Archive for Logistics Trends

ARC was briefed by Mike Mulqueen of Manhattan Associates on their transportation management (TMS) product. Mike is a Senior Director for Product Management at Manhattan. What I found most interesting was a short conversation we had about the carrier capacity crunch and the role various supply chain software solutions can play in improving matters for shippers.

I wanted to dig deeper on Mike’s thoughts around the capacity crunch so I asked Mike if he would be open to being interviewed. He was.

Steve: When I talk to transportation professionals that work for shippers, the capacity crunch is what they say is keeping them up at night. I gather you are hearing the same thing.

Mike: Absolutely. The capacity issues that we are seeing are most prevalent in the long-haul, truckload segment of the market. Like any market, trucking will respond to the realities of supply and demand, but today, the asset based trucking companies are not yet convinced that they can profitably add capacity, even as demand for their services increase. Trucking executives I hear from are concerned about an active regulatory environment that has reduced productivity of their operations and promises/threatens to do more. They continue to have great difficulty in recruiting and retaining qualified drivers, and the cost of tractors and trailers continues to rise for those companies that even have access to the capital necessary to expand their businesses.

Therefore, we are in a situation where trucking companies are in a position to be much more selective for whom they haul freight. For shippers, this means that they must understand the levers that impact the profitability of their transportation service providers. If you don’t, it can be an expensive proposition. A recent study from MIT’s Center for Transportation and Logistics showed that freight rates can increase by nearly 15 percent when shippers have to purchase service outside of their primary carriers. This became apparent earlier this year to shippers when spot market rates hit all-time highs.

Steve: So what is the solution?

Mike: One way for shippers to ensure they have capacity is to pay higher rates, but as you can imagine, that is not a shipper’s first choice. Instead, we see a lot of shippers focusing on how to change their business processes in order to be “carrier-friendly.” This means the development and implementation of process improvements that make carriers want to haul their freight.

Some of these process changes can be pretty simple. One of our shipper customers has developed a program to ensure that driver facilities are clean, comfortable and well-maintained while also allowing drivers to use their yard if they are out of hours. Driver attrition approaches nearly 100% for long-haul trucking firms and the cost of hiring and training new drivers typically exceeds $5000 / driver. Therefore, shippers that treat their carriers’ drivers respectfully are given preferential treatment.

Additionally, we are seeing shippers look to alternative methods to transport freight that are less reliant on long-haul trucking. Intermodal has grown dramatically over the past decade as service has become much more reliable. We are also seeing a heightened interest in converting one-way truckload freight to dedicated contract services. A dedicated fleet is a good way for shippers to lock in capacity, but it comes with the risk of paying substantially more for transportation if the dedicated assets are not well utilized. Often times both intermodal and dedicated services are provided by the same transport providers that are providing one-way services, so shippers should work with their carriers to understand the full breadth of offerings and align their shipping needs accordingly.

Finally, we are seeing shippers and carriers moving much more aggressively to “drop-trailer” programs. These programs enable carriers to simply drop trailers at a shipper’s yard and have them loaded or unloaded by the shipper company. This enables the carrier’s driver to quickly return to revenue generating activities (i.e. hauling freight) without having to wait for warehouse operations to process the trailer. While the carrier does have to increase their trailer inventories to support these programs, the cost of drivers waiting to be loaded or unloaded, especially considering the new HOS rules, far exceeds the cost of the extra trailers.

Steve: How can transportation management software help shippers cope with the capacity situation?

Mike: Shippers are exploring different ways to move their freight. Therefore, a TMS must make the most efficient use of all transport options at the shipper’s disposal, be they full truckload, intermodal, LTL or fleet. As long-haul truckload rates rise and capacity tightens, a TMS with strong optimization capabilities will naturally flow more shipments to alternative modes of transport where possible.

However, once the mode decision is made, a TMS offers other capabilities valued by carriers. It will automate and standardize communication flows between shippers and carriers. This reduces both data errors as well as labor costs for both the shipper and carrier. The TMS also ensures that carriers are assigned loads based on agreed upon commitments and given the necessary latitude, will balance those commitments so as to not overwhelm a carrier on any given day. Advanced TMS systems also have the ability to send short-term volume forecasts to carriers so that they have time to react when surges or lulls in demand become evident.

Finally, a TMS becomes a repository for a great deal of information that can be used by shippers to identify opportunities to improve their operations. For instance, by integrating with a yard management system, the TMS gains visibility into driver dwell times (i.e the amount of time the driver is at the shipper’s facility). Inefficient yard operations are a significant drain on driver and asset productivity and those shippers that are unable to turn around drivers quickly are going to have great difficulty getting carriers to haul their freight or will be able to do so only at premium rates.

Steve: The shipper-carrier relationships tend to be very cyclical. One year the shipper is up, the next the carrier. Is there any reason to think that the current capacity crunch will continue for an extended length of time?

Mike: I believe there is. The last big capacity crunch we had was in 2004-2005. To your point, it was short lived and we quickly moved back to a period of excess capacity.   However, all signs point to this capacity situation being fundamentally different. There just is no quick and easy way to solve the driver shortage problem. Long-haul truck driving is a demanding job and there are just not enough people willing to do it, given the compensation levels in place today. The over-capacity situation of 2006-2008 was remedied by the Great Recession, which culled a great deal of capacity from the system. The subsequent weak recovery has given shippers a false sense of security, even as more capacity has been drained from the system as an increasing number of trucking companies have shuttered their operations. However, as we begin to see signs of stronger economic growth, the demand for capacity will intensify. Ultimately, higher rates are inevitable, but shippers can mute the impact by implementing carrier friendly processes that are designed with an understanding of basic trucking economics.

Steve: Thank you very much for taking the time to talk to me.

Mike: Always a pleasure Steve, thank you for the opportunity.

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The hottest trend in supply chain management is omni-channel. Five years ago it was shelf-level collaboration. But really, these initiatives should be seen as mutually reinforcing.

Omni-channel is retailing is based on providing consumers with a better shopping experience by leveraging both stores and the e-commerce channel. The idea is that a customer should be able to go to a store, see something they like, and order it for home delivery; or order the item online and pick it up at a store; etc. There are many different product flow paths that cross sales channels that are possible.

In a survey we completed last year, the top three reasons retailers are moving towards omni-channel initiatives are to increase sales (77.9%), increase market share (73.0%), and improve customer loyalty (69.7%).

Now let’s turn to shelf-level collaboration, also known as demand driven supply chain. Here the primary goal is for consumer goods companies to leverage downstream data, particularly a retailer’s point of sale data, to achieve a better in stock position on the store shelf to the benefit of both themselves and the retailer they are collaborating with.

However, one thing connects traditional shopping and new omni-channel buying paths: product availability. If the product is not available through the channel of choice, the customer may move on to another retailer that can fulfill his or her order. That means lost sales, market share, and less customer loyalty.

While many brick and mortar retailers are seeing quickly growing revenues from e-commerce, and stagnant or declining same store sales (as Walmart has been reporting in the US), traditional store retail is still the great majority of sales. Thus, shelf level collaboration between consumer goods companies and retailers should be considered foundational to omni-channel!

Most retailers recognize that an omni-channel initiative is a multiyear project. Rather than doing a big bang project and trying to enable all potential multi-channel flow paths simultaneously, they pick one or two that have the greatest ROI and focus on them initially. Ironically, most appear to be ignoring the path to product most often used by customers – i.e. go to the store, take it off the shelf, buy it, and take it home. Of all paths to the customer, this one is apt to have one of the largest ROIs.

A few years ago, ARC did a strategic report on shelf-level collaboration that examined the ROI of these projects. The average in-stock position at grocery stores was 92 percent. 98 percent in-stock was achieved across various consumer goods/retail collaborative efforts. There was substantial incremental profit improvement for non-promoted items for the consumer goods company. For promoted items, moving from 85 percent in stock to 95 percent were the improvements that we were seeing. The profit improvements for promoted items was even higher. We were looking at ROI from the consumer goods companies’ perspective, but retailers can also expect to gain substantially, particularly since the consumer goods companies were doing much of the heavy lifting around these projects.

Empty Shelves Mean Lost Profits

Empty Shelves Means Lost Profits

I’m beginning to think that many retailers have put the cart before the horse. They should not abandon their omni-channel initiatives, but if they have not fixed their in stock problem at the shelf, they should fold a shelf-level collaboration project into the omni-channel initiative and prioritize that flow path appropriately.

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There has been a lot of talk lately as it relates to “last mile” deliveries, and how retailers can delight their customers at the actual moment of fulfillment. As more retailers venture into the omni-channel space, last mile has taken on more importance. Two behemoths have taken center stage in the battle for perfecting (or at least improving) the last mile for customers: Amazon and Google.

For many people, Amazon is the end-all, be-all for their shopping needs. With nearly 60 (and counting) distribution centers in the United States, Amazon can fulfill orders quickly to nearly every square inch of the country. With Amazon Prime, and its $99 a year price tag, customers can receive these orders in two days, guaranteed. But two day delivery isn’t the only perk of Prime. Amazon Prime customers have access to a growing catalog of e-books, and streaming digital music and video, including a new partnership with HBO.

Amazon Fresh

But controlling the last mile is more important than ever. So Amazon is rolling out its own fleet of delivery trucks. These trucks become a true competitor to UPS and FedEx, which will surely miss the Amazon business. For Amazon, it adds control over the last mile, and who is actually delivering the merchandise to customers. It also creates some additional flexibility into delivery timeframes, which can increase customer satisfaction. At the same time, it offers a way to reduce shipping costs, which have been increasingly as a larger percentage of revenue every year since 2009.

GoogleEnter Google, and its desire to play in the last mile game. Google’s model is different than Amazon. Google does not have distribution centers around the country, nor does it want to. Instead, Google contracts directly with local stores to provide same-day delivery (mostly). The advantage for Google here is that it can keep adding new partners without worrying about inventory carrying costs. As part of Google’s Shopping Express, customers can sign in through their Google account, use their Google Wallet to pay for the purchase, and select a delivery timeframe. Overnight deliveries are offered in select areas where same-day delivery is not offered.

There is also a third option for retailers to deliver their goods to the end consumer, without going the traditional route of using UPS, FedEx, or USPS: crowdsourcing. Crowdsourcing has taken off in recent years. Companies like Uber and Lyft are changing the livery market, and making life more challenging for traditional taxi companies. Crowdsourced hospitality sites like Airbnb and VRBO are changing the way people travel. And now retailers can jump on the bandwagon too.

Companies like Deliv and Kanga are expanding delivery options for retailers. Deliv, for example, uses an API to create a same day shipping option for e-commerce customers. At check-out, there is a new question – “would you like this order delivered?” The price for same day delivery is the same as standard 3 – 5 day delivery in most cases. The big thing for retailers is to ensure safe delivery of the merchandise. That’s why these companies have a rigorous screening process prior to certification, including background checks, interviews, insurance coverage, and vehicle checks.

The last mile is the last chance retailers get to influence the final leg of the customer experience. Offering same day delivery to customers is one more way to leave them with a good taste in their mouth about the experience as a whole. Amazon and Google have entered into an arms race to roll out their own fleets to provide this last touch-point. And while customers have taken notice, so have enterprising minds. The rise of crowdsourced options for the last mile is the next logical step in ensuring quick, efficient deliveries. It also shows that consumers are willing to pay for same day delivery. In those markets where Google and Amazon do not offer same day delivery, the opportunity for a crowdsourced model is huge. And as these models grow, it will be interesting to see how Amazon and Google respond. Will they turn to innovation mode or acquisition mode? Only time will tell.

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I’ve had recent conversations with part of the ARC Advisory Group Oil & Gas team – Dave Lafferty, Paul Steinitz, Tim Shea, and Mark Sen Gupta – on the  upstream “fracking” or shale oil supply chain. Fracking includes getting oil and natural gas out of shale by fracturing (“fracking”) the shale rock. In the industry, oil wells are considered part of the upstream supply chain.

Getting unconventional natural gas and oil out of the ground introduces new supply chain challenges because the wells decline more quickly than traditional fields, extra materials are needed to produce the gas and oil, there is a shortage of midstream pipelines, and the fields are much larger in size than traditional oil fields. (See Exploiting Unconventional Oil Fields Requires Overcoming Tough Logistics Challenges).

There are actually five supply chains that support unconventional oilfields.

The Project Supply Chain – the supply chain associated with building rigs and the necessary supporting infrastructure. Because “fracking” oilfields hit peak production and decline more quickly than traditional fields, the project logistics is more difficult. Gas needs a pipeline to make it to market – oil can be transported in a number of ways – with rail being quite common.

In addition to midstream pipelines, the natural gas infrastructure includes a separator at the well head for removing water and sand and a gas plant for removing impurities out of the gas. To support the oil supply chain, rail spurs may need to be constructed. Both the oil and gas infrastructure may include the building of roads.

The Inbound Supply Chain – bringing in and staging the materials associated with drilling. These materials include drill casings, drills, water, drilling mud, and lubricants for the rig. In shale oilfields, materials such as water, sand, and fracking chemicals are used in far greater quantities than in conventional fields.

The Outbound Supply Chain – the supply chain associated with taking away the oil and gas produced by the field. Here the challenges center around the fact that as traditional oilfields left production and were not replaced, the necessary logistics infrastructure withered. In other cases, oil was discovered and drilled in new locations that never needed pipelines. As a new renaissance in North American oil production started, based on the new technologies and production methodologies, there were not enough pipelines to support the new unconventional oilfields. Because the price of natural gas is low, fields focused on producing oil are all too often flaring off the natural gas. In addition to just being distastefully wasteful, flaring has ethical (the land owner and state are not being fairly compensated) and environmental issues associated with it.

Rail can also be used to take away oil from these fields. However, recent derailments which caused death, widespread destruction, and environmental harm have been in the news. Consequently, new US Department of Transportation safety rules are being proposed that the railroad industry claims will not only reduce their ability to support the oilfields, but which will in all likelihood adversely affect the entire rail network and thus the ability to serve clients outside the oil industry. However, it is likely that the final draft of rules will be friendlier to the rail industry than the first proposal. It is also likely that the final rules will not go into effect anytime soon.  Court cases and challenges are likely.

The Remote Worker Supply Chain – many of oil sand fields are in extremely remote locations. Consequently, the oilfield workers work for two weeks and then have two weeks off. In some cases, workers are actually flown in by small plane to the site. Workers on site have to be supplied with food and related supplies.  In this way, the unconventional oil supply chain resembles offshore locations more than traditional onshore drilling.

The Emergency Supply Chain – The operators (oil companies) are required to have risk based emergency response plans in place for controlling fires, leaks, and other health, safety, and environmental risks. This may mean emergency response teams strategically located so as to be able to respond to several rigs. This supply chain also needs inventory stocks and replenishment.

At a high level, these are the supply chains associated with upstream oil. Future articles are planned on this topic.

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It’s the beginning of August and already I’ve been inundated with back-to-school advertisements. I suppose this is better than the Christmas ads that will plague us following Labor Day, but still, it just seems a bit early for me. My son doesn’t go back to school for another 5 weeks. But retailers are all in for creating buzz around their back-to-school offers. The National Retail Federation (NRF) expects back-to-school shopping to hit $26.6 billion in 2014, with nearly $8.5 billion spent on electronics. Check out NRF’s cool infographic here to see some more mind boggling back-to-school numbers. I’m just hoping to get in a few more trips to the beach while it’s still officially summer.

And now on to this week’s news:

Buy online, pick up in-store is getting a facelift in the UK. A number of companies are turning local shops, car parks, airports, and gas stations into pick up places for online orders. Waitrose, in partnership with logistics company ByBox, will set up refrigerated lockers from this autumn in Gatwick’s two terminals, enabling travelers to pick up their groceries on the way home. Having just returned from a vacation, this is certainly a perk that I could get used to. But the big push behind the influx of pick up locations is the holiday shopping season. The hope is to give shoppers more and more options to have their online orders fulfilled around the holidays, which will help alleviate the problems associated with last year’s delivery nightmare.

BBCbOn a similar note, the Royal Mail has begun phasing in a new ‘click and collect’ service to 20,000 small and medium sized businesses as it moves to capitalize on its parcel business. Customers will be able to collect packages directly from any of 10,500 Post Office branches nationwide. As Amazon continues to evolve its delivery network, retailers are looking for new ways to reach their customers quickly and efficiently. With the “click and collect” model already well established in the UK, this move simply makes sense for the Royal Mail and small and medium sized businesses.

In Canada, the push is not towards more pick up locations, but towards free shipping. Last year, Wal-Mart Canada introduced free shipping on all purchases. This is a deviation from the norm, where shipping is either free based on spend thresholds or for loyalty members. In a country as large and sparsely populated as Canada, free shipping has not been a logistical possibility, especially for smaller retailers. But Wal-Mart’s introduction of free shipping on all orders has changed the retail landscape, and an all-out war has been declared.  Amazon has responded by offering unlimited free shipping for six months to students in Canada through its Amazon Prime Program. After that, students pay half price for the annual service, which is regularly $79.99 in Canada. It will be interesting to see how this all plays out, and what the effect on prices and profitability will be.

In the US, New Jersey is becoming a launching pad for the online fulfillment boom. From Jersey City to Trenton, 12 warehouses and distribution centers are under construction, amounting to 5.17 million square feet of new industrial space entering the New Jersey market. All but two of the properties are speculative. As the e-commerce market continues to grow, more businesses are looking for distribution facilities to meet their e-commerce needs. In the last year alone, there has been a flurry of lease activity in New Jersey, with Amazon opening a one-million-square-foot distribution center in Robbinsville, Peapod opening a 345,000-square-foot distribution center in Jersey City, and Williams-Sonoma leasing a 750,000-square-foot distribution center in South Brunswick. The state’s proximity to New York and area ports has been crucial to the growth. According to Thomas F. Monahan, a senior vice president at CBRE, a commercial real estate brokerage firm, “New Jersey has always benefited through thick and thin by one thing and one thing only, and that’s location. And that will never change.”

140728110116-amazon-3d-printing-620xaAnd speaking of Amazon, the company launched its 3D printing store this week. The 3D printing store offers shoppers over 200 products, including toys, jewelry and home decorations. The items are produced via 3-D printer, and can be customized by size, color, material or with personal text and images. A widget allows shoppers to play around with the design and preview the end result before they buy it.

“The introduction of our 3-D Printed Products store suggests the beginnings of a shift in online retail – that manufacturing can be more nimble to provide an immersive customer experience,” Petra Schindler-Carter, Amazon’s director for marketplace sales, said in a statement.

That’s all for this week. Enjoy the weekend and the song of the week, The Clash’s Should I Stay or Should I Go?

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