This week, the United States Postal Service (USPS) reported its financial performance for the latest quarter, and from our lens, there are distinct indications that the agency has reached a critical juncture in its ability to be a sustaining competitor and service provider to the world of online fulfillment. As the agency handles more and more package volumes, its transportation and operating costs have risen significantly. Readers, those residing in small and medium as well as large businesses, need to continue to be aware of the implications of this trend.
In September of 2014, Supply Chain Matters declared that the USPS had suddenly changed the industry dynamics of parcel shipping, online commerce and customer fulfillment. The agency established a whole different dynamic for B2C/B2B online commerce by aggressively reducing parcel shipping rates and by declaring to online retailers and businesses that the USPS intended to be a parcel transportation and last-mile delivery partner in the ongoing explosion of online. Suddenly, e-retailers who wanted to maintain attractive free shipping options discovered a potential new alternative to control costs of such programs, and entities such as Amazon were quick to make leverage. Both FedEx and UPS were not all that pleased with the pricing move and began logging protests claiming foul, even though both relied on the agency for completing more costly last-mile delivery needs. However, both were forced to deal with a different competitive landscape in terms of rates and customer alternatives.
Then we viewed the evidence of the results from the all-important 2015 holiday fulfillment quarter, as the agency actually surpassed UPS in total delivered packages. USPS letter carriers delivered about 660 million packages, up from an initial anticipated volume of 600 million packages. UPS reportedly delivered 612 million packages as compared to its initial forecast of 630 million. The postal agency offered the equivalent of as many as 25,000 Sunday delivery routes, up from a normal 4000 pattern. In essence, the USPS became the de-facto go-to carrier for Amazon’s needs for Sunday deliveries. Financially, the agency recorded its first quarterly profit since 2011, earning $307 million, a significant milestone.
In the latest June ending quarter, while total revenues increased 7 percent, the agency reported a controllable loss of $552 million compared with a year-earlier controllable loss of $197 million. Overall volumes were down slightly while package volumes increased 14 percent, an indication of offsetting declining volume in standard mail. The agency reports that it is now delivering to one million additional addresses across the U.S..
In the latest quarter, operating expenses increased 12 percent. The agency’s CFO indicated that transportation and compensation costs continue to rise despite strict cost controls, and according to The Wall Street Journal, the majority of compensation cost increases were related to the growth in package volumes. Further noted was that transportation costs rose in part due to added air freight expenses to meet customer expectations. According to a statement from the Postmaster General, while a recent package rate increase helped to boost revenues in that segment, it was not enough to offset rising costs. By the way, the principle air freight services provider to the agency is FedEx, who obviously benefitted from increased USPS package volumes.
From our lens, the USPS cannot continue to sustain its growth in package deliveries related to current and more expanded online commerce package volumes without investments in newer equipment, systems, and more flexible people resources. Most current delivery vans are over 20 years old and added package volumes are obviously taking a toll on these trucks. The agency is close to awarding contracts in evaluating new delivery van prototypes with larger cargo capacities while consuming less fuel, but the timetable obviously needs to accelerate. Most of the agencies inter-city and cross-country surface delivery needs are established with external transportation firms or independent trucking contractors. As noted, air freight resources are contracted as well.
Scalability of this model does not equate to added efficiencies and cost control. As a government agency, beholden to the U.S. Congress, there are obvious political constraints. Some in Congress want to be rid of direct government ownership yet many current and retired postal workers as well as associated contractors are voters who expect their interests to be considered. Add to this a heightened and highly partisan Presidential campaign environment and readers can get the picture.
The agency and its associated postal workforce have proven viability as an option in package delivery and last-mile fulfillment. The latest TV commercials depicting USPS vans branded with virtual retail branding has purposeful meaning for online consumers. But, the crossroads has been reached in terms of added scalability without losing additional monies.
It is time for the U.S. Congress to act. Either allow the agency to manage, invest and compete as an alternative e-commerce delivery provider or take action on other options.
The analogy is perhaps a teenager that proves to his or her parents that they have finally grown-up and matured, and desire to launch on a chosen career, and seek the support to do so. So is the situation with the USPS and the Congress. The crossroads is at-hand.
In the meantime, businesses need to stay aware to the implications of these trends especially in the light of continual evidence indicating that supporting online customer fulfillment has become more expensive with every passing campaign.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
No sooner had Supply Chain Matters raised our awareness to the collective march to the bottom of the U.S. airline industry came this week’s network-wide computer systems disruption impacting Delta Airlines. As we observed, it is looking more and more like the industry is being led by financial types who seem to have completely ignored the tenets and principles of basic operations and network management.
But, Supply Chain Matters wants to extend direct praise to Delta Chief Executive, Ed Bastian. The primary reason- as the CEO he stepped-up and took full responsibility for the systems failure resulting in the cancelling of thousands of flights and inconvenience to countless customers. He further praised all of his employees for the extraordinary effort in delaing with this crisis and efforts to assist impacted customers.
The airline further posted a video where the CEO directly apologized to Delta customers.
According to Bastian, the disruption began when a power switch failed causing a power outage that subsequently led to other cascading incidents including a transformer blow out in Delta’s data center. The entire system crashed and backup systems did not perform as expected. Bastian indicated openly: “This is our responsibility- the buck stops here.”
What impressed us even more was Bastia’s statement:
“It’s not clear the priorities in our investment have been in the right place. It has caused us to ask a lot of questions which candidly we don’t have a lot of answers for.”
Unlike some other airlines, Delta has invested in operational capability both in aircraft and in supporting systems. In 2012 we praised Delta’s bold supply chain vertical integration initiative in acquiring its own oil refinery. We have also highlighted innovation in aircraft re-purposing.
Yet, this week, the system failed, and the airline has taken full responsibility to find out why and hopefully correct flaws.
Too often in times of major operational or supply chain disruption, CEO’s turn silent and de-facto let operational executives take the arrows and blowback. Some are arrogant enough to openly blame disruption on suppliers, partners or equipment, not acknowledging the principles of ownership and accountability.
Hopefully this week’s incident may provide a watershed for the U.S. airline industry. The compass of services focused on customer needs for a convenient, somewhat pleasant and reliable travel experience has been pointed in the wrong direction, and the consequences and cost of these decisions are coming home to roost.
Praise to a CEO who demonstrates accountability and leadership. We need more of this.
August marks the traditional start of the peak transportation period leading up the October thru December peak holiday fulfillment period involving both traditional and online retail channels. Today we feature two Supply Chain Matters commentaries addressing two separate but important trends that will make the forthcoming period far different and perhaps far more challenging for industry supply chain teams. The first was our prior posting, Amazon’s continued strategic and tactical efforts in deploying owned logistics, transportation and last-mile delivery capabilities.
In this posting, we highlight a recent report echoing the currently gross overcapacity conditions concerning global ocean container fleets, a situation which supply chain and procurement teams need to pay close attention to in the coming weeks.
Global Trade Magazine reports that certain industry alliances involving ocean container shipping lines have now suspended shipping services available for the current peak holiday global shipping season. In this report, Why are Shipowners Parking Containships?, the publication observes that in ideal world, ship fleets would be fully utilized during this upcoming peak holiday period as goods make their way from Asian based suppliers and manufacturers to global markets in-time for the forthcoming holidays at the end of this year. Instead, the G6 Alliance has suspended transpacific service resulting in five of its six vessels being idled while the Ocean Three alliance suspended its Manhattan Bridge service idling nine container ships. The report cites Drewry Shipping Advisors proprietary data indicating that over 300 container vessels, with a combined capacity of over 800,000 TEU’s were idle by early July, at the start of this year’s peak shipping period. The report further implied that the ongoing peak period is rather weak and resulted in the decisions by shipping alliances to idle vessels much earlier in the season. More importantly, the report speculates that carriers are not only moving to park unused capacity earlier in the peak period, but further attempting to boost spot rates up by increasing load factors on remaining active vessels.
This commentary further declares:
“As deliveries of new ships continue, carriers are starting to run out of options on how to deploy them even their largest ships in today’s over-supplier market.”
The above is the obvious red flag to industry supply chains as the overcapacity crisis now reaches an extreme stage. Compounding the problem is the opening of the expanded Panama Canal that occurred in June, causing ships with 4500-5000 TEU capacity to be now idle as carriers begin to route their largest vessels directly through the canal.
For industry supply chain and services procurement teams, particularly those directly related to the retail industry, the coming peak season obviously requires very careful planning of inventory and capacity needs. Those that have a higher reliance on spot market movements and rates need to be especially vigilant in the coming months, particularly if inventory movement needs relate to supporting post-peak market needs in the January-March period. By the end of the year, the overcapacity situation involving ocean container lines should be even more of a challenge that can impact transit times as well as vessel availability.
Thus, it remains critically important for industry supply chain teams to pay close attention and double-check all planning related to inventory requirements and transportation servicing needs. This advice includes teams who have outsourced much of their transportation planning and execution needs to third-party providers. While there may be an assumption of predictable rates, industry dynamics are changing quickly, and along with this, vessel availability and global shipping transit times.
Technology can certainly aide in this area, particularly that which tracks spot ocean container shipping rates and vessel availability trends. But in the end, you cannot afford to assume that your transportation partners totally have your back, especially if you are an organization that dwarfs the shipping needs of far larger global retail or manufacturing enterprises. Small and medium businesses are often subject to the mercies of the spot market.
Insure your organization does its homework, constantly checks and validates planning assumptions and keeps a keen eye on spot market transportation rates. Consider using technology that can assist in navigating these unchartered waters.
In providing our Supply Chain Matters readership with market landscape education regarding technology supporting B2B business networks process needs, we have provided prior visibility to Canadian based technology services provider OpenText.
Last week, this analyst and executive editor had the opportunity to attend OpenText Enterprise World 2016, this vendor’s annual customer conference and we walked away with rather positive impressions regarding direction and services.
OpenText has now assimilated technology centered on three focused strategic areas which CEO and CTO Mark Barrenechea addressed in the conference opening keynote:
OpenText Enterprise Information Management (EIM) which is just about everything related to document and content management. Many SAP ERP users may or may not be familiar with the brand, but much of the document content exchanged within SAP applications is powered by OpenText including new iterations of SAP HANA and SAP S4HANA applications. Likewise, the vendor supports EIM needs for other ERP systems as well.
OpenText Business Network which is a B2B business network platform that supports EDI messaging, supplier and customer onboarding, purchase-to-pay transactional support and other growing managed services. The gem of this network is the 2013 acquisition of the GXS Trading Grid network with its genesis as the prior General Electric Information Services. In June of 2012 this author declared that GXS was the hidden gem in B2B information transfer and software services and that prediction continues to manifest itself.
OpenText Analytics which is the new evolving area for this provider, one that promises to harness insights and business decision support related to both EIM and Business Network operational and business information flows. This capability has become a new strategic thrust for the company, one that by our view can present a more visible player to the analytics and enterprise technology market.
Regarding the latter, Barrenechea provided two major product announcements in conjunction with the conference. The first was Project Bandaroo, a technology to be focused on the changing nature of work. It was described as bringing together OpenText Core, the vendor’s core Cloud platform for everything related to EIM, with other elements of social communities, channels, bots and project management. An on-stage demo outlined a scenario of working group interactions and discussion forums centered on specific information needs. From our lens, the concept seems interesting but needs more specifics related to actual business challenges. Timetable communicated was the second-half of 2017.
The second announcement related to Project Magellan which is described as a next generation cognitive platform being designed to integrate voice, video, natural language processing and other content. It was outlined as an open systems based platform that would leverage both the Spark Apache platform along with the analytics capabilities of Actuate, OpenText’s most recent acquisition focused on advanced analytics. Barrenechea was not shy in making a direct head-to-head technology comparison with the IBM Watson Cognitive platform and that his company will compete directly as an alternative platform in the market. From this author’s lens, this was a far more newsworthy announcement and one to keep an eye on in the coming months, especially since such technology can be applied to the OpenText Business Network. This capability is also planned for introduction in the second-half of 2017.
Regarding the Business Network, much more strategy and information was shared with conference attendees, information that we garnered from an April industry analyst event. Product managers declared that upwards of $7.4 trillion in commerce, the equivalent of 10 percent of world GDP, along with connections to 65,000 partners are currently supported by this network. Support encompasses 37 data centers across 18 countries and 25 satellites.
In addition to electronic transactional messaging (EDI), support is provided in the process areas of purchase-to-pay (P2P), order and shipment visibility and other business process areas. Evolved capabilities in a series of managed services for specific industries and customers continues to expand with an increase of over 200 customers in this segment alone since the acquisition of GXS. The audience was reminded that OpenText Business Network is currently positioned by Gartner in the Leaders Quadrant for B2B Business Networks.
Our on-site executive briefings not only provided more background to new functionality and services that are enabled by the latest OpenText Suite 16 product release but future capabilities being planned in the all-important area of supply chain wide analytics. Of further interest is the introduction of what is termed as Supply Chain Activity Index, an analytical based aggregate view of the B2B network, with forms of Business Process Management (BPM) support for processes that span the supply and value chain network. These two areas should really peak interest, depending on eventual design and functionality.
There was additional validation that support for SAP Ariba’s efforts to move beyond indirect procurement and support more direct materials procurement processes such as electronic invoicing and messaging will stem from OpenText Managed Network Services.
Our other impressions from this event include:
OpenText is indeed well on the road towards addressing the complex and fast-changing requirements for supporting globally-extended B2B networks beyond electronic messaging and EDI. Unfolding support in specific managed services and analytics areas are very promising as is the unfolding strategy of leveraging analytical capabilities to support network-wide decision-making.
An open question acknowledged by senior management is whether OpenText remains an infrastructure and Cloud services provider or moves more boldly into applications. This will be an area we keep an eye to in the coming months since there are pros and cons to either.
We are of the impression that OpenText senior management now understands the stand-alone nature and business value of OpenText Business Network in terms of an independent marketing persona of that of EIM that includes need for brand recognition within broader supply chain management functional audiences. Anticipate more concentrated efforts and visibility in this area.
Having the opportunity to attend many vendor conferences in any given year, this author can quickly extract a sense of overall management culture. Having now had direct 1:1 interaction with a number of OpenText senior executives at multiple events, we are impressed with their openness, sensitivity to customer and market needs and desire to make good on commitments. That was supported by some select customer interviews conducted. Once more, the company continues to reach out and hire and retain additional experienced talent. As an example, we were impressed with the technical savvy and communication skills of Actuate executives brought forward from that most recent acquisition.
As always, this analyst will provide continued assessment commentaries related to both Open Text and the broader B2B supply chain business network technology landscape. In the meantime, if readers have specific questions, send us an email or call.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for More Active Planning – Part Two
It’s the last Monday in June and as we pen this part two Supply Chain Matters advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. Our part one posting of this series addressed our initial perspectives and recommendations regarding Brexit. In this part two advisory, we will address yesterday’s formal opening of an expanded Panama Canal.
Yesterday, after nine years and in excess of $5 billion in investment, the Panama Canal Authority formally opened new locks on both the Pacific and Atlantic Ocean facing entries to accommodate the transit of far larger ships. The first ocean container ship to transit the expanded canal, the renamed Cosco Shipping Panama, operated by Costco Shipping Lines traversed an expanded canal from the Atlantic to the Pacific side.
The opening of this well-known expanded waterway was completed after nearly two years of delay, and considerable cost overruns. At one point in 2014, a stalemate raised doubts as to whether this huge infrastructure project would ever be completed. Container vessels with capacity in excess of 12,000 TEU’s are now expected to be able to take advantage of the widened canal with promised faster direct transit times from Asia based ports directly to eastern United States ports, thus avoiding inter-modal movements across the United States. The other opportunity is for east coast based regional shippers to now have a direct transit route to East Asia.
There has been much anticipation as well as speculation regarding the benefits of an expanded Panama Canal. About a year ago, The Boston Consulting Group (BSC) and C.H. Robinson released a joint study-How the Panama Canal Expansion is Redrawing the Logistics Map, and predicted that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. East Coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing Ports of Savannah and Charleston. The study concluded that this container routing shift will permanently alter the competitive balance among U.S. East and West Coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing. The BSC study concluded that time-sensitive cargo may continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings.
Since then, other studies have pointed to new opportunities in logistics and transportation related to direct Asia to U.S. and converse goods transit, including the operation of new inland ports.
However, the one current gating factor is that many of the key U.S. East Coast ports are still working on infrastructure projects that would allow larger vessels to call on such ports. The ports currently best prepared to handle these larger vessels are the Ports of Miami and Savannah. Both the Ports of Baltimore and Charleston have active dredging projects underway while the combined Ports of New York and New Jersey still have significant infrastructure requirements yet to be overcome including a bridge near Bayonne New Jersey.
As we noted in a previous Supply Chain Matters commentary, a current boom in distribution and warehouse development includes large investments in east coast regions. The State of South Carolina is aggressively positioning its logistics and distribution infrastructure to be an economic beneficiary of the new routing. Over six million square feet of warehouse space is under construction in the Greenville- Spartanburg region mostly being attributed to the ability to support direct ocean container movements from Asia to the U.S. An inland port at nearby Greer South Carolina is connected by rail to the Port of Charleston. From the Greenville- Spartanburg area, trucks can transit goods to the rest of major eastern U.S. cities or to U.S. Midwest manufacturing regions within a day’s drive. Thus, an alternative option opens up for direct transit and distribution of goods.
A lot will depend on active analysis and modeling by logistics and transportation as well as S&OP teams on the various cost and service options related to ocean movements to U.S. West Coast ports with intermodal truck and mail inland vs. direct ocean transit to U.S. East Coast ports with adjacent inland distribution and transit. A factor in modeling will be assumptions on port and infrastructure readiness as well as direct labor environment. Another uncertain factor is the all-important long-term cost of fuel, which is currently still hovering at unprecedented low levels.
Needless to state, global supply chain logistics and distribution routing has no changed. Active global supply chain network modeling and assessment has become an all-important necessity followed by capability elements for ensuring broader supply chain wide visibility. The expanded Panama Canal now opens a long anticipated new opportunity but comes with differing and changing assumptions.
Be prepared with people, technology and more informed decision-making capabilities.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.