We’re getting close to the end of the year, which means every media outlet is obligated to publish a top 10 list of things that happened in 2008, along with predictions for the coming year. I enjoy reading these lists, especially those related to movies and music, but I’m less excited about creating my own list. In my opinion, the past is history, and the future is uncertain, even more so next year, as nobody really knows what will happen with the economy and the financial markets.
Then again, it’s part of my job to make predictions (“forecasts” in supply chain parlance), so I’ve come up with a few things that might happen next year. But first, let me start by telling you what I think had the greatest impact on supply chain and logistics in 2008: the volatile swings in commodity prices, especially oil and corn prices.
Oil prices were $71 a barrel in July 2007. A year later it had risen more than 107 percent to $147, and in less than five months, prices crashed back down to $40 a barrel today (the lowest level in 4.5 years). In the process, 1,905 trucking companies went out of business in the first half of 2008 (and another 2,000 in the second half of the year, according to estimates by Donald Broughton at the investment bank Avondale Partners).
Similarly, US corn prices reached a record $7.65 a bushel in June, due in part to the “ethanol bubble.” But now that the bubble has burst (e.g., the U.S. Agriculture Department reduced the amount of corn it expects the ethanol industry to use in the 2008/09 marketing year by 300 million bushels), corn prices have tumbled 55 percent to $3.41 last week.
This type of volatility creates havoc on supply chains, especially from a planning perspective. A year ago, as some analysts floated the possibility of oil reaching $200 a barrel, many companies began reevaluating their supply chain networks, exploring the possibility of bringing supply closer to demand. In some cases, increasing inventory and having more DCs was a more favorable option for companies, in terms of total costs and service levels, than transporting products over long distances. And let’s not forget all of the “green” initiatives that oil at $147 a barrel initiated.
But what happens now that the pendulum has swung so quickly in the other direction? Everyone knows that oil prices will rise again, but will it take a few months or a few years before they exceed the levels reached earlier this year? Does “long-term” supply chain planning make sense anymore?
The answer to the last question is yes; what doesn’t make sense anymore, however, is the way companies have traditionally approached long-term planning. I’ll write more about this point in the future, but for now, let me just say that “strategic planning” must occur more frequently than in the past; companies must have more timely, accurate, and complete visibility to supply chain data (an age-old challenge); and optimization and analytics tools must become more user-friendly and intuitive to use.
So, my first prediction for 2009 is that many companies will “panic” and do things that might benefit them in the short term, but could potentially hurt them down the road. For example, a recent article in the Financial Times highlights how “companies around the world are becoming petrified of the economic outlook and are cutting their stock levels sharply.” A related article comments on how companies are cancelling orders to deplete their existing inventories, or delaying orders, particularly for commodities, betting that prices will drop further down the road. Indeed, the “bullwhip effect” lives on.
Okay, here are my other predictions, from most audacious to most reliable:
- A leading Logistics Service Provider will acquire a leading Logistics Software Company. We all know that high-level forecasts are more accurate than detailed ones, so I’ll refrain from citing specific LSPs and software companies, like I did in a May 2004 report titled “What if UPS Acquires Manhattan Associates?” As I wrote at the time, I used this hypothetical deal to highlight a trend occurring in the market, namely the merging of technology with managed services. UPS didn’t acquire Manhattan Associates, but the worlds of technology and managed services continue to merge, as Transplace’s tag line-”The 3PL & Technology Company”-illustrates.
- More logistics software companies will venture into managed services. This prediction is closely related to the previous one. I’ve written about this trend many times before, citing LeanLogistics and i2 Technologies as examples. Simply stated, the traditional model of buying software from one company, hiring another company to implement and provide advice, and contracting with yet another company to manage all or part of an operation is giving way to a bundled solution from a single partner. The old model won’t disappear, but the bundled approach offers the greatest growth opportunity. For some logistics software vendors, especially those with a TMS, the first step towards offering managed services is launching a software-as-a-service (SaaS) solution. The next step is figuring out how not to upset their consulting partners who are also migrating towards “business process outsourcing.”
- The era of re-regulation begins. Last week, I wrote about California and its “green” regulations. At the national level, there’s the Employee Free Choice Act and carbon cap and trade regulation. From a global trade perspective, NAFTA and other trade agreements may get “renegotiated” and companies must start complying with the new “10+2″ requirements. In short, regulations will have a greater impact on logistics operations in the years ahead than in the recent past.
Well, there you have it, my four predictions for 2009. I’d come up with more, but it’s like playing the lottery: it doesn’t matter how many tickets I buy, I never seem to win the jackpot.
