subscribe: Posts | Comments | Email

The Implications of the Announced Apple and IBM Alliance

0 comments

Business and social media is abuzz with today’s announcement that two long-time rivals, Apple and IBM, are teaming-up in an alliance to create simple business apps on Apple’s iPhone and iPad devices.  As pictured in the Times Square featured announcement, both CEO’s are pictured in a casual and friendly stroll.

Apple and IBM Alliance Announced

The obvious question is which of the vendor’s benefit the most from the proposed alliance.  Another question is the potential impact on supply chain and B2B business network technology deployment. In this Supply Chain Matters initial viewpoint commentary; we briefly dwell on both questions.

Under the alliance, IBM will create what is termed as “simple” business apps leveraging the respective Apple mobile devices.  IBM employees will further provide on-site services and support for Apple mobile devices. Of more interest is the report that IBM is planning to make 100,000 employees available to the Apple imitative, which is rather significant. Both alliance CEO’s made themselves available for a joint media interview. IBM CEO Virginia Rometty indicated: “This is just the beginning” and Apple CEO Tim Cook indicated: “This is really a landmark deal”. The apps themselves are reported to draw on IBM’s computing services including security, device management and big-data analytics. Apple and IBM engineers will jointly be developing more than 100 new business applications tailored for specific industry needs. The apps will begin arriving in the fall and IBM will resell iPhones/iPads containing the apps to its business enterprise customers.

The initial online consensus is that both vendors will benefit from this alliance and this analyst shares that opinion.  Apple has struggled to penetrate the coupling of its mobile devices with business enterprise applications since the market continues to perceive the company as just a consumer electronics provider, albeit with elegant offerings. Security of mobile based information remains a big concern for both supply chain and IT teams. IBM with its deep ties to C-Suite and IT teams has been struggling with the need for more positive revenue momentum. A late entry and lack of momentum in supporting cloud-based and mobile computing needs has not helped. Thus, benefits and rewards loom large for both vendors under this alliance.  They just need to collaborate and execute.

As for the potential impact for supply chain and B2B business network technology support, it’s too early to tell.  As we have noted to our readers, IBM has amassed a broad suite of end-to-end supply chain, B2B, customer fulfillment network, service and business analytics capabilities that can all benefit from further leveraging of mobile-based applications.  The open question remains on IBM’s track record of delivering on broader supply chain process integration in a much more time-to-market manner.  We anticipate there will be opportunities to enhance mobile-based apps in Emptoris Supply Management Suite, Sterling B2B and online fulfillment network as well as end-to-end supply chain focused analytics. Customers will just have to wait and see what develops in the coming months.

A further implication of this alliance announcement will be how other business enterprise vendors such as SAP, Oracle, Google and Microsoft eventually respond. Each has positioned the leveraging of mobile devices within business applications from a multi-vendor perspective in an effort to support multiple brands. This week’s announcement may prompt a re-visit of these strategies, and consumer electronics providers Samsung, Lenovo or perhaps HP, could benefit with enterprise software vendors again seeking deeper development alliances.

Bottom-line, our community can well anticipate some benefits of the Apple-IBM alliance along with the competitive response from other competitors in the market.  IT teams will be able to rest more easy knowing that burden of integrating application with mobile device will be assumed by alliance partners.

The open question however is how mission critical supply chain and B2B mobile computing needs will be viewed in the light of implementing other more simplified apps that meet alliance objectives for total apps availability.

We all need to stay tuned.

Bob Ferrari


Airbus and Boeing Announce First-Half Commercial Aircraft Shipments

0 comments

Both Airbus and Boeing announced their commercial aircraft deliveries for the first-half of 2014, which are indicators of each OEM’s current supply chain support activity. These announcements come as a prelude to this month’s Farnborough International Airshow in Great Britain, a premiere event for announcing newly booked orders.

Airbus indicated that it delivered 303 aircraft through the end of June, an increase of 2.7 percent from the year earlier period. The aerospace OEM indicated that its plans call for total 2014 aircraft deliveries to match the 2013 number of 626 aircraft. On the inbound order front, Airbus booked 290 net commercial aircraft orders in the first-half although cancellations surged after global carrier Emirates cancelled its outstanding order for 70 A350 aircraft.

Boeing indicated that it delivered 342 aircraft in the first six months including 48 of the 787 Dreamliner’s. That 787 number is slightly below Boeing’s initial estimates for monthly 787 production volumes in 2014. The numbers include the delivery of 239 new 737 Next Generation aircraft which equate to an average production run-rate of 40 per month which is a considerable production pace.  The current pace of commercial aircraft deliveries would position Boeing’s supply chain in a position to exceed the total 648 total commercial aircraft delivered in 2013.

While both Airbus and Boeing supply chain teams should be applauded for first-half performance, the fact remains that multi-year order backlogs remain rather large that the jet buying frenzy among Asian based carriers may give way to a more sober approach that reflects the current global airline challenges of intense competition, pilot shortages and inadequate infrastructure. As Supply Chain Matters and now traditional business media has opined in previous commentaries, multi-year backlogs can give way to more changing market dynamics.  The recent Emirates announced cancellation of its hefty A350 order could be considered another indicator of changing industry dynamics.

We again echo our prior advisory, namely that an enviable industry position awash with order backlog does not condone a business-as-usual focus on product lifecycle and supply chain management. Rather, dynamic and responsive capacity management, end-to-end value chain intelligence, enhanced supplier collaboration and goal-sharing will all come into play as aerospace supply chains continue to adjust to extraordinary and constantly changing industry dynamics.

Bob Ferrari


A Flood of Rumors Surround Apple’s Pending Product Launches with High Expectations

1 comment

Wall Street insiders and the financial press are hard at work extracting tidbits of information from elements of Apple’s supply chain. The buzz and interest centers squarely on what can be anticipated for Apple’s Fall new product introduction (NPI) pipeline. Obviously there is a lot at-stake.

We at Supply Chain Matters have featured prior commentaries related to information leaks from the Apple supply chain ecosystem. But we put that aside in this commentary. Rather, let’s focus on Apple’s new product ramp-up, overall planning and supplier management strategies that are evolving in this current phase.

The current two areas of focus are on the rumored introduction of Apple’s next iteration of the iPhone along with the so termed, iWatch, a smartwatch that is rumored to have rather mind blowing functionality and characteristics.

Earlier this week, the Wall Street Journal published an article, Can Apple Crack the Smartphone Code? (paid subscription required) The article indicates that Apple will join other consumer electronics firms, namely Samsung, Sony, Intel and a host of start-ups who have already released versions of a smartwatch into the market. We recently called Supply Chain Matters reader attention to reports that Google was ramping-up volume production for  a smartwatch product as well. According to the WSJ article authors, thus far the market has been lukewarm in sales volumes. Thus, Apple does not have its usual first-mover advantage, and is compelled to provide more attractive product innovation to differentiate from existing competitors. The publication cites one market research firm as indicating that shipments of so-termed wearable devices amounted to roughly 3 million units in the first quarter of 2014, not a lot in the context of previous Apple product releases.

Regarding supply chain related insights, the WSJ cites a source indicating that Apple’s past ability to integrate both hardware and software design concurrently give it a leg-up in the market. Another source from a component supplier is quoted as indicating that Apple is planning for 2014 shipments ranging from 10-15 million production units this year.

A separate published report by Reuters , citing a source familiar with the matter, indicates Taiwan’s Quanta Computer will begin mass smartwatch production in July, with the planned product launch coming as early as October. Thus, we can surmise that in 3 months, Apple is planning to ship three to four times the market volumes that occurred in Q1.  That’s Apple’s big bet on more attractive production innovation. The cited source further indicates that Apple expects to ship 50 million units within the first year of the product’s release, although these types of initial estimates can be subject to change or later adjustment. Further noted is that LG Display Co is the exclusive supplier of the screen for the gadget’s initial batch of production. LG Display has become Apple’s preferred go-to supplier for next generation display technology, that which requires difficult challenges in overcoming initial production yields. Two other sources of Reuters indicated that the subject smartwatch is rumored to also contain a sensor that monitors the user’s pulse. Singapore-based imaging and sensor maker Heptagon is cited as being on the supplier list for that feature, a rather new player in the Apple ecosystem.

Now let’s turn attention to the rumored new iPhone6.

A published advisory on Seeking Alpha cites Taiwan’s Economic Daily News report indicating that global contract manufacturer Foxconn is being tapped to be the prime contract manufacturer and is in the midst of hiring 100,000 workers to help ramp up iPhone 6 production. Fellow ODMPegatron is also said to be ramping iPhone-related hiring. Further noted is the rumor that Apple is targeting a price hike for carriers regarding the new phone model, which perhaps implies a bigger margin. Yesterday, a published report from Bloomberg indicates that production for the new model iPhone will begin in July and include two different models. One model will have a 4.7-inch display, compared to the 4-inch screen of the current iPhone 5s and may be available to ship to retailers around September. A 5.5-inch version is also being prepared for manufacturing and may be available at the same time according to the Bloomberg sources. The new iPhones will also be rounder and thinner than previous models, and include curved glass. Production of the 5.5-inch model is more complicated than the smaller version, resulting in lower production efficiency that must be overcome before manufacturing volume can be increased.

That news concerning Foxconn is incredibly interesting because the CMS was previously transitioning away from Apple’s volume business. Foxconn actually declared in February 2013 that it would freeze all hiring in China.  Supply Chain Matters featured a past commentary related to Foxconn’s annual meeting of shareholders that communicated that having Apple as one of your prime customers is probably both a blessing and a curse, because the Apple way requires maximum flexibility with a magnification of the principle that the customer is always right, even when that customer abuses planning norms. In that stockholder event just about one year ago, Foxconn management indicated the intent to lighten its high exposure to Apple related production contracts in favor of both moving downstream in the consumer electronics supply chain and developing its own line of devices and software. At the time we opined that we would not be at all surprised that one day, there will be a number of consumer electronics devices branded by Foxconn, probably in the China market.  If the rumors that Foxconn will be the prime manufacturer for the upcoming iPhone 6 turn out to be accurate, that would place a new or different perspective, namely that Apple is leaning on its most trusted and experienced contract manufacturer to insure that innovative design can meet high volume production requirements in a more-timely manner.

Apple is obviously deep into two major new production introduction ramp-ups with entirely new product designs, over the next several months. Notice that the windows are shorter, production start in July with possible global product launches in September or October. Usually, these NPI ramp-up phases start earlier in the year, perhaps May or June.

A brand new product area, namely a wearable device, far different iPhone design functionality (bendable glass, touch fingerprint sensor, wireless charging to name but a few rumors) blended among dynamic connections among product design, management and contract manufacturing partners. No doubt, this is an intense effort, with high stakes.  Apple’s information connections from product management to the manufacturing shop floor, its inventory positioning and overall S&OP coordination are all dynamically at-play.  We would not be all that surprised to hear that product designers are still making changes.  That is the Apple way.

Yet, if any supply chain is up to the task, it certainly will be that of Apple.

We all await the results that come over the coming months.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


The Implications of SAP Run Simple for Supply Chain Applications Support

2 comments

SAP conducted its annual Sapphire NOW users conference in the U.S. and utilized this customer forum to once again communicate significant changes and implications concerning future direction.  The prime theme that SAP management delivered to customers was the SAP Run Simple message, which for many day-to-day users of SAP, is a message that is received with some cynicism. None the less, the implications are rather profound and real. Supply Chain Matters penned a prior commentary regarding the implications of SAP’s new strategies focused on integrated business planning that has since received significant reader and social media activity.

Among the keynotes delivered at Sapphire was the often anticipated talk by Hasso Plattner, one of the original founders of the company and existing Chairperson of the company’s Supervisory Board. While Hasso’s annual talks to SAP customers tend to sometimes be academic and lengthy, they often contain candor and important insights regarding SAP direction or missteps in the market.  This year was no exception.

One of the most significant messages delivered by Hasso was that enterprise software running on-premise is going to the cloud, no matter what.  That is why SAP’s new strategic emphasis is now all about reengineering for “the cloud.” The message from Hasso was that it is no longer a matter of if but rather a matter of time. That alone is a significant message coming from SAP’s founder and most influential investor.  He further indicated that four years ago, SAP leadership was initially very apprehensive regarding the challenge to change 400 million lines of code within its ERP backbone system, but has now come to the conclusion that it would have no choice but to do so. Software that was designed many years ago under different assumptions related to business processes and existing technology at the time, now has to better match the realities of today’s new business and technology paradigms. Hasso’s drumbeat message remains: “simplicity beats complexity”.

A very significant implication of SAP’s ongoing re-engineering towards leveraging HANA and the cloud is the goal to eliminate “aggregates” within its internal system’s functions.  Aggregates are when the system calculates for instance, gross margin, income statements or a supply chain planning optimization. Long-time SAP APO user teams can best relate to this concept by considering APO’s in-memory or former “live cache” design concept, where all planning related transactional and master data is drawn into the planning engine to formulate optimized supply chain plans.

Instead, the new HANA based cloud or on-premise technology will store all of SAP transactional data in memory (column-store) and will respond to information needs and reporting requirements by assembling models and algorithms on top of transactional data. The implication is a system with a far smaller footprint that users will eventually have the infinite freedom to re-arrange information hierarchy’s on-the-fly in a matter of a few seconds. By Hasso’s description, that opens opportunities for the system to perform all functions via models and algorithms and the ability to perform more predictive and simulation based analysis capabilities based on system-wide data.

Other significant implications will be the even more critical importance to accurate master data, internal skills in modeling and simulation of supply chain related data and the ability of supply chain planning and fulfillment teams to perform multitudes of what-if or target supply chain goal fulfillment analysis.

Of course, this broad and sweeping scope of SAP focused change is going to take additional time, perhaps years in scope. There will be critical decisions that customers will need to make over that time period.  At Sapphire, SAP further communicated its increased dependence on select key partners to assist both SAP and its existing customers to more quickly and successfully navigate this ongoing and significant transition.

Existing SAP customers need to seriously think about the implications of this shift in technology direction, especially as it relates to supporting today’s and tomorrow’s broader and more complex supply chain management needs.  While complexity and frustration may rule today’s mindsets, start seriously thinking about what these new changes imply for integrated supply chain and business planning support needs under the SAP HANA enabled banner. Such changes involve a changing mindset, new and different skill needs as well as a reliance on a trusted external consulting and support partner.

It is no secret that SAP APO, while designed as a bullet-proof supply chain planning system built around SAP master and transactional data, is somewhat difficult and inflexible in its ability to provide a means to support rapidly changing supply chain business processes or to support a new data paradigm where the majority of supply chain related data exists in an external demand or supply network. In a prior Supply Chain Matters posting, we noted that the structural design rigor and tight internal system linkages has led to many work arounds, including spreadsheets and supplemental systems. In many cases, the full potential of supply chain optimization, such as optimized supply planning is avoided because of the complexity and lack of understanding of innards of SAP APO. However, those teams that have taken the dedicated time and patience to learn and understand such innards with supplemental tools have managed to leverage APO functionality and subsequent benefits.

As noted in prior commentaries, as SAP continues to build out its described muscle platform, organizations need to focus efforts on the further mastering of broad-based supply chain planning and fulfillment process modeling, optimization, simulation and master data management capabilities. There are available tools and knowledgeable partners who can help you to re-focus your current efforts and direction and better respond to line of business needs, customer fulfillment or product management requirements, while helping to facilitate the skills and new capabilities roadmap that prepares for what will come in the new world of SAP.

Key SAP strategic partners such as Intrigo Systems, are not only focused on SAP APO, but the broader SAP Supply Chain Management, both today, and in the realities of the SAP HANA enabled environment. The Intrigo Systems Optek tool suite consists of modules that have been designed to place the planner more in control of the process while making SAP APO functionally more effective today, and in the future capabilities of SAP Supply Chain Management.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.

Disclosure; Intrigo Systems is a current client of the Ferrari Consulting and Research Group.


Supply Chain Matters Friday News Roundup

0 comments

It’s the end of the work week and we continue with our news update series related to previous Supply Chain Matters posted commentaries or news developments.

 

Another Bombardier C-Series Program Delay

Supply Chain Matters has featured past commentaries concerning Bombardier and its efforts to make its presence as an aircraft provider in the single-aisle market and compete with the likes of an Airbus or Boeing. The company’s C-Series of aircraft were designed to offer prospective air carriers an  Bombardier C-Series First maiden Flighttechnologically advanced single aisle aircraft at perhaps a more cost competitive option for airlines. However, like many other commercial aircraft programs, the C-Series has suffered a series of milestone setbacks.  The first maiden flight of the C-Series was in September 2013, nine months behind its original schedule. In December, the aircraft and diversified transportation equipment provider replaced its head of aviation sales due to lagging booked orders.

There are reports of continued setbacks regarding the C-Series program. This month, Bombardier re-started ground tests following a test failure of the aircraft’s innovative geared turbofan engines designed and produced by Pratt & Whitney. The company further announced that it will not feature the C-Series at the Farnborough International Airshow that occurs in July, forgoing a major sales opportunity. The revised plan is to introduce the smaller CS100 version of the C-Series in the second-half of 2015, with the larger version six months later.  Thus far, about 15 percent of test activity has been completed.

The company has scaled-down its expectations of orders to a number of 300 expected orders by the time the aircraft enters operational service. Air Canada had been evaluating the C-Series as a potential replacement for 25 existing Embraer aircraft has now indicated it will not order any of the aircraft.

 

Airbus Loses Huge A350 Order

An update to our ongoing Supply Chain Matters commentaries regarding Airbus’s A350 supply chain which completed its maiden flight in June of 2013. A major new program development includes some disappointing news.  A350_XWB_first_flight_350242

Business media reported last week that Airbus suffered one of the industry’s largest plane cancellations. Emirates Airlines elected to walk away from a previous deal to acquire 50 A350-900 and 20 A350-1000 aircraft after the airline reevaluated its long-term capacity needs. Emirates is apparently concerned that capacity at its Dubai hub could be an impediment to long-term growth, and that larger capacity aircraft should be part of its fleet strategy.

According to a published report by the Wall Street Journal, the A350 order was placed in 2007 and had a list price value of $16 billion.  The cancellation represents a 9 percent hit to the A350 current order backlog. That will add some sting to the A350 supply chain ecosystem.

According to the WSJ, Emirates is the most influential buyer of Boeing’s 777 and Airbus’s A380 super jumbo aircraft. In November, Emirates boosted its A380 order commitment to 140 aircraft.

The order cancellation also effects engine provider Rolls Royce who indicated that its order book would fall by about 3.5 percent or $4.4 billion as a result of the Emirates decision.

 

UPS Appoints New CEO and Other Senior Management Changes

Earlier this month, UPS announced that David Abney, currently the company’s Chief Operating Officer, will be the transportation provider’s new Chief Executive Officer. Scott Davis, who has served as the company’s Chairman of the Board and CEO since 2008, will retire from UPS and will assume the role of non-executive Chairman. Both appointments are effective September 1, 2014.

In conjunction with the appointment of a new CEO from the ranks, UPS announced further senior management appointments. Alan Gershenhorn was appointed Executive Vice President and the company’s first Chief Commercial Officer, effective immediately. Gershenhorn will lead development and implementation of broad strategic growth and innovation initiatives focused on creating distinctive customer value. These include new market development, innovative future products and solutions, increased speed-to-market and stronger customer engagement across the entire UPS portfolio. Gershenhorn, a 35-year UPS veteran, previously served as chief sales, marketing and strategy officer.

UPS also announced the addition of Kate Gutmann to lead the provider’s global sales solutions and customer engagement strategy. Her new role as Senior Vice President of Worldwide Sales and Solutions was created to further market penetration through broader customer relationships. Gutmann is a 24 year UPS veteran.

Mitch Nichols, a 27-year UPS veteran and current president of UPS Airlines, was promoted to a newly created position on the Management Committee as Senior Vice President of Transportation and Engineering. His responsibilities will include UPS Airlines, transportation, engineering and sustainability.

Brendan Canavan, currently president of UPS Asia Pacific, will replace Nichols as president of UPS Airlines.  Nando Cesarone, a 24-year UPS veteran, was promoted to President of UPS Asia Pacific.

Rhonda Clark will become the company’s Chief Sustainability Officer (CSO). Amy Whitley was named as the company’s first Chief Diversity & Inclusion Officer. Whitley will oversee global strategies to ensure that UPS leverages the talents and unique perspectives of a diverse workforce. She will also serve as vice president overseeing strategic human resources programs.

 

Tesla Motors Releases its Patents to Industry Rivals

Tesla Motors announced that it is offering open access to its patents related to its electric car technology to other automotive providers. CEO Elon Musk indicated that the offer is intended to spur wider development of electric powered vehicles that currently only make-up less than one percent of the new car and truck market. BMW is already interested, confirming that it has met with Tesla to discuss the success of electro-mobility on the international level.

Musk hinted at another reason for this announcement.  Readers will recall tesla’s bold announcement to build a “gigafactory” in the U.S. to produce the company’s smaller battery packs for the industry. A sharing of Tesla developed IP can insure that the planned U.S. battery factory can be a potential supplier for other manufacturers.

 

Kinaxis Completes its IPO

Supply chain planning technology provider Kinaxis announced that it has completed its public offering of the company’s stock in Canada. Kinaxis issued 5,000,000 common shares and an aggregate of 2,739,715 common shares were sold by certain selling shareholders at a price of Cdn$13.00 per share. Canadian business media reports identified the selling shareholders as Boston based HarbourVest Partners and Alberta Trust of Montreal, both of which retain a 30 percent ownership stake.

The initial public offering and secondary offering resulted in aggregate gross proceeds of Cdn$65.0 million to Kinaxis and Cdn$35.6 million to the selling shareholders, for total aggregate gross proceeds of Cdn$100.6 million. Kinaxis’ common shares will be traded on the Toronto Stock Exchange under the symbol “KXS”.

Kinaxis CEO Doug Colbeth indicated to media that proceeds from the IPO will be utilized to pay down $30 million in debt and strengthen the company’s balance sheet. He did not rule out acquisition of other companies if that makes sense for Kinaxis’s business. Kinaxis reported a net loss of Cdn $9.7 million in 2013. In the first quarter of 2014, the company reported revenues of Cdn $15.6 million and a net income of Cdn $2 million.


The State of U.S. Logistics is Once Again, Even More Concerning

0 comments

The 25rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals (CSCMP) was released earlier this week (free for CSCMP members and can be purchased for $295). This report has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and procurement professionals.  inventory

The report reflecting 2013 activity again notes a continued trend for increased logistics, transportation and inventory costs.  More than ever, this should be of continued concern to manufacturers and retailers and their associated supply chain and product management teams.  Similar concerning observations were noted by Supply Chain Matters in last year’s annual report.

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

The cost of the U.S. business logistics rose 2.3 percent in 2013 to $1.39 trillion, an increase of $31 billion from 2012. Logistics costs as a percent of nominal GDP were reported to have dropped to 8.2 percent, just about the same 8.3 percentage reported for 2012.

Most concerning from our lens, inventory carrying costs in 2013 rose another 2.8 percent, albeit less than the 4.0 percent increase reported for 2012. While interest costs rose slightly, inventory levels inched up leading to increased costs for taxes, insurance, warehousing, depreciation and obsolescence. By our calculation, the former components rose 9.2 percent or $28 billion from that reported in 2012. According to the report authors, the cost of warehousing was up 5.6 percent in 2013, as rates for warehouse space continue to rise. As a wise sage once exclaimed to this author, “warehouses are monuments to inefficient inventory practices.” That sage advice continues to reflect itself.

Overall inventory levels continued to rise despite the advent of advanced inventory management practices and historically low interest rates. The report includes a chart reflecting Total U.S. Business Inventories that visually indicates that total inventories in 2013 now surpass levels recorded in 2008, the peak before the great recession. With relatively low GDP growth levels, these numbers are alarming. With carrying costs increasing, industry supply chain teams need to seriously analyze why more overall inventory is being maintained.  Consider that interest rates remain at historic lows, and what would be the incremental cost if they were not. We suspect that with high levels of global outsourcing and slower global transportation, that larger levels of pipeline inventory are being planned. We further suspect that planning and optimization models are not reflecting up-to-date inventory cost factors.

Another important concern brought out in the report is the current fragile state of the U.S. trucking industry with utilization rates remained close to 100 percent and fleet and driver capacity declining. High costs and regulatory issues are deterring new entrants to the industry.  With the U.S. railroad industry operating at near capacity, reflecting building shortages of available specialty railcars, supply chain teams need to remain concerned about this area.

Data compiled in the 2013 report indicates the revenue growth trajectory of U.S. non-asset based services and Third Party Logistics providers continued in 2013 with revenues pegged at $146.4 Billion, an increase of $4.6 billion over 2012. Revenues broken out for 3PL’s rose 3.2 percent in 2013, lower than the 5.9 percent growth recorded in 2012. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 7.2 percent in 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, funded by a new wave of private equity interest. We 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.

Supply Chain Matters submits that the overall takeaways from the 2013 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.

Thus far in 2014, U.S. manufacturing activity continues to surge. According to the report authors, freight shipments are up 13.1 percent and so are rates.  The global ocean container industry remains in a capacity crisis, and so is the U.S. rail and trucking industry. The State of Logistics, by our view is rather fragile, fueled by private investors looking to cash in on opportunities to make quick money without holding hard assets.  That is not a healthy outlook.

Once again we offer the following insights:

  • 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 strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost.

 

  • Procurement teams who context transportation spend in the singular dimension of cost reduction remains 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-double efforts to further analyze and 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.

 

  • The recent announcements from both FedEx and UPS regarding the initiation of dimensional pricing on ground shipments in 2015 will have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy. Be watchful of this area.

As was the case in last year’s Supply Chain Matters commentary, the U.S. economy continues to show even more promising signs of manufacturing renewal and 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 and the industry coming to grips with troubling capacity constraint trends.

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

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 

 


« Previous Entries