Fellows in the air - Brown & Yellow
June 17th, 2008
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The headline read: UPS plans air deal with DHL in US, the byline of which is,
UPS plans up to 10-year air deal with DHL within the US, expects $1B in added annual sales
Only, I don’t think that it is UPS’s plan - It sounds more like DHL going around with a bowl in hand. That’s too dramatic? But, the roots of this story goes back about 5 years - a failed strategic acquisition/strategy and the resultant. Where do I read that? Right from the same story,
The arrangement with UPS is part of a U.S. restructuring announced by DHL parent Deutsche Post. DHL is slashing network capacity in the U.S. by 30 percent, which includes closing and consolidating sorting facilities and streamlining pickup and delivery routes. The company did not say how many employees would be affected.
DHL’s U.S. business has posted repeated losses and slipping sales as it continues to lose market share to UPS and FedEx Corp.
That is the real story within the story but to get that I think a little background is in order. Back in 2003, DHL acquired Airborne Express for a little over $1 billion USD. At that time, this deal was considered a strategic acquisition by DHL and Deutsche Post (DHL’s parent company and the privatized German Postal Company) in order to expand into the US market.
The long and short on the impact of DHL- Airborne (3/18/2004)
DHL’s American Adventure (11/29/2004)
At that time, one of the critical decisions made with Airborne’s assets was to keep its ground assets including the sorting facility in Wilmington, OH but spinning of Airborne’s air assets into a separate company - now known as ABX Air. This might have been a critical error but the decision might have been forced at DHL (DHL deal with UPS could end thousands of jobs in Ohio)
When DHL bought Airborne Express in 2003, it spun off its airline into the independent ABX Air because DHL, owned by Deutsche Post AG of Germany, was not allowed to own an American airline.
So up until the UPS air freight deal, DHL contracted ABX Air and ASTAR Air Cargo to shuttle the packages across the country. The statement from ABX Air when apprised of this deal reads:
"We cannot now determine whether those negotiations will lead to an agreement, or what other steps DHL might consider to reverse its losses in the U.S.," Joe Hete, chief executive of Air Transport Services Group, said in the statement. "In the meantime, we intend to continue to perform under our current agreements with DHL while aggressively pursuing our strategy of expanding our business with other customers,based on the technical and cost advantages of our fleet of advanced Boeing 767 cargo aircraft."
So clearly, DHL seems to be hurting from using ABX Air and possibly ASTAR Air Cargo - but in what way? It might very well be the case that UPS is able to leverage its economies of scale better than ABX Air and/or ASTAR Air Cargo. Or it could be that operational costs at the Wilmington hub are relatively higher and DHL’s declining volumes could be handled within its own sorting facility. So what got DHL to this point? That’s what I want to know and went looking for. The starkness of the headlines you read about this story these days compared with the big splash headlines back in 2003 contrast like night and day. While it is certainly wise to read comments posted on an internet board with a grain of salt - when two and two are put together, you ought to get four:
I departed in late 2006 amid a series of ill-advised and puzzling moves. The first and biggest blunder of DHL in the US was their decision to dismiss all but one of the former Airborne executives after a very brief transition. The ineptitude of the DHL senior management team was clearly demonstrated early on with a mindset that DHL was now a big player in the US market. They added on an unprecedented cost structure almost immediately; layers of personnel,new hubs, IT changes, significant service upgrades, etc, without the benefit of a dramatic increase in shipments. Airborne was methodical and cost conscious, so the culture was very unfamiliar and local managers often received conflicting messages regarding service and cost: a balancing act of two goals that can be mutually exclusive.Essentially, DHL brought on the cost structure of a FedEx sized company with Airborne-sized revenue and units. Almost overnight they began to offer premium service to thousands of new zip codes in the US regardless of potential revenue, just to say they can compete head-to-head with UPS and FedEx.
and,
Lastly, the consolidation of the two air hubs was ill-timed and poorly executed. The concept was correct, but the plan for it (short timeline, no test runs, incomplete sort facility in Wilmington ) was faulty and the project failed from the outset. I personally was there that first night to watch it unfold (while unloading containers and sorting packages). Tugs were lined up 20 deep waiting to offload aircraft containers; sorters stood for 10 minutes ata time waiting for packages; some slides were empty while others overflowed onto the ground in piles up to 6 feet high with no shift of labor from one to the other. Most shift supervisors were new and in experienced. The new sort facility was designed for a larger container type and workers were unfamiliar with how to process them.Packages were backed up for weeks while aircraft departed well under capacity due to the inability to process the containers in a timely fashion. Much of the backup was finally shifted to ground transfer to help catch up with the backlog, but not until the second week. By then,many major shippers had already rerouted their shipments to competitors. Many of them never returned.
These snafus correlate very well with the personnel management changes at the highest level at DHL Express USA. So the story so far as I see it for DHL Express USA:
1. Big splash.
2. Very deep pool - barely swimming, maybe drowning.
3. Latch onto a shark to swim to the other side.
But what is DHL supposed to do now?
Tags: DHL is yellow. No, it’s brown, DHL signs with UPS, DHL’s American Journey, DHL flies into a storm
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Two challenges on your plate…
May 17th, 2008
Or rather on my plate. I want to draw your attention to these two challenges that are floating out there in cyberspace - prize money being offered for your (my) troubles as well if one contributes something of value:
1. The first one is the older of the two - The Netflix Prize, which is a problem in improving the accuracy of the movie recommendation system that is used by Netflix (in addition to several other ecommerce sites). This is something that I started working on before I got deluged at work but I hope to pick up the pieces again and make a try.
2. The second challenge is being offered by ROADEF, the French Society of Operations Research - which is to use OR techniques in Disruption Management for Commercial Aviation. I’m sure that if you fly these days, you’d appreciate a little succor from such sources and I’m glad that people are being invited to contribute towards solving this problem. Since I’m working in applying optimization to such problems, this is something I definitely will consider working on.
So, any takers?
Tags: Optimization Challenge, Netflix Prize, ROADEF, Disruption Management in Commercial Aviation
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Outsourcing Reverse Logistics
May 6th, 2008
Outsourcing Reverse Logistics is a recent article posted Modern Materials Handling.com that has an interview with Tim Konrad of GENCO (my former employer) - it’s a niche for GENCO that it has been rather good at exploiting . He notes the following key points concerning reverse logistics as practiced by a 3PL:
Do it in volume
Establish vendor agreements
Implement a software package
Receive, inspect and dispose
Reconciliation
If you wanted to know what happens to a product that you returned for whatever reason:
“Ideally, you want to take that product and return it to the same configuration it was in when it left the DC,” says Konrad.
When that happens, the product may be put back on the shelf and sold again.But that’s not always possible. For that reason, a 3PL may return the product to the original vendor, especially if it is a recalled item, sell it in a secondary channel where it will end up in discount stores,donate it to a charity for tax incentives, send it to recycling, or destroy it.
"…sell it in a secondary channel" - If you don’t already know, that means Ebay. You can even buy stuff a pallet/truckload at a go which only goes on to say that what works for diamonds also works for returns - at a different scale.
Tags: Reverse Logistics, Reverse Supply Chain, Outsourcing to a 3PL, How returns flow?
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Building a resilient Supply Chain
May 5th, 2008
Building a resilient supply chain is a report (freely available) published by Marsh (MMC) which focuses on supply chain risks as assessed in a free wheeling interview with a panel of six experts.
Karen Avery : National practice leader for Marsh’s Business Continuity Risk Management Practice.
Chris de Wolfe: Risk manager at Mars Incorporated, one of the worlds leading food manufacturers.
Diane Foley: Director of mission assurance at BAE Systems, a leading defense contractor.
Scott Warren: Managing director with Kroll Business Intelligence and Investigations.
Thierry Brevet: Mercer Investment Consulting on growing concerns of shareholders related to environmental risk.
Rosaline Chow Koo: Asia business leader for Mercer HR Consulting
Three primary Supply Chain risks are highlighted:
- First, clients are struggling to efficiently and effectively manage the risk of complex and interdependent supply chains.
- Second, insurance doesn’t fully manage the risks, meaning that much risk is retained more so than in the past especially for tier-two, tier-three, and tier-four suppliers.
- Finally, taking on some of this risk used to be an accepted practice, but now it represents a material exposure. And the activities to mitigate this risk now represent the potential of a material investment.
However, I didn’t remember when this turn of events came about:
Traditionally, a supply chain was defined as a network of internal and external resources that performed three main functions procuring materials, transforming the materials into intermediate and finished products, and distributing the finished products to customers and consumers. Over time, organizations have narrowed the definition to where "supply chain" refers more specifically to managing the primary suppliers responsible for the key inputs into a product or service. The definition has become much less focused on the end-to-end process and the upstream and downstream risks in the extended supply chain that involve creating value for customers.
Something did happen along the way but perhaps not in a change in the manner of realization of what a supply chain truly is. Or what it became? The "transforming the materials into intermediate and finished products" step doesn’t reside in the stateside supply chain anymore- it, largely, went overseas. Therefore, it became an imperative in the supply chain to manage that overseas transformation function as well as the larger inventories all over the place.
Thus,
Speaking in terms of the risk-intelligent supply chain is our way of avoiding that more narrow definition. We are reestablishing the original intent of the definition of supply chain for the end-to-end process from raw material source to the ultimate consumer"farm to fork."
recasting the fact of outsourcing/offshoring in terms of a risk-intelligent supply chain does really nothing about returning to an earlier concept of the supply chain - an important part of the supply chain has been outsourced - perhaps, even commoditized for many industries. In my humble opinion, what risk management should really be about is realizing the impact that globally stretched and tightly constrained supply chains present in the face of disruptive events (terrorism, pandemics etc) and exposure to economic agendas of several nations housing pieces of the supply chain and myriad market inputs (oil, port capacity, transportation lanes etc)? It is a distraction to think that a risk informed supply chain is a return to a truer concept of the supply chain.
I’ve always contended on this blog that offshoring/outsourcing multiplied risks dramatically (which was never truly appreciated at that time), trading off burgeoning inventories (which will remain at a much higher level regardless of any and every effort at efficient allocation) against lower unit costs while they last. But that’s what we have right now. That said and recognizing it as being one of the primary causes, secondary effects have accompanied it such as trade deficits, consolidation and growth in aspects of the supply chain such as transportation as providers have to integrate from the end point (stateside) to the source (overseas production points), an increase in the demand for oil etc. These are the macro-level changes that affect every supply chain and within each supply chain lie a set of micro-level priorities that need to be addressed.
One of the industry based contributors to this report is Chris de Wolfe who is a Corporate Risk Manager at Mars Inc. One of the items on his plate is global business continuity initiative. But here is something interesting about how the talk of risk management meets the road:
GL: I imagine you have hundreds of suppliers. How do you ensure that these suppliers are prepared for any of the numerous catastrophes that can occur?
CDW: Its actually one of our key challenges. Because of all the work we’ve done with Marsh, Im pretty confident that everything under our own roof. But outside of our own operations, we rely on contractual relationships. One of the functions that we rely on specifically is our vendor-assurance process. Managers in this function essentially do a comprehensive business impact analysis for each of the vendors we work with, whether they are raw materials suppliers, or packaging suppliers, or distributors. With the output from these business impact analyses, were able to assess which of the vendors or business partners need to perform a thorough risk assessment.
Its a good process. It works very well. But it is very reliant on the managers who are involved. And therefore, were going to develop a checklist for these vendor assurance managers so we can get a much better idea of what kind of shape our suppliers are in and what sort of preparation they have in place.
The fact of the matter is that a firm’s supply chain is only as good as the talent it brings to bear upon the problem (if the firm has outsourced a particular function - then by extension, as good as the talent the firm has outsourced that function to). Risk Management for the supply chain, as illustrated here in this report, is not a formulaic concept that can be readily applied anywhere, even the processes that bear application require a Plan->Do->Check->Act (PDCA) approach. Much of what can be found under this heading of RISK has been addressed in the annals of Quality Management, methinks, but protecting Intellectual Property and Business Continuity, which the report delves into in some measure are contributions to a firm’s critical task of Quality Management, something that has to be revisited in the age of Outsourcing/Offshoring. Just when you thought that you had a handle on all things Quality stateside, you’re called upon to revisit this same topic overseas.
HT: Ehsan @ Supplychainer.com - New Supply Chain risk management study by Marsh
Tags: Risk Intelligent Supply Chain, Marsh Risk Report, Supply Chain Resiliency, Building a Resilient Supply Chain
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Reducing U.S. Greenhouse Gas Emissions: How much at what cost?
April 25th, 2008
Reducing U.S. Greenhouse Gas Emissions: How much at what cost? is a report put together by the consulting firm McKinsey & Co. (from December 2007) that takes up this issue. The full report can be accessed here. The central conclusion of this report states:
The United States could reduce greenhouse gas emissions in 2030 by 3.0 to 4.5 gigatons of CO2 using tested approaches and high-potential emerging technologies. These reductions would involve pursuing a wide array of abatement options available at marginal costs less than $50 per ton, with the average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency. Achieving these reductions at the lowest cost to the economy, however, will require strong, coordinated, economy-wide action that begins in the near future.
Strong, coordinated, economy-wide action that begins in the near future?
Ouch!
Double Ouch!!
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Supply Chain : Pros to know
March 19th, 2008
SDCExec.com has published its annual list of Pros to know in its article: 2008 Supply & Demand Chain Executive Pros to Know. An exhaustive list to be sure and it should point you towards personalities as well as up and rising firms that they lead and/or represent.
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Supply Management Talent Crunch
March 14th, 2008
This story is not new but like all truths, it bears repetition - again and again and again…
I came across this story via Supply Excellence, which tagged a story in WSJ (registration required) and Aberdeen (free report available until April 28, 2008 with registration),
The professors from the business and management schools of Florida State and North Carolina State University note that managing the supply chain in the face of globalization, offshoring, and an ailing economy “requires a broad skill set that many managers simply don’t have right now.”
It’s something that I have touched upon in this post - Three issues in Supply Chain Management 2.0 - Part 2, as well. But there is a crucial divergence. The report from WSJ highlights the following gaps in the current crop of supply chain managerial talent:
Specifically, the scholars’ joint study of supply chain managers found that the following skills or approaches are required to effectively manage supply in today’s global economy:
I don’t know if these suggestions are a little dated because as the economies of the developed world contract (slightly/more than slightly/moderately/severely), some of the above points will be precisely the inverse. For example, as the US dollar finds new lows and continues to dig deeper, the notion of finding appropriately situated suppliers will begin to become competitive between global and local. That "Big Picture View" above is about to find more than a few competitive solutions back home rather than abroad. If there is a real contraction in the US economy, one can be sure that supply chains with customer end-points will find themselves operating in an environment of slumping demand while simultaneously experiencing lower purchasing power with dollars. Moreover, if the dollar continues to plummet, what supply sources unique to the US will the rest of the world have a demand for? While in the past (recent past), supply chains (and talent therein) had the relatively easier notion of deciding and developing sound global sourcing strategies, the new challenge for us might very well be the development of goods that the rest of the world that is awash in US dollars will want to buy. The notion of Supply has just taken on a new meaning.
Tags: SCM, Supply Chain talent, Supply - then and now
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