness. The open question however is that Apple will need to continue its product innovation and pushing the envelope of supply chain expectations.  The chain is already showing some signs of weak links.

Bob Ferrari

 

©2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.


Nintendo Supply Chain Facing Big Challenges This Coming Holiday Season

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An interesting twist to the upcoming 2012 holiday buying surge are reports that Nintendo Company’s new Wii U gaming device, which was introduced to the market this weekend, is already expected to be in short supply.  Both a Bloomberg published article and a CNET news article indicate that Nintendo’s executives expect supply shortages due to late start in production ramp-up. Bloomberg reports that more than 500,000 worldwide customers are currently on a GameStop waiting list awaiting the device. The Wii U features a tablet controller allowing for more game interaction as well as adding more online interaction in the playing of games. However, this first new video-game console for U.S. homes since 2006, won’t offer the Nintendo TVii service that the Kyoto, Japan-based company has touted as a centerpiece of its capabilities. The feature will be available sometime in December, the company said on Nov. 16, without being specific. According to Bloomberg, Nintendo also delayed the availability of some online services including Amazon.com Inc.’s Instant Video, and Google’s YouTube on the Wii U.

The delays could make it more difficult during the crucial holiday shopping season for Nintendo to position the Wii U as a whole-home entertainment center for parents and kids alike.

As much as a few weeks ago, these same executives had made indications that the new Wii U gaming device may not be ready for this year’s holiday buying period. The supply chain has obviously been pushed to make units available sooner.  In addition to the U.S., reports indicate that the new console is expected to be available in Europe and Australia on November 30 and in Japan on December 8. In late October, Nintendo indicated it expected to sell 5.5 million units by March 31, an indication that the supply chain must anticipate customer interest and order fulfillment efforts that extend into next year. IHS expects Nintendo to sell upwards of 3.5 million units during the upcoming holiday period. The Wii U will be introduced with 23 available game titles, with 29 expected by the end of march.  Similar to shades of 2008, a competitive race among game console providers Microsoft, Sony and Nintendo is underway to capture consumer interest this holiday period. Available game titles will obviously been a determinant. However, tablets and smartphones have gained even more interest for share of consumer wallets, and more and more gamers are turning to online options.

There is a lot at stake for Nintendo, including delivery of some level of respectable profitability for its fiscal year.  No doubt, gaming devices will be one of the supply chain related headlines for all of us to watch unfold in 2012 and early 2013.

Bob Ferrari


Breaking Technology News: RedPrairie and JDA Software to Merge

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On Tuesday, Supply Chain Matters commented that something was up at supply chain planning technology provider JDA Software, and that an announcement could come soon.

This morning features breaking news indicating that privately held supply chain execution technology provider RedPrairie and JDA Software will merge into a combined supply chain planning and execution powerhouse with revenues extending beyond $1 billion.

According to the press announcement a cash tender offer of $45 per share, representing a 33 percent premium to JDA’s stock price on October 23, will be extended. The total value is estimated to be $1.9 billion, and there are certain conditions that must be met to complete this deal.  RedPrairie itself was acquired in 2010 by New Mountain Capital, and has since completed a number of other acquisitions to include cloud-based WMS provider SmartTurn, SofTechnics Shippers Commonwealth, Escalate, and Vortex Connect.  The JDA merger, however, is far more significant.

The announcement also indicates that current JDA CEO Hamish Brewer will lead the combined companies while existing RedPrairie CEO Michael Mayoras will remain on the board of the combined companies.

Obviously, this deal, if consummated provides significant implications for both management of the combined companies and for the supply chain best-of-breed technology market as a whole.  Supply Chain Matters has often reinforced the fact that in today’s new normal of highly dynamic global supply chains, where time is ever more critical, supply chain planning and execution processes have been compelled to morph as one contiguous process.  This announcement is a significant testimonial to that trend.

There will be an industry analyst briefing later today and Supply Chain Matters will reserve further commentary until more information is gleamed.

In the meantime, existing customers from both companies should be patient and await the full picture of the implications in terms of timing, resource impacts and product implications.

Stay tuned.

Bob Ferrari