Home - Adrian Gonzalez

7/3/2008

Ashton Kutcher has certainly matured as an actor since making “Dude, Where’s My Car?” back in 2000. Okay, maybe not, but I have an idea for a movie role that could elevate his stature in the movie industry. It’s a remake of the Dude movie, but this time he’s an owner-operator truck driver, who after spending a few hours in a Vegas casino, can’t find his tractor in the parking lot. After a hilarious dream sequence involving turtles and a brief love scene, Ashton learns that his truck was stolen and exported to Russia. I’m still working on the rest of the story line, but I can tell you’re interested.

In case you’re wondering, this movie idea was inspired by a serious conversation I had with the folks at LeanLogistics and Transplace, two companies with a great pulse on the transportation industry. Yes, the high price of gasoline is the top headline today, but this doesn’t mean that other problems facing the industry have gone away. There’s still a driver shortage, and capacity constraints will surely emerge again (maybe sooner than you think). On the latter point, there were close to 1,000 carrier bankruptcies in Q1 2008, according to the American Trucking Association, and over 750 in April alone! Bankruptcies are not new to the industry, but the number and rate are staggering nonetheless. Overall, more than 42,000 trucks, or 2.1 percent of the nation's tractor-trailers, were taken out of the market in Q1, according to Donald Broughton at Avondale Partners, an investment banking firm.

There’s another trend, however, that is even more fascinating. When large trucking companies get rid of used tractors, either as part of a replacement cycle or to reduce their capacity (as is the case today), the equipment typically works its way down to owner-operators via the used truck market. But thanks to the weak dollar and rising demand overseas, large trucking companies are exporting their used equipment to places like Russia, Vietnam, Eastern Europe, and Brazil. I haven’t been able to obtain firm statistics on the number of used trucks going overseas, but anecdotally some large carriers have exported “hundreds” of tractors in recent months, and one source estimated 21,000 tractors were exported in Q1.

What does this all mean to shippers? The pendulum is swinging back towards tight capacity, which will ultimately result in higher rates. The weak economy has buffered the impact to date, but it won’t last much longer, as more carriers go out of business, more trucks get shipped overseas, and truck manufacturers decrease their output. What can you do? Our past recommendations still hold true today: develop strategic relationships with your carriers, adopt “carrier-friendly” practices, and investigate other transport options, such as intermodal. These are all important things to keep in mind during a procurement engagement, which many shippers are doing today.

But are these actions enough? I don’t think so, mainly because we’re long overdue for a redesign of the industry. Shippers and carriers have been working the same way since deregulation almost 30 years ago. But everything about today’s world is vastly different than in the past. Not only is gasoline much more expensive, but supply chains are more outsourced and global, our roads more congested and in poor condition, consumer expectations are vastly different (“we want it all and we want it now”), our demographics have changed, our economy has shifted from manufacturing to services, and so on. We’re all living in a networked world: computer networks, telecommunication networks, MySpace, Facebook, LinkedIn, you name it. Except for the Transportation industry, where shippers and carriers still operate, for the most part, in standalone fashion.

But aren’t On Demand (aka Software-as-a-Service) Transportation Management Systems creating networks of shippers, carriers, and other trading partners? Absolutely, but these solutions primarily address the technology piece of the puzzle, and while they offer unique benefits compared to in-house implementations, they have yet to deliver the full value of the “network effect”, because the business processes and relationships between shippers and carriers are stuck in 1980.

Are we at the tipping point? Maybe, based on what I’ve heard from shippers and carriers the past six months. Just last week, at the SMC3 Summer Conference, shippers and carriers were standing up and taking the first step: admitting they have a problem and that things need to change. Of course, this isn’t the first time there’s been a call to action with nothing to show for it, but maybe things are different this time. For one, companies like LeanLogistics, Sterling Commerce, and Transplace continue to innovate, not only on the technology front, but on developing (proposing) new business process. It’s the latter that holds the most value for the industry, but only if shippers and carriers are willing to take off their leg warmers and Walkmans and join other businesses in the networked era.

I plan to write more on this topic in the near future, after I brush up on my Russian and finish my script. If any of you know Ashton Kutcher, let him know that I’ll be calling him soon, and to clear some space on his mantle, because this Dude is bringing him an Oscar.

Posted at 2:24 PM by agonzalez | Category: Transportation Management | Permalink | Email this Post | Comments (0)

6/6/2008

C-TPAT Spells 'Trust Me'

The last time the Government Accountability Office (GAO) assessed the Customs-Trade Partnership Against Terrorism (C-TPAT) program, back in March 2005, they reached the following conclusion:

“While [US Customs and Border Protection (CBP)] has developed a new strategic plan, it has not fully developed other management tools, such as a human capital plan, performance measures, or effective internal controls, needed to ensure that the program is actually meeting its objectives.”

Well, the GAO released a new report last week and the conclusion can be summarized more succinctly: It’s better, but not good enough. You can read the report for all the details, but here are two things that caught my attention (excerpted from the report):

“CBP does not have reasonable assurance that companies implement its [post validation] recommendations to enhance supply chain security practices in accordance with CBP criteria. Until CBP overcomes these collective challenges, CBP will be unable to assure Congress and others that C-TPAT member companies that have been granted reduced scrutiny of their U.S.-bound containerized shipments actually employ adequate security practices.“

“The difficulty of determining the deterrent effect of security practices continues to challenge CBP in seeking outcome-based performance measures for the effectiveness of C-TPAT’s efforts to ensure improved supply chain security. For example, CBP has not collected data on the results of C-TPAT members’ actions to enhance supply chain security. Moreover, the lack of security-specific performance measures limits CBP’s ability to evaluate progress for this program goal.”

This is a long-winded way of saying that CBP is trusting companies to follow through on their commitments, and that CBP doesn’t really know if any of this is actually improving supply chain security. Should we panic or demand some of our tax dollars back? I’m trying to keep my blog postings short, so I won’t delve into these questions too deeply now, but here is some additional food for thought.

The article on MSNBC.com reporting on the GAO report had the following subtext: “Report: Weapons of mass destruction could be smuggled into cargo containers.” But I question why a terrorist would set up such a long supply chain to create havoc when there’s plenty of ammonium nitrate fertilizer and nuclear and biological material right here in the US of A to create a “dirty” bomb. Sourcing locally would also result in a low carbon footprint bomb (who’s to say terrorists can’t be ‘green’ too).

My point is that the weakest link in preventing terrorism is a single person—a hospital technician, a scientist, a chemical plant worker, an air traffic controller, a bullied student, your neighbor down the street—who wakes up one day and decides to commit an evil act. It doesn’t matter how much money we spend or how many programs we put in place, someone, somewhere, at some time will eventually slip through.

This brings me to the importance of “failing well,” a concept I first wrote about back in 2002. When you consider that even the most fortified computer networks in the world are hacked or go down unexpectedly, security failures are to be expected. The impact ultimately depends on how “well” the system fails, a concept put forth by noted cryptographer Bruce Schneier in his book Secrets and Lies. In Schneier’s words, “security measures are characterized less by their manner of success than by their manner of failure. All security systems eventually miscarry. But when this happens to the good ones, they stretch and sag before breaking, each component failure leaving the whole as unaffected as possible.”

“Failing well” from a trade security and supply chain standpoint means executing a clearly-defined action plan that outlines roles, responsibilities, and chain of command in order to minimize the scale and duration of a disruption. Back in 2002, about a year after the 9/11 terrorist acts, I wrote: “it’s unclear at the moment how much effort has been devoted to creating such a plan.” Three years later, in the aftermath of Hurricane Katrina, the answer was painfully clear.

Well, so much for keeping my blog postings short. Now tell me what you think. Should CBP trust companies to follow through on their C-TPAT promises, especially as companies scale back investments in response to high energy prices and a slowing economy? Are we investing too much on prevention and not enough on failing safely? Do environmentally-friendly terrorists really exist?

Posted at 9:31 AM by agonzalez | Category: Global Trade Management | Permalink | Email this Post | Comments (0)

5/29/2008

Lessons from the Road

The spring conference season is finally coming to an end. Over the past few weeks, I’ve spoken or moderated panels at The Logistics & Supply Chain Forum, Transplace’s Shipper Symposium, and Manhattan Associates’ Momentum 2008. If you missed any of these events, you should plan to attend next year. They all had great agendas and speakers. Unfortunately, next year’s Shipper Symposium won’t be held in Northwest Arkansas, one of the most unique airports I’ve flown to recently. As the plane descended, I looked out the window, and all I could see was green farmland, chicken coops, and cattle. No highways, no cars, no tall buildings anywhere. And then we landed, just like that, in the middle of a farm. Okay, in an airport surrounded by farms. As the plane taxied to the gate, the song Nothing But Flowers by the Talking Heads popped into my head, the part that goes “This used to be real estate/Now it's only fields and trees/Where, where is the town/Now, it's nothing but flowers/The highways and cars/Were sacrificed for agriculture/I thought that we'd start over/But I guess I was wrong.”

But I digress…

Here are my key takeaways from my time on the road.

Dealing with rising fuel prices is the number one issue facing transportation professionals today. No surprise here. During a panel session I moderated at Momentum 2008, James Durfee, Director of Supply Chain Operations at MeadWestvaco, said their transportation budget for this year had assumed an oil price of $85 per barrel. A few weeks ago, they had to update their budget using $115 per barrel. Now that oil is above $130, it may be time to sharpen those pencils again. What can companies do lessen the impact of high fuel prices? The low hanging fruit opportunities are obvious to most transportation executives: improve your load factor, optimize your routes, conduct a procurement engagement, use more rail or intermodal, etc. The people I spoke with at these conferences are looking for more creative or less-obvious opportunities, but I didn’t hear of any. Some folks mentioned fuel hedging, but it seems that the window of opportunity may have already passed for locking in attractive rates. Cross-shipper collaboration is also attracting renewed interest, but it’s still a challenge to execute. Get Sales to increase their prices to customers? Good luck winning that battle. For the time being, it seems that the best approach is to keep focusing on the fundamentals.
Green is a hot conference topic, but you’ll still find more questions than answers. As I've highlighted before, most companies are still in the “information-gathering” stage, so attending conferences like these are a great starting point. For example, the first day of the Shipper Symposium was almost fully dedicated to the topic. In addition to my presentation (“Inconvenient Truths About ‘Green’ Supply Chains”), there was “The End of the Oil Age: Understanding the Perilous New World of Supply Chain Management” by the always-provocative Chuck Taylor, “Lessons from a Multi-Stakeholder Approach to Carbon Removal” by Dr. Jonathan Johnson from the University of Arkansas, and “Energy and Carbon Efficient Supply Chains” by Edgar Blanco from MIT.

I also moderated a panel discussion with Rick Bingle, Director of Global Supply Chain at Recreational Equipment Inc. (REI), and Deb Trusty, Director, Supply Chain, Wal-Mart & Club at Del Monte Foods. The conversation touched upon many different aspects of “green” and sustainability, too many to recap here. Both companies are doing great work in this area, with REI perhaps a bit further along (you can find out more about REI’s work in this area on its website). Rick did comment on something I said in my presentation, which I thought was interesting. I made the point that ‘green’ is good for business, because, for the most part, only 'green' projects that are good for business (or required by law or Wal-Mart) get done. Rick asked a simple question: What does “good for business” mean? His point is that the answer will vary by company, and that it won’t always be focused on financial results, at least not directly or in the near term. Good point.

Finally, kudos to Manhattan Associates for giving away reusable grocery bags to the attendees instead of yet another briefcase or backpack. My office has become a landfill for the countless conference bags I’ve received over the past 9 years, some from software companies that no longer exist. It’s nice to come home with something I will actually use (okay, something my wife will use because I get lost in supermarkets and have to call her every five minutes to find out where I’m going).

People still make or break a Shipper-3PL relationship. I conducted a couple of “think tanks” at The Logistics & Supply Chain Forum titled “Defining the Next Chapter in 3PL-Customer Relationships.” Prior to the event, I wrote about how I haven’t seen much change in how shippers and 3PLs work together over the past six years. I’m sorry to say that after these think tanks, the next chapter will read the same as the previous ones. To put it bluntly, most shippers still view their 3PLs solely from a cost and tactical perspective, and not as strategic partners. Where are 3PLs providing the most value today? In helping shippers establish a presence in emerging economies. But even in these cases, shippers are taking different approaches. One shipper mentioned that they use 3PLs when they first enter a country, but after the business reaches a certain volume, they bring the operations back in house. Why? The 3PLs have too much employee turnover, which impacts their service levels and work quality. This shipper believes that they do a much better job at recruiting, training, and retaining employees than their 3PLs, especially in these emerging countries.

Turnover at the management level is also an ongoing issue, as well as poor succession planning. Again, this is nothing new. I wrote about these issues six years ago. So for all the talk about how 3PLs need to enhance their IT capabilities (which they do), I’m beginning to think that improving their Human Resources and Customer Service operations should be bigger priorities.

Finally, I continue to hear of more shippers that are bringing part or all of their transportation operations back in-house. And I’m even hearing from 3PLs that are seeing the same trend and are getting concerned. I’ll address this topic again in the near future.

I’ve got one more event on my calendar, the SMC3 2008 Summer Conference in Boston, June 25-27. I’m moderating a panel session on Emerging Supply Chain Technology with representatives from i2 Technologies, SAP, Sterling Commerce, and Pinnacle Foods. I hope you can make it. In the meantime, I’m going to look for that Talking Heads CD packed away somewhere in my basement, upload the songs to my iPod, and “dream of cherry pies, candy bars, and chocolate chip cookies.”

Posted at 3:50 PM by agonzalez | Category: General Supply Chain & Logistics | Permalink | Email this Post | Comments (0)

5/15/2008

Making Smarter Decisions Faster

There is a lot of buzz these days about Business Intelligence (BI) and Analytics. Three leading BI software vendors (Business Objects, Cognos, and Hyperion) were acquired last year (by SAP, IBM, and Oracle, respectively) for over $15 billion. Books like Thomas Davenport's "Competing on Analytics: The New Science of Winning" are best sellers, and articles like "Math Will Rock Your World" (Business Week, January 2006) are appearing in mainstream and trade publications. Why all the attention?

To quote from Davenport’s book, “At a time when firms in many industries offer similar products and use comparable technologies, business processes are among the last remaining points of differentiation.” Put differently, companies are starting to view the information they collect about their customers and supply chains as a corporate asset they can leverage to create more efficient, flexible and impactful business processes.

But what is Business Intelligence? Webster’s Dictionary and Wikipedia both offer their definitions, but here is mine: “BI is about empowering people, across all levels of the organization, to make smarter and faster business decisions by providing them with a more detailed, accurate, and timely understanding of their role in achieving the company’s strategic, tactical, and operational goals”. And you thought it was just a type of software application!

Of course, technology is a key enabler of BI and Analytics. Logistics software vendors have been investing heavily in “performance management” solutions, which provide companies with more timely and insightful visibility to key performance indicators (KPIs). Online dashboards that track carrier and vendor performance, as well as planned versus actual costs, are particularly popular today. Supply chain network design tools and other types of optimization solutions are also important components of BI and analytics.

But companies that approach BI solely from an IT perspective are missing out on the “big picture” opportunity of actually changing the way people work and make decisions, from the CEO all the way down to the employee loading boxes onto a truck. In short, there are many facets to implementing a successful BI strategy. Technology is certainly a critical component, but not the only one.

At last month’s The Logistics & Supply Chain Forum, I conducted a workshop on BI for over 60 senior logistics executives. The information I presented was based on primary and secondary research we conducted at ARC, including conversations with companies that have implemented BI solutions and leading software vendors like Manhattan Associates, Oracle, RedPrairie, and SAP. I’ve distilled the research findings into these Five Key Steps to a Successful BI Strategy:

CEO commitment is a must. This is a given with any strategic initiative that requires a significant investment of time, money, and resources. Companies like Harrah’s Entertainment and Amazon, recognized for their effective use of BI and analytics, are lead by CEOs that “get it” and drive the use of BI across the company. One of the workshop participants asked me a great question: What if my CEO doesn’t get it, how do I build the business case? The quick answer is to start small, achieve success, and build up from there. P&G is a great example. Although the company had a BI and analytics group for many years, it wasn’t until the team saved the company $200 million annually by consolidating P&G’s manufacturing and distribution network that the CEO fully recognized the value and role of BI and analytics.

Determine upfront which KPIs are important and create standard definitions. In my opinion, this is the most important step because it forces companies to think about why they’re investing in BI and what benefits and outcomes they expect to achieve. Best practice is to align corporate and operational KPIs with strategic objectives and desired competitive differentiators. If you don’t know why you’re collecting certain data or can’t explain the value of a metric, you probably don’t need it.

Hire and train the “right” people; create incentives to use BI tools. “Personable geeks with MBAs” is the way some folks characterize the talent required to successfully leverage BI. Put differently, companies need people with the right mix of analytical, business, and relationship skills. These types of people are in high demand, but short supply. As Davenport states, “Analytical talent may be to the early 2000s what programming talent was in the late 1990s”.

Take a “manage globally, act locally” approach to BI. Just like many companies have established centralized load control centers, BI leaders like P&G and Schneider National have centralized their BI and analytics operations. This approach makes it easier to evaluate strategic and tactical scenarios, where the analysis may span across multiple business units, geographies, and functional groups. But to achieve the greatest value from BI, it’s also important to bring BI and analytics down to the operations level, so that employees can make smarter and faster decisions on a day-to-day basis, particularly in response to exceptions.

Establish a BI Governance Framework and Process. Most companies don’t think about this step until it’s too late. BI Governance is about answering some basic questions: What decisions need to be made? Who will make those decisions? How will the decisions be made? How will the decisions be monitored? The more strategic your BI focus, the more critical governance becomes because strategic decisions typically come with the most financial risk.

Last Word

Here are a few other things companies should consider:

Poor data quality (stale, incomplete, inaccurate) is the Achilles heel of BI. Data quality must move beyond IT and become part of the business agenda.
There’s a lot of information about customers, suppliers, and the market embedded in e-mails, instant messages, PowerPoint presentations, podcasts, webcasts, etc. How do you incorporate this “unstructured information” into the analysis?
How do you gather external benchmarking data and include it in the analysis?

Is Business Intelligence a strategic initiative at your company? Do you agree with my five key steps to success? Are there other things you would add to the list? Let me know. I think we’re just starting to scratch the surface on how companies can use BI and analytics to create a competitive advantage.

Posted at 4:10 PM by agonzalez | Category: General Supply Chain & Logistics | Permalink | Email this Post | Comments (0)

5/8/2008

Should Companies Use"Green" Initiatives as a Competitive Weapon?

Back in February, I presented at the Green Supply Chain Forum organized by The Ryder Center for Supply Chain Management at Florida International University (FIU). In preparation for that conference, ARC and FIU developed a web survey to determine the current state of "Green" Supply Chain Management. The survey focused on answering the following questions: Are we still in the ‘early adopter’ phase or is this trend more widespread? What types of “green” initiatives are companies prioritizing? What factors are driving companies to become more "green"? Who manages these initiatives and how is success measured?

We recently published the results of this survey in a report titled "The State of Green Supply Chain Management," co-written by me and Dr. Walfried Lassar, the Director of the Ryder Center for Supply Chain Management at FIU. You can register to download a free copy of the report by clicking here.

The survey results confirmed many of our hypotheses, but there were a few surprises. For example, we asked the respondents which external parties they are currently collaborating with on "green" initiatives, or plan to work with in the future. The chart below summarizes the results:

Not surprising, companies are working primarily with suppliers and customers on "green" initiatives today; they're also working with transportation companies and Logistics Service Providers. What is surprising, however, is that the vast majority of the people who answered this question have "no plans to engage with [competitors] on these issues." Why not? Will this attitude limit how much progress companies can make, and how quickly, in reducing the environmental impact of their supply chains?

Dr. Lassar and I hope to explore these questions further in phase two of our research, which we're kicking off this month (if you'd like to participate, please send me an email at adriang@arcweb.com). But here are my theories, based on a few conversations, as to why companies may not want to work with competitors on "green" initiatives:

· "Green" can be used as a competitive weapon, especially from a brand perspective. For example, if a company reformulates one of its leading products to be more environmentally-friendly, and it costs less and performs better than the existing version and competing products, the company could potentially take market share away from its competitors.

· "Green" can reduce a company's operating costs, thus strengthening its financial performance and shareholder value. If a retailer, for example, finds a way to reduce the amount of energy used by its stores by 30 percent, the financial benefits would be great.

· Working with competitors is always problematic from a regulatory perspective (e.g., risk of being charged with collusion).

It's important to note, however, that the sample size of our survey was relatively small (70 total respondents). And the respondents were primarily logistics executives. If we had surveyed 1,000 CEOs, I'm sure the results would have been different. But in favor of more or less collaboration?

Some early adopters of the "green" movement are certainly collaborating, at least via third-party initiatives. Dell and HP, for example, are working with the Carbon Disclosure Project, and so are P&G and Unilever. At this stage of the game, industry-level collaboration is critical for developing standard metrics and measurement methodologies, a key pre-requisite for accelerating the adoption of "green" practices. Most of the collaboration taking place today is along these lines.

But will these same companies share best practices and intellectual property that would benefit the environment greatly if all companies adopted them, but could also provide them with a significant market advantage if they kept the knowledge to themselves? The answer, I suppose, will depend on how broadly companies define social responsibility.

What do you think? Should companies view their "green" initiatives as a competitive weapon, or should they share their "green" best practices and IP with other companies, including their competitors? Where do you draw the line when it comes to collaborating on "green" initiatives?

Posted at 12:59 PM by agonzalez | Category: Green Supply Chain | Permalink | Email this Post | Comments (1)

4/3/2008

Is Logistics Outsourcing Still a One-Way Street?

Six years ago, I facilitated Think Tank sessions at The Logistics & Supply Chain Forum called “3PLs: Living Up to Expectations?” I recently re-read the report that we published based on those sessions and I’m amazed at how little things have changed. Are 3PLs living up to expectations? Here’s how I answered the question back then:

"This may be a simple question, but considering the fragmented nature of this market, the answer is anything but straightforward. It depends on who or what you consider to be a 3PL. It also depends on the expectations themselves, which vary depending on the complexity of a company’s business, and how the results are evaluated, either strictly on cost or service level factors, or against higher-level strategic goals, such as the ability to enter new markets quickly. In short, there may not be a right or wrong answer, only differences in opinion."

I also highlighted many of the contradictions that existed back then, and still exist today:

"Companies want service providers to be more proactive and creative, but they often dictate every detail of how the 3PL should operate. Many 3PLs are trying to be global “one-stop-shop” providers, but most companies would never put all of their eggs in one basket. People are the root cause of success, but they’re also the primary mode of failure. Many contracts are “ever-green, eternal,” but they include a 30-day escape clause. A particular 3PL could be your best performer, but they could also be your worst."

Every year I look forward to the Annual Third-Party Logistics Study conducted by Dr. John Langley from the Georgia Institute of Technology, now in its 13th year. While there are always nuggets of new and interesting information in each edition, many things stay the same year after year: 3PL customers are generally unhappy with the IT capabilities of their service providers; transportation and warehousing are the main operations that companies outsource; very few companies outsource more “strategic” functions like inventory management or establish “4PL” relationships.

What is changing, however, is a bit surprising, and troubling, for the 3PL industry. The logistics executives that participated in the Think Tank sessions six years ago generally agreed that outsourcing your logistics operations was a one-way street. Here’s how one executive put it:

“The real question is can you bring [your logistics operations back in-house], because most of my experience is that once you de-invest in an area, boy, it takes a major traumatic occurrence to ever be able to re-invest.”

It appears that the answer is yes, you can bring it back in-house, and it’s happening with greater frequency. CNH, for example, determined that it could achieve “significant cost savings” by bringing its transportation operations back in-house. In addition to embarking on a multi-year, global roll-out of Oracle TMS, the company is hiring a lot transportation planners and operations people. In short, CNH is investing a ton of money on IT and overhead to rebuild its transportation management capabilities and it still expects to achieve significant cost savings compared to staying with their 3PLs. Either their math is wrong, or their outsourcing contracts were poorly negotiated, or the economics of outsourcing are changing.

Why are companies bringing all or part of their logistics operations back in-house? I think there are several contributing factors. IT solutions like Transportation Management Systems and Warehouse Management Systems are much more affordable, flexible, and easier to deploy today than they were in the past. For example, a company can deploy a Software-as-a-Service TMS in just a few weeks, with minimal upfront investment and IT support. In the past, part of a 3PL’s value proposition was eliminating the need for customers to spend millions of dollars on IT. This value proposition is not as strong anymore, and as the annual surveys show, 3PLs have generally failed to meet the IT expectations of their clients.

Companies are also placing greater value on working directly with carriers instead of through a third party. Briefly stated, companies want to take control of their own destiny when it comes to securing capacity and negotiating strategic carrier relationships that ultimately impact rates and coverage. Most carriers also prefer to work directly with shippers. It allows them to demonstrate their value more clearly and effectively, which they can leverage to justify a premium rate or to acquire additional business. These trends go against the traditional 3PL model, where the service provider typically owns and manages the transportation contracts and carrier relationships.

In the weeks ahead, I plan to interview several companies that have said goodbye to their 3PLs to understand how they justified the decision. I also hope to gain additional insight on this topic at this year’s Logistics & Supply Chain Forum (April 15-18), where I’ll be conducting a Think Tank titled “Defining the Next Chapter in 3PL-Customer Relationships.” I’ll share my takeaways when I return. In the meantime, what do you think? Have you brought part or all of logistics operations back in-house, and if so, why? Is a fundamental shift occurring in how companies approach outsourcing and how they select and measure the ongoing value of a 3PL? How are 3PLs responding to this trend?

Posted at 12:56 AM by agonzalez | Category: Logistics Outsourcing / Service Providers | Permalink | Email this Post | Comments (0)

3/6/2008

The Hidden Value of LeanLogistics and CHEP

So, let’s cut to the chase and address the two questions many people are asking me about this deal: Why did LeanLogistics, a company with 50 people, considered by some folks as a Software-as-a-Service (SaaS) TMS vendor and by others as a quasi-3PL, receive such a high valuation (almost $1 million per employee)? And why did Brambles, the parent company of CHEP, a firm that specializes in pallet and container pooling, acquire a ‘software’ company? The answer to both questions is the same: the value is in the Network.

Lower upfront costs and faster time-to-value are the most visible and publicized benefits of SaaS (aka “on demand”) TMS. But as I’ve written about in the past, companies using these solutions are discovering a more powerful and lasting value proposition: SaaS solutions create a network of trading partners that serves as an ideal platform for enabling continuous improvement and inter-company business processes. LeanLogistics has over 40 shippers, 2,000 suppliers, and 4,000 carriers connected to its network. Almost $4 billion in freight is managed using a common TMS, which currently processes 5 million loads and 150 million transactions per year. All of this data, flowing through a single system, enables network-level benchmarking, so companies can compare their performance against an external benchmark and quickly pinpoint problem areas.

Similarly, you can make a strong argument that CHEP’s most valuable asset isn’t its 285 million pallets and containers. It’s the vast amount of data the company collects across the 300,000 customers it serves. For example, CHEP has visibility to 2.5 million equipment moves each day, including the origin, destination, and departure/arrival times of thousands of transportation moves. What can you do with this information? Can you leverage it, for example, to enable continuous moves across shippers where enough density exists? Can you provide benchmark information to clients regarding lead times and lead time variability? These and other opportunities exist, but you need the right technology infrastructure and the right people to provide these services, and that’s where LeanLogistics comes in. Over the past couple of years, the company has introduced a set of managed services (part of its “Path to Value” program) that uses network-level information to benchmark their clients’ performance, identify best practices, and execute continuous improvement initiatives.

Simply stated, this deal is not about a pallet company buying a software company. It’s about the coming together of two rich information networks and the services they can power to bring value to shippers, consignees, and carriers by enabling more efficient, cross-company business processes. LeanLogistics was already moving down this path, but as a relatively small and private company, its growth trajectory was constrained. CHEP’s scale and financial strength ($3.2 billion in sales and $845 million in comparable operating profit in 2007) overcomes this growth constraint. About 60 percent of LeanLogistics’ clients are also CHEP customers, which is an added benefit for everyone. Both companies also sell to the same person within an organization, generally the Senior VP of Supply Chain.

As with any acquisition, there are always risks, especially when a little fish enters a big pond. Both companies have lots of ideas about different processes and services they can enable using their combined information network. Turning these ideas into a profitable reality, however, is a different matter, especially when some of these ideas (e.g. collaborative tours) have failed in the past. Then again, many past failures were caused by poor business models, technology limitations, or a case of “right idea, wrong time.”

LeanLogistics got here today by surviving the dotcom bust and evolving its business model in response to customer requirements and competitive pressures. I’ve interviewed several of their customers over the years, including Scott McLean, Director of Transportation at ACE Hardware. When I asked Scott why they selected LeanLogistics, his response echoed the comments of other customers: “LeanLogistics are transportation ops guys that work with technology [as opposed to software guys that develop transportation applications]. They understand the transportation business and what we're trying to accomplish." Therefore, whatever risks exist with this deal, they’re minimized by the fact that Lean’s leadership team is staying with the company and that Lean will remain headquartered in Michigan and keep operating under its brand name.

Back in August 2003, I wrote a report called “

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