A carousel of uncertainty. We have entered a spin cycle.

Once upon a time trade was bilateral. Then it became multilateral. Today logistics networks encircle the globe. That’s the development vector logisticians rode for the last thirty years.

We cannot rely on that accelerating and unidirectional vector anymore. Brexit uncertainty. NAFTA uncertainty. The death of the Trans-Pacific Partnership. The ongoing and escalating tensions with China. The gradual emergence of the New Silk Road, with its potential to undermine the basic structure and flow of global logistics.

These issues ripple through North American logistics. Even more unsettling is the disruption of the vector we’ve been riding for the last year. Volleys back and forth with the EU on protectionist aircraft tariffs and subsidies continue. Tensions with China now extend past soybeans all the way to the NBA.

It’s a new world for the logistician. Our perspective on the world seems to be shifting by the day. We are no longer on the march. We are riding the Carousel of Uncertainty. 

Time to double down on agility, not structure.

Let’s talk about Supply Chain Integrity. It's more than Cyber

Bill Evanina, director of the National Counterintelligence and Security Center in the Office of the Director of National Intelligence, doesn’t think we should be focused on Cyber Security.

In remarks published by the Federal News Network, Evanina said, “I think the question I’d ask every federal employee and contractor to go back and ask your organization, ‘What are you doing to advise and inform your supply chain integrity? What are we doing as an organization to protect our supply chain integrity?  Every single government employee and contractor has a role in this. This is not owned and operated by the chief information officer and the chief information security officer. We all, as government employees and contractors, own a piece of the stake of the supply chain integrity.”

The next time somebody tells you that you have a cyber problem, acquaint them with all the players across the organization who play a critical role in maintaining Supply Chain Integrity.

What is going to come out of the sausage factory?

The federal government can do remarkable things. They are worried about supply chain integrity. Can we trust Congress to do the right thing?

The machine that is the federal government – and, by implication, the Department of Defense Supply Chain - can be difficult to understand. Yet we really need to understand it, because it is a significant driver of logistics. Logistics activities are channeled, and often specifically directed, by what Congress decides to do. If a company doesn’t pay attention, unexpected impacts can roll in from the blind side.

The implications of the blind side hits can be significant.

Consider the continuing trade tensions with China. The total value of bilateral trade between the United States and China dropped by nearly 14% in the first half of the year compared to the same period in 2018 according to the US Commerce Department. There are a variety of opinions on whether this is a positive development or a negative one. What is not in dispute is that the trade war has resulted in seismic shirts in logistics.

President Trump and China’s President Xi have disrupted a globalization trend that has been going on for decades.

There may be another disruption on the way. On June 27, at the beginning of the summer, the Senate’s passed their version of the National Defense Authorization Act for Fiscal Year 2020. Included in the Senate’s version of the Defense Budget for the next year has an obscure feature built in. Section 831 provides for the “modernization of acquisition processes to ensure integrity of industrial base.”

The focus of the bill is, “Digitization and modernization.” Specifically, “The Secretary of Defense shall streamline and digitize the existing Department of Defense approach for identifying and mitigating risks to the defense industrial base across the acquisition process, creating a continuous model that uses digital tools, technologies, and approaches designed to ensure the accessibility of data to decision-makers in the Department.” 

Embedded supply chain and logistics risk – think Huawei’s 5G technology - is influencing the thinking on Capitol Hill and Congress is worried.

The bill directs the Under Secretary of Defense for Acquisition and Sustainment to take the lead. Specifically, the Under Secretary will characterize and monitor supply chain risks, including material sources and fragility, counterfeit parts, cybersecurity of contractors, vendor vetting in contingency or operational environments, and other risk areas as determined appropriate.

That is a broad portfolio with the potential to intrude and perhaps disrupt logistics.

The MITRE Corporation, a prominent think tank, supports the bill. On a publicly available website they say, “there are critical risks across the industrial base to include adversaries stealing designs of critical systems to controlling and corrupting key elements of the supply chain. DoD must also develop contract strategies at portfolio and enterprise levels to minimize winner-take-all contracts that create a monopoly for key defense sectors and instead enable vibrant competition from many vendors from the primes down to all tiers of the supply chain. Digital solutions help DoD maintain an enterprise view.”

While MITRE and many others may endorse the idea of the Federal Government being involved “from the primes [Prime Contractors to the Department of Defense] down to all tiers of the supply chain,” there are contractors supporting the Defense Industrial base with a different point of view.

The emerging legislative perspective is that the Department of Defense has responsibility for the “characterization and monitoring the health and activities of the defense industrial base.” This view assumes that the Department is equipped to pass judgement on profitability, investment, innovation, technological and manufacturing sophistication, as well as the “culture of performance.”

Individuals civil servants award federal contracts, not an Office or a Department. The Contracting Officer has absolute final decision authority. Part of that final decision is the “Responsibility Determination,” where the Contracting Officer certifies that, in their judgement, the contractor to have the means and ability to complete the contract. Congress may broaden the scope of the Contracting Officers portfolio to include “consideration of the need for special standards of responsibility to address the risks.”

The challenge lies in the implementation language. “Special standards” are not defined.

It is a complex problem. Huawei is the latest case, but there are others. Buried deep inside many products – even those assembled in the United States – are computer chips. The largest producer is China. The list includes common items like steel, a vital defense commodity, and we import substantial quantities from Russia.

Uncommon materials, vital in certain defense applications, that are dependent on a logistics network that extends to China. According to the Government Accountability Office, “rare earths are essential to the production, sustainment, and operation of U.S. military equipment. Reliable access to the necessary material, regardless of the overall level of defense demand, is a bedrock requirement for DOD.” What the GAO delicately avoids mentioning is that China is the principal – and for some of the elements, the only – source.

Congress has a challenge. There is merit to both perspectives. The art lies in creating the right blend. Remember, laws are like sausages. It is better not to see them being made.

 

Brexit and the pizza pie

According to a CNN report on August 6, in the United Kingdom “Domino's is stockpiling pizza ingredients to protect against a disorderly Brexit.”  In today’s global economy, all supply chains – and by implication, logistics networks – are facing materiel risk at an unprecedented scale.  Sometimes the risk we face are beyond our control, but that doesn’t absolve leaders of the responsibility to mitigate.

We all have critical materiel flows.  These flows typically include imports.  At Domino’s UK, CNN reports that the set of critical inputs includes tomato sauce, frozen chicken, pineapple and tuna.  Not complex, but clearly essential if you run a pizza shop.  Even the simplest supply chains can create considered strategies to mitigate supply chain risk. 

Domino’s in the UK has a plan.  Do you?

Trade war, skirmish, or stalemate?

The trade deficit with China is trending favorably. A comparison of the first six months of 2019 with the comparable period in 2018 shows the trade deficit with China edging down. That’s a reduction of about 10%, according to Census Bureau statistics.

Welcome news, perhaps, but hardly a breakthrough. 

If the logistics network in Southeast Asia were to realign, a surge in trade with Bangladesh or Vietnam would be expected. The trade deficit with Bangladesh is up by about a third, by about one hundred million dollars a month. The trade deficit with Vietnam is also up by a third, about a billion dollars a month.

Logistics professionals are flexing, evolving away from China, but that is not the same as reshoring to domestic U.S., or even North American, sources. Port volume at Los Angeles–Long Beach is up 3.9%, higher than the growth rate of the U.S. economy. The growth in the GDP (Gross Domestic Product) for the 2nd quarter 2019 was 2.1 percent, and the 1st quarter clocked in at 3.1 percent. 

This data demonstrates that the global logistics networks are evolving, perhaps balkanizing, but that is not the same as reshoring. How the tensions with China will resolve is unknowable. What is clear is that logisticians need to pay attention. 

Supply Chain Risk Management matters.  Educate your boss.

Improvise, adapt, overcome. That’s logistics.

My firm does a lot of work with the Federal Government.  One 30-something federal employee, Jae (not her real name), has been in many of our supply chain classes.  She faithfully gets on an airplane a couple of times a year to further her professional knowledge with structured education to make her agency better.  Jae has been doing that for the past couple of years. 

She primarily takes courses in the summer months for a compelling reason:  Jae is a single Mom.  Managing her kid’s school, related activities, working full time, and building a career is challenging during the school year.  In the summer Jae has more flexibility, and she takes advantage of it. 

Jae reaches into her own pocket to buy companion plane tickets for her kid – on a civil servant’s salary – and they fly to the schoolhouse so Jae can take classes.  Jae leaves the schoolhouse at noon every day to have lunch with her child, and then returns for the afternoon. 

Jae has all the right instincts.  In logistics, we improvise, adapt, and overcome.  Some folks, like Jae, have those instincts hardwired. It’s how she excels and succeeds at what she does:  supply chain and logistics.

As a bonus at the end of the week, they took in some of the metro DC and Northern Virginia sites before heading to the airport. 

Everybody wins - the Federal Government, the taxpayer, Jae, and her kid.  That’s improvise, adapt, and overcome. 

That’s logistics.

Beyond the four walls.

Risk beyond the four walls of the distribution center—driven by changes in federal government policy—is making fulfillment a lot more complicated. BlackRock, an investment advisory firm, publishes a “Geopolitical Risk Management Index.” 

That sounds rather abstract, a topic far removed from the distribution center, but all it takes is one glance to see that it isn’t.

The BlackRock June 2019 risk list of top five includes Gulf Tensions, Global Trade Tensions (i.e. tariffs), European Fragmentation, U.S.–China Competition, and South Asia (India/Pakistan) Trade Tensions. 

Each of these risks is climbing. 

Each has a direct impact on distribution. 

• Gulf tensions translate to petroleum risks. That ripples to transportation costs. Transportation managers must be ready to adapt distribution networks, quickly, if the curtain goes up in the gulf.  Since the middle of June—thirty days ago—crude oil futures prices have risen to over $60 a barrel, a bump of close to 20%.  These costs will ripple across the supply chain.
  
  
• New tariffs can disrupt the economics of distribution routes, sometimes overnight. Solid contemporary examples include the plight of soybean farmers who rely on exports, or domestic steel producers who unexpectedly found new opportunities with new tariffs on imports. 
  
  
• “European fragmentation,” most notably Brexit, but also active protectionist waves in other nations, are on the table. Our total trade with the EU exceeds what we do with China. The headlines fixate on China, but the trade arrangements with the EU and the impact of Brexit may be highly disruptive and possibly more disruptive than what is happening with China. We won’t know until the dust settles, and how the dust settles includes a visible role for the U.S. government.
  
  
• U.S.–China tensions are all over the headlines, and they won’t be resolved soon. Many companies went all in with a China sourcing strategy. It might be time to reconsider.
  
  
• The tensions between Pakistan and India are longstanding. India is a top 10 trading partner. Border tensions this year escalated to kinetic military incidents. Pakistan’s political structure is not known for stability. Prime Minister Modi of India is often cited as the most powerful political leader since Ghandi.  There is far too much uncertainty, and uncertainty means risk.

The spectrum of management in the DC is changing. Supply chains are at risk, which means that we need to be prepared to adapt the DCs on short notice. Contingency plans are more important than ever.  Do you have backup plans? Have you tested them?

It isn’t just about execution inside the four walls of the distribution center anymore.

It’s about Risk Management. What’s in your wallet—and can you afford it if you don’t have a risk management plan?

Your job description has changed.

Our sister publication, Supply Chain Quarterly (SCQ), published an interesting list in the last issue.  It’s the “’Top 10 Supply Chain Risks of 2019.”  There are serious supply chain risks out there.  Some of them link directly to logistics operations. 

A thread in the SCQ risks involve uncertainties that just a few years ago were not top of mind in distribution centers.  These risks involve government oversight and management of logistics.  Both are pulling distribution managers into new directions.

Logistics managers in the United States are agile at managing international movements.  Unfortunately, the choreography of those moves is shifting.  According to the article in the SCQ, “Companies face the immediate risk of increased cost and customs agents are adapting to new processes.”

We’re talking tariffs.

It’s hard to be agile when shackled by evolving costs outside of the logistician’s control.  Agile distribution means we anticipate as best as we can, but new variables introduced by the federal government without enough runway cause disruption. 

Improvisation – the development and deployment of new processes, no matter how agile you are - implies risk, always. 

We’re in an era of improvisation.

These risks emerging across the international dimension for logistics managers are now driving issues.  Just what are the rules going to be for Mexico?  How will Brexit impact movements to and from Europe?  How and when will the situation stabilize with China?

Risk managers deliver stability.  The government isn’t helping.

All of these “international” issues roll uncertainty into warehouse and distribution operations.  Is there enough space to hold increased buffer inventories?  As inbound and outbound flows evolve – perhaps rapidly – are transportation contracts in place to handle it?  Are customs brokers actively managing the backlogs at the ports as industry – not just your company – scramble to react to moves out of the White House? 

Supply Chain Risk Management is now an issue on the distribution center, not just the corporate offices.   

A sense of mission

Some people have jobs.  Some have missions.  Sometimes logistics execution is the job at the heart of that mission.

It’s magic when that happens.

It’s around 11 am, and over a dozen people loiter in a church parking lot.  The delivery truck arrives from the central kitchen, and the crew breaks down the load.  The sort happens.  Manifests are checked, and the delivery vehicles are loaded.  The cross-dock operation completes.

Within 15 minutes the parking lot clears.  The delivery vehicles are on their way, fanning out across the county.  By 1 pm around one hundred and fifty deliveries happen, and seniors are sitting down to a hot lunch delivered to their home.  And there is a second cold meal in the bundle, available for dinner later in the day.

Meals on Wheels - a 501(c)(3) tax exempt organization - operates in virtually every community in America to address senior hunger and isolation.  All of these logisticians are volunteers, with an unselfish passion to help their neighbors.  Amazing what can happen when you mix mission, passion, and logistics:   innovation and volunteerism to help others. 

Logistics, mission, passion.

Magic!

What’s your passion?

Qualified truck drivers are in short supply. Let’s address it.

Congress is on the right track. The DRIVE-Safe Act (Developing Responsible Individuals for a Vibrant Economy) has been introduced in Congress.  The bill makes sense.

Basic economics tells us two options can bring a labor market into balance.  One option:  increase wages to motivate more people to become qualified truck drivers.  Another option:  reduce unwarranted barriers to qualify as a professional trucker.

Today the federally specified minimum age is an overly stringent limitation.  The federal government requires interstate drivers to be 21 years of age.  Many states set the age requirement for intrastate truck drivers at 18.  Some are lower than that.

DRIVE-Safe opens opportunities to qualify as an interstate trucker right about the time most teens graduate from high school.  Those not headed for college need to earn a living and begin a career.  They can apprentice as a plumber, an electrician, join a union and start earning seniority, or any number of tracks as a skilled practitioner in the trades.  For some reason the feds prohibit high school graduates from becoming a long-haul trucker for another three years.

Call your Senator, call your Representative, and ask them to support the DRIVE-Safe Act [S. 3352 + H.R. 5358]