Forecasting supply chains and logistics businesses.

Even in large companies, the person or team who consider future economic and business scenarios and how the enterprise may respond, do not always get it right.

The chairman of Origin Energy has admitted that management had not foreseen the extent of the fall of crude oil prices and had been mistaken in its original belief that the business would be largely insulated from price weakness. That mistake has resulted in a $6b loss of market value over the past 12 months and the need for a $2.5b capital injection (that diluted the share price). Errors in forecasting can be expensive!

The global energy industry forward business plans are based on nine broad assumptions concerning the world economy, developed by the International Energy Agency (IEA). The assumptions help to justify planned expenditure in the multi-billions, but how good are the assumptions? The research organisation Carbon Tracker challenges these assumptions and advises shareholders to challenge energy companies management, because the new investments could become ‘stranded assets’, as the world changes (more rapidly?) to a renewable energy based economy.

What are the forecasts for your supply chains or logistics services business? Management likes graphs with slopes that incline upwards. If this year has been good, next year will be better and the year after, better still – it’s called the straight line syndrome, where the gravy train never stops.

What could derail your gravy train?

I recently read a comment that ‘Uber is not valued at U$50b because it is a taxi company, but because it is a logistics business’. As the company is viewed as a disrupter of one industry, could its business model be applied to freight transport?

Maybe – a scenario is possible if the prime mover and trailer are considered separately. The shipper or its 3PL services supplier owns or rents the trailers, which become an inventory location, planned as links between warehouses. When a prime mover of a particular size is required, book it through Uber (or similar). As with its taxi service, Uber tracks the journey and debits the account. It also retains feedback on the capability and presentation of the driver and the driver’s input about their experience of the client.

This simple scenario contains many complexities in its structure and operation, but the possibility is there. And what about the road; how might it be paid for and will usage charging change distribution business models?

Building more roads will not solve the congestion and delay problem, as more roads increase travel demand – behaviour must change, to more effectively use the current road network. Price is a common way to modify behaviour – we experience it with ‘time of day’ utility charges.

‘User Pay’ road user charges could consist of:

• An annual road access charge (the payment receipt is downloaded to the GPS technology unit fitted in all registered vehicles). The charge is based on costs such as the:
  • Road wear and tear caused by the vehicle’s weight and power to weight ratio. This would be similar to the system used in some European countries, which accounts for: the emission class of the vehicle, maximum gross vehicle mass and the number of axles. For private vehicles it would reflect that a large SUV vehicle causes more road damage than a small sedan
  • Environmental costs
  • Road safety and transport accident costs
  • Transport administration costs
• Travel distance (per km) charge based on time of day and day of the week, by geographic zone; this reflects congestion costs. A vehicle used in rural areas outside peak hours would be charged significantly less per kilometre than a vehicle used in peak times on city streets
• Travel distance (per km) charge based on location and road type (freeway/motorway, urban road, rural road) to reflect delay costs

The travel distance charges provide the revenue for improving roads and public (including rail freight) transport infrastructure. This encourages the use of alternative transport modes. The usage charging system could replace current taxes and charges on operating vehicles, typically built into the price of fuel.

To use the road network more effectively, access restrictions for delivery vehicles in city streets could be imposed. To provide replenishment services for small shops within a geographic area, only permit holding vehicles can enter within defined hours. This ensures full trucks and less of them.

This form of distribution requires warehouses sited within logistics hubs (depending on size, typically called freight village, inter-modal terminal, logistics hub, inland port and logistics city) which contain the value adding service facilities of logistics service providers (LSPs):

• Material handling services e.g. break bulk; stuff and un-stuff containers; shuttle rail services to sea and air ports
• Order fulfilment services e.g. Merge in transit; Postponement in assembly; Kitting; Pack and Label; Reverse Logistics
• Light Manufacturing services
• Business services

As items can be consolidated in a hub for the same geographic destination, availability of items should be provided at less overall cost to the economy.

Another possible change is implementation of ‘chain of responsibility’ legislation. This states that shippers and principals are responsible for the actions of their LSP suppliers, particularly truck fleets and warehouse operations. In both situations, outsourcing is prevalent, where principals state they have negotiated contracts with LSPs and therefore have no knowledge of how the contract will be executed. The LSP supplier then sub-contracts with warehouse labour hire companies and smaller transport companies that pay lower wages, have poor working conditions and may have poor vehicle maintenance. Under chain of responsibility, the principal is always responsible for the actions of their contractors, which can negate the need for contractors.

So, these four possible scenarios – disruptive technologies, road usage charges, restrictions on delivery areas and times and chain of responsibility legislation – could change your future supply chains or logistics service business. Will they happen and if so, when? – That is for you to decide and whether they (and other assumptions) should be built into your forward business plans.