Chain of Thought

The Thing That Goes Bump in the Night Works 24/7

We just posted a news item stating that according to a new U.K. Logistics Confidence Index, while businesses across the pond are investing in problem solving over the next six months, they're tackling the same old problems. This leads to the conclusion that those mysterious things that continue to go “bump” in the night will remain in the dark—and soon grow big and strong enough to jump out and eat them in broad daylight.

I guess you can chalk that up to Darwin's theory at work—survival of the fittest. Philip Bird, director of corporate finance at Grant Thornton, seems to support this without citing Darwin.

“The next 12 months will likely be a period of consolidation in the [logistics] sector, creating more companies of scale who are able to invest in innovation and diversification, as continuing to do more of the same is simply not an option,” he said.

This reminded me of some of the things I heard from customers of 3PLs at last month's 3PL Summit sponsored by Eyefortransport. One told me they have seven major long term agreements with 3PLs lasting a minimum of three years. The challenge with long-term agreements, he added, is that as you get into the later years, the low hanging fruit of opportunity has already been picked. That requires customers to work a little harder with their 3PL partners to develop gainsharing targets (win/wins). Many do that by establishing metrics by which to evaluate success. This particular 3PL customer believes in fewer rather than more metrics.

“We believe if you focus on a smaller number of metrics you're in a much better place than if you go for a broader scorecard with lots of numbers,” he said. “That just confuses everyone.”

A metric like “inventory levels” is particularly vexing. Too much or too little can both be harmful. But there are times when either higher than normal or lower than normal can be beneficial, depending on business conditions. In her annual State of Logistics Report, released by CSCMP last month, Rosalyn Wilson, a transportation consultant for Delcan Corporation, noted that all business inventories increased at all ports and are now close to where they were when the U.S. went into recession. But if you break those inventories down you'll see that retail inventories are fairly flat. According to Wilson, that's because retailers have a good handle on their sales-to-inventory ratio and have been able to keep it low.

In other words, they've become innovative in how they push goods back on their suppliers. That's why wholesale inventories are now higher than retail inventories—which didn't used to be the state of logistics. But the current state is for those inventories to continue going up. And what's new about that is Ms. Wilson doesn't think that's a bad thing.

“With all the problems we're having with plant shutdowns globally and erratic ocean shipping, people are anticipating things and making sure they have things in stock,” she said. “I consider a higher inventory level actually being a positive sign.”

It's positive as long as these companies are innovative in how they manage their higher inventories. How are they lowering costs in other areas? Are they working with their transportation providers to find solutions? Wilson noted that transportation costs were up 6.2% last year—mostly on the strength of higher rates, not increased volumes. You can be sure these transportation providers are being innovative in keeping their own costs down. That includes working with their customers to take more advantage of intermodal transportation. This enables them to avoid adding to their truck fleets. As Wilson pointed out, now they just have to buy trailers and chassis rather than more trucks. That's leading to a new pattern of usage for intermodal, handling shorter hauls than its traditional 500-mile minimum.

And while at this point in the state of U.S. logistics higher inventories may be healthy, it will take innovation for companies to stay healthy as the economy changes and inventories need cutting again. Managing to stay on this logistics roller coaster requires good supply chain communications. If you need to reduce inventory padding, that will require challenging everyone—customers as well as your own sales people and buyers—to provide realistic lead time estimates. I like the advice provided by The Distributor Board in its “10 Reasons Why Distributors Have Too Much Inventory”: explore ways to execute tasks in parallel, rather than sequentially. Ask principle suppliers how you can work together to reduce lead times. Progress made here leads to permanent reductions in the level of inventory without affecting fill rates.

If all supply chain managers were innovative enough to make that happen, inventory padding would be a thing of the past and Darwin's performance metric would be raised another notch. But the tricky thing about innovation is that you can't measure it in a metric. It's more like a light switch. It's either on or it's off. You either succeed with your innovation or you don't. Either way, you have to keep reaching for that switch if you're going to shed light on what's going bump in the night. Do it before it changes to the day shift.

Related Editorial:

U.K. Logistics Pros Confident but Innovation Suffering

2011 Logistics Spend was 8.5% of U.S. GDP

Identify Your 3PL Pain Threshold

Wow Customers with What They Want Before They Want It

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