SUPPLY CHAIN RESOURCE COOPERATIVE

Our NC State student research recent met with Dan Stanton, Vice President of Education and Professional Development at the Material Handling Institute.  MHI (“The Industry That Makes Supply Chains Work”) publishes an annual U.S. Roadmap, that identifies some of the major technology and logistics trends on the horizon.  As noted in their publication, some of the trends have been around for awhile, including the growth of e-commerce, relentless competition, urbanization, and Big Data/predictive analytics.  In fact, many of my predictions made in 2014 also appear in my 2015 predictions as well.  

However, the MHI study, conducted through interviews and surveys with logistics executives, provide a compelling view of what the future will look like.  The group held workshops in 2013 at several locations, and spent eight hours over two days discussing them…a team of academics from Auburn, Florida, Georgia Tech, Clemson, and MHI worked on the report.

On page 21, the U.S. Roadmap for Material Handling & Logistics calls the Physical Internet an “ambitious, comprehensive vision that addresses a wide variety of [supply chain-related] problems.” 

The concept, put forth by Benoit Montreuil, Professor and Coca-Cola Chair in Material Handling and Distribution at the Georgia Institute of Technology (Georgia Tech), proposes an open global logistics system that leverages interconnected supply networks through a standardized set of collaborative protocols, modular containers and smart interfaces that enable universal tracking and communication. The goal is to increase efficiency and profitability while promoting sustainability.  This is indeed an ambitious goal – but the details on the infrastructure, technology standards, and ownership of IP in such a system precludes it from happening in the short-term, unless major players take control and become the “owner” of these systems (in my humble opinion).

Another interesting proposal is the idea os sensors, data, and algorithms that drive technological capabilities, of the so-called “internet of Things”.  One of the roadblocks here is the need to work with data in different formats, and the challenges around standard data formats.  I’ve seen this in person – witness the simple challenges associated with a “spend analysis” using structured data, and the challenges on trying to derive meaning from stuff companies are already know they are buying!  The roadmap predicts 2025 as the date when standards emerge….as well as appropriate forms of data sharing across boundaries to ensure real-time data.

Other predictions include total supply chain visibility – and development of GPS capabilities across transportation assets.  (Again the magic time frame is 2025 – which seems to be the magical year when all of this will come to fruition!  The ability to track things in real-time also applies to people – and UPS recently deployed this for their Xmas rush program…which went way over-budget by the way….resulting in a downgrade of their stock…so cost does in fact matter when investing in technology! The Atlanta-based company also warned that its 2015 earnings projection is now likely out of reach in part because of pension costs and currency fluctuations..

There is lots more in this report to read about…drone deliveries, shared-use self-service parcel delivery kiosks for urban areas (already a reality in China), shared-use distribution facilities, driverless vehicles – and lots more!  Any techie or futurist should have a look at what our future world is going to look like!

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As organizations seek to drive supply chain integration across global business units and markets, billions of dollars have been invested in massive systems known as
enterprise resource planning (ERP) systems. ERP systems are generally thought of as large systems with transaction processing and data structure capabilities that promote intra-organizational communication.   ERP systems are deemed to be a critical enabler for real-time information sharing to align business decisions and to increase visibility to transactions across internal functions is the largest technological investment for Fortune 500 companies.  Such systems are also instrumental in establishing aligned tactical and strategic performance metrics systems that drive improved economic outcomes (Bendoly et al., 2007). Companies such as Honeywell, Caterpillar, Procter and Gamble, GlaxoSmithKline, and others have made decisions to implement ERP systems across their end-to-end supply chains, from customer order  management to supplier collaboration. ERP systems are designed to integrate transactions from finance, human resources, procurement, operations, sales and marketing, logistics, and other functions in a firm. ERP systems serve as massive databases to standardize business processes and to support decisions concurrent with planning and managing of businesses.  ERP systems were developed from material requirements planning (MRP) and manufacturing resource planning II (MRP-II) systems to supplement the need of an automatic interface between operational activities and corresponding accounting transactions.  They have been touted as the key to manufacturing excellence and supply chain integration…

But what is the real ROI on ERP system implementation?  And how do these benefits accrue?  A research study published recently in the International Journal of Operations and Production Management by my PhD student, Yun-Yung Huang and myself, suggest that the data point to some interesting results.

First the research shows that organizations who had implemented an ERP system had a higher overall level of supply chain maturity and performance.  This however may be due to the supplier segmentation process that occurs when organizations have access to better spend data.  Segmentation, generally associated with strategic sourcing practices, is the basis for building sourcing strategies, which require an ability to negotiate prices based on leveraged volumes of purchases from across the organization.  This in turn drives transformational value in the form of category teams that include multiple stakeholders across the enterprise, leading to improved supplier relationships and other forms of intangible value (e.g. innovation, total cost of ownership improvements, etc.). All of these capabilities take time to build and create, and for that reason, deployment of ERP systems become a catalyst for change within the organization, but is not the sole source of value formation that occurs. Our model would therefore predict that organizations who do not follow-up ERP deployments with other strategic efforts are not only missing out on the potential benefits!

Our research also found that organizations selecting a large provider (SAP) had improved outcomes relative to users of Oracle, other ERP systems, and no ERP system.  However, the results also pointed to some other interesting relationships. An important finding was a negative significant relationship between non-ERP users and category management, supporting our earlier contention that one of the foundational elements in building effective insights into supplier management is the ability to measure what you are spending your money on! With no system in place, users are likely to use multiple forms of transaction channels, including purchase cards, online vendor web sites, purchase orders, or in many cases, contracting after the fact! This form of activity ( known as maverick buying) is one of the most challenging behaviors to control in the enterprise, and leads to deterioration of supplier leverage, and a focus on transactional activities to the exclusion of strategic value-added
procurement activities.  This form of activity ( known as maverick buying) is one of the most challenging behaviors to control in the enterprise, and leads to deterioration of supplier leverage, and a focus on transactional activities to the exclusion of strategic value-added procurement activities.  In a sense, implementing an ERP system “forces” people to “use the system”, rather than navigating the back channels.  By forcing people to go through authorized buying channels, it makes it more difficult (but not impossible) for people to dodge the approved contracts and suppliers.  This discourages most people, apparently, and drives better data accuracy, which in turn, leads to better analytics, and better control of organizational spend.

A secondary effect was a positive significant relationship for Oracle users, but only for the supplier relationship management. This result provides some level of assurance that higher-order supply management benefits are being derived by Oracle users, but neglects to provide evidence of foundational supply management improvements. A confounding factor here may be that Oracle users tend to be congregated in services industries, where achieving a higher level of spend management and strategic sourcing may be more difficult, due to the more fragmented nature of spending on service contracts.

Please go to the IJOPM website to download the article if you’d like more details!

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Last year around this time I made a lot of predictions about what 2014 would hold in store…Let’s revisit some of these, and see what has happened (or what hasn’t!)  Here are my predictions from 2014, and an update on what I think will happen in these areas.  Most of them really haven’t panned out yet…but have a longer time horizon than I originally anticipated..

Global supply chain footprints will continue to expand.

No question the global supply chain is still going strong.  However, the global economy has certainly gone soft…with the exception of the US!  While it seemed like many companies would be moving more towards the BRIC countries, global events have proven this uptake to be relatively slow.  Brazil had an election that proved to be radically unpopular with the global business community, Russia has alienated itself and is hurting due to the rapid drop in the price of oil, while India and China are in a holding pattern, with tepid growth.  So while globalization hasn’t gone away, people are re-thinking global supply chain outsourcing, particularly as wages and risks are both rising in global emerging countries.

As Companies Expand Globally, So Will the Level of Operational Complexity

No surprise here – many, many complexities continue to arise.  With Amazon and others going to same day deliveries, the e-commerce boom is making transportation and delivery infrastructure more difficult to navigate.  Everybody seems to think that digital devices will somehow reduce all this complexity.  Sorry, but having my iPhone tell me my shipment isn’t going to make it in time, isn’t going to make the shipment make it in time!  Physical logistics will become more and more important, which comes down to fundamental process execution, performance measurement, teamwork, and communication…in other words, back to the basics!

Increased Globalization Brings Increased Risks of Supply Disruption

Duh!  I sure called this one right…Globalization linked with increasing labor costs in countries such as China, as well as fuel costs and regulatory shifts, are driving a dramatic impact on where companies source, where they produce, and the complexity of processes required to sell to the customer.  The recent spate of terrorism in France, the massive and mysterious number of airplane disasters in Malaysia, and even more regulatory risks will continue to drive greater disruptions – which again means better communication, risk mitigation, and early warning systems to alert managers when there is a problem.

 Regulatory Requirements Will Grow as Governments Seek to Overcome Shortfalls in Operating Revenue

The last SCRC conference again emphasized the increasing complexity of logistics regulations, protectionist policies, product regulations, compliance to customs, trade, local content issues, and security requirements.  This is likely to continue.  More of the same.  If you aren’t thinking that “the government is part of every supply chain”, then you are in for a rude awakening.  The solution?  Make government relationship management an important part of your strategic planning process.

Supply Chain Technology Investments Will Continue to Escalate..and so will Master Data Management.  As multiple parties across the extended global supply chain have access to the same “sheet of music”, the global supply chain orchestra will be playing their instruments and produce a masterpiece of sound. The only problem is….we need someone to establish a solid master data system so we are all in tune!  This is the biggest problem I see on the horizon.  Without accurate and timely data that is properly coded and classified, whatever fancy “big data” analytics are produced will be utterly meaningless.

Cost Pressures Will Continue to Escalate.  This is an area many companies are continuing to attempt to navigate using “hardball negotiation” methods that focus on “tips and tricks”, as opposed to collaborative “fact-based negotiation”.  An increasing number of companies I’ve been working with are making the increased investment in training to drive improved market intelligence, cost modeling, and power-leverage management, that emphasize working with supply chain partners to drive down costs, while keeping an eye on margins to make them palatable, but not excessive.  All parties in the supply chain will need to have a common view to cost reduction through productivity, quality improvements, value-added activity, transportation efficiency, and working capital management.

Supply Chain Analytics Will Emerge as a Key Enabler to Performance.  I’ve been most disappointed by what I’ve seen in this area.  There are a few interesting providers out there, but many companies are still floundering when it comes to using analytics to envision what is happening in their supply chain.  Hopefully 2015 will produce some products that work and that are interesting, and not created by techies with no knowledge of how supply chains really work…

Internal Analytics Applications Will Focus on Business Intelligence, ERP, and Product/Process Cost Data.  This is the biggest opportunity I see for 2015.  An NC State team worked with a major manufacturer to create a backbone cost database that establishes different types of cost data, including actual data, assumptions about the data based on prior history, and approximated data based on “best available information”.  Cost modeling will be the most important of all supply chain tools and methodologies in the coming year, not only for building “cost to serve” models, but also to identify opportunities to drive collaborative cost reduction models… with supply chain partners, internal discussions with engineers, sales account managers, and purchasing category managers.

Network Analytics Applications Will Draw on Data from Partners with a Focus on Sharing Across Platforms.  Lots and lots of work to do here…we continue to see many legal teams are loath to do this, but the fact is that knowledge and data sharing drives better performance….period.  Understanding what is inside people’s heads and being able to share that knowledge will be one of the biggest issues at work here..

Collaborative Analytics Will Determine the Winners Information derived through collaborative sharing of information from diverse sources, sometimes pulled together from various sources, and jointly acted on will build capabilities that will be difficult, if not impossible, for competitors to copy and mimic.  Again – people need to LEARN how to share insights and capture them in a meaningful way.

Community-based Analytics - analytics that are contributing to insights on sustainable supply chains and corporate social responsibility, both critical imperatives for manufacturing companies today.  This is especially true for predicting disruptions in today’s globally extended supply chains.

So, my predictions in 2015 really haven’t changed much since 2014…maybe we will see some real progress on these though in the coming year!

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The leading IT magazine, CIO Review,  today published a special issue on supply chain transformation, and included an article I wrote on spend management as a core capability.

Rather than striving for “perfect data” in all supply chain systems, my research suggests that primary efforts should be focused on the most fundamental yet most critical form of supply chain systems output: the spend analysis.

A spend analysis answers the simple question of how much money has the organization spent on all third party products, services, and expenses in the last year, what is the budgeted rolling horizon for the next year, and what is projected change in the mix of suppliers we are contracting and spending with?  This seems like a simple question, yet most Fortune 500 companies struggle to provide any type of granularity beyond top line spending numbers.  A spend analysis was often viewed as a one-time annual event to derive budgeting estimates, and develop insights into annual contract negotiations.  Today, spend analysis is evolving into spend management, which is a much more dynamic and on-going assessment and tracking of spending patterns, matched to other cost drivers and activities.  Spend analysis does not need to occur only on an annual basis, but can be applied also to reviews of a category or subcategory of spend that occurs when a contract is being negotiated, or when a strategic sourcing project is initiated for a particular category group.  Spend analysis is also a critical component of effective budget planning, and setting key performance indicators for sourcing teams to consider in their assigned duties.

Some of the most basic questions that determine whether an adequate spend management system is in place include the following:

  • What did the enterprise spend its money on over the past year? This value is an important component in calculating the cost of goods sold in the financial statement. Purchased goods and materials are often more than 40% of the total cost of goods sold in healthcare and manufacturing sectors.  Many systems fail to include indirect spending in their analysis, which is missing an important piece of the spend analysis piechart.
  • Did the enterprise receive the contracted level of products and services based on payments made to third parties?  Although many companies route purchases through an ERP or purchasing system, there is nevertheless a need to audit and verify that services and products delivered met not only contracted pricing, but also service level agreements, statements of work, and appropriate levels of support services.  A thorough spend analysis will often reveal areas where products and services are being paid for, but the goods or services are not even being received or being used by the system.  This is particularly true, for example, in the case of software licenses, where many licenses are auto-renewed or contracted for, but never used.  In other cases, multiples licenses may exist across the enterprise with varying terms and requirements that overlap.
  • What suppliers received the majority of the business, and did they charge an accurate price across all the units in comparison to the requirements in the POs, contracts, and statements of work? (This is an important component to ensure contract compliance.)  Understanding WHO we are spending our money with is an important input into making decisions on strategic leverage, and ensuring that the same prices, same levels of service, and potential economies of scale are being fully applied.
  • Which divisions of the business spent their money on products and services that were correctly budgeted for? (This is an important component for planning annual budgets for spending in the coming year.)  Understanding the “power users” of a particular category of spending can help drive the right sets of discussions for the supply chain team when they being to rationalize the supply base, and eliminate poorly performing suppliers.
  • Are there opportunities to combine volumes of spending from different parts of the enterprise network, and standardize product and service requirements, reduce the number of suppliers providing these products, or exploit market conditions to receive better pricing? (This is an important input into strategic sourcing).
  • Are we dedicating the right resources to categories of spending that represent not only an important source of cost savings, but which are deemed critical to the organization, in terms of enterprise risk, impact on revenue, or customer impacts?  This issue has been of particular importance to the financial services sector, which is concerned with the right level of risk mitigation for suppliers that handle customer data.

Moreover, spend management provides insights and clarity into these questions and yields an important planning document for senior executives in operations, supply management, and financial management. Despite the importance of this capability, many enterprise systems struggle to develop a comprehensive and accurate spend analysis report.

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Today’s Wall Street Journal documented the new, upgraded UPS service that is running full tilt to bring packages in before Christmas.  This is an on-going concern, after the debacle last year when UPS’s systems shut down in the face of massive capacity constraints driven by etailers promising delivery by Christmas.  The facilities were unable to cope with the last minute shopping rush that occurred, and has had to boost resources significantly to deal with this year’s massive shopping spree driven by millions of procrastinators (myself included).

Research in our BVL study showed that cost pressures are going up, but that the cost of transportation driven by the rise in small package home delivery is also driving costs up.  In fact, the article goes on to note that “home delivery from online shopping has been a rag on UPS profitablity in the US.  And with e-commerce soon to account for half of U.S. packages, the company is trying to automate and digitize operations to boost profitability and improve productivity.  In fact, forecats are that over 34M pages will be delivered on December 22 (today), and a total of 585 M in December.

Last month in Atlanta I spoke to a UPS executive who shared with me his insights on this issue.  He mentioned that UPS was hiring extra workers, extra truck drivers, and extra part-time workers to be able to work in the warehouses.  He noted that UPS was going to use cellphones to track workers, using built-in GPS technology.  The WSJ article also mentioned a new automated sorting sytem that will simplify and reduce the need to skilled workers.  This is part of the overall trend of severe shortages for warehouse workers being experienced in the industry, not to mention the even worse problem with truck drivers…however the new system has been experiencing kinks with the automated chutes and cameras inside the warehouse.

Let’s hope the elves make it in time for Christmas..

 

 

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Oil prices continued to plummet last week to below $60, and experts predict that it could continue to drop.  All of a sudden, what seemed like a boost to the global economy has caused consternation and worry among economists, as the recognition that the oil supports jobs across a number of important sectors.  There are of course rumors circulating about the politics of the situation and what is driving it.

One school of thought is that “OPEC is trying to drive out the competition”.  That is, they are hoping to be able to drive out many of the directional driller outfits using fracking technology that has boosted output in the United States over the last two years.  There is some truth to this.  The drilllers that were early to the party were able to drill relatively shallow at a low cost, and had very good returns on these early fracking forays, that has created a real economic upswing.  However, as these drillers are forced to drill deeper, their costs are going up – and if oil is at $57/bbl, the costs are unsustainble, and they will be forced to shut down operations.  Bigger operations, such as the major projects in the Canadian oil sands, can continue to operate profitably at oil prices upward of $40/bbl, so will be relatively untouched by these developments.  However, the smaller operations in the fracking industry will in all likelihood be packing up their things and going home, and so will be the jobs associated with these operations.  In addition, the railroads which have been run at peak capacity due to the plethora of oil being shipped by rail will see a downturn.  This is in truth probably a good thing, as there is not even enough capacity to operate the railroads to bring farmers’ crops to market, causing prices of wheat and corn to spike as railyards continue to push more and more oil carriers onto the tracks, causing massive bottlenecks in railyards and leaving crops undelivered during a bumper year of production.

On the other hand, there may be more to it than OPEC trying to drive out smaller players.  Jason Schenker from Prestige Economics, spoke at our SCRC meeting, and pointed out that OPEC members really don’t see smaller drillers in North Dakota as a threat.  Rather, their worry is more on the state of the global economy, and the fact that China and India’s GDP continues to drop.  In such cases, it is likely that there will indeed be the beginnings of a global recession.  In such cases, the theory goes, the economy needs a “jumpstart” to grow demand for vehicles and oil, which means growing overall demand for new vehicles, and hence demand for oil.  Remember that revenue = price X demand, so if price goes down, than demand will jump…a supply side strategy.  Schenker believes that OPEC is more worried about the global economic recovery, and by boosting oil inventories, prices will drop and bump up all global economies….and prices will naturally drop.

It will certainly be interesting to see which way this will go…

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Bob Trebilcock, the editor of the Supply Chain Management Review, interviewed me and my co-author Gerard Chick on our new book “Procurement’s Value Proposition”.  Here’s an excerpt from the interview.

SCMR:  The role of the Chief Procurement Officer is becoming more strategic and even more important as procurement is affected by technological advances, changing demographics, geo-political and macro-economic change, and an increased focus on sustainability and Corporate Social Responsibility. In The Procurement Value Proposition, Gerard Chick and Robert Handfield consider how these global economic changes will alter purchasing strategies, organizational structure, role and responsibility, system development, and the skills required to work in the profession. I recently had a chance to speak with Chick and Handfield about their book. You can read an excerpt on SCMR.com.

SCMR: Gerard and Rob. Thanks for speaking with me. First, tell us a little about the book and how procurement is changing. It’s no longer just about purchasing, correct?

Handfield: We argue that there is an evolution of procurement as a true value added business function. For a long time, procurement was boxed into a corner. Its role was viewed within the organization as negotiating to get better prices. Even today, in many organizations procurement is still about leveraging the spend to get quantity discounts and lower costs. However, given sustainability mandates, supply chain risks, and the huge amount of volatility in business today, procurement has to be different now. One of the trends we’re seeing is that the real savings often occurs after the contract is signed by looking at the total cost of ownership, which can include the end-to-end supply chain costs. The question is: Who leads that? Is it supply chain management or is it supply management? It could be different depending on the organization, but you have to bring them together. We think there is an opportunity for procurement in that change. But, in order for procurement to lead and get a seat at the table, it has to demonstrate a business case. It has to be a value added function.

Chick: One of the things you’ll see in the book is a formula related to procurement and profit. I’ve had procurement people tell me that procurement isn’t strategic; they just go out and do deals. But, the cost of purchased goods impacts profit so it must be strategic because the business is there to make profit. Secondly, value is a word that people bandy about today. The way I approach it is that value is the utility you derive from a good or service. If procurement works well in an oil and gas company so that they don’t have rigs producing the wrong crude then procurement is adding value because it is ensuring that through its work, the company is creating the petrol people need for their cars, it’ll be the right quality, and they’ll be paying the right price. They’re valued by the effectiveness they bring to the company. They’re not just buyers cutting deals. They are aligned with what the company wants to achieve. That’s value.

Read more of the interview on the SCMR website.

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Speakers are the SCRC meeting yesterday and today continued to speak more on the topic of transportation strategy given increasing challenges in the transportation sector, and the need for an effective transportation management strategy.

George List, a professor of mechanical and construction engineering, emphasized the need for governments to consider the broader impacts of global change.  For example, the widening of the Panama Canal will change the conditions here in North Carolina, as enormous container ships will be circumnavigating the globe. Steamship companies will dedicate vessels that permanently go eastbound and westbound. And in Panama a huge transshipment area will grow where they will will do break bulk, put cargo onto smaller ships and send to North America. These services will no longer occur in US ports, and this will shift the nature of supply chain designs.  As opposed to increasing ports to ship massive containers of bulk items, regions like North Carolina need to think differently, and to consider new possible locations for transport-driven logistics portals statewide.  For example, George mentioned that the Research Triangle is a major provider of vaccines worldwide.  These are little vials with very short half-lives, and to ship them you need a category 3 ILS equipped airport so autopilot technology landings are possible.  This requires investment in the right sophisticated technology.    But for public sector funding decision makers, the idea of spending money on runways is a foreign idea.

Clark Robertson from CSX Railroads also came in to speak on the role that railroads have played in the US economy.  Railroads were critical in helping to develop the United States in the last half of the 1800’s.  Their growth was incentivized by governments to expand networks.  In the last 1880s  the first Interstate Commerce Act rregulated trains.  The rights of way today were built from 1850-1920.  Rail mileage peaked in 1920 and then went into recession.  By 1850 there were more than 9000 miles of track which expanded to 450,000 miles by 1920.  The mass production of vehicles caused this market to drop dramatically, and now the US has about 180,000 miles of railroad.  By 1970s the railroads were on the brink of ruin.  More than 21% of mileage was run by bankrupt railroads.  The railroads had lost most passenger business, and freight business was regulated and operating at a loss.

What changed that was the Staggers Act in 1980.  Prior to this Act, railroads could not enter into confidential contracts with clients.  The Act introduced balanced regulation in the rail industry and allowed railroads  some freedom.  Since the Staggers Act rail volumes have doubled.  Average rail rates have fallen 42%.  Rail productivity have been among the highest, and railroads are financially strong.  Railroads are much safer and spending on infrastructure continues to be strong. Clark did mention that rail capacity continues to be a challenge with the shale oil boom, and this is simply a function of the rapid rise in demand and the inability of the railroads to add capacity to meet this.

Adam Ruff from Excel Logistics spoke about some of the challenges of transportation, and mentioned that the indicators continue to show constrained markets.  He noted that “We are seeing good economic growth and YOY increases in tonnage, and passenger vehicle production is hitting a high water mark, as is industrial production.  There is increasing pricing power, and on average a 2-4% increase in freight demand – which is outpacing the supply of truck capacity due to limited drivers.  There is a chronic lack of drivers, and it is an unattractive profession for most people.   He notes that this is similar to the 2006-2007 market where capacity was becoming constrained.  This is impacting how you think about managing the network, and in procurement.

In the regulatory environment, there are a number of regulations that are on the books.  These include hours of service limitations for drivers (11 hours), and Compliance, Safety and Accountability (CSA).  Other that will impact productivity include fuel economy (Café standards are increasing for mid-heavy weight trucks), emissions of particulate and Co2, and others regarding comprehensive drug and alcohol databases, and equipment with speed limiters and stability control systems.  These are all designed to provide greater safety and environmental improvements, but there is a cumulative drag on operational productivity and running the network.  Drivers are negatively impacted in terms of productivity.

Some estimates cite that the equivalent of 400,000-800,000 drivers will be taken out of the market in the next 10 years!   This is perhaps a high estimate, but it is nevertheless alarming.  The first impact on hours of service has already been felt.  Some solutions include allowing Canadian truckers to operate in the US, and in the future perhaps using other foreign drivers as well.

In terms of the challenges to freight infrastructure, Adam noted that  Excel has to design in a lot of “slack” due to the congestion in major urban centers.  Fuel tax hasn’t been increased since 1993, and funding for the Highway Trust fund is truly “hand to mouth”.  Investments in ports and rails and waterways are competing with other political priorities.  There is inadequate funding and lack of consensus on investment priorities in general in the US.  As an example, Adam Ruff mentioned the big border crossing across the Detroit River.  The Canadian government is going to pay for a new bridge, but the US government cannot find the funding to fund the customs plaza.

On the inbound side customers started to by-pass or disintermediate middlemen and going directly to the point of need.  Given challenges with capacity, companies are re-thinking their transportation strategies – perhaps going to smaller fleets that are better suited to the business.  Some are also looking at dedicated fleets, and ensuring that they are using their full capacity and do operational tradeoffs to fill every empty mile on fleets that are dedicated.  Many companies are thinking about the different advantages and options for dedicated capacity investments in a constrained transportation market environment.

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The 30th SCRC meeting kicked off today with a theme on “Transportation Strategy in an Infrastructure Constrained Environment”.  This is a theme that was discussed a year ago at a conference in DC on Transportation Infrastructure, over coffee with William Lucas from Caterpillar.  We talked about focusing on transportation as an issue that needs to be specifically addressed. Infrastructure came up time and time again in the BVL Study we worked on last year.  This continues to be a major challenge as companies think about their long-term strategic planning investments.

As William discussed, the top 10 truckload carriers represent less than 6% of the total market.  This creates strong bargaining power, but brokers are moving more and more towards playing a larger roll in truckload shipments.  But drivers will turn down loads in lanes where they are not paid enough – and this is a challenging issue.  Truckload is also evolving into complex multi-mode areas – and it has become a larger carrier and more dedicated set of issues.  Truck drivers are also getting older, and a discussion with carrier JB Hunt, reveals that salaries are now over $65K for drivers.

Ocean carriers are also a challenge, as there is not enough capacity – and US imports exceed exports by 40B.  This will continue to congest the ports, and it is tough to find carriers as there are a limited number of competitors. Another big challenge is around government regulations.  First on the list are regulations around Class A drivers – and the 11 hour driving limit constrains when trucks can load, and driving time is being tracked electronically.  The key is that it is helping and removing people from the road.  It is better for safety but a lot of people are not making the same amount of money.  Loads also have to be permitted, and each state has its own permitting requirements.Roads are becoming more congested, and many of them are aging.

Infrastructure growth is a major issue for companies who ship a lot, especially those like CAT who ship heavy permit loads from the ports.  It is also happening at border crossings such as Mexico. The expansion of Panama has shifted shipments from West Coast to East Coast, but only Norfolk and Baltimore can handle these larger ships – and this will result in longer berths  where will the funding be coming from for these port expansions – and it is something that is happening, but we aren’t sure how to handle it.

Rail repairs to existing infrastructure is a big issue, and rail companies are investing a huge amount in infrastructure.  Replacement costs are going up.  And there is a massive challenge with rail capacity due to the shale oil crisis. William also talked about the importance of having an integrated transportation strategy that thinking about packaging and planning issues – and the quality concerns are becoming more important.  If we can’t protect it or get it to the line, quality will be impacted.

Matthew Drown from CAT then talked about some of the solutions that existed.  Some of the solutions are from a strategy perspective, but also from a continuous improvement perspective.  Depending on weight and velocity needs, decisions and optimal transportation strategies are impacted.  As our growth increases, CAT uses heat maps and center of gravity studies to consider where our major shipments are going, but also looking at costs. Matt gave a great plug for our student projects that were used for transportation planning approaches.  In 2011 a student project team focused on packaging and where there were changes in sourcing and whether weights were correct.  In 2012 a port study was conducted by students to understand capabilities of ports and what existed, and whether to use Savannah and Charleston, considering their capabilities, number of calls, what types of shipments they are strongest with.  The developed a tool to assist with decision-making.  There was also a study looking at lanes coming out of Mexico – and to have a truck do a live load, vs. drop the load and the facility loads it and picks up the trailer.  The team questioned whether a larger pool of trailers would be beneficial.  As you have more trailers, there is a cost, but is the benefit more than the cost?  In 2013 a study project looked at transportation regulations and permits, and what globally were the limitations on weights?  A final team this year looked at volume readiness.

We are excited by the quality of the student projects and their contribution to the transportation team at Caterpillar.

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A supply manager in the Canadian oil patch wrote me recently about their experience on a major capital project, after reading my blog on capital equipment uptime.  He was quick to point out that ensuring uptime of equipment is a major priority, not the cost of the equipment itself, due to the amount of production revenue being lost for every minute that the site is not operational due to equipment failures. He pointed out that this principle doesn’t necessarily apply to capital equipment only. “You might find this a bit hard to believe but this could even extend to something that you’d otherwise shrug off as ‘not that’ important! E.g. Small tools and consumables. A purchase order to a supplier for $25k would be construed as a minor purchase that wouldn’t even warrant the raising of an eyebrow. Here’s an example of how things could go horribly wrong were the goods to be not procured in time: A construction crew of 40 people, all employed at $ 85/hour and working on a 10 hour shift in the oil sands remain idle for 4 days because they didn’t receive their tools in time. The idle time cost alone for 4 days would cost the company $136k!! I have to literally breathe down the supplier’s neck every single day to ensure that we won’t have any nasty surprises! Small tools and consumables fall under the MRO (Maintenance , Repair & Operations) category,and in the oil sands, it’s booming business for some suppliers.  A crane operator cannot get on a crane or any other major piece of equipment unless he has the proper PPE gear on! Fail to get him his gear and we end up losing big money!

This is a perfect example of thinking about Total Cost of Ownership as a component of procurement value.  Thank you for the readers of my blog for their comments!

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