This week, The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney, published its 27th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions of this year’s report.
Before we begin, let’s take a step back.
For the past several years, we have raised a number of concerns and added perspectives regarding the state and overall costs of logistics across the United States. Our chosen editorial commentaries reflecting on the 2012 thru 2014 reports expressed concerns towards a continued trend for increased logistics, transportation and inventory costs and in 2014, we again cited our growing concerns regarding cost and service trends. Regarding the 2015 report, our headline takeaway moved toward action, indicating that industry supply chain teams required to take attentiveness to the implications of what was occurring in various logistics and transportation channels.
We quote one of our Supply Chain Matters key takeaways from last year’s report:
“With the latest (2015) 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.”
Similarly in our annual predictions for industry supply chains published prior to the beginning of every New Year, we have continually raised awareness to increasing forms of ongoing disruption occurring in various logistics and transportation sectors.
This year’s report was compiled by a different research partner, AT Kearney. Thankfully, the current report authors are finally acknowledging that change is occurring, with the main theme being- Logistics is in Transition. Other sub-headlines and takeaways in this year’s report include:
- The logistics industry is entering a new era of disruptive forces that involve technology investments and operational constraints that will fundamentally change the rules of the game.
- Growth in the parcel and express segment continues to be fueled by the ongoing explosion in online B2C E-commence and Omni-channel retail growth.
- Overcapacity and buyer’s market state conditions continuing in the ocean container, air freight and now the U.S. rail segments.
- Technology continuing to play a key role in the future transformation of the 3PL industry.
Regarding that latter headline, the CSCMP sponsored report indicates:
“The pace and breakthrough nature of technological innovation- and the rate of which it is adopted- will heavily impact supply chain assets, processes and people.”
A further perspective we urge are multi-industry supply chain readers to dwell upon is that according to this latest report, while business inventory growth flattened in 2015, it was countered by a 42 basis point increase in the weighted cost of capital resulting in a 5.1 percent overall increase in inventory carrying costs in 2015. Part of the explanation can be found in the Appendix section of the current report. The new authors elected to modify the calculation of inventory carrying costs because prior reports multiplied the total value of business inventories by a fixed percentage- 19 percent in prior years. The new authors elected to calculate the value by utilizing other matrices more reflecting actual values of weighted cost of capital.
The implication going forward is that pressures to add additional inventory to mitigate risk or respond to customer needs for same-day delivery will come with a stiffer financial cost beyond zero interest rate conditions.
Thus, if you chose not to consider what we have been pointing out in the last 18 months, you now have a renewed industry perspective. Therefore, we need not dwell in broader or different perspectives,, rather we urge our readers and followers to just read and absorb the report for yourself.
The latest report is available for download on the CSCMP web site. Existing CSCMP members can download the report at no-cost, while non-members must pay a publication fee.
A few added comments related to the changes in this year’s report. We applaud CSCMP and AT Kearney for the changed methodology and added internal logistics industry and external multi-industry perspectives and insights brought forward in the new format. We encourage both organizations to continue that effort in future annual reports. Previous reports featured more added color and current data points in the current year and we trust the authors will take that into effect in future reports as well.
We re-iterate our ongoing key Supply Chain Matters takeaways:
The “new normal” of logistics and transportation 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 continuing data is to insure that the cost, service and inventory benefits derived by contracting or outsourcing logistics and transportation services outweighs the continuing pattern of increasing 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 and total logistics providers will have to invest more in technology and services, adding more motivation to increase fees or institute risk sharing methodologies.
If you require another proof-point- reflect on the actions that Amazon has been taking to take more control of its logistics and transportation capabilities for premium fulfillment services. If your organization spent billions on transportation and logistics, you would probably be just as motivated.
A final note:
At this year’s annual CSCMP conference being held in late September, this author will be collaborating with The Washington Post in moderating a specific panel discussion related to ongoing logistics and transportation industry trends and how specific industry supply chain organizations are responding to these changes. Stay tuned for further details.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Today marks a product milestone for Tesla Motors, namely the public debut and availability of the new Model 3 SUV targeted for a broader customer base. In shades of Apple product availability events, Tesla’s PR team insures that photos of prospective customers camped out overnight at Tesla outlets are spread throughout media channels.
The hype cycle is on but the real test will be Tesla’s supply chain and product management flawless execution in the coming months.
In a prior Tesla commentary published in January, Supply Chain Matters noted that while Tesla met its internal goal to deliver more than 50,000 total vehicles in 2015, customers who made deposits as far back as three years ago to secure the new Model 3 remained disappointed. The model, which was supposedly designed to be built for a lower price point and with higher output volumes, has undergone a series of repeated delays making the overall program almost two years later than originally planned for market availability. Of course, such a delay has provided industry competitors such as General Motors ad Toyota the opportunity to bring to market electric powered models that can compete with the Model 3.
Tesla’s founder Elon Musk has characterized the Model 3 as “The hardest car to build in the world.” We interpreted that statement to mean the most sophisticated engineered vehicle but not necessarily one designed for higher volume manufacturing. Its falcon wing doors and air filtering system are examples of noteworthy engineering accomplishments but call into question needs related to design for higher volume manufacturing. Luxury seat manufacturing was recently moved from a supplier, in-house to Tesla’s production facilities because of quality and volume needs. Another ongoing open question is whether the planned Gigafactory designed to produce lithium-ion batteries in-volume will be ready to meet production ramp-up needs.
According to the latest update on the Tesla web site, general reservations begin today on a worldwide basis with a different order queue planned for each geographic region. Existing Tesla customers will also get a priority in the queue, which at first blush, somewhat defeats the objective of a car produced for new customers. Volume production of the new model is noted as beginning in late 2017 with deliveries initially targeted for North America. While those expectations might change during tonight’s scheduled Model 3 unveil, it does set muted expectations as to when large numbers of global consumers can expect to be driving the new Model 3.
It would appear that this is another classic case of product marketing meets the hard realities of supply chain ramp-up execution of a product in high demand. As in the case of Apple, be careful as to marketing hype when supply chain is the real determinant of customer fulfillment.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
A week ago today, Supply Chain Matters broke the news regarding the acquisition of product demand sourcing provider Terra Technology by E2open. According to the announcement, the combination will provide the opportunity for E2open trading network members to have the ability to access real-time product demand signals directly from the end-to-end supply chain network.
Since little had been shared up to last week’s announcement, this independent industry analyst reserved any opinion or customer advisories until having the opportunity to secure a briefing relative to what led up to the announcement and how this acquisition fits with long-term strategy.
Shortly after publishing our commentary, we heard directly from Michael Farlekas, CEO of E2open and indeed, we were able to secure a briefing earlier this week. We thank Michael for his prompt response. Based on that exchange, we can now share some additional advisories regarding the opportunities and consequences of this deal.
First and foremost, this was a strategic acquisition for E2open.
After the firm was taken private by Insight Venture Partners in February of last year, efforts were taken to reduce the overall cost structure of E2open which included moving corporate headquarters from Silicon Valley to Austin Texas. Leadership across most of the senior management ranks has since changed and according to Farlekas, cost trimming efforts were initiated resulting in the company now trending towards positive EBITA earnings. The next order of business was to augment E2open’s synchronized supply chain execution platform with stronger capabilities in supporting product demand planning and sensing. Hence, eyes turned towards the opportunity to acquire Terra Technology.
More importantly, Terra augments two other strategic needs.
First, Terra’s strong presence with high profile consumer product goods producers such as Procter& Gamble, Campbell Soup, Con Agra and Unilever, among others, potentially broadens E2open’s abilities to support process manufacturing supply chain needs where the emphasis is more concentrated on the complexity of supporting complex distribution channels. As our readers are often aware, demand planning and demand sensing are rather important competencies required in managing a consumer packaged goods focused supply chain network. The opportunity provided by this acquisition are the abilities to sense point-of-sales or channel product demand changes on the B2B business network platform and integrate demand signals to inventory planning, replenishment and customer fulfillment actions.
Obviously, another component of this deal rests in business development and sales strategy. E2open gains access to very influential CPG companies for the opportunity to further support their supply chain end-to-end process needs. Most of Terra’s customers utilize large scale ERP backbone systems, primarily SAP, thus they gain the opportunity to assess a different B2B supply chain network option. Many turned to Terra for product and process demand sensing support because of their perceptions that SAP was lacking adequate or timely support in this area. In essence, they were practicing an SAP ring-fence strategy depicted in the book SAP Nation by Vinnie Mirchandani. Terra Technology can be deployed in either a Cloud-based or behind-the-firewall implementation strategy.
Terra Technology itself gains the benefit of a larger sales and support team to increase its sales growth and market penetration as well as compete more aggressively with other supply chain planning and predictive analytics providers. The provider has been hampered in growth by a perceived lack of investment in sales and marketing resources. We were informed that Robert Byrne, Terra Technology Co-founder and CEO will stay on with the acquisition.
As with other acquisitions among software providers, the real importance and benefits of such marriages come with the subsequent integration of technology, people and business process expertise of the combined teams. We advise customers of both of these technology providers to sit back and assess the overall integration that has the potential to bring together augmented demand planning, process simulation and scenario planning, multi-echelon inventory optimization and synchronized execution across a contiguous supply chain B2B network platform.
The strategy is by our lens, solid, but requires dedicated resources and efforts from two companies that have been operating in lean, slimmed-down profiles. Look for signs as to further investments in program talent, development and customer support. The other watch out is obviously any change in pricing strategy. Overall however, we view upside potential in this marriage if carried out successfully.
After our briefing discussion, this analyst is more convinced that the market can expect other acquisitions from E2open as the company and its venture backed investors moves forward with a broader strategy for end-to-end supply chain platform business process support that umbrellas both more responsive and predictive based planning with synchronized supply chain customer fulfillment execution across multiple supply chain profiles. As that occurs, the pressure toward further consolidation among the up and coming supply chain best-of-breed technology segment will increase since long-term growth strategies are quickly moving away from IPO towards strategic link-ups.
One final observation we can share with our readers and clients. The E2open and Terra link-up places even more pressure on supply chain planning provider Kinaxis to broaden its responsive planning capabilities with added support for synchronized fulfillment execution. The pressure to be an acquirer itself or deeper strategic partner is building
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Report Card for Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains- Part Four
While industry supply chain teams wrap-up their various 2015 strategic, tactical, and operational line-of-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.
In Part Three, we revisited our supply chain industry-specific predictions.
We focus this commentary on predictions six through eight.
2015 Prediction Six: A Stalling of Big Data and Predictive Analytics in Favor of Alternative Application Focused Strategies
Self-Rating: 2.5 (Max Score 4.0)
We predicted that the promise of Big Data and Predictive Analytics technology in enabling more insightful and predictive decision-making at the enterprise level would stall in 2015, mainly because of certain technology and organizational constraints. The promises in capabilities to analyze terabyte streams of enterprise structured and unstructured data related to customers, products, suppliers and equipment are dependent on software and database capabilities that can accommodate large data streams and simultaneous user inquiries. We felt that the term Big Data itself was a symptom of a far more perplexing problem, namely that enterprises, organizations and industry supply chains are currently overwhelmed by collecting too much extraneous data. The challenge at-hand was collecting and harvesting “smarter data”.
We are actually pleased that from the technology side, vendors provided special attention towards helping customers to narrow the scope of analytics initiatives, helping organizations to initially pilot both the technology as well as the organizational skills and change management perspectives. Thus, this proactive attention muted our prediction.
A further concern we raised was the organizational challenges in addressing security and governance of mission critical data. Here again, our polling of both vendors and end-users across multiple industry settings indicates that a lot more attention was focused in this area. While legitimate concerns remain, especially in the light of even more cyber-security and hacker information attacks, IT and line-of-business teams seem to taking proactive and balanced approaches. The need to be more predictive and be far more agile to business change seems too prominent.
We further predicted that more supply chain, procurement and S&OP focused applications would be augmented with embedded predictive analytics and machine learning capabilities. We felt that supply chain planning applications that include predictive analytics and/or augmented simulation will continue to lead in this effort. For the most part, supply chain planning vendors such as JDA Software, Kinaxis, Oracle and others are indeed developing and releasing more predictive analytics capabilities. Specialized supply chain operational and financial intelligence vendors such as River Logic and Every Angle are concentrating specifically in the need for more predictive and prescriptive capabilities across cross-functional and enterprise environments.
Interest levels in enabling more predictive capabilities remains high among industry supply chains, and organizations are taking a balanced and risk-aware approach. Thus our self-rating reflects a lower score relative to our original prediction.
2015 Prediction Seven: A Turbulent Year in Global Transportation
Self-Rating: 3.5 (Max Score 4.0)
We obviously for the most part, nailed this prediction, but then again, as we entered 2015, the signs were obvious. Our one misreading of turbulence was that of the U.S. rail industry.
We predicted a continuing shake-out of excess capacity among ocean container shipping lines leading the re-sizing of global transportation fleets. That trend continues in earnest, with more ocean container ships being idled. For the most part, shipping rates collapsed for most of 2015 leading to a buyer’s market, despite multiple attempts among carriers to influence higher rates. By October, industry watcher Drewry predicted upwards of another three years of industry overcapacity while the CEO of industry leader Maersk Lines, openly called for further industry consolidation. In November, China’s two ocean container lines announced their intention to merge while speculation continued that Neptune Orient Line was seeking a buyer.
We predicted that the “perfect storm” of dysfunction among U.S. west coast ports in the latter half of 2014 would have implications in how shippers, exporters and retailers route future shipments destined for the United States and global markets. That trend indeed manifested itself with ongoing reports indicating that this year’s traditional holiday seasonal surge in shipping really never occurred. Retail and other industry supply chains suffered a sizable inventory overhang as 2014 holiday inventories arrived in the early part of 2015. While 2015 data relative to a volume shift among U.S. West Coast, Gulf and East Coast port activity is still to be determined, current trending numbers to-date point to supply chain teams indeed exercising a more balanced inbound routing. We pointed to the issues uncovered in 2014 labor contract negotiations, and work stoppages involving independent trucking’s driver contracts, the leasing and 3rd party deployment of tractor-trailer carriages to transport containers as needing to be addressed by transportation industry and labor union players to avoid a repeat of what occurred in 2014. Those issues remain at-odds, especially among independent truckers without full-time labor agreements that account for idle and delay time.
One of the most prominent turbulence areas was increased merger and acquisition activity in the third-party logistics sector. We predicted that the added complexities and service needs related to Omni-channel and industry-specific logistics would continue to spur more service and technology requirements by customers on third-party logistics providers (3PL’s), forcing them to invest in broader technological and systems capabilities along with broader scale, or risk losing business to larger more versatile providers. The acquisition announcement by FedEx of GENCO at the end of 2014 portended this dynamic in 2015. Indeed that came to pass with continuous announcements of M&A activity involving both larger and smaller industry players. Among the most prominent, in April, FedEx announced its intent to acquire TNT Express for $4.8 billion. That announcement came in the wake of UPS’s previous failed attempt to acquire TNT after encountering stiff regulatory resistance. In September, XPO Logistics announced its intent to acquire Con-Way for an estimated $3 billion raising the specter of further industry consolidation. In October, Denmark based DSV announced its intent to acquire U.S. based UTi Worldwide.
We predicted that the plunging cost of crude oil prices would further add to turbulence involving existing fuel surcharges affixed to transport rate structures. Carriers and parcel shipment firms will likely attempt to drag out the suspension of fuel surcharges to protect or sustain ongoing margins. That turned out to be the case and the most visible attempts were from FedEx and UPS who each announced added fuel surcharges for both 2015 and 2016.
Turning to railroads, we predicted that Canadian and U.S. based railroads would encounter turbulence in accommodating higher volumes of crude oil shipments as well as increased regulatory pressures for upgrading sub-standard tank cars to new safety standards. The opposite occurred. The continuous decline of world crude oil prices triggered a noteworthy reduction in U.S. domestic crude production leading to lower oil train volumes. With lower volume, regulatory pressures for tank car upgrading seemed to have eased but there was a crisis involving the December 2015 deadline for railroads to have implemented positive train control technology. That deadline was extended over an additional three year horizon.
2015 Prediction Eight: Sales and Operations Planning Transitions to Broader Scope Information Management Augmented by What-If and Simulation Activities.
Self-Rating: 3.5 (Max Score 4.0)
We have long advocated that today’s more globally based supply chains require end-to-end business network technology support in supply chain execution, customer fulfillment and more integrated business planning dimensions. With that perspective, we predicted that select industry sales and operations planning (S&OP) processes will begin efforts to transition toward inclusion of broader aspects of internal and external business planning, response management and predictive decision-making capabilities. We believed that this would most likely include deeper, cross-application information connections to product demand pipelines, augmented with traditional and social media based demand sensing. We further anticipated more-timely information connections with external or outsourced suppliers along with key customers, leveraging cloud-based planning and fulfillment synchronization networks.
Because of these needs, we expected B2B supply chain business network providers, including ERP players, to deepen their support for broader integrated business planning needs by leveraging cloud-based platforms or networks.
Our polling of technology vendors including where specific market interest occurred in 2015 reinforced that industry supply chain and line-of-business teams indeed expressed desires for integrating broader information streams and more contextual-based decision-making capabilities. Also on the vendor side, briefings on product strategy pointed to consistent themes for augmenting S&OP process support with broader aspects of network-wide information and with more prescriptive and predictive decision-making capabilities.
When we made our prediction, we had in-mind that certain existing B2B business network technology providers would become more attractive in M&A activity. In February, private equity firm Insight Venture Partners announced its intent to take E2open Inc. private. In June, best-of-breed supply chain planning provider JDA Software announced a strategic partnership with Google directed at deployment of a supply chain wide public cloud capability. In August, ERP provider Infor announced its acquisition of GT Nexus declaring the advent of the “first global commerce cloud” for small and large enterprises. Infor’s stated objectives are to implement broader supply chain business network support capabilities including S&OP processes. And at its annual customer conference in late October, Oracle announced its public SCM Cloud offering with the ability to integrate a broader B2B business network. Meanwhile, SAP continued with its efforts to broaden its Ariba B2B platform for broader support of direct materials procurement and integrated business planning.
In our next and final posting, we will look back on our final two predictions for 2015.
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Hewlett Packard Now Operating as Two Separate Companies: Supply Chain Test Comes in the Coming Weeks
Today marks the official first day of high-tech firm Hewlett Packard operating as two separate and distinct companies. One company, Hewlett Packard Enterprise Company will oversee operations of the former HP Enterprise division, a $55 billion dollar entity. The other, HP Inc., will oversee operations of the former HP Printer and PC divisions, of equivalent revenue size. Supply Chain Matters commented on this proposed split, along with supply chain implications in a July commentary, as we envisioned a very busy summer across the company.
The massive HP split involved separating balance sheets, facilities, IT systems and applications, including those related directly to the support of HP’s end-to-end supply chain. Purchase agreements among various suppliers would have to be recast foe each new company along with various special agreements.
A published article from the San Jose Mercury Times provides perspective on the scope and efforts that went into this split, which overall involved 300,000 employees among 651 global locations. Formal planning began last February and initially involved a flow chart that consumed a 40 foot length, 10 foot high wall. Approximately 60,000 employees had to be moved to separate locations, along with a reported 2700 bank accounts and IT systems.
An interesting perspective brought out in the article was the planning could not be a consensus-driven decision-making process. Instead, a small group of executive decision-makers were supported by a separation project team that grew to about 400 people.
The real-test of this separation comes over the coming weeks as the spilt processes and systems begin efforts as two separate enterprises. From a supply chain and product management perspective, key sensitivities will be seamless uninterrupted operation of both order fulfillment, supply chain planning and execution systems. A further perspective will be how inbound direct material and indirect materials contracts are structured, implemented and managed under the split. The Mercury Times report indicates that HP Labs will remain as a separate research and development center shared by both companies.
Obviously, the good news here was that the November 1st separation milestone was completed as required. The systems shakeout period will hopefully occur without major snafus.