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Going for Broke

By Clifford F. Lynch

DC Velocity, November 2008

As this column is being written, we in the United States are in the midst of what many experts believe is the worst economic crisis in U.S. history. While this may or may not be true, certainly it is the worst I have seen in my 50 years in the supply chain industry. It will, beyond the shadow of a doubt, affect every link in the supply chain and every one of us who is connected with, and by, it.

The supply chain industry is not likely to escape the crisis, but its’ not likely to be a casualty either. Although the term "chain" suggests a hard, inflexible system, we are a resilient industry; and in the past, we’ve demonstrated our ability to deal with economic crises. While it may be more difficult this time, we can do so again. None of us are quite sure what the new crises will be, but I believe there are several predictable consequences with which we must be prepared to deal.

The most important involves the basic cogs in the wheel – our people. Our industry is not generally known for its high percentage of executive positions. The bulk of the supply chain labor force is made up of truck drivers, railroad crewmen, warehouse employees, inventory clerks, customer service representatives, and others who contribute much, but don’t always have much. As supply chain managers, we must be sensitive to – and accommodate as best we can – the needs of employees who have lost their homes, their trucks, and even their retirement savings. These workers are demoralized, and we must do all we can to help them through their individual crises. In the coming months, we will need exceptional performance. To ensure it, we must have a motivated workforce.

I believe we will have continuing carrier issues. Transportation 101 teaches us that transportation is a "derived demand." In other words, the demand for transportation is dependent on the demand for the products transported. We can expect overcapacity as buying habits change.

In the motor carrier industry, we depend on a large number of smaller carriers for most of our transportation needs. (While there are, of course, a number of larger carriers, no single one of them controls more than a small percentage of the market.) The small carriers already are reeling from rising fuel, labor, and insurance costs. If their volume declines too much and their ability to borrow is curtailed, we could see several business failures. Unfortunately, there are a few large carriers that are just a vulnerable.

Most major logistics centers report significant vacancy rates in their distribution facility inventory, and many logistics service providers are seeing empty space increase. With the crisis in the credit markets, their ability to fall back on credit lines and friendly banks will be restricted.

The users of logistics services will experience internal pressures to reduce their costs, but now is not the time to squeeze our suppliers. Eventually, the crisis will pass, and we want them to still be around when it’s over. During the past few years, there has been a move toward shifting responsibility for negotiating supply chain contracts to procurement departments, rather than the users of the services. Unfortunately, some of them approach these purchases in the same way they acquire ballpoint pens and stationery – price above all. In our industry, in this environment, this could prove to be a short-sighted approach.

Notwithstanding all this, the supply chain is flexible; and while it may be stretched to an uncomfortable point, it won’t break if managed intelligently. The smart managers will plan and manage for the worst but hope for the best.

 

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