Analysts Raise Warnings about the Fragility of Logistics

Stephen DeAngelis

July 15, 2011

If earthquakes, tsunamis, volcanic eruptions, floods, fires, strikes and the like were not enough for supply chain professionals to worry about, supply chain analysts are now warning about systemic fragilities they see in many supply chains. For example, Lora Cecere writes, “I believe logistics matters. In my opinion, it matters now more than ever. The logistics community is insular, the ecosystem is fragile, and I believe that the health of the system is at a tipping point that requires a community effort.” [“Birds of Feather: Should They Only Flock Together?” Supply Chain Shaman, 28 June 2011] Another well-known analyst, Bob Ferrari, writes, “Of the 100 of the largest publically traded technology companies analyzed [by BDO], 86 percent stress supply chain concerns, noted as supplier relations, distribution and material costs, as a top risk factor.” [“Supply Chain Issues on the Rise in the Executive Suite With Supply Chain Community Implications,” Supply Chain Matters, 11 May 2011]. And procurement expert Paul Teague writes, “Procurement executives with logistics responsibilities know, the most appropriate [type of] music for much of the US transportation infrastructure, including the highways, is the blues.” [“US transportation at breaking point,” ProcurementBlog, 24 January 2011]

 

Of the concerns raised above, infrastructure is perhaps the most vexing. In the current fiscal fiasco in which most levels of government find themselves, money to correct infrastructure shortfalls is going to be hard to find. Teague continues:

“There have been countless reports over the past few years about the miserable state of the nation’s roads, bridges, ports, and rail systems. The collapse in 2007 of a major bridge in Minneapolis is only one manifestation of the problems. Another is the fact that port owners are not investing in maintenance. US transportation secretary Ray LaHood says the Obama Administration is determined to get agreement on a national transportation-spending plan – preferably an infrastructure bank – to fund needed improvements. Truckers, rail managers, port officials, and the procurement and logistics professionals who depend on them will be eager to hear how strongly the president makes the case for investing in improvements. Another party listening will be the incoming chairman of the US House Transportation and Infrastructure Committee, who says he has some new ideas himself for funding infrastructure improvements. Ideas – and action – are certainly in order.”

In February, the Obama administration “proposed a six-year, $556 billion transportation plan.” [“Obama introduces $556bn transportation spending plan,” PEI Infrastructure Investor, 15 February 2011] In May, “a bipartisan group of senators announced that they had come to an agreement on a long-term transportation spending bill ending a three year stalemate.” [“Senators outline long-term transportation spending plan,” Homeland Security Newswire (HSNW), 26 May 2011] According to article, however, senators couldn’t agree on whether the bill should cover two years or six years. The article also notes that “it is unclear what the final bill will look like as the Senate, House, and executive branch each have diverging views on highway funding.” The House of Representatives is probably the long-pole in the tent since “House Republicans are proposing to cut highway spending by as much as 30 percent.” The article concludes:

“Given the current fiscal environment, funding the transportation bill will be no small feat. A two year Senate bill would require $12 billion in additional fuel –tax revenues and a six year bill would require an addition $70 billion. Since 2008, highway and transit construction programs have had an uncertain fate, but the proposed bill would allocate roughly $56 billion a year to highway and transit construction.”

Teague notes that there are “bottlenecks in U. S. logistics” and without funding to improve U.S. infrastructure those bottlenecks are not likely to be eliminated. He concludes:

“It has also reported on the fact that politics have got in the way of the funding. That’s a scandal because the problems are real. The Washington Post recently quoted a panel of transportation experts who said that the infrastructure problems could well imperil the nation’s prosperity. No one has to tell that to procurement and transportation executives. In private conversations, a logistics executive at one major company said that the country needs a national freight strategy to optimize highway efficiency. Another bemoaned that equipment and physical infrastructure issues are a bigger challenge for ports than labor strife. Hopefully, the pleas of these executives and organizations like The American Association of Road and Transportation Builders will get through to the politicians.”

Turning from infrastructure issues, Ferrari notes that many of the issues raising concerns at the executive level of business directly affect supply chain management. He writes:

“Glancing at the table outlining the top 20 risk factors [in the BDO study], it is rather stark as to how many of these risk factors have a direct impact on the supply chain. Also take note of the risk factors that had the highest percentage increase for concern in just one year: (2010 to 2011)

  • Natural disasters, war, conflicts and terrorist attacks – 26 percentage point increase
  • Inability to maintain operational infrastructure and systems – 26 percentage point increase
  • Predicting customer demand and interest – 22 percentage point increase
  • Cyclical revenue and stock fluctuation – 13 percentage point increase

“Translating these concerns to supply chain business process support needs, one has to target supply chain risk mitigation, business continuity, sales and operations planning (S&OP) and more responsive planning as the key looking glass areas for 2011.”

Ferrari concludes, “Now, more than ever, is the time for supply chain teams to seek more alignment and influence with the CFO and CEO.” As I noted in a past post, supply chain executives have had a difficult time finding a seat at the boardroom table but that could be changing [S&OP: Supply Chain’s Foot in the Boardroom Door] Ferrari ends his post with some thoughts about getting that foot in the boardroom door. He writes:

“On the good side, senior executives seem to now have a far deeper understanding on the relationship of certain supply chain capabilities to business strategy and outcomes. If your team was holding back on pitching investment plans on the key processes noted above, now may be the best time to communicate these plans. On the flip side, the notion of supply chain functional stovepiping, where areas such as planning, procurement, operations and product management focus on different goals and metrics will no longer be tolerated. We may be fast approaching an era of single accountability for supply chain initiatives and activities that directly impact required business outcomes. That may include risk mitigation, integrated business planning and operations management. Supply chain developments in the high tech sector are often the early indicator of broader industry initiatives, and both of these studies reflect rapidly changing perspectives at the top of the house.”

Cecere has her own concerns about the state of logistics. She writes, “While the community is tight knit and the themes are consistent, I feel that the gravity of the situation is not well understood by the broader supply chain community. I see three scenarios happening.” She calls the first scenario, “Will the Nightingale Sing?” About this scenario, she writes:

“The nightingale is one of the few birds that sings at night. In parallel, the area of logistics is becoming one of the major parts of the supply chain that is being forced to hum at night. From the [Council of Supply Chain Management Professionals (CSCMP) 22nd Annual Report on Logistics (http://cscmp.org/memberonly/state.asp)], ‘ … volumes are about ½ of pre-recovery levels, but capacity especially in air and truck are almost fully engaged. The recession had a devastating impact on capacity.’ The report goes on to say that ‘16% of truckload capacity has been removed since 2006.’ Fewer assets, growing issues with infrastructure, and a shortage of drivers will force more logistics operations to what manufacturers fondly term the ‘third shift’. I believe that it will definitely sing with the nightingale. What does this mean for shippers? Increasingly, shippers need to work on improving operations to ‘be easier to do business with…’ This includes better staffing of the third shift, seven-day operations, ease of dock loading and effectiveness in drop yard management. The early bird will definitely get the worm.”

Cecere calls her second scenario, “A Canary in the Coal Mine?” She writes:

“I grew up in West Virginia. In a coal mine, methane is a silent killer. No smell. Serious business. Before there were electronic sensors in the mines, the workers used canaries as sentinels. When there were high levels of methane, it would kill the bird before affecting the health of the miners allowing the workers to escape. I believe that logistics is supply chain’s canary in the coal mine. I believe that the current slowdown in logistics volume is an indicator of economic softening. 2010 was not what we hoped it would be. Volume was up slightly. Gas prices skyrocketed. We are close to a breaking point in capacity in truck and air. The industry has not recovered from the Great Recession. I love the wording in the CSCMP report, ‘Volumes grew slowly and fitfully with truck tonnage rising 5.7% not even close to reversing the losses of the past two years.’ We have a slow down in industrial manufacturing. The last four months of unemployment in the United States economy has been disappointing. We only have a ¼ off the jobs back from the beginning of the recession. We are seeing a structural change in who we are hiring. This canary is a sentinel for the supply chain. It is time to focus on demand sensing to reduce demand latency and better orchestrate the demand signal. Inventory configuration planning is paramount, and increasing capabilities to do better network design is growing in importance. The key is better sensing and a more intelligent response.”

Cecere calls her final scenario, “A Do-Do Bird?” She writes:

“This bird is extinct. It is most talked about case of extinction driven by humans. The loss of ecosystem and the introduction of new species killed this species. The health of logistics is dependent on ecosystem that is fragmented. It is a village of government, shippers, carriers and logistics providers. Shippers need to be more active to be sure that we do not see the extinction of best in class processes. The increasing governmental regulation needs to be on the lobbying agenda for the shippers as well as the carriers. Likewise, the shortage of drivers may increase the need for private fleet. As they say in wrestling, ‘logistics is on the mat in a stronghold.’ We need to be careful that we don’t kill the good things that have been built into the system over the last thirty years. For example, logistics needs to be viewed in aggregate -– air, rail, barge, truckload, and less than truckload -– with a focus on multi-mode and relationships. The ability to effectively work with carriers on multiple-mode capabilities with improved lane visibility can greatly improve the ability to get loads.

Cecere notes that “logistics variability has increased for multiple reasons.” Among them she lists: “road congestion, governmental regulations, slow steaming of ocean fleet, and the shortage of capacity.” Along with variability, complexity has increased as a result of “the introduction of corporate sustainability scorecards for efficiency, the increase in compliance fees and the tightening of definition for the perfect order is putting a stronghold on logistics.” Cecere concludes:

“While each may seem OK in isolation, it is the combination that worries me. We need to look holistically at how we move freight (modes) and how we manage freight (scorecards, penalties, expectations) to be sure that we are not killing the ecosystem (especially as we enter the back-to-school and the holiday shopping periods). … In short, … we have some issues. The US economy is uncertain, and the logistics ecosystem is fragile. While birds of a feather may gather at logistics events and carefully detail the issues, they gravity of the issues are not well-recognized by the greater supply chain community. Each of these three scenarios are today’s reality.”

Logistics is one of those areas where policymakers, business executives, and industry organizations need to work together to ensure that the logistics system and the infrastructure that supports it remains world-class. To use an old British phrase, failing to invest in infrastructure “is penny-wise and pound foolish.”