C. F. Lynch & Associates

The Sun Will Come Out Tomorrow

By Clifford F. Lynch

CSCMP's Supply Chain Quarterly, 2010 Special Issue

The last couple of years have been stormy ones for the global economy. But rather than dwell on past difficulties, perhaps we should take a cue from Little Orphan Annie, who sang in the Broadway musical Annie, "Bet your bottom dollar that tomorrow, there’ll be sun."

There still are some pessimists among us, but most economists are predicting a gradual upturn in the economy through the remainder of this year and next. We already are seeing signs of this as firms report improved first-quarter earnings. Of course we all hope this will continue. But for many companies, the recovery will not be as easy as flipping a switch and singing, "Happy days are here again."

Managing through difficult times is quite different from managing through an economic upturn. Techniques are different, and even some managers are better suited for one economic environment than for the other. This can be true for all types of firms, but logistics service providers have a unique set of problems.

While it is true that in difficult times a number of potential users of third-party logistics services will turn to outsourcing, it is also true that many will not. Managers are often reluctant to make any major changes in strategy or are afraid that outsourcing could lead to job eliminations and staff reductions. As a result, a number of providers have seen a decline in the numbers of existing clients with little new business to offset those losses.

That’s certainly been the case with logistics service providers (LSPs) that focus on warehousing services. Many of their clients have had to reduce their inventories or have seen a decline in the volume of orders from their own customers; as a result, there is less demand for warehousing space and shipping resource.

The ideal situation for those LSPs would have been to find new customers to replace lost business or business that was subject to inventory and volume reductions. Despite their best efforts, though, some providers that lease their warehousing space had to reduce their lease commitments. Those with longer-term leases have not been able to do this. Meanwhile, LSPs that own their facilities have had little, if any, flexibility, although some have been able to lease blocks of space to other companies.

Regardless of the degree to which the economy improves and volumes rise, many LSPs will find themselves with little room to increase the amount of product they ship. Indeed, as inventories and shipments from existing customers increase, there will be a need to add space that may or may not be readily available at the location where it is needed. Ironically, LSPs that have been unable to minimize empty space will be in the best position when business picks up, since they will be able to handle additional volumes with little effort.

Similarly, from a labor perspective, providers that were forced to lay off employees will now need to hire and train new people. Availability, however, should not be a problem, and they should be able to ramp up staffing fairly quickly.

As the economy improves, logistics service providers will continue to offer new systems and technology to boost their service offerings to customers. Others may increase their trucking offerings or establish new ones. While many warehouse providers already offer trucking, those that focus only on warehousing may now find that expanded offerings are both possible and profitable in the new economy. Finally, as volume increases, the demand for brokerage will also rise, and some providers may find this to be a profitable area as well.

The real opportunities, of course, will be available to those LSPs that were creative and innovative during the downturn and installed new systems, techniques, and cost-cutting initiatives that they can carry forward into the new economy. They will be able to handle higher volumes at lower costs, a recipe for a sunny day in anyone’s book.



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