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The State of U.S. Logistics in 2015- An Acknowledgement of an Industry In-Transition


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.  MSC_Ship_2

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.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Report of a Different Focus for General Motors in Supplier Management Relationships


The Wall Street Journal has reported that General Motors will allow 400 U.S. and Canada based component suppliers for GM vehicles being produced in Brazil and Mexico to be able to periodically renegotiate their supply contracts. These suppliers are currently challenged with the effects of a volatile foreign currency environment causing rising material and labor costs. At least once per year, suppliers can renegotiate terms when impacted by unexpected external economic factors.

This development is newsworthy because among long time automotive industry watchers, GM has developed somewhat of a past reputation as a strict negotiator with what the WSJ describes as “ironclad” contracts with suppliers. Annual industry surveys ranking the relationship of suppliers with various global OEM’s have consistently ranked GM much lower in past surveys.

This latest move is attributed to support a new GM strategy that involves investing $5 billion over the next ten years to develop a new line-up of Chevrolet branded vehicles for consumer markets in Brazil, Mexico and foreign markets such as India and China. Thus, procurement strategy has taken on a more active strategy to longer-term support product development needs. GM’s new chief procurement officer, Steve Kiefer has reportedly been exploring alternative supplier management efforts with GM’s supplier base since taking on the CPO role in late 2014.

What we believe should go unnoticed is that Keifer’s previous industry background included roles at Tier One industry supplier Delphi Automotive, thus providing a fresh bottoms-up perspective on supplier relationship management.  Since taking over leadership of GM procurement, he has reportedly fostered the creation of longer-term supplier contracts that include co-innovation in component design or automotive sub-systems for areas such as safety and more intelligent vehicles. The WSJ report quotes a marketing executive for supplier Magna International as reinforcing that GM has taken on a more collaborative approach with that supplier.

We wanted to highlight this report for Supply Chain Matters readers because it is indeed noteworthy.  We thought about extending our “Thumbs-Up” recognition but we will hold off somewhat until there is further history in these ongoing efforts.

However, in the meantime, well-done, GM…

Ongoing Airbus Delivery Delays Lead to Order Cancellation and a Publically Declared Riled Customer

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In a recent Supply Chain Matters commentary, we highlighted that Airbus’s commercial aircraft delivery cadence was under a broader looking glass with perhaps undesired customer visibility.  That visibility took on a more succinct perspective last week with the announcement of a customer order cancellation from none other than the Airbus A320neo launch customer.  Airbus A320neo test aircraft

Reports indicate that Qatar Airways has invoked a cancellation clause in its contract with Airbus for canceling one of a total of 50 A320neo family aircraft.

What makes this development more newsworthy are statements from the airline’s chief executive indicating that the airline could potentially cancel more aircraft orders, and further declaring to The Wall Street Journal: “It is (delayed deliveries) making a huge impact on my bottom line. We are, quite frankly, screaming.”

That is a statement that any aircraft manufacturer does not want to hear from a customer, let alone the designated and highly influential launch customer.

In January, because of undisclosed documentation and other issues, Airbus quickly changed initial delivery of the first A320neo off the assembly line to substitute customer Lufthansa when Qatar refused to accept initial delivery because of performance concerns.

Fabrice Bregier, head of Airbus’s commercial aircraft group acknowledged to the WSJ the aircraft’s lateness to original promise of delivery which was originally due for delivery in 2015. However on Friday, the same executive indicated to Reuters that the current delivery issues would be resolved by mid-year and the problems would be forgotten in months.

Perhaps the context of the latter statement was not exactly ideal given ongoing customer concern and sensitivities.

As we have noted in prior commentaries, the bulk of the contract delivery delays relative to the A320neo are not solely in Airbus’s court, and our shared with aircraft engine producer Pratt & Whitney. According to published reports, Pratt has struggled to get the new model engine up to required delivery milestones due to a reported turbine glitch and other software issues causing premature or false alert messages. Engine deliveries are not expected to catch-up until after June.

Meanwhile, similar to previous actions related to the Boeing 787 Dreamliner lithium ion battery crisis, a reported two-dozen completed A320neo aircraft continue to pile-up in parking areas located in Toulouse France and Hamburg Germany awaiting engine delivery and installation creating what one Airbus executive cited as a queue of “gliders.”

The latest published reports further indicate that Airbus will now attempt to make-up for the shortfall in 2016 delivery volume of A320neo aircraft by bringing forward deliveries of the existing version of the aircraft, now termed A320ceo (current engine option). Cudos to the Airbus marketing team for their novel re-branding.

In essence, Airbus and certain airline customers may trade-off the current low prices of jet fuel to gain earlier delivery of new aircraft rather than wait for the promised fuel efficiencies of the new engine option. The other new engine offering, the new LEAP model from CFM International is expected to be available in the second-half of this year as-well.

A tense launch customer relationship had already existed among Qatar and Airbus dating back to the scheduled initial delivery of the new Airbus A350 XWB aircraft. As noted previously, subsequent deliveries of new A350 model aircraft remain impacted due to adequate supply of cabin seating and interior equipment. Plans called for delivery of a total of 50 A350 aircraft in 2016, but Airbus has managed to deliver only 10 so far this year due to the supply delays. There are a reported 40 of this aircraft in various stages of final assembly and Airbus has augmented production with added work stations to get late delivered cabin equipment installed as quickly as possible.

The takeaway is obvious apparent strained and perhaps tense relationships involving an influential Middle East based airline customer, perhaps other customers, and certain suppliers.  Unfinished aircraft sitting idle in all available spaces within manufacturer host airport tarmacs is of course a monument to supply chain glitches and disruption.

Once again, the commercial aircraft industry dominates business media headlines with product design and supply chain management glitches that are impacting delivery commitments, and it seems that no manufacturer is immune.

Bob Ferrari

Tesla Founder Elon Musk Addresses Plan to Revolutionize Factories


Our last Supply Chain Matters commentary concerning electric automotive manufacturer Tesla highlighted a candid admission of the importance of design for supply chain practices, as well as a new dilemma relative to the need to more dramatically scale its supply chain and manufacturing cadence.  Tesla Model X SUV

Earlier this week, in an address at Tesla’s annual meeting of shareholders, founder and CEO Elon Musk further addressed these challenges including a plan to revolutionize factories. Hearing the passion of Musk and his executive team, we believe that there may be some substance to these efforts, worthy of ongoing monitoring.

In addition to reiterating the fascinating history of Tesla, Musk shared with shareholders various lessons learned along the way. Among them was an admission that the Model X design was over complicated, perhaps too much to accommodate initial production volume needs. “We have great ideas, The smart move would have been to table those for version 2 or version 3.”

He reiterated that going forward, particularly with the new Model 3 design, Tesla teams will have a tighter integration loop among product design and manufacturing.

In his address, Musk indicated Tesla will “completely re-think the factory process.

The last time similar words were communicated was when Tesla developed the strategy to source all of its supply requirements for lithium ion batteries from a massive production facility or “gigafactory” to be located in the United States. The long-term core mission for Tesla has been to build very high performance vehicles that could be affordable for consumers. The core component of an electric vehicle is its batteries. As Musk explained the situation, it was a revelation that the company’s needs for such higher performance batteries would exceed current existing global capacity, so why not build it in the U.S. The other revelation was that most existing battery manufacturing techniques stemmed from consumer electronics companies with different design principles. This, Musk challenged his internal and external supplier teams to literally re-invent the way batteries can be produced including the adoption of more vertically integrated value-chain principles.

On July 29, a grand party is scheduled to celebrate the culmination of such vision in the operational opening of this gigafactory located in northern Nevada.

When addressing the future, Musk repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. To that end, he further disclosed that he now no longer has a Tesla office, instead spending the bulk of his time residing on the production floor and observing.

He indicated to shareholders that his team now realizes that in re-thinking the challenge for the ability to support output volumes of 500,000 or more vehicles per year the same principles, “you build the machines that build the machine” apply. In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.

To that end, Tesla is now calling on existing product design engineers who constantly labor to achieve vehicle performance enhancements, to now turn their attention and efforts into building far more efficient production capability. Musk himself indicated that he is very confident that improvements in a factor 10x can be achieved in these ongoing efforts. Then again, having already amassed 400,000 pre-orders for the newly announced Model 3, there is somewhat a sense of urgency for the need to fulfill these orders in a timely manner.

We at Supply Chain Matters continue to admire the supply chain and manufacturing thinking that exists at Tesla.  This is a company that literally challenged the notions that one could source owned internal manufacturing directly in Silicon Valley. As noted, they challenged existing notions of lithium ion battery design and high volume manufacturing. Similarly, the company challenged the industry norm of established dealer networks and instead has a direct sales and service relationship with its customers.

Tesla is always challenging established thinking and now, has expressed a renewed belief that the supply chain does indeed matter. We expect even more supply chain innovation from this innovation driven organization and would not at all be surprised that during the next five years, Tesla will be cited as one of the top five supply chains.

Readers can view the more than two hour address to shareholders by visiting this Tesla Investors web link.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.

An Online Retailer Reinventing Post Luxury Goods and Tapping New Consumer Buying Sentiments


We recently ran across a commentary outlining the efforts of a rather innovative, Boston based online retailer of luxury class goods, who’s CEO indicates that serving a need in an underserved market segment can be accomplished with the combination of leveraging innovative sales practices, advanced technology and a modern supply chain.

The Bloomberg Businessweek article, Satisfying the Fetish For Italian Shoes, describes the efforts of M.Gemmi, a 15 month old online retailer addressing a challenging and lucrative market that has struggled to reinvent itself. The mission of this B2C online retailer is to sell beautiful and well-constructed high-end footwear without the luxury price tag in what the CEO describes as a “post-luxury” online business model to addresses a new shift in consumer attitudes toward luxury goods..

Citing the Bloomberg descriptor of capabilities:

Armed with a team of data scientists, 15 Italian factories, and $32 million in venture capital, Boston-based M.Gemi wants to shake up the luxury shoe market much like Brooklinen unmade the posh world of 1,000-thread-count bedsheets or Warby Parker upended the business of fashion eyewear.”

This online retailer offers shoes that generally retail from anywhere from $500 to $2000 in price offerings from traditional luxury goods retailers to M.Gemmi prices ranging from $128 to $498.

To accomplish this goal while meeting financial performance needs, the two co-founders invested a year in developing relationships with smaller, family-run Italian cobblers, most of who had been abandoned by other luxury goods retailers in favor of cheaper, Asian based suppliers. Somewhat similar to apparel and fashion goods retailer Zara, new and different shoe styles are introduced each week and retired after three months. According to Bloomberg, the online retailer’s design staff can move from sketch to sale in 60-90 days. Further, production is continually calibrated to match customer product demand by closely monitoring buyer responses to various footwear designs.

The article notes:

Within three hours of going live with its line of summer espadrilles in April, it knew the slip-on style was a hit but the lace-up version was a dud. So it revved up production of one and dialed back the other.”

From our Supply Chain Matters lens, that is a good example of responsive retail supply chain capability.

The firm’s talented CEO, Ben Fischman, is no stranger to the apparel and footwear industry, having founded retailers Lids and Rue La La. He indicated to Bloomberg that current online consumer demand has exceeded initial projections, with M.Gemmi expected to reach $60 million in revenues this year. Once more, the online retailer’s customer count has grown 500 percent in one year with half of those customers being repeat buyers who spend an average of $1000 per year.

While primarily focused on a U.S. based online market, Fischman indicated to Bloomberg his belief of the need to have presence in all retail channels with the retailer now looking at potential expansion into Europe and Asia, as well as the opening of two pop-up style physical retail stores in New York and Los Angeles.

We wanted to bring M.Gemmi to Supply Chain Matters reader attention because it manifests the new style of retail leadership, one that balances addresses underserved market segments with integrated product design and supply chain wide responsiveness capabilities. Notice also that the emphasis is not solely on growth and scale, but rather growth in conjunction with existing and future business process and supply chain response capabilities.

Bob Ferrari

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