Tilting at Windmills

According to the New York Times earlier this month, “Google, hoping to head off a rebellion by employees upset that the technology they were working on could be used for lethal purposes, will not renew a contract with the Pentagon for artificial intelligence work when a current deal expires next year.”

Maybe I have too much imagination, but I can also envision using this technology to find lost hikers, locate migratory herds, or find illegal logging or mining operations.

The technology “uses artificial intelligence to interpret video images.”  That kind of technology could have broad application in logistics, too.  Mapping is often pretty important in the context of designing and operating logistics networks.  Presumably, the technology under development at Google could be pretty useful in a broader logistics context.

What’s next for the employees at Google?  Are they going to boycott boot manufacturers because soldiers wear boots?  Are they going to stop driving on interstate highways because they were funded by the federal government to allow rapid movement of military forces?  Are Google employees going to stop using the internet because defense research created it?

A dictionary definition of hypocrisy is “the practice of claiming to have moral standards or beliefs to which one's own behavior does not conform.”

The definition must be accurate; I googled it.

A Holistic View of Supply Chain Risk

Allianz – an international insurance firm headquartered in Europe – publishes an annual “Risk Barometer.” 

According to the report, globally, “Business interruption ranks as the most important global risk for the sixth year in a row (42% of responses), due to its tremendous effect on revenues.”

Drilling down into the Americas specifically, in 2018, the top 10 risks identified in the Americas region are:

1. Cyber Incidents
2. Business Interruption
3. Natural Catastrophes
4. Market Developments
5. Fire and Explosion
6. Changes in Legislation and Regulation
7. Loss of Reputation and Brand Value
8. New Technologies
9. Climate Change and Weather Volatility
10. Talent Shortage

It’s a good list, and Supply Chain Risk Management weaves through all of it.  Logisticians ship, receive, and store things all over the world, so supply chain leaders have to worry about taking a hit in any one of these dimensions.  At the moment, we’re all riding the uncertainty on the domestic regulatory dimension, while chatter about a trade war looms on the horizon. 

The immediate tends to occupy our attention.  That’s natural. The academics call it selection bias.  We focus on what’s in front of us, and have a tougher time thinking about what might be around the corner.

But hurricane season has officially started, unemployment is under 4% so key positions go unfilled, block chain is disrupting traditional business networks, volcanos are being disagreeable in Hawaii, and the FBI is telling us to reboot our servers because of some insidious Russian virus.  And that’s just off the top of my head.  Take a moment and make a list of the “significant” supply chain management risks for your business.

Take a look at your operation through this holistic lens.  Where are your vulnerabilities?  What are your countermeasures?  Do you have a plan?  Are you even capable of executing the plans you have?

Be honest about it, be a little bit intimidated, and then get to work.

Are Government Supply Chains Really that Bad?

Gartner’s annual list of the Top 25 Supply Chains is out. 

Just like every year since 2010, there isn’t a single business focused on the government as a customer listed.  Is it selection bias, or are organizations operating in the government space really that bad?  As far as I can tell, the last supply chain with a government focus to make the list was Lockheed Martin in 2010, coming in at number twenty-five.

Over 95% of the population of the United States gets water from a municipal supply.  That’s a government supply chain.

We have the United States Postal Service, a prodigious capability that operates as an independent agency of the federal government.  The USPS even handles some of Amazon’s Sunday deliveries.  That’s a government supply chain.

And, of course, we have the military industrial complex.  That slice of American commerce includes highly competent companies like Lockheed Martin, Boeing, Raytheon, General Dynamics, Northrop Grumman, United Technologies, L-3 Communications, and BAE Systems.  These are just the biggest; there are lots of others.

I don’t think twice about drinking water out of a tap in any office building in America.  Making that happen requires world class supply chain chops, and those organizations are not on the Gartner list. 

I’ve received mail in towns in truly isolated US locations, simply addressed to me, General Delivery, but I don’t see the USPS on the list.

I’ve eaten fresh coffee cake sent by my wife using the US Mail in combat-zone in Southwest Asia – what the military calls an austere non-permissive environment - while at the same time eating three hot meals a day prepared for me by government contractors.  I don’t see any aspect of that supply chain reflected on the list.

Why are none of the government-centric operations or players on the Gartner list?  Are the supply chain capabilities in the government space really as mediocre as Gartner seems to imply?  Or is there some sort of unintended selection bias taking place?

Speed Kills. So does lettuce.

Supply Chain Risk Management (SCRM) is complicated.   But sometimes, the complexity resolves down to a single event.  And that event can be tragic.

The supply chain for agricultural products in the United States is really complex.  Somehow, that integrated set of capabilities brings fresh lettuce from Yuma, Arizona to my home outside of Boston, Massachusetts.  The supply chain network has a lot of players running an interwoven network that moves fresh produce through echelons from coast to coast.

According to the Washington Post on May 2, “The nationwide food poisoning outbreak from E. coli-contaminated romaine lettuce has claimed its first fatality, an unidentified person in California, and the infections have sickened a total of 121 people in 25 states, the U.S. Centers for Disease Control and Prevention announced Wednesday.”

That lettuce is believed to have come from the Yuma area.  There are no simple supply chains.  A head of lettuce may be simple, but the associated supply chain processes are complex.  That complexity brings risk and danger.  Just ask the family in California.

The Defense Acquisition University defines SCRM as “a systematic process for managing supply chain risk by identifying susceptibilities, vulnerabilities and threats throughout DoD’s “supply chain” and developing mitigation strategies to combat those threats whether presented by the supplier, the supplied product and its subcomponents, or the supply chain.”

Supply Chain Risk Management includes more than cyber threats, so it isn’t just an IT problem.  Risk touches all functions in the supply chain, and it needs to be addressed by the operators, too.  The next time somebody tells you that supply chain risk is an IT problem and tries to kick the can down the hall, remember that family in California.

Post Office vs. Amazon – the real reasons USPS is losing money

Late last year, President Trump took aim at the Post Office and Amazon, tweeting, “Why is the United States Post Office, which is losing many billions of dollars a year, while charging Amazon and others so little to deliver their packages, making Amazon richer and the Post Office dumber and poorer? Should be charging MUCH MORE!

In another tweet, on March 31, the President goes on, “While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars.”

President Trump might be overlooking the real challenges at the United States Postal Service (USPS), and Amazon isn’t on the list.  The President argues that Amazon is getting the better end of the deal in the agreement with the USPS  and insinuates that taxpayers may in effect be subsidizing a private sector company. But, there is a bit more to the story.

FedEx and UPS and a bunch of other companies use the Post Office for last mile delivery.  The Post Office has the most formidable infrastructure in place in the United States designed to deliver everywhere, every day.  Standard delivery covers the map six days a week.  The Post Office delivers some high priority mail packages on Sunday, as well as some Amazon packages. 

That last mile capability is what we call a competitive advantage, and the Post Office is mining it for all it’s worth.  And in reality, the small package segment of the USPS business model is actually a money maker. There is a really important concept in accounting called “contribution margin,” and the President Trump needs to consider it.

The Post Office is losing money, and has for years; largely driven by shifts in the market.  Junk mail – once a cash cow for the Post Office - is tanking.  First class mail – supplanted by email - is tanking.  eBills and ePayments – it’s been months since I last wrote a physical check – have totally reengineered the way we do business. 

However, . Postal Service expenses continue to exceed revenues and they have limited ability to control overhead.  Challenges include a unionized government workforce, high pension and healthcare costs mandated by Congress, regulatory obstacles, and the inability to close underperforming (money-losing) post offices, to name a few.  

The Post Office is significantly constrained in their ability to react appropriately, in a business sense.

Federal Statute establishes the USPS Board of Governors to “direct the exercise of the powers of the Postal Service, direct and control its expenditures, reviews its practices, conduct long-range planning, approve officer compensation, and set policies on all postal matters.”  By law, there should be nine members on the Board of Governors, nominated by the President and subject to Senate confirmation.  These nine select both the Postmaster General and the Deputy Postmaster General, for a total of 11 seats. 

At the present time, all nine of the Senate-confirmed seats are vacant with just three nominations pending Senate confirmation.  There are still six more nominations to go, and Congress is still on the hook to confirm the three that have been made.

Good luck with recruiting willing participants for the Board of Governors.  We’d all like to see the President tap his network and recruit some serious players for the board, but there are challenges.  Pay is limited to a rate of no more than $300/day for forty-two days, plus an annual salary of $30,000, or a maximum total annual pay of $42,600.

So, the President’s recent attention on the business acumen of the folks at the Post Office is a little off target.  Post Office profitability challenges are tied to far more issues than Amazon.  In reality, the President and Congress are significantly contributing to the problem. 

Might we respectfully suggest that the President and Congress exercise some leadership and sound business management acumen to fill the void and position the Post Office for success?

Disclosure:  the US Postal Service is a current client with one of my consulting businesses.  You might consider that a conflict of interest or you might believe that gives some credibility to my opinions.  That judgement is in the hands of the readers.

It’s great when the federal government nails it.

Since it was established 25 years ago, the U.S. Trade and Development Agency (USTDA) has generated a total of $61 billion in U.S. exports and supported over 500,000 American jobs.

The USTDA is a small independent federal agency whose mission is to help American “companies create U.S. jobs through the export of U.S. goods and services in emerging economies.”

If you are reading this blog, you know that transportation and transportation infrastructure – a focus area for the USTDA – is a catalyst for business.  The USTDA’s published statistics cite $95 in trade generated for every dollar spent by the agency.

According to the USTDA website, “Transportation is a critical sector, as it links people and, even more importantly, drives trade, investment and economic growth.  USTDA activities in the transportation sector support the development of higher capacity aviation, rail, port and highway systems, improved safety management, and the adoption of international safety and security standards.”

Describing what they do, the USTDA says, “From providing technical assistance that supports trade facilitation, to piloting U.S. technologies for customs systems at borders, to modernizing ‘hard’ infrastructure at ports, railways and airports, the Agency introduces high-performing U.S. solutions that can increase capacity, enhance efficiency and improve safety.”

In 2016, USTDA launched the Global Procurement Initiative, to provide partner nations with the knowledge needed to make “best value” decisions and understand life cycle cost analysis to level the playing field for US companies seeking international opportunities. 

The natural follow-on to any infrastructure development funded by the United States is trade with the United States.  Businessmen understand taxes when they yield an asset.  Logisticians understand taxes when that asset is transportation infrastructure.

That’s what USTDA does:  build transportation capability to drive business for the United States.  Notably, transportation is just one of their sectors.  They also focus on energy and telecommunications.  The Agency has actually gotten ink from Forbes, so they must be doing something right.

Now, if Congress would only apply the same logic to transportation within the United States that USTDA uses to drive international trade . . . for more, please see my February blog, “Memo to Washington:  Do the math, then do your job.”

There is a storm rolling in

If you work in logistics, you understand compliance.  The government sets the rules, and we figure out how to follow them.  OSHA rules.  Labor standards.  Tariffs.  Gas taxes.  The list goes on.

We know how to project these costs, know how to plan for these costs, and know how to run a business incorporating these costs.

President Trump has now introduced uncertainty, announcing tariffs on aluminum and steel.  And while he began with steel and aluminum, he quickly escalated the rhetoric to include a threat of tariffs on European autos.  Our trading partners have not been silent.  Europe is talking about Tennessee whiskey and Harley Davidson.

To make it messier, the President has added unpredictability to the uncertainty.  Canada and Mexico are exempted, but what about Australia.  There is confusion over Australia.  Who knows who else is knocking on the door of the White House.

These ten countries account for about two-thirds of our steel imports:

1. Canada 16.7%
2. Brazil 13.2%
3. South Korea  9.7%
4. Mexico 9.4%
5. Russia 8.1%
6. Turkey 5.6%
7. Japan 4.9%
8. Germany 3.7%
9. Taiwan 3.2%
10. China 2.9%

Source:  Reuters

What is the President up to?  Why steel?  Why aluminum?  What next?  Just about a year ago I wrote, “Uncertainty Stinks.”  Then last fall, I followed up with “Interesting times.”  The time for conjecture is over; there is a storm rolling in.

Tariffs and retaliatory tariffs are in play, and they will ripple across the supply chain.  Depending on your exposure, you may have a blip to deal with, or you may have to do a complete logistics and sourcing reset. 

Even worse, any hope for precision is out the window because we do not know broad the impact will be.  Is it just steel and aluminum, or did we just see the start of a global trade war?  Are we reacting to a ripple, or will it be a tsunami? 

My advice for logisticians: plan for the worst, hope for the best, and start running for the high ground.

Affirmation is a wonderful thing: Performance Based Logistics at DLA

A tranquil and rainy Sunday morning is an ideal opportunity the to read and digest DoD policy.  Policy is a wonderful thing – the playbook that directs what the government actually does – and today’s theme is logistics policy at the Defense Logistics Agency (DLA).  In particular, the focus is a search for Performance Based Logistics directives at DLA. 

According to the Defense Acquisition University, with PBL “outcomes are acquired through performance based arrangements that deliver Warfighter requirements and incentivize product support providers to reduce costs through innovation. These arrangements are contracts with industry or inter-governmental agreements.”

Policy at the Defense Logistics Agency flows from the top down, beginning at the White House.  The President provides the vector, the Secretary of Defense issues direction across the Department of Defense, and the direction ultimately cascades down to the operational level. 

There are five Focus Areas laid out by DLA leadership to describe DLA’s “plans, priorities and expectations related to Industry Engagement from the DLA enterprise perspective.”  Peeling back within the five Industry Engagement Focus areas, there is a detailed description of “Supplier Communication and Interaction.”

“Following Secretary Mattis’ guidance, DLA acquisition professionals and leaders are encouraged and expected to engage with and work collaboratively with industry in a fair and open manner. DLA will continue to initiate, ensure and be responsive to supplier interactions at all levels of business.”

And then there is a citation pointing to a detailed diagram that invokes Performance Based Logistics as a critical piece of the Supplier Engagement Strategy, “see Supplier Engagement Spectrum below.”

PBL lives on at DLA.

Memo to Washington: Do the math, then do your job

The federal government funds the nation’s transportation surface infrastructure in large part through federal gas taxes. Conceptually, that makes sense. If you drive a car, or a truck, you use the roads, so the 18.4 cents per gallon tax funds roads and bridges.

Except it doesn’t anymore, and projections show it getting worse. The gas tax is a fixed rate, not a percentage, and it hasn’t been revised since 1993. Because of inflation the purchasing power of the 18.4 cents per gallon has declined, meaning that the effective tax rate has declined to around 11 cents.

We can quibble over the math, look at the underlying variations in the cost of gasoline itself, but let’s just accept that the purchasing power of a dollar in 1993 has declined by about 40%, there isn’t enough government money to maintain the infrastructure.

And technology shifts will further erode the revenue base. The federal government understands this, and the GAO has been firing warning flares since 2009.

The tax base will likely continue to erode as demand for gasoline decreases with the introduction and adoption of more fuel-efficient and alternative fuel vehicles. To maintain spending levels of about $45-50 billion a year for highway and transit programs and to cover revenue shortfalls, Congress transferred a total of about $141 billion in general revenues to the Highway Trust Fund on eight occasions from 2008 through 2015. This funding approach has effectively ended the long-standing principle of "users pay" in highway finance, breaking the link between the taxes paid and the benefits received by highway users. 
Source: GAO.gov

We need infrastructure. In business, there is not a thing we bring into our warehouse or send out to our customers that doesn’t need transportation infrastructure. Washington needs to wake up and do its job.

Even my mother understands it

Watch what happens in any Emergency Room.  Patients arrive.  Medical professionals examine, categorize, and route to treatment.  That routing may be to a bed in that facility, perhaps an operating table, or a transfer to a more appropriate facility.

That same description would work for any cross-dock operation in the world.  Go to any cross-dock facility, or even a break bulk location, and you will see the same process flow.  Goods arrive.  They are identified, categorized, and routed.  That routing may be to points of use, a queue, or matched to another facility.  Top notch distribution centers move through this process at the speed of light.

This weekend, my mother and I experienced the full spectrum of logistics in health care.  We rode an ambulance to one facility, spent a couple of hours in an examination process, then routed to another facility 10 miles down the road, where we went through the examination, categorization process  all over again.

Let’s say it didn’t feel like we were running through the medical analogue to a Wal-Mart DC.

Good logistics practice applies where ever there is flow.  What’s moving can be a physical item, or a logical concept, or even person.  Everything fits in a flow, and best-in-class logistics principles are universal.

Maybe somebody should ask the insurance companies, who seem to have distorted good logistics principles when it comes to patients in hospitals. Or maybe we should ask the government folks who write the regulations.  But, given what we saw,  I think I understand why medical costs are spiraling out of control.

As we were idling in one of the stops along the way, my mother looked at me and said, “What is so hard about this?” 

All I could do was smile, and then go hunt down somebody to expedite.