21st annual State of Logistics Report: Beating the Recession; Making dollars and Sense out of Jabulanis and Vuvuzelas; Mergers and Acquisitions Show signs of Recovery
June 9, 2010: The nagging question raised during the Council of Supply Chain Management Professional’s 21st-annual State of Logistics Report, presented by Penske Logistics, was how industry could apply lessons learned during the recent economic tailspin to the new normal. Rosalyn Wilson’s annual presentation at the National Press Club in Washington, D.C., got right down to the nitty gritty details beginning with the title of the report: The Great Freight Recession.
For many companies, longer supply chains and speculative demand triggered an inventory clearinghouse. “All business inventories dropped for the first three quarters of 2009. Companies cleared inventories at a rate not seen in 30 years,” said Wilson.
But many were unable to keep ahead of the drop in demand. Consequently, the inventory-to-sales ratio (a measurement that compares inventory against sales for the same month, with a ratio of 1.0 indicating inventory excess and 1.5 equating to one and a half months of inventory at current sales rates) reached 1.48.
Orders placed months before the recession was in full swing continued to flow, despite market conditions. Retail was the quickest to respond, adjusting for declining consumer demand in early 2008. But the inventory-to-sales ratio skyrocketed from 1.26 in 2007 to 1.48 in early 2009. It returned to 1.26 by the end of last year and even reached 1.23 in the most recent report.
Corporate efforts to draw down stock accounted for most of the drop, but as demand has started to pick up, ordering has kept more in line with demand. Whether or not this lean position is sustainable was a hot topic among the panel of industry experts gathered to comment on the report.
Those Who Cannot Remember the Past…
Across-the-board cuts aren’t sustainable, but targeted efforts are stronger and offer a better opportunity to create long-term efficiencies, explained Don Ralph, senior vice president for supply chain and logistics at office supplies retailer Staples.
Burlington Northern Santa Fe Railway (BNSF), for example, made a concerted effort to specify improvements in processes “all the way from the terminal gate to the customer door,” said John Lanigan, executive vice president and chief marketing officer for BNSF.
Specific manufacturing industries responded in kind. Covidien, a medical device developer, fared better than most during the economic stumble, so it proactively invested resources toward automating its distribution centers.
“By bringing automation into our facilities, we are significantly more productive than simply throwing people at inventory,” said Peter Sturtevant, vice president of supply chain solutions and transportation at Covidien. “That’s going to be key to our distribution center strategy moving forward.”
Miami University of Ohio
Covidien’s direct approach to improving warehouse productivity paid extra dividends by allowing it to organically consolidate its U.S. distribution footprint. It’s these lessons that will serve industry well as it emerges from the recession, suggested Tom Speh, James Evans Rees Distinguished Professor of Distribution, The Richard T. Farmer School of Business, Miami University of Ohio.
“I think we’ve learned some things about managing inventory. But what concerns me is that research demonstrates only 10 percent of cost savings become sustainable following a recession,” he added.
For example, many retailers changed their focus to lower-cost items, shrunk product SKUs, and reduced the number of items per outlet to eliminate substantial restocks. Manufacturers maintained lean ordering, requiring suppliers to hold inventory and therefore reduce exposure to obsolete products.
Long supply chains also impacted inventory strategy. “Several manufacturers reported shutting down production lines because they lacked the necessary materials and parts to produce finished products,” said Wilson.
But even with all these changes, and perhaps in part because of them, “we’ve opened up the supply chain to greater risk,” observed Speh. “Industry may have cut a little agility out of the supply chain, and we need to make sure we can get it back.”
…Are Condemned to Repeat It
Out of necessity, shippers and service providers leaned their operations to reduce costs. Now they are exposed to re-emerging risks. Some of this comes from reduced capacity on the carrier side.
Many shippers responded to their own internal cost pressures by moving from long-term carrier relationships to the spot market or third-party logistics partnerships. 3PLs, in turn, pressed carriers harder for rate reductions, explained Wilson. As fuel costs dropped, surcharges played less of a role in revenue generation for trucking companies. Length of haul also continued to drop as shippers shifted more long-haul moves to rail/intermodal and utilized regional distribution strategies where possible.
With truckload volumes dropping faster than capacity in 2009, there was little incentive for motor freight carriers or asset-based 3PLs to keep equipment. In addition to planned asset attrition, approximately 2,000 trucking companies went out of business during the last year. Beyond that, another 2,000 carriers could be driven from the market in 2010 due to increased operating costs and low demand, Wilson added.
Citing an American Trucking Associations (ATA) figure of a 12.8-percent contraction in capacity in 2009, Wilson commented that asset utilization stood at only 75 percent, which wasn’t sufficient to generate new truck sales. Orders have only recently started to pick up in 2010.
While equipment capacity is a growing concern, a looming driver shortage is gaining currency again as well. An ATA study in 2005 showed a shortfall of 20,000 long-haul truck drivers. But because freight volumes fell so fast over the last few years, the driver issue was barely noticeable.
Since December 2007, approximately 142,660 drivers have exited the field, Wilson said. More telling, one in six drivers is 55 years old or older, and will be nearing retirement as volumes finally start to rebound. UPS, for one, reports that it expects to see 25,000 of its drivers retire over the next five years. Less than one quarter of current drivers are younger than 35 and the industry has been attracting a smaller share of younger workers entering the job market.
Complicating matters, new safety recordkeeping and enforcement rules under the Federal Motor Carrier Safety Administration’s Comprehensive Safety Analysis (CSA) 2010 will contribute to driver shortages and slow the return of capacity to the market. Noël Perry, economist with FTR Associates, predicts a shortage of 200,000 drivers by the end of 2010 and another 200,000 by the end of 2011, for a total shortfall going into 2012 of 400,000 drivers.
A Volatile Road Ahead
Even with a steady recovery of demand, volatility on the supply side of transportation capacity means 2010 will continue to challenge logistics professionals. While the State of Logistics Report is not intended to be predictive, Wilson did acknowledge that 2010 indicators speak to this unpredictability.
On rates alone, driver pay has been driven down as carriers scramble to find ways to cut costs. Layoffs and early retirements, without a swell of new drivers, add to the problem. Safety enforcement is likely to replicate the experience of earlier changes such as the commercial driver license, security background checks, and drug testing—shrinking the pool of drivers and increasing the cost to find and keep qualified workers.
But it isn’t all about drivers. Required equipment and technology upgrades are pushing the cost of vehicles higher. Using rail and rail/intermodal, equipment can be brought back online. The railroads are already paying attractive wages and offering good benefits, so railroad jobs are some of the best in the industry. But ocean carriers are holding capacity back to try to support price increases. With new builds in the works, the ocean lines are scrapping older vessels to avoid a glut. Even the troubled airlines, with some widebody capacity idled, are slow to bring back aircraft.
If the cost of transportation is almost certain to go up because of these natural and artificial constraints on capacity, it appears the best supply chain strategy to control costs will be to watch inventory positions and keep supply closely aligned to demand.
During the downturn, many carriers decommissioned aircraft and removed them from their fleets. The International Air Transport Association says that 12 percent of cargo capacity was lost in 2009, with widebody freighter capacity down 22 percent. The airfreight industry is experiencing an intensive shortage of capacity, which has led to spiraling rates and a shipment backlog. But this was welcome news to beleaguered carriers who had been hit with high fuel costs and low demand.
Trucking, the largest component of the transportation sector, has been one of the hardest hit modes throughout the recession, with logistics costs dropping 20.3 percent in 2009. On a volume basis, truck tonnage was down 8.7 percent last year, over already depressed 2008 levels. There was abundant capacity competing for fewer loads, which led to price wars that often dropped rates well below cost on the spot market. As the market reverses itself and capacity tightens, shippers will be looking to their transport partners to help secure space.
Costs for the maritime sector fell 21.6 percent in 2009, as traffic through the nation’s ports contracted again. All top 10 ports, with the exception of Oakland, registered a decline in TEUs moved. Ocean carriers reported big losses in 2009, especially as spot rates were depressed below costs and desperate carriers tried to fill their ships, while idling others. Rates did begin to rise by the end of 2009 and have continued to strengthen in the first half of 2010.
The cost for rail transportation was down 20.6 percent in 2009. Carload traffic was down 16.1 percent and intermodal traffic declined 14.1 percent — 2009 was the worst year on record since 1988 when the Association of American Railroads began tracking this data. Every major commodity group experienced a decline. Much of the decline in intermodal traffic during the past year is attributable to the 33.8-percent drop in trailers hauled. The absence of fuel surcharges and aggressive pricing strategies dropped revenue to 3.01 cents per ton-mile in 2009 from 3.34 cents in 2008. The good news is that fuel as a percent of operating expenses went from 25.8 in 2008 to 15.3 in 2009.
One swerved with wild abandon; the other’s endless drone left television viewers abandoning sound altogether. Together, they captivated billions of people around the world for 31 days.
Adidas’ gravity-defying Jabulani soccer ball and the ear-deafening vuvuzela stadium horns created a buzz at this summer’s 2010 World Cup in South Africa, adding to the surreal atmosphere, if stirring some controversy. Goalkeepers had difficulty tracking the ball’s trajectory at high altitude and global audiences couldn’t figure out the swarming background noise—so much so that TV networks purposely muted ambient sound during telecasts. It was media frenzy on and off the pitch.
But like the old adage goes, any publicity is good publicity. Soccer fans are fanatic about the game, their clubs, their national teams, and their gear. From kits to kitsch, balls and horns included, pride feeds an insatiable appetite that manufacturers and retailers are all too willing to satisfy. Demand for the Jabulani and vuvuzela triggered an upstream supply chain wave that had factories trying to keep pace like defenders pursuing a mazy Lionel Messi run.
The Chinese factories that were pumping out thousands of plastic vuvuzelas and synthetic Jabulani balls found themselves adrift in a logistics counterattack only matched by the buildup of consumer demand before and during the World Cup. For many, it was a well-orchestrated game plan.
Media outlets reported that 90 percent of the vuvuzelas sold at the World Cup were made in China—mass-produced South African culture courtesy of the People’s Republic, go figure. The Ninghai Jiying plastics factory in Ningbo, China, began manufacturing 25,000 vuvuzelas a day in January, filling containers and exporting to South Africa. Another toy manufacturer in Yiwu shipped more than one million units all told.
The vuvuzela’s circus appeal has been surpassed only by its profitability. Each one costs approximately 36 cents to make and sells for as much as $10. It has also created a vertical market for noise creation and mediation. Two of South Africa’s largest earplug suppliers witnessed record growth during the World Cup. Ear Plugs Online’s sales increased 121 percent; Sheppard Medical sold more than 400,000 sets.
And there are signs the buzz might catch on at sporting venues elsewhere around the world, keeping low-cost Chinese manufacturers tooting their horns as demand drones on. In the United States, for example, Major League Baseball’s Florida Marlins offered 15,000 free vuvuzelas as a marketing gimmick during the World Cup.
Adidas’ Jabulani soccer ball presents a different sourcing challenge, at greater expense. Its thermoplastic polyurethane-elastomer is manufactured in Taiwan; India provides the latex bladder; and the ink, fabric, and glue come from China—where the balls are put together. The real deal sells for $150.
In spite of the asking price and perhaps because of the “noise” generated by the ball’s unique aerodynamics, the Jabulani has become Adidas’ best seller, with global sales expected to surpass 13 million units. In addition to the 6.5 million replica soccer jerseys it has already moved—three million more than during the 2006 World Cup—Adidas is predicting a record-breaking year with global revenue in excess of $2 billion.
Beyond the Jabulani and vuvuzela, other companies ramped up their supply chains to capitalize on World Cup fever. Manchester, England-based Concave Sports—a soccer footwear manufacturer that kicked off operations in 2007—partnered with third-party logistics provider OHL in January 2010 to manage retail and direct-to-consumer fulfillment in Asia, North America, and the United Kingdom. Good timing.
Serec, a California-based 3PL, opened an East Coast distribution facility to specifically manage Total Apparel Group’s fulfillment of FIFA and Kappa-licensed soccer apparel for Walmart—also in anticipation of the World Cup.
At the end of the day—to borrow a favored soccer pundit’s cliché—the World Cup is all about pageantry and performance, the vuvuzela and the Jabulani. It’s a global phenomenon without comparison. For some companies, even as the horns in South Africa cease blowing and the balls stop rolling, supply chain motions will continue marching to a rising Samba beat as the clock ticks down on preparations for the 2014 World Cup in Brazil.
An uptick in mergers and acquisitions (M&A) is a positive sign that the global transportation and logistics sector is recovering from the economic meltdown, according to PricewaterhouseCoopers’ first-quarter 2010 global transportation and logistics (T&L) industry analysis.
In the beginning of 2010, the pace of deal announcements in the T&L sector was strong, compared with 2009. Thirty-four deals were announced, which exceeds the total number publicized in each of the four quarters last year. Additionally, this quarter’s aggregate deal value is on pace to approach the value level of 2009; however, when excluding a major rail transaction from 2009 totals, 2010 deal value is actually on pace to far exceed last year’s level. This improvement may indicate that acquirers are gaining confidence to engage in larger takeovers.
“The positioning of acquirers to engage in deal activity continues to improve, supported by generally higher levels of traffic as well as better liquidity and capital market conditions,” says Kenneth Evans, U.S. transportation and logistics leader for PricewaterhouseCoopers. “Rising expectations for economic growth may encourage those acquirers who have remained on the sidelines to re-enter the deal market.”