Rising Energy Prices (and Profits) 

ExxonMobil reported its annual earnings last week - $40.61 billion!  Exxon’s profit is the largest in US corporate history beating its own record 2006 earnings of $39.5 billion.  To illustrate the magnitude of Exxon’s achievement consider that

·         Exxon’s profits alone would be nearly enough to buy Yahoo! assuming they would accept the valuation ($44.6B) Microsoft placed in their offer last week.

·         Exxon’s profits are larger than the GDP of over 120 countries.  If Exxon’s 2006 profits were a country it would rank #67 in terms of GDP on on the World Bank’s list. 

·         If Exxon’s profits were revenues, they would rank #58 in the 2006 version of the Fortune 500.

Exxon is not the only energy company enjoying robust profits.  Chevron posted $18.69 billion for its 2007 earnings.  BP posted $20.8 billion for full year 2007.  Royal Dutch Shell, ConocoPhillips and other the energy titans are also benefiting from the high price of oil. 

Energy’s Impact on the Economy 

As consumers we are well aware of the rising energy costs in today’s markets.  The pain is felt every time you go to the gas pump or your heating bill arrives in the mail.  But how are rising energy prices are affecting corporate spending?  Businesses focused on transportation services have the most obvious impact.  In the past few weeks several major US airline operators such as Delta have reported significant losses.  Rising costs of jet fuel were cited as the primary cost.  Higher energy costs impact profit margins not just for transportation providers, but for any company in the business of transporting physical goods.  Manufacturers of raw materials and parts or finished goods such as automobiles, food, apparel, electronics, pharmaceuticals and medical-surgical products, are being significantly impacted by rising transportation costs.

TMS Applications 

Rising transportation costs are one key factor leading many retailers and manufacturers to purchase specialized software to optimize logistics processes.  These applications called Transportation Management Systems (TMS) offer support for logistics sourcing, planning, execution, settlement and optimization.  A recent Gartner Group report on Transportation Management Systems stated:

“Exploding freight costs, increasing supply chain complexity and rising globalization combine to create a lucrative TMS market, with 10% annual growth projected during the next five years.” 

Rising fuel costs are not the only factors driving manufacturers to focus more closely on logistics processes.  As more and more manufacturing is being relocated to Asia, goods are traveling further to reach their final destinations in the US and Europe.  The result is that transportation represents a higher percentage of the overall costs of goods sold.  Inventory levels are also rising to hedge against the uncertainty associated with international shipments.  Port congestion and potential labor strikes represent growing risks, particularly for the West Cost of the US.  Many US importers are employing diversification strategies to route goods through East Coast or Gulf State ports.   Growing driver shortages and roadway congestion also pose on-going risks to logistics performance.

The ROI of TMS 

Using a TMS, logistics professionals can tackle a number of the complex issues related to long-distance supply chains, global trade management and freight spend management.   A TMS enables transportation managers to assess total landed costs per shipment; to identify opportunities for load consolidation; to measure carrier performance; and to audit invoices for contract compliance.  Successful TMS implementations can yield annual logistics cost reductions of 5-25%.  TMS users have also improved customer service by improving delivery schedule reliability.  More and more customers are requiring shipments to arrive within relatively narrow delivery windows.  Being able to plan exact timeframes for deliveries is becoming critical to support sophisticated cross docking or vendor managed inventory processes.

A Complete View of Logistics Activity 

A key pre-requisite to achieving the benefits of a TMS application is digitizing the information flows between carriers or 3PLs and their customers.  Retailers and manufacturers implementing TMS applications need to centralize all logistics related data into one master repository.  The TMS application then functions as a single window for all transportation activities across the enterprise, regardless of the third party provider; the mode of transportation; and the point of origin.  Without 100% of the logistics data, a TMS application may not provide accurate recommendations on route optimization, carrier performance or shipment visibility.

Carrier On-Boarding 

One of the greatest challenges for buyers of TMS applications is integrating with their diverse community of transportation vendors around the world.  To gain a complete picture of logistics activities, TMS owners must ensure 100% integration with all of their marine, air, rail, TL and LTL carriers as well as other logistics providers such as 3PL, 4PL, consolidator, freight forwarders, customs brokers and postponement specialists.  All of the larger carriers and 3PLs offer Electronic Data Interchange (EDI) with their customers.  However, an individual connection must be established and tested independently with each different carrier.  The process to on-board transportation vendors using EDI can take many months, if not a full year.  As a result, the expected return on investment from TMS projects is not realized as quickly as promised in the original business case. 

Transportation vendors struggle with B2B integration as well.  They have to integrate to each customer independently, resulting in a spaghetti-like maze of connections using a myriad of e-commerce standards.  Not only due transportation vendors have to support the wide variety of Internet communications protocols (AS2, S/FTP, HTTP/S, etc.) in use today, but they also have to support the wide variety of document formats  such as EDI (ANSI X12 and EDIFACT), XML and  RosettaNet.  Increasingly, customers are requesting that logistics providers provide data in the native file formats of their TMS application.  Each of the 10+ popular TMS vendors (i2, Oracle, Red Prairie, SAP, JDA, etc.) has their own internal data structure.   

Poor Data Quality 

As retailers and manufacturers on-board transportation vendors onto their TMS applications they are often discover another challenge.  The data being provided via EDI is inaccurate, out-of-date or incomplete.  Logistics providers are notorious for providing low levels of data quality in their electronic transmissions.   Simple examples include:

·         Codes – Most transportation vendors have a unique system for referencing locations, time zones, activities and units of measure using 2 or 4 letter codes.  While these codes are meaningful to the carriers, they are unintelligible to a retailer or manufacturer.

·         Time Zones – Shipment status messages often contain a date and time for a specific activity such as port departure.  However, an accurate time zone is not provided.  As a result, the retailer or manufacturer is not sure if the time refers to GMT, US EST or local time at the port of origin.

·         Quantity –Often the quantity fields in shipment documentation have a numeric value, but no unit of measure.  So a shipment may contain a quantity of 5000, but the retailer or manufacturer receiving the goods does not know if 5000 refers to the number of units or the weight in kilograms.

Poor data quality degrades the value of TMS applications by lowering the confidence level associated with the reports and analysis provided.  Prior to making decisions, transportation managers must cross-reference the data in TMS applications with phone calls to the supplier and carrier.

A Better Model 

So the point of all this is that without high quality, up-to-date feeds from third party logistics providers, a TMS application offers little value to the customer.  Buyers should factor these challenges into ROI and deployment models for new transportation projects.  But there is a new paradigm emerging – one that helps retailers and manufacturers minimize the challenges with carrier on-boarding and data quality.  I will discuss the new models in a future post.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

This is a follow up to Sunday’s post on my visit to the National Retail Federation show (http://blogs.gxs.com/keifers/2008/01/13/the-power-of-retailing-%e2%80%93-nrf-big-show-2008/0) Out of the sessions I attended there were five topics I thought were particularly noteworthy this year:

1.       Threat of US Economic Recession looms over the retail industry in 2008.  There is an air of caution in the market.  Retailers at NRF discussed plans for fewer new store openings in 2008-9 and the heightened competition to gain the trust, loyalty and spend of an increasingly demanding consumer.   Perhaps, most interesting to me was a slide that Deloitte Researched showed of the US household mortgage market in 2008.  The chart illustrated the number of mortgages per month that will convert from the introductory, low-end teaser rates consumers have enjoyed in the past few years to the higher-fee, adjustable terms popular with ARMs.   While, many of us would like to believe that the worst of the US mortgage crisis is over, this chart showed otherwise.  The transition to adjustable rate terms for mortgage holders will peak this year between the months of January and July.  Unfortunately, this leaves little hope for an improvement in the global credit markets or consumer spending patterns in the near future.

2.       US Port Diversification – In addition to fears about the looming economic recession, there is a growing concern about the capacity of the US transportation infrastructure.  Specifically, there is a great deal of concern about the West Coast ports of Long Beach and Los Angeles, California, which together handle about 40% of the US import trade.  Negotiations with the labor unions that work these ports are scheduled to commence early this year.  If mutually acceptable terms are not reached by summer, a potential labor strike could cripple the import process.  One panelist on a supply chain forum stated that a work stoppage at a critical West Coast port would represent an economic loss of up to $150M per day.  Needless to say this has retail leaders and their shareholders very concerned.  As a result, retailers such as JCPenney have developed “Port Diversification” strategies to reduce dependency on West Coast hubs.  For example, Penney’s now re-routes their Indian sub-continent imports through the Suez Canal to an East Coast port.  Merchandise destined for the Midwestern states is routed through the Seattle-Tacoma port then hauled via rail freight to local distribution centers.  Penney’s is also experimenting with a port called Lazaro in Mexico.  Container freight imported to Mexico can be transferred to rail lines via intermodal links then easily transported to Midwest destinations such as Houston, Fort Worth, Kansas City and St. Louis.

Kansas City Southern’s Rail Network

 

Key US West Coast Ports 

3.       Department Stores making a comeback - WSL’s (www.wslstrategicretail.com) study on How America Shops found that 27% of US shoppers visited a department store weekly in 2007 as compared to only 17% in 2006.  The trend was further supported by Deloitte Global Powers of Retail 2008 study, which found that retailers of fashion goods experienced an impressive sales growth of 8.5% on average.  Not only are the sales of department stores and apparel retailers growing, but the profit margins are increasing as well.  Deloitte’s study revealed that fashion retailers boasted the highest profit margins of any segment (5.2%).  Who benefits from these trends?  The US retailers (Macys, J.C. Penney, TJX, Gap and Kohl’s) certainly will benefit as they claim the top 5 positions globally in terms of sales.  However, I think European-based retailers will benefit as well.  European chains, in my opinion, such as Inditex (Zara) of Spain; LVMH’s Sephora of France and H&M of Sweden are among the most innovative in the department store and fashion sector.

4.       Presidential Primaries drive the Food Market – Dr. Ira Kalish of Deloitte Research gave a fascinating insight about the relationship between the food market and the US presidential elections.  As most Americans learned earlier this month the Iowa Caucuses continues to be one of the most influential events in the US Presidential election race.  Most US senators and congressmen have ambitions of some day reaching the Oval Office as either the Commander-in-Chief or the #2.  Not surprisingly such ambitions drive most politicians to be unusually sensitive to the needs of the Iowa population, which is in large part represented by the agriculture industry.  As a result, there is strong support in the US Congress for Iowa’s rapidly growing ethanol-based biofuel business.  But every acre of farm space devoted to energy production is one less acre reserved for producing food products.  So not only are rising energy prices driving up food prices due to higher transportation costs, but additionally energy firms are reducing the available food supply by consuming  key agricultural products for use in alternative fuels.

5.       Web 2.0 Impact is Real – WSL told a great story about a pair of teenager’s process for selecting a prom dress, which I think summarizes the complexities of today’s multi-channel buying process.  As you would expect, the first action the two teens took was to visit high-end retail stores to try on dresses.  Here is where it gets interesting - they visited the stores with no intention of actually buying anything.  Instead, the purpose of the trip was to get photos of themselves in the gowns they liked the most.  Using the camera on their mobile phones, they took pictures which they then uploaded to Facebook to share with their friends.  Using an on-line voting process with their social network, they decided which gown to buy.  And, of course, to purchase the actual gown they didn’t return to the original stores they visited.  Instead they researched prices, colors and sizes online to find the best value before making a purchase.

More information on the show including some of the presentation handouts can be found online at:

http://events.nrf.com/annual08/public/enter.aspx

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.