Monthly Archives: June 2013

Can Trucking Clean Up Its Act?

A recent article over on Inbound Logistics on Going Green to Save Green (which you all know is true after reading SI for years) had a scary statistic: freight trucks are on pace to increase their carbon emissions by 40 percent over the coming decades, according to the Department of Energy’s Annual Energy Outlook. Ouch!

With strict new fuel economy standards for passenger vehicles, which were never the big emission culprit in the first place (they just took the blame for all the pollution caused by ocean shipping, which contributes approximately 3,500* times the pollution produced by all personal automobiles on the planet, and ground transport), this means that trucks are going to become the biggest producer of road sector emissions. The logistics sector constitutes about 6% of the total man-made GHG emissions, with transport as a whole constituting about 12%. This says that the personal automobile, which is 50% to 60% of road sector emissions, depending on the source, accounts for less than 2% of total CO2 and GHG emissions as road transport is only about 25% of logistics emissions (with the rest coming from rail, aviation, and ocean shipping) and that trucking will soon account for more than 2% of total CO2 and GHG emissions.

This does not bode well for the trucking industry which is already hard hit with an impending driver shortage of 240,000, a 100%+ annual turnover, and onerous regulations. With the growing desire of the Millennials (Generation Y) to only work for companies that are socially responsible, this is going to make it even harder to recruit young drivers (which is a must! How long do you think an industry with an average new graduate age of 54 can last without fresh blood?)

So what can it do? While hybrid is an option for smaller trucks, such as UPS and Fedex parcel delivery trucks, it’s not a great option for 18 wheelers (which have to roll on, and will have to continue to do so even after America rediscovers rail). The first thing the trucking industry needs to do is switchover to clean diesel (ULSD) vehicles as fast as possible. Not only is it 97% cleaner than regular diesel, but a well-designed diesel engine can be 40% more efficient than a gasoline engine.

The next thing it needs to do is switch to lightweight pallets and containers. For example, as illustrated in the Inbound Logistics article, a heavy-duty plastic container has only one third the weight of a steel container, and is just as effective. Lower shipment weight translates into a lower fuel requirement which translates into lower emissions.

The third, and most important, thing it needs to do is eliminate empty miles. An empty trailer can weigh as much as 7.5 tons / 15,000 lbs, which is almost 20% of the maximum allowed weight of 40 tons on most US highways. This says that if a truck has to return to its origin point empty, it’s using 120% of the fuel requirement. So how does it do this? First of all, it only works with buyers who recycle containers and pallets so that at least one trip out of every X is full just with reusable containers and pallets. Secondly, it balances its routes by way of the right mix of contract and spot-market deliveries. As hinted at in our recent post on BuyTruckLoad.com which noted that you could expect to pay an average of 15% less on the spot market, an optimization-powered spot-market hub which analyzes a buyer’s need against all of the “empty miles” of all carriers in the area can help a carrier identify the right customers to insure that it’s trucks stay full.

And while trucking may not be able to keep pace with the passenger automobile, if it does these three things, it will be pretty close. Clean diesel has at most half the sulfur content of gasoline (which has to average 30 ppm from any single manufacturer, compared to 15 ppm for clean diesel), diesel engines will be (on average) one third more efficient, lighter weight packaging has the potential to reduce emissions by one sixth, and eliminating empty miles by 80%+ (which spot-market hubs have have the potential to do) will reduce GHGs by another one-sixth. Put this altogether and the GHG emissions from clean diesel engines, which are already twice as clean as gasoline engines, can be effectively reduced by about another five sixths, or 83%. In other words, a 40% GHG reduction is within reach, and close to the mandated 45% reduction from the federal vehicle standards which mandate a fuel economy increase of new passenger vehicles from approximately 30 mpg in 2011 to 54.5 mpg in 2025.

So, if it wants to, Trucking can clean up its act. The question is, will it?

* As per this historical post on SI, 15 of the world’s biggest cargo ships emit more pollution than the roughly 750 Million cars in operation around the globe. The world fleet in 2011 was 104,304 ships. Some are Post-Panamax and emit more pollution than 50 million cars, some are much smaller. Given the average size, the factor of 3,500 is a good approximation.

Even China Knows that You Should Home (Market) Source!

SI has been telling you since 2007 that you should be Home Sourcing. SI has outlined the Advantages of Home Country Sourcing, shared a great post on Home-Shoring from the Manufacturing Innovation Blog, and given you another reason to source close to home. But have you listened? For the most part, no.

But you should, or this is another area where China is going to eat your lunch too. As per this recent article over on the Washington Post that asked if U.S. Manufacturing [is] Making a Comeback, a Chinese company has just set up a factory in the United States!

This January, Lenovo (which acquired IBM’s PC business in 2005), a Beijing-based computer maker, opened a new manufacturing line in Whitsett, N.C. to handle assembly of PCs, tablets, workstations, and servers. Why? According to Jay Parker, President for North America, it needs the flexibility to assemble units for speedy delivery. But, more importantly, the math adds up. Chinese wages are on the rise, the risk of loss to piracy (at sea) is increasing every year, and we have reached the point where the higher North American labour costs can be offset by savings on logistics. And Chinese companies know logistics costs as good as anyone. (As per Sunday’s post on China Packaged Goods, with a [major] stake in 16 global ports, thousands of shipping lanes, and a fifth of the world’s container fleet, China pretty much sets the prices for Ocean shipping these days.) A barrel of crude oil that was $27 in 1993 and $35 in 2003 is now $88 in 2013, inflation adjusted. That’s over a 3X increase since the early stages of the outsourcing craze. And China wages have increased so much in China over the last decade that a new study just found that labour costs are now 20% lower in Mexico. (Source: SCDigest) Plus, the wage gap between China and North America is expected to shrink to a mere $7 per hour by 2015! When you factor in logistics costs and loss due to theft, IP theft, and (ocean) piracy, that’s nothing! (Especially when the US is on pace to have lower manufacturing costs than Europe and Japan by 2015! There’s a reason Nissan, Honda, and Toyota are exporting from the US. That’s right, exporting from, not importing into.)

When you add it all up, and consider the production efficiencies that come from our ability to constantly innovate better processes, it just makes sense to bring (last stage) manufacturing back to North America. (Especially when the productivity of North American workers keeps rising.) Maybe you still outsource key components, but you certainly don’t outsource washing machine production, for example. The last thing you do is ship empty space or dead-weight.

Is Your Supply Management Ethical?

Corporate Social Responsibility (CSR) and Corporate Ethics are becoming more important by the day. Just ask BP, the Gap, Chick Fillet, and Monsanto, who have all had to deal with Boycotts in recent years (for oil spills, supply chain factory fires resulting in worker death, stance on gay rights, and genetically modified food). You don’t want to get caught in the cross hairs of an organized activist group like PETA, GreenPeace, or Anonymous.

It only takes one slip up somewhere in your supply chain to become the target of globally organized boycott. Thus, you need to take a step back and ask if your supply management is ethical.

A code of Supply Management conduct, as described in The Procurement Game Plan, is a good start, but it’s not enough. You also need a supplier code of conduct, and you need to insure that not only do your suppliers honour the code of conduct they agree to, but themselves have a code of conduct for their suppliers. The buck stops with you, so you are responsible for making sure the buck is spent ethically. Turning down free World Cup tickets from a potential supplier is a good start, but making sure the supplier adopts a code of conduct that prohibits them from even offering such a wasteful, lavish gift in the first place is better — especially if that money is redirected to safety improvements and community programs for its workers.

Supply Management Ethics provide the foundation for CSR, so it’s important that your organization get them right. One of the experts on this topic is Stephen Guth, Chief Corporate Counsel and VP Vendor Operations for the National Rural Electric Cooperative Association and author of “The Contract Negotiation Handbook”, “The Vendor Management Office”, “Hotel Contract Negotiation Tips, Tricks, and Traps”, “Project Procurement Management”, and a set of free “Procurement Contract Templates”. This fall, Stephen is going to be giving a session on Building a Strong Foundation with Supply Management Ethics at the NLPA Conference where he will go beyond the usual horror stories of supply management professionals in jail jumpsuits and look at supply management ethics through the eyes of a forensic auditor. In this session, you will go beyond the process of learning how to put a code of conduct together and learn what investigators look for, who is most likely to violate supply management ethics, and why. You’ll learn how to identify potential problems and violators before they occur.

If you haven’t already, consider registering for the NLPA Conference today.

Who Is Your Vendor Really Working For?

SI has done a lot of posts on how to identify the right e-Sourcing/e-Procurement/e-Supply Chain vendor, over the years, but one question that is often overlooked, or left unstated, is “who is your vendor really working for“. You might expect, based upon their marketing and their business, that they are working for their customers who are paying them, but is this always the case?

To answer this question, we need to go back to the basics of how businesses are structured and funded.

A business is either public or private. A public business is funded entirely by revenue and has its performance judged by Shareholders and Wall Street. A private business is eventually funded by revenue but initially funded either by founders, third-party angels and/or VCs, or a private equity group. There are other business structures and funding arrangements, but these are the most common in our space. Let’s consider each of these.

Public

A public company will make an effort to work for you, but only so far as it does not hurt their Wall Street rating and does not cause the Shareholders to ask questions. They live and die by the stock price, so if the stock price falls, they will typically have to react by way of layoffs to meet whatever earnings number Wall Street has dictated, and probably layoff your account manager and the developer who was committed to your upgrades in the process. They work for you only so far as it doesn’t hurt them in the eyes of Wall Street which typically does not have the long term view you need as a Supply Manager. And while you’ll never get fired for buying from a big public company, you won’t be important to them, unless you’re a Fortune 100 and bringing them > 10% of their business. (And even then, you’re only important until they land someone bigger.)

Private – Angel & VC

Like a public company, a private company controlled by third party investors will make an effort to work for you, but only so far as it meets the objectives of the Angel and/or Venture Capitalists who are driving the board towards whatever vision for the company they believe will make them the most amount of money in the shortest time possible. And since Angels and Venture Capitalists are ultimately only concerned with the balance of their bank account, that vision will be whatever is sexy and likely to support a quick initial public offering (so they can get their return). If that means getting as many new customers in a year as possible to allow for a quick public exit, then all of the money and efforts will be directed towards sales and marketing and customer support and incremental product development and improvement will be an afterthought, if it is even given a thought at all!

Private – Founder Funded

A private company controlled by a founder, or a small group of founders, will be focussed on the objectives of the founder(s). If the goal of the founder(s) is to make money and grow the business organically, the company will have a razor-sharp focus on meeting each and every customer need that the customer is willing to pay for. If the focus of the founder(s) is to get Angel & VC funding as part of an ultimate goal to get the company to an initial public offering, because the founder(s) are vain and more concerned with public image and sex factor than quiet success, the company will work for you only so far as the founders feel it won’t make the company less attractive to the Angels & VCs that can help to take them public.

Private – Private Equity Group

A private company controlled by a private equity group will be razor-sharp focussed on the needs of the customer. Private Equity Groups exist to make money — and while they may sometimes take a company public, this is not their ultimate goal. They take a company public only when the opportunity is right and they’ve reached the point where they believe they can’t make more money growing the company organically over the long term. Generally speaking, private companies controlled by private equity groups will be boring as hell compared to the sexy companies driven by venture capitalists, but they will be the only companies that make you feel like you are the center of the business world, because, in the end, they need your money to pay the bills and keep the lights on. It’s their model, and the one model where you are always the center of attention.

So don’t forget to ask yourself “who is this vendor really working for” before signing on the dotted line. They won’t tell you (the truth), but if you look at their ownership structure (and the frequency of their press releases), you can figure it out.

As a final note, if you are still seeking spherical supply solutions (Part I, Part II, and Part III), you should take another look at the EU Supply Management software providers. Not only do they have more experience in international implementations, but most of their companies are controlled by private equity groups where as most of the North American companies are either funded by Angels and VCs or part of big public companies.

CPG: China Packaged Goods

It used to be just “Made in China”. Now it’s also “Shipped From China” and “Shipped to China”. No matter how you look at it, China’s almost always in the equation.

What is SI talking about? In addition to being the primary outsourcing destination for many North American & European MultiNational Organizations, and one of the biggest manufacturers in the world in many areas of CPG, China is now a major driving force behind the global shipping industry. As per this recent article over on the Economist on China’s Foreign Ports, China has a significant influence over sixteen (16) major ports all over the world.

In addition to the major ports of:

  • Shanghai
  • Hong Kong / Shenzhen

China also has a (mainland) stake in:

  • Singapore
  • Djibouti
  • Chittagong (India)
  • Kyaukpyu (Myanmar)
  • Hambantota (Sri Lanka)
  • Colombo (Sri Lanka)
  • Gwadar (Pakistan)
  • Karachi (Pakistan)
  • Tin Can (Nigeria)
  • Lome (Togo)
  • Piraeus (Greece)
  • Antwerp/Zeebrugge (Belgium)
  • Seattle (USA)
  • Los Angeles (USA)

Thus, in addition to being the world’s largest exporter and second-largest importer, in addition to controlling a fifth of the world’s container fleet through giant state-owned lines, and in addition to building 41% of the ships built in 2012, it’s going to control a significant percentage of the global shipping routes. Moreover, in addition to the mainland China stake in the above ports, privately owned conglomerates in China and Hong Kong – including Hutchison Whampoa, China Merchants Holdings, and China Shipping Terminal, are also buying stakes in global ports. These firms also own stakes in Suez, Terminal Link, and a forthcoming port in Tanzania.

In other words, at the end of the day, China will have a stake in every step of the global (Consumer Purchased Goods) supply chain. It will supply at least some of the raw materials (as it controls some global markets, such as rare earth metals where close to 90% come from China), make some of the parts, assemble one or more subcomponents, ship it from a port it controls, on a ship it built, to a port it controls — where the goods will be unloaded using equipment where components came from China, put on a truck where the steel came from China, and delivered to the store where a China Conglomerate owns a minority stake. We might as well just accept the reality and form the Alliance today. Why wait?