The economy underlying our
supply chains started weak in the US and ended strong, with Q1 real GDP
falling 2.1% - largely blamed on bad weather - and ending with signs of
strength, with the latest estimate for Q3 GDP growth of a robust 5%.
It does feel better
economically right now than for a long time, as we learned to live with
the "new normal" of positive but weak growth of 2% or so.
But the US economy is
somewhat under threat from a global environment that continues to
sputter. Growth in Europe has been weak or even negative, with a real
and justified fear of deflation. Despite massive stimulus, Japan's
economy has again stalled, and it is responding with even more massive
stimulus. China's growth has slowed to about 7%, still hefty by most
standards, but trending down and putting a drag on other countries and
most notably commodity and input prices, good for many but not all and
perhaps a sign of weakness.
The first half of the year
was also overshadowed by geopolitical events that seemed possible to
ignite into real conflict, but luckily mostly did not. That included
Russia's invasion of Crimea and Ukraine, tensions in the South China Sea
between an aggressive China and many of its neighbors over control of
ocean and land, the seeming likelihood Israel would attack Iran's
nuclear facilities and more.
But by year's end most of
those tensions had died down but certainly not out, with some renewed
risks for 2015, as I will discuss below.
With that high-level
overview, here are what I view as the four key trends or themes relative
to supply chain in 2014:
The Collapse of Oil Prices and the Rise of US Fracking:
It is almost hard to believe what is now occurring, with US oil prices
falling to below $50 per barrel and global prices just a few bucks above
that, down around 50% since the middle of the year. Not much talk of
Peak Oil now, is there? Who would have ever guessed, in the absence of a
deep recession.
There are many causes, from a
strong dollar to weak global demand, but key is surging US production
that has taken it to the top of the oil producer list due to the magic
of fracking. That has added millions of barrels per day to the global
supply. Indeed, Saudi Arabia is said to have decided not to reduce
production to drive prices back up because it actually hoped they would
fall below where it was economical for US frackers to keep production
going.
This astounding turn has
more ramifications than we can list here, but let's start with some key
ones. The financial pressure the oil price fall is putting on countries
such as Russia, Iran, Venezuela and others is good to see, at one level,
but could cause them to lash out in some form to take their citizens'
minds off all the bad economic news. This is a real danger the longer
this lasts.
It was again a very interesting year in supply chain for 2014 - but aren't they all these days?
This week, I will summarize
what I feel are the most important key themes and trends of the supply
chain year that was. Next week in our OnTarget newsletter, we'll publish
our popular timeline of key events over the past year. In two weeks
(after a pause for a summary of next week's National Retail Federation
conference) I will be back for a review of the year in numbers and
graphs.
So let's get right to it, starting with the really big picture.
The economy underlying our
supply chains started weak in the US and ended strong, with Q1 real GDP
falling 2.1% - largely blamed on bad weather - and ending with signs of
strength, with the latest estimate for Q3 GDP growth of a robust 5%.
It does feel better
economically right now than for a long time, as we learned to live with
the "new normal" of positive but weak growth of 2% or so.
But the US economy is
somewhat under threat from a global environment that continues to
sputter. Growth in Europe has been weak or even negative, with a real
and justified fear of deflation. Despite massive stimulus, Japan's
economy has again stalled, and it is responding with even more massive
stimulus. China's growth has slowed to about 7%, still hefty by most
standards, but trending down and putting a drag on other countries and
most notably commodity and input prices, good for many but not all and
perhaps a sign of weakness.
The first half of the year
was also overshadowed by geopolitical events that seemed possible to
ignite into real conflict, but luckily mostly did not. That included
Russia's invasion of Crimea and Ukraine, tensions in the South China Sea
between an aggressive China and many of its neighbors over control of
ocean and land, the seeming likelihood Israel would attack Iran's
nuclear facilities and more.
But by year's end most of
those tensions had died down but certainly not out, with some renewed
risks for 2015, as I will discuss below.
With that high-level
overview, here are what I view as the four key trends or themes relative
to supply chain in 2014:
The Collapse of Oil Prices and the Rise of US Fracking:
It is almost hard to believe what is now occurring, with US oil prices
falling to below $50 per barrel and global prices just a few bucks above
that, down around 50% since the middle of the year. Not much talk of
Peak Oil now, is there? Who would have ever guessed, in the absence of a
deep recession.
There are many causes, from a
strong dollar to weak global demand, but key is surging US production
that has taken it to the top of the oil producer list due to the magic
of fracking. That has added millions of barrels per day to the global
supply. Indeed, Saudi Arabia is said to have decided not to reduce
production to drive prices back up because it actually hoped they would
fall below where it was economical for US frackers to keep production
going.
This astounding turn has
more ramifications than we can list here, but let's start with some key
ones. The financial pressure the oil price fall is putting on countries
such as Russia, Iran, Venezuela and others is good to see, at one level,
but could cause them to lash out in some form to take their citizens'
minds off all the bad economic news. This is a real danger the longer
this lasts.
The
big drop in oil and most other commodities increases the still very
present possibility of devastating deflation in Europe, Japan and
elsewhere, a concern even in the US.
Many commenters have noted
that the falling energy prices are a real threat to many Green supply
chain and clean energy programs, as the economic landscape has been
turned on its head. It was easy to reduce CO2 emissions when the ROI was
also strong, but the numbers will often be very different now.
Will it last? Who knows. But
if these low prices persist, just as we spoke about the need to rethink
supply chain network designs considering that oil would stay at $100
per barrel or more for the long run, should not that same thinking apply
on the way down too? Maybe the companies that did little to change
their networks in the face of rising oil prices will have the last laugh
on this one for a few years.
Continued OmniChannel Madness:
OmniChannel developments continued to come fast and furious, so much so
that it was hard to keep track of them, even for us here at SCDigest
that do it for a living.
Amazon by itself had a
series of tests and innovations, including piloting same day deliveries
with commercial taxies in San Francisco and rolling out a new immediate
delivery service (Amazon Prime Now) in Manhattan using bike couriers. It
launched a new line of private label goods that could be a threat to
branded consumer package goods companies, announced plans to
aggressively expand its grocery business to new markets and much more.
"Amazon shows us what is possible," a Walmart exec said.
"Click and collect" emerged
as something of a "killer app" for ecommerce, in which customers place
orders online and the goods are either delivered to lockers or to a
drive through type location at a retail store where merchandise is
loaded by a store employee into the consumer's trunk. Walmart is betting
big on this strategy, hoping this and same day deliveries using its
vast store network will give it an advantage Amazon can't match.
DHL is testing drone
deliveries in Europe, Macy's is counting on RFID to empower inventory
accuracy for store-based efulfillment, UBER is setting up efulfillment
capabilities, etc.
And don't be confused that all this omnichannel madness applies only to retailers.
Acute US Driver Shortage:
After appearing a bit like the boy who cried Wolfe in previous years,
2014 is the year the driver shortage really started to hit home. There
was a new sense of urgency among trucking companies describing the
situation, and nearly all - some substantially - raised driver pay
during the year.
But it wasn't nearly enough,
as an expanding economy drove freight volumes to record levels, while
capacity was capped first by carrier strategy, then by a lack of
drivers. So, we saw substantial increases in rates for the last nine
months of the year.
According to Cass
Information Systems, year over year increases in truckload rates in
March through November, respectively, were 6.0%, 5.7%, 5.8%, 5.2%, 7.2%,
7.0%, 6.7%, 7.3%, and 6.5%. This cost nightmare for shippers is being
partially offset by falling oil prices, but diesel costs were down only
17% in 2014, much less than gasoline, for a variety of reasons.
If the economy does show strong growth in 2015, watch out.
US Port Chaos:
Service at US ports was lousy for much of the year, in some East Coast
ports more in the first half of the year, West Coast ports in the second
half.
A common theme: chassis
mismanagement, of all things. As the carriers exited the low-margin
business in recent years and sold it off to third parties on both
coasts, chaos generally ensued. It usually was not so much a matter of
the total number of chassis at a port, but rather where they were
located.
This should be an easy
problem to solve, and appears to have ameliorated on the East Coast,
with a new program coming at LA/Long Beach soon.
On the West Coast, the
chassis issue plus increased volumes plus what sure look like work
slowdowns by the ILWU over the lack of a new contract have led to huge
congestion and long delays basically since October, causing something of
a nightmare for importers.
Those are my key 2014 supply
chain themes. We'll have our full 2014 timeline next week in OnTarget,
but the top events for me include: workers at a VW plant in Chattanooga
vote against unionization in major blow to UAW; Zebra Technologies
surprisingly announces it will acquire the radio frequency systems and
bar code scanning business from Motorola Solutions; China blocks
formation of the P3 network of ocean carriers; US manufacturing finally
exceeds 2007 levels in July; UPS and FedEx implement full dimensional
weighing programs at year's end; and the NLRB approves "microwave"
elections and other changes in December in the biggest change to labor
law in decades in a pro-union move.
Source : http://www.scdigest.com/assets/FIRSTTHOUGHTS/15-01-09.php?cid=8860&ctype=content
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