Last week, Material Handling and Logistics called attention to the Stifel Logistics Confidence Index indicating that the first eight months of 2015 have not been positive indicators to the logistics and transportation universe. The report indicates: “Fierce competition, volatility and overcapacity have all taken their toll and driven the Index to its lowest point since September 2013.”
From our Supply Chain Matters lens, this report should not be a surprise to transportation and procurement teams and is a reflection of further industry turbulence ahead.
The report touches upon the airfreight sector and notes that the Logistics Situation Index for airfreight fell 4.1 points, its lowest point of the year because of lackluster volume. Likewise, the Logistics Expectation Index for airfreight was reported as troubling despite the upcoming holiday shipping period. It is yet another indication that capacity cutbacks from carriers will continue.
The Logistics Situation Index for sea freight was noted as slightly positive, as three of the four major lanes examined recorded some growth. The Europe to U.S. lane reportedly declined sharply, and puzzling indication of the effects a far stronger U.S. dollar which would make European imports more attractive. However, exports from North Europe to North America were reported growing by 8.4 percent over the first five months of 2015, but considerable capacity increases on the lane are threatening to outstrip shipping demand.
For Supply Chain Matters, this latest index related report reflects further evidence of the significant overcapacity situation for both seaborne and airfreight that is currently driving industry spot pricing and other dynamics. We recently called attention to announcements of ocean container consortium cutbacks on Asia to Europe ratings that take effect in September.
While we were away on a two-week summer break, there was a significant acquisition announcement related to cloud-based supply chain technology, one that warrants a Supply Chain Matters perspective.
Last Tuesday, ERP provider Infor announced that he had entered into an agreement to acquire supply chain logistics and commerce network provider GT Nexus for $675 million. GT Nexus technology supports the ability of buyers to transmit order information across a connected supply chain business network, linking various suppliers, logistics providers and financial institutions.
According to the announcement, this deal is expected to close within 45 days, pending regulatory approval. GT Nexus is expected to operate as an independent division of Infor.
This author was not at all surprised at this announcement concerning GT Nexus. It was just a matter of time, and which ERP or enterprise software provider would pull the trigger.
In early January, The Wall Street Journal had reported that two supply chain business support providers, one being E2open, the other GT Nexus, were being pitched as potential acquisitions. Readers might recall that E2open, a publically traded firm at the time, was subsequently acquired by private equity firm Insight Venture Partners and has since been taken private. That transaction was valued at $273 million, approximately three times current revenues. The GT Nexus transaction value of $675 million however, is a surprise, in terms of overall amount paid.
The core of GT Nexus has always been its end-to-end supply chain execution connectivity with ten of the largest third-party logistics (3PL) services providers along with the largest ocean transportation providers as part of its supply chain execution network. Its customer base that includes names such as Adidas Group, Caterpillar, Columbia Sportswear, Pfizer and Procter and Gamble were motivated by needs for deeper supply chain wide execution synchronization.
In January of 2013, GT Nexus merged with cloud-based sourcing provider TradeCard in a strategy focused on adding financial services connectivity to supply chain networks. That included pre and post export financing and payment protection services. At the time of the merger, TradeCard had deep relationships among retail, apparel and consumer soft goods industry players who require such needs in financial supply chain services.
In the view of Supply Chain Matters, that merger moved GT Nexus further towards financial services business support opportunities as opposed to opportunities for broader supply chain planning and execution control synchronization. TradeCard CEO Sean Feeney assumed leadership of the combined companies after the merger.
For many years, GT Nexus had an on again, off again partnership with supply chain planning provider Kinaxis, in an attempt to add deeper planning and control capabilities. That relationship brought little in joint customer deployments and was broken off several weeks ago.
According to the announcement, Infor plans to leverage GT Nexus for its cloud-based capabilities in integrating direct procurement processes. Infor additionally has an existing ERP customer base anchored in fashion and retail customers which focuses this acquisition as an industry concentration strategy facilitating the integration of merchandising, marketing and online Omni-channel fulfillment needs across an extended supply chain business network. The ERP provider further hints of the ability to utilize the GT Nexus cloud-based network in the support a two-tier ERP strategy that utilizes the combination of Infor and GT Nexus capabilities in support of extended supply chain business process, S&OP and other decision-support needs. Once more, Infor is no stranger in M&A activity, and has demonstrated a track record of aggressive technology platform and application integration of its prior acquisitions.
Supply Chain Matters has long advocated the importance for industry supply chains to leverage an end-to-end business network to synchronize supply chain planning, execution and customer fulfillment needs on a global basis. The fact that two of the more visible, independent cloud-based extended supply chain network providers have now been involved in acquisition activity involving nearly $950 million is testimony to the attraction and importance of this cloud-based technology area.
For existing customers of either GT Nexus or E2open, the open question remains how each of these providers will evolve under new leadership and differing perspectives.
For our part, Supply Chain Matters will continue to provide insights and recommendations regarding this important technology area, and how both of these network providers evolve under new management.
JDA Software announced today that its latest product release, version 9.0 is now available. Supply Chain Matters previously provided some hints to this new release in our coverage of the JDA FOCUS 2015 customer conference in April.
This version 9 release is significant from three perspectives:
- It marks a major stepping-stone in JDA’s plans for providing customers added support in connecting supply chain physical and digital planning as well as customer fulfillment execution processes. Release 9.0 further provides demonstration of JDA’s efforts to reorient the technology provider’s vertical industry support to provide continued support for Omni-channel and online focused retail industry needs as well as core discrete and process based manufacturing industries support. This strategy was re-iterated at FOCUS in April.
- Release 9.0 features the initial introduction and utilization of new JDA FLEX integration platform, designed to connect applications and information sources across heterogeneous systems. It further provides new opportunities for integrating supply chain planning and execution applications including the integration of the RedPrairie warehouse management and supply chain execution applications which were acquired in 2012. The JDA FLEX technology is further being utilized in the support of Omni-channel end-to-end Retail Omni-channel fulfillment processes, including the awaited connections to IBM’s Retail Commerce and Order Management (former Sterling Commerce) platform that was initially jointly announced in November of last year.
- The Release introduces what JDA describes as: “Risk Aware, Agile Supply Chain Planning.” Included in new enhancements are:
- Automated parameter and level optimization in product demand forecasting, allowing the system to analyze available historical data and recommend most appropriate forecast parameters.
- The addition of a termed Replenishment Interval Workbench that allows planners to analyze and factor risk mitigation and more effective vendor or supplier negotiations.
- In-memory, constrained aware S&OP planning with significantly added system scalability and performance, along with enhanced in-memory scenario planning allowing comparison of multiple scenarios utilizing a form of scenario scorecard functionality.
- An enhanced Agile Control Tower that adds guided-response forms of descriptive, prescriptive diagnostic and predictive analytical capabilities.
- Enhanced scenario and task planning within Factory Planning and Scheduling.
Another noteworthy aspect for this product release is additional enhanced functionality added to JDA Intelligent Fulfillment for support of Click and Collect online fulfillment needs that include pick-up at designated retail store, destination-driven demand categorization to match the actual physical presence of demand such as a retail store or online channel with inventory placement needs. Supply Chain Matters has previously shared our positive impressions with the current and planned functionality of Intelligent Fulfillment and we continue to believe that this application will be a strategic underpinning for JDA’s efforts in supporting online Omni-channel and multi-channel order fulfillment process needs.
More for more detailed information, readers can view an upcoming JDA Software webinar being held on July 23.
In the coming weeks, Supply Chain Matters will provide further, more detailed commentaries related to specific functionality and business process support aspects of this new JDA release.
Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters© blog.
Supply Chain Matters calls reader attention to an added backdrop to the State of U.S. Logistics during 2014, specifically continuing ocean container shipping challenges. Robert Bowman, Editor at SupplyChainBrain penned an article, Searching for a Solution to Chassis Management.
The article observes that in a bid to cut costs and focus on the construction and launch of ever-larger container vessels, shipping lines began selling off intermodal assets such as owned truck chassis. The result is noted as some of the largest U.S. port complexes having a tough time managing the ocean container truck chassis flowing between terminals, attempting to figure out which entity has jurisdiction over inspection, maintenance and repair practices, and where chassis need to be scheduled to handle arriving vessels. Supply Chain Matters also called attention to this problem in our coverage of the U.S. West Coast port disruption in the fall of 2014.
While equipment leasing companies have stepped into the vacuum with various concepts of equipment pools or “pool of pools” the latest ratified labor agreement involving U.S. West Coast ports calls for dockworkers insisting that inspect chassis upon exit from a facility, That has led to additional challenges and frustrations, and according to this report, federal cout action is a strong possibility as lessors balk at this added inspection step.
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.
Commercial aircraft industry eyeballs were focused on this week’s Paris Air Show, a biannual event with enormous significance to major aircraft manufacturers and their respective supply chain partners. Each event is a competition as to which manufacturer walks away with bragging rights to the most landed customer orders or most buzz regarding a new aircraft model. Beyond the headline buzz as to whether Airbus or Boeing landed the most orders, the global supply chain takeaway is an additional $100 billion plus in customer orders and another obvious extension of multi-year backlogs. The overall pressures on aerospace focused supply chain have clearly and unquestionably turned toward fulfillment execution.
Reports indicate that Airbus booked $57 billion for 421 new aircraft orders at list prices while Boeing landed $50 billion worth of orders representing 331 new aircraft. Combined, it represents nearly another 6 to 9 months of customer order backlog at current monthly production volumes.
Aircraft engine providers also shared in the order bonanza with consortium based CFM International reporting a combined $19 billion in orders related to its LEAP family of engines, and other models, while General Electric Aerospace reported orders valued at $5.4 billion for its new GE9X engine. Interesting enough, as a literal follow-up to our previous Supply Chain Matters commentary related to CFM International, the CEO of that engine supplier publically warned the two major OEM’s not to request additional production volume beyond aircraft currently scheduled for delivery through 2020, and that the consortium is currently stretched to capacity in fulfilling what has already been booked in orders. Likewise, the President of Rolls Royce’s aircraft engine business indicated that supplier was booked out to 2021 and the current industry message is about production and supply chain ramp-up.
On the topic of engines, Airbus had previously planned to feature its new A320neo aircraft at this week’s show but a component problem within the new model Pratt and Whitney engine grounded the aircraft.
A further industry implication is that more and more of added industry orders are originating from new and up and coming discount based carriers. Indonesia based Garuda was reported to be one of the most active buyers this week, placing orders for both Airbus and Boeing aircraft. Many are opting for termed “power by the hour” or included service management contracts where manufacturers guarantee a specified level of operational up-time and assume annualized aircraft maintenance costs. The longer the industry backlog continues, the less likely that OEM’s and engine suppliers can take advantage and leverage these incremental recurring revenue streams.
On the product design front, the reported buzz centered on a potential new Boeing model termed “Mom”, billed as a likely replacement of current discontinued Boeing 757 fleets. The aircraft does not exist and is more in the pitching stage, but talk of the new model was enough to reportedly generate a lot of interest and a lot of differing views. Postings by Business Insider and Bloomberg provided added color to Boeing’s potential new model. Industry participants are quoted as indicating that Boeing has no choice but to pitch such an aircraft because of current functional advantages offered by arch rival Airbus with its new A320neo aircraft. According to these postings, Boeing is indicating a “clean sheet” design. However, the current realities of the current highly capacity constrained industry are already adding to the discussion as to the time-to-market timetable for such a new model. Once more, the current operational 757 fleet is noted as more than two decades old and will need replacement rather soon. This author alone is rather frustrated in having to fly coast-to-coast across the United States in aging and dull United Airlines 757’s. It is akin to driving a station wagon with 200,000 miles on the odometer with seats and upholstery worn out. The notion of “Mom” will undoubtedly place enormous pressure on Boeing’s design engineering and program management teams at a crucial time when other new aircraft need to meet delivery and volume milestones.
Obviously, the industry question centers on whether both Airbus and Boeing have learned from past supply chain snafu’s with prior models and can effectively instill added agility, cadence and responsiveness to global-based supply chains. Supplier resiliency and contingency planning will be crucial as will supply chain risk mitigation. Advanced technology is already playing a crucial role in areas of additive manufacturing, RFID, IoT and more extensive end-to-end supply chain visibility. Both OEM’s, along with key suppliers, would be wise to increase their investments in more predictive planning and supply chain wide business and operational intelligence.
As Supply Chain Matters has noted often, an industry with engineering based culture having upwards of a current ten year order fulfillment backlog while enviable, has unprecedented challenges and requires more innovative approaches by all its players. The focus is now flawless and synchronized execution.