Category Archives: Logistics

Infrastructure Damnation 11: Postal Services

While most Supply Chains don’t run on public postal services, and instead rely on private transportation companies for both their freight and package delivery needs, public postal services are still needed. Why?

Without public postal services, there would be an effective private monopoly in mail and package distribution. While there are multiple private options, without a public body to set baseline prices, there is no incentive for the private companies to be competitive. As long as the private companies thought they could charge more, it is very likely that rates would increase across the board, consistently, until the average company switched to independent bike couriers.

More importantly, without public postal services, the average consumer would not be able to afford to shop online as much as she does now, which would likely lead to an across the board decline in sales for many companies, which would, of course lead to a decline in order volumes and Procurement’s negotiating leverage with its suppliers.

And this is looking like a reality in multiple countries right now. As discussed here on Sourcing Innovation over the last few years, The First World Postal Services Are in Trouble and the, US, UK, and Canadian public postal services are all deep in debt and may need to drastically reduce services in the coming years in order to balance the books and keep in business. Consider SI’s recent posts on the US, UK, and Canadian postal services (including, but not limited to, our posts that asked if the U.S. Post Office Can Be Fixed and Too Bad the US Post Office Did Not Follow Royal Mail’s Lead). They are billions in debt (Canada Post is over 1 Billion in debt exclusive of pension liabilities, the recently privatized Royal Mail has a debt to equity ratio of 91% (which puts its debts at over 1 Billion US Dollars, and US is over 100 Billion in debt (cnsnews.com) when underfunded pension liabilities are taken into account, and it’s not getting any better.

While one may think that this will never happen, as Canada has had its own public mail service since 1867, the US has had a reliable public service since the Pony Express started back in 1860, and the UK has had public mail since 1516 — but we could be just a few years away from the day it’s private bike courier for mail and small packages (and we need a Dark Angel for reliable deliveries). It is likely that Royal Mail is only still in existence because it was privatized (and that postal services in North America, if they do not drastically restructure operations, will have to follow suit).
And while you might not see a large impact to your supply chain, since the 3PLs and trucking companies are here to stay, when your order volumes decline and you have to pay double just to send a contract across town, you will.

Provider Damnation #69: 3PL Firms

Today we tackle our first provider damnation — Third Party Logistic (3PL) firms. These firms, or providers, provide logistics services for part or all of the organization’s supply chain management functions. Unlike trucking companies, ocean cargo companies, or air freight companies which simply manage trucks, ships, and aeroplanes, 3PL firms specialize in integrated operations and manage both multi-modal transportation (where the goods are trucked from the plant to the dock, shipped on a cargo carrier to a foreign port, loaded onto a truck for the local warehouse, and then loaded on another truck to the local airport when expedited air freight is needed) and warehousing on behalf of the client (that might need goods from multiple suppliers simultaneously cross-docked and shipped to local warehouses and storefronts across the country from a central warehouse).

For many under-staffed, under-supported, and under-platformed logistics departments, 3PLs are a blessing because, without enough staff to analyze options or modern technology platforms to crunch the numbers, 3PLs offer the organization an instant cost savings, a substantial time savings (because they do all the work), flexibility (as they can adapt to new regions and new demands quickly), and focus (allowing the logistics department to just worry about the warehouse and local distribution / shelf restocking).

These advantages are there for a reason, to cloud the disadvantages that 3PLs also bring — because they are a true double edged sword that, depending on the angle you see it from, shines as bright as the sun or drowns you in the darkest night of the abyss.

In exchange for cost savings obtained by the 3PL, the organization gets IT headaches. In exchange for flexibility, the organization gets a loss of visibility. And in exchange for focus, the organization gets a complete loss of control.

The 3PL is going to use their own TMS (Transportation Management System) to manage your organization’s freight, and this is going to contain the data your organization needs to complete import/export and global trade documents, the data Finance needs to confirm the invoices, the data Accounts Payable needs to match the goods receipts to the invoices, and the data Sourcing/Procurement needs to analyze the total spend. And if you think they are going to have an out-of-the-box import into any of your systems, think again. Unless you use one of the three systems they decided to support, it is CSV or XML dump and good luck Mr. and Mrs. Client.

The 3PL is going to manage the carriers it uses, the lanes they take, the cross-docks they use, and so on. Your visibility, especially if you don’t have a tight integration, might be limited to ship date, status, expected delivery date. Not very good in today’s world where you might need to know where that critical shipment is at all times.

Finally, the 3PL is going to contract the carriers it uses, and if they suck, well, too bad for you until the contract is up. You might get a carrier that, instead of showing up an hour after your warehouse loading dock opens, as per the contract, consistently shows up an hour before it closes that uses refrigerated trucks that only cool to 5C above mandated transport temperature and that occasionally “forgets” to lock the back leading to inventory regularly going missing, resulting in a lot of claims to the 3PL and/or your insurance company. Remember, if you give the 3PL the authority to negotiate contracts on your behalf which can’t be terminated until the carrier is insolvent, your organization is, simply put, screwed.

Organizational Damnation #58 Logistics

Logistics should be Procurement’s best friend, but if Logistics is a separate organization, Logistics can be one of Procurement’s worst enemies. This is because while Procurement believes that it’s job is to negotiate the best overall deal, including transportation, Logistics believes transportation is it’s business, and Procurement should just stick to unit price or landed cost from overseas suppliers and let Logistics use it’s relationships to get the best deal.

And while this sounds like a reasonable division of labour, there are a few issues with this arrangement.

  1. The best deal is not always on a purchase level.
  2. The best deal can not always be negotiated by Logistics that have long-term relationships with incumbent carriers.
  3. The best deal can often be improved by atypical routes.

What do we mean by this?

1. If Logistics is in charge, they will obtain “best rates” from current carriers for Procurement for regular routes. But these will be based on current contracts, not new contracts — and if the contracts were not obtained competitively, it won’t be the best rate.

2. if Logistics is in charge, they will look at preferred suppliers for “best rates”, and not go out to bid until it is time to renew the global standing offer contracts, bid sheets which will often be sent only to “preferred” suppliers only — sometimes new suppliers, especially in restricted geographies, will have the best rates.

3. If Logistics is in charge, they will typically look at a fixed set of typical routes — not atypical routes from nearby airpots, nearby ports, or nearby dockyards. It may require a few more miles on a truck, but if the airport fees from a secondary airport are half that of the major airport, it might be worth it.

Plus, the best deals are often negotiated when Procurement can put out a tender that groups nearby lanes on unrelated bids, they can often get better rate sheets for Logistics than Logistics can, especially since Procurement is often impartial and not managing the relationships day-to-day.

But if Procurement tries to use its ability to get Logistics a better deal, Logistics will feel that it’s rights are being trampled on and might do everything it can to get in the way. It will try to prevent tenders, feed backdoor information to preferred carriers, and spread rumours that your actions will damage relationships and increase prices.

What can you do? There are only two options.

Either Procurement manages to convince Logistics to use its processes and best practices to source transportation bids and get the best rates or it manages to convince the C-Suite that Logistics should be under its purview and that the two departments should be merged into one under the CPO.

Geopolitical Damnation #31: China and the New Silk Road

China is arguably, and simultaneously, the world’s oldest culture and the world’s newest mega-economy and super-power. Not only does China have the 2nd largest GDP in the world, but it is one of only 4 countries that are net international creditors (the other three being Norway, Luxumbourg, and Switzerland). In comparison, the US, with the largest GDP (of slightly less than 18 Trillion), has an external debt that is roughly 18 Trillion. (In other words, it’s debt now exceeds its annual GDP!)

It’s also the world’s most populous country with 1.35 Billion people and the second largest country by land area. It has the world’s third longest river, 14,500 kilometers (or 9,000 miles) of coast lines, approximately 130 ports open to foreign ships, over 11,000 kilometers (or 6,800 miles) of rail, and over 180 commercial airports. It’s rail network and ships transport a significant percentage of the world’s global trade and traffic is still increasing annually.

China is no longer the emerging economy of the 80s and 90s that you outsourced to and imported from — now it is the emergent economy that is outsourcing to Brazil (to serve the North American Market, consider Foxconn) and Africa (to serve the European market). And, for most multi-nationals, it’s their newest, and most promising (and potentially most profitable) market. China already has over 220 billionaires, and this number increases annually. (The US has 442.)

And as a result, China is turning the traditional sourcing world topsy-turvy — especially now that the New Silk Road (China’s Grand Strategy has been operational for eight weeks. (Source: UNZ) As described in the UNZ article, and on SI last fall (in What Impact Will The New Silk Road Have on Global Trade?, for e.g.), this 13,000 km railroad that crosses China from East to West and then Kazakhstan, Russia, Belarus, Poland, Germany, France, and finally Spain enables trade across most of Eurasia. And when the high-speed rail is complete, transport from China to Europe will take even less time than it does now. And China, which is home to 7 of the world’s top 10 container ports and which serves up air cargo that represents more than one-third of global trade value (even though only 1% by weight), will control even more of global trade then it does now! While also being your biggest customer.

You can’t deal with China in the old way anymore. Gone are the days when they were the low cost provider that needed your business. Gone are the days when you could fall back on Mexico. And gone are the days when you never needed to worry about the China market. Now they are a lower cost provider, due to their increases in efficiency (just like Japan increased in efficiency after WWII), but they don’t need your business. They have money and they have the world to sell you. Because Mexico was almost abandoned for China, there are few factories left that can produce modern electronics and none that can produce the volume to equal a Foxconn. And with most markets stagnant, China is one of your few opportunities for growth. Moreover, the supplier you are negotiating with to produce your cell phones for Engineering might be the same supplier your sales team is negotiating with to buy IT’s new mobile factory management software suite.

In other words, when China is across the table, they are not a vendor or supplier that can be beaten down with old-school hard-ball negotiation (even if they historically put melamine in the milk, lead in the paint, and who knows what in the pet food) — they are a partner, and equal, and must be approached as such. Even if you never sell to them, you might sell to one of their partners, and they talk just like we do. This doesn’t mean that you shouldn’t be determined in your negotiations — as you should always fight for the best deal — but be fair, realistic, and base your demands on fact and should-cost models, not empty threats or baseless demands for unreasonable cost reductions.

China is about to become your upstream as well as your downstream supply chain. You have to abandon your old view of the world, accept this reality, and start preparing for it. It doesn’t have to be the damnation that causes your undoing. It can be your salvation. Your choice.

Infrastructure Damnation #13: Ports & Labour Strikes

Last year, in the fourth quarter during the critical Christmas shipping season, truckers, clerks, dockworkers, and other union workers went on strike and effectively closed the Ports of Los Angeles and Long Beach. The Port of LA typically receives over 330,000 TEUs (Twenty-Foot Equivalent Units) of loaded inbounded containers each month, which equates to roughly 4 Million or so TEUs a year. A single TEU container can hold up to 47,000 lbs of cargo and can accommodate 796 bushels of soybeans or approximately 6,192 shoeboxes. (That’s a lot of shoes! At the rate of 1 pair a day, it would take over 17 years to wear them all.) And while we haven’t yet been able to find a tally of the losses, as a benchmark, if the ILWU (International Longshore and Warehouse Union) went on strike and shut down all the west coast ports, estimates are that it would cost the US economy 2 Billion a day. A complete shutdown at the ports of Los Angeles and Long Beach would, thus, likely cost the US economy over 1 Billion a day since, of the roughly 116 M short tons of foreign imports that came into West Coast ports in 2012, 74 M (over 60%) of those short tons were through the ports of Los Angeles and Long Beach!

In 2013, a 40-day labour strike occurred at the Kwai Tsing Container Terminal in the Hong Kong Dock Strike. This strike cost Hongkong International Terminals almost HK $5 Million in daily losses as the loss of over one third of the workforce caused average delays of 2 to 4 days for all ships. That’s a loss of roughly HK $200 Million!

In 2012, the industry was almost paralyzed when the East Coast ports threatened to go on strike on October 1, as this strike was only narrowly averted at the last minute. This strike could also have cost the US Economy Billions.

In 2008, in protest of the Iraq War, the ILWU encouraged longshore workers to “shut down all West Coast ports” by walking off the job on May 1, 2008 to “Make May Day a ‘No Peace, No Work’ holiday”. On that day, more than 10,000 ILWU workers from all 29 West Coast ports voluntarily stopped work, effectively shutting down all west coast ports for a day.

In 2007, we saw the German National Rail strike of 2007. While it was only for 3 days, starting on November 14 and ending on November 17, it was the largest strike in history against Deutsche Bahn, shutting down freight service as well as passenger trains. Even though management brought in managers and other employers to keep trains running, more than 40% of freight trains — needed to carry cargo to and from docks — were halted. The strike cost over € 50 Million a day.

Strikes aren’t a new occurrence. We can keep going, all the way back to (at least) the 1792 Philadelphia River Pilot’s strike. More importantly, since unions aren’t going anywhere (and are, in fact, gaining ground in the emerging and newly emergent economies), strikes aren’t going anywhere either.

And they will bring your global trade to a halt if you are not prepared for them.

How do you prepare for them? Keep an eye on all of the ports, rail, and trucking companies you use to move your goods and when their union contracts expire. When expiration draws near, monitor the situation. If it looks like talks will break down, make sure you have alternate options at the ready. Have plans that use other ports, and other trucking companies, even if those ports are further and those trucking companies cost more, if the goods are critical to your bottom line — and if they are strategic, and small enough, consider air freight from a secondary airport to a secondary airport. (Solutions like FreightOS can often help you identify nearby ports and airports and relative costs.) While the hope is that you will never need to use less efficient and less cost-effective options, if the alternative is risking your goods trapped in a port for months, a less profitable sale is still much better than no sale. (Remember, No Sale, No Store.)