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Fellows in the air – Brown & Yellow

The headline read: UPS plans air deal with DHL in US, the byline of which is,

UPS plans up to 10-year air deal with DHL within the US, expects $1B in added annual sales

Only, I don’t think that it is UPS’s plan – It sounds more like DHL going around with a bowl in hand. That’s too dramatic? But, the roots of this story goes back about 5 years – a failed strategic acquisition/strategy and the resultant. Where do I read that? Right from the same story,

The arrangement with UPS is part of a U.S. restructuring announced by DHL parent Deutsche Post. DHL is slashing network capacity in the U.S. by 30 percent, which includes closing and consolidating sorting facilities and streamlining pickup and delivery routes. The company did not say how many employees would be affected.
DHL’s U.S. business has posted repeated losses and slipping sales as it continues to lose market share to UPS and FedEx Corp.

That is the real story within the story but to get that I think a little background is in order. Back in 2003, DHL acquired Airborne Express for a little over $1 billion USD. At that time, this deal was considered a strategic acquisition by DHL and Deutsche Post (DHL’s parent company and the privatized German Postal Company) in order to expand into the US market.

The long and short on the impact of DHL- Airborne (3/18/2004)

DHL’s American Adventure (11/29/2004)

At that time, one of the critical decisions made with Airborne’s assets was to keep its ground assets including the sorting facility in Wilmington, OH but spinning of Airborne’s air assets into a separate company – now known as ABX Air. This might have been a critical error but the decision might have been forced at DHL (DHL deal with UPS could end thousands of jobs in Ohio)

When DHL bought Airborne Express in 2003, it spun off its airline into the independent ABX Air because DHL, owned by Deutsche Post AG of Germany, was not allowed to own an American airline.

So up until the UPS air freight deal, DHL contracted ABX Air and ASTAR Air Cargo to shuttle the packages across the country. The statement from ABX Air when apprised of this deal reads:

"We cannot now determine whether those negotiations will lead to an agreement, or what other steps DHL might consider to reverse its losses in the U.S.," Joe Hete, chief executive of Air Transport Services Group, said in the statement. "In the meantime, we intend to continue to perform under our current agreements with DHL while aggressively pursuing our strategy of expanding our business with other customers,based on the technical and cost advantages of our fleet of advanced Boeing 767 cargo aircraft."

So clearly, DHL seems to be hurting from using ABX Air and possibly ASTAR Air Cargo – but in what way? It might very well be the case that UPS is able to leverage its economies of scale better than ABX Air and/or ASTAR Air Cargo. Or it could be that operational costs at the Wilmington hub are relatively higher and DHL’s declining volumes could be handled within its own sorting facility. So what got DHL to this point? That’s what I want to know and went looking for. The starkness of the headlines you read about this story these days compared with the big splash headlines back in 2003 contrast like night and day. While it is certainly wise to read comments posted on an internet board with a grain of salt – when two and two are put together, you ought to get four:

I departed in late 2006 amid a series of ill-advised and puzzling moves. The first and biggest blunder of DHL in the US was their decision to dismiss all but one of the former Airborne executives after a very brief transition. The ineptitude of the DHL senior management team was clearly demonstrated early on with a mindset that DHL was now a big player in the US market. They added on an unprecedented cost structure almost immediately; layers of personnel,new hubs, IT changes, significant service upgrades, etc, without the benefit of a dramatic increase in shipments. Airborne was methodical and cost conscious, so the culture was very unfamiliar and local managers often received conflicting messages regarding service and cost: a balancing act of two goals that can be mutually exclusive.Essentially, DHL brought on the cost structure of a FedEx sized company with Airborne-sized revenue and units. Almost overnight they began to offer premium service to thousands of new zip codes in the US regardless of potential revenue, just to say they can compete head-to-head with UPS and FedEx.

and,

Lastly, the consolidation of the two air hubs was ill-timed and poorly executed. The concept was correct, but the plan for it (short timeline, no test runs, incomplete sort facility in Wilmington ) was faulty and the project failed from the outset. I personally was there that first night to watch it unfold (while unloading containers and sorting packages). Tugs were lined up 20 deep waiting to offload aircraft containers; sorters stood for 10 minutes ata time waiting for packages; some slides were empty while others overflowed onto the ground in piles up to 6 feet high with no shift of labor from one to the other. Most shift supervisors were new and in experienced. The new sort facility was designed for a larger container type and workers were unfamiliar with how to process them.Packages were backed up for weeks while aircraft departed well under capacity due to the inability to process the containers in a timely fashion. Much of the backup was finally shifted to ground transfer to help catch up with the backlog, but not until the second week. By then,many major shippers had already rerouted their shipments to competitors. Many of them never returned.

These snafus correlate very well with the personnel management changes at the highest level at DHL Express USA. So the story so far as I see it for DHL Express USA:

1. Big splash.

2. Very deep pool – barely swimming, maybe drowning.

3. Latch onto a shark to swim to the other side.

But what is DHL supposed to do now?

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Outsourcing Reverse Logistics

Outsourcing Reverse Logistics is a recent article posted Modern Materials Handling.com that has an interview with Tim Konrad of GENCO (my former employer) – it’s a niche for GENCO that it has been rather good at exploiting . He notes the following key points concerning reverse logistics as practiced by a 3PL:

Do it in volume

Establish vendor agreements

Implement a software package

Receive, inspect and dispose

Reconciliation

If you wanted to know what happens to a product that you returned for whatever reason:

Achieving World-Class Supply Chain Collaboration: Managing the Transformation

Achieving World-Class Supply Chain Collaboration: Managing the Transformation is a new report available from CAPS Research (free registration required) published by authors – Stanley Fawcett (BYU), Gregory Magnan (Seattle U) and Jeffrey Ogden (Airforce Inst of Tech). First off, this report is a research oriented report and so it is a virtual gold mine of possibilities. But also of dead- ends and the difference between them are not readily apparent all the time.

In the preface of the report, the authors note that,

"but the world has also, literally, become a more dangerous and risky place in which to do business. Today’s global supply chains are only one terrorist attack, one bird flu pandemic or one not-yet-envisioned threat away from disruption and potential chaos."

These threats in the past would never have affected supply chains of the past. This is not to say that there has not been global trade going on which has been going on for centuries. However, there has been a shift in the sense that the decision to source globally is not only from a point of availability but also from the point of price and value added (i.e. a lot of firms believe that outsourcing/offshoring non-value added activities is a good business decision). One wonders here whether in that non value added determination, whether it was deemed necessary to couple that determination with supply risk. Regardless, we’re well down that path and now we get to face both the pleasures and perils of that commitment.

The irony of change however is well noted by the authors,

Companies have struggled for years to learn how to integrate processes within their own four walls – most still do not! Learning how to build a collaborative team of companies in a world motivated by short-term financial results is a far more daunting task.

So why then the focus on collaboration than making the global supply chain a better one? Well, I guess that’s what the authors wanted to do but I’d have thought that these global supply chains have not yet had the time to settle down before the effort to tack on collaboration enters the picture. Perhaps, the global distribution of participants and stakeholders in the supply chain makes it important but one wonders when collaboration made little headway in the laboratory of the domestic supply chain, one wonders the risks of taking on the challenge globally.

Go on, read the report and see what nuggets you find!!

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How IBM makes radical collaboration work?

How IBM makes radical collaboration work is a special report that BusinessWeek has up at its website. Since I work at the site that forms the ground zero of this radical collaborative venture at and through IBM, I am at the vantage of seeing this happen not so much in evaluating how each of these partners are actually collaborating and creating value but in ensuring that the chip designs and processes of the collaborators actually get executed in the best way possible.

First, Steve Hamm lays out the financial picture of IBM prior to embarking on this radical venture.

By late 2003, IBM’s decision three years earlier to pump $5 billion into its chip business wasn’t looking so smart. The division had lost more than $1 billion in 2002 and was on its way to losing $252 million more in 2003. Investors urged Big Blue to quit, but that wasn’t going to happen. IBM saw leading-edge chip technology as vital to keeping its lead in the highly profitable business of making powerful server computers. Still, clearly, something had to be done.

I must note two different actors in this drama, their respective actions and their reasons which are important to evaluate not so much because they can be pigeonholed as primary reactions but as a sort of chicken-egg dilemma. As reported, the financial fact is that IBM is bleeding money in its semiconductor division. In IBM’s view chip-making is a source of competitive advantage in its high-margin server business and so it views its chip-making (and perhaps chip design) as an important upstream activity. Investors on the other hand, privy as they are to a set of financial facts and numbers, will view a bleed as something that has to be fixed. There are scores of examples that one can find where unprofitable businesses are spun-off or shut down by parent companies that go on to find, fund, nurture and defend other sources of competitive advantage. So why not in this case? What bridges these two camps is the need for a new story, a new strategy, a set of steps that must not only staunch the bleeding but also refresh the bleeding patient. And that’s what IBM has done,

IBM has built what it calls an "open ecosystem" of chip R&D with nine partners, including Advanced Micro Devices, Sony, Toshiba, Freescale Semiconductor, and Albany Nanontech, a university research center. All told, in five separate alliances, IBM partners have contributed more than $1 billion to help expand the company’s facilities and buy the latest chipmaking equipment. But just as important, they’re providing brainpower, including more than 250 scientists and engineers who now work in East Fishkill. As a result, IBM’s chip operation boomed, and, even now, during a cyclical downturn in the chip industry, it’s still making a profit.

How far this sort of collaborative innovation will go is anyone’s guess but it is a stab at the future. What you will note is that there isn’t a magical software that is enabling this sort of a collaboration. If you read more of the article, you will note that this sort of collaboration involves actual engineering teams sitting down together and circumscribing the terms of the collaboration while being open to the road ahead. So mark this down as an important milestone in the collaboration journey:

1. Collaboration requires partners to get down to brass tacks and structure it or at the very least draw a few boundaries and open up a few channels – it also involves the commitment of resources.

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More DTCI links…

The interest in DTCI (Defense Transportation Coordinator Initiative) related material has been surprising. So, I thought that I’d post a roundup of links about it:

DTCI Program Office

DTCI – the beginnings – What the DoD was trying to achieve through the DTCI?

DTCI incorporates lessons from its pilot program – Outlines some of the reasons why DTCI was a successful program; a pilot and then the real thing.

The Big Switch – A lengthy article that highlights the many turns of the DTCI project.

DTCI protest info – Some information about the protest lodged by TIA

My own blog posts about DTCI are here:

Uncle Sam’s looking for a few good bids

DTCI contract awarded to…

High level overview of DTCI

Enjoy!

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High level overview of DTCI

If you wanted to know more about DTCI (Defense Transportation Coordinator Initiative), you might want to check out this public link from SDDC – Defense Transportation Coordination Inititative Overview Briefing that provides a high-level summary presentation of the scope of the DTCI contract.

What I’d cue you into are the following slides:

Slide 4 which shows the scale of the US DoD logistics network and conservatively what the Dept. hopes to save.

Slide 7 which is the roll out plan for the DTCI contract which should give you an idea of the complexity of the network and the volume that will flow in it

Slide 8 which is the distribution of the facilities that will fall under the plan

Slide 9/28 which summarizes the Key Performance Indicators (KPIs) that the coordinator is expected to fulfill.

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DTCI Contract awarded to …

Menlo Worldwide. Menlo Worldwide is the winner of the DTCI contract awarded by the US Dept. of Defence (DoD) for all Continental US (CONUS) logistics. DTCI is a huge contract not only to win (which was the easy part) but it’s going to be a challenging one to execute as well,

Under the contract, which is potentially worth $1.6 billion, Menlo will be responsible for deploying and operating an integrated logistics solution for shipment planning, optimization, shipment execution and overall transportation resource management governing all Department of Defense (DOD) materiel shipments moving into and among DOD facilities in the 48 contiguous United States.

They should be congratulated. Their team was as follows:

Menlo Worldwide is prime contractor for DTCI in partnership with the following principal subcontractors:

  • Computer Sciences Corp. (CSC), which will provide IT infrastructure hosting, network management and integration services;
  • ONE Networks Enterprises, Inc., which will provide the transportation management software for shipment planning, optimization and execution, and;
  • Olgoonik Logistics, which will provide professional services supporting the participation of minority-owned and small business firms as service contractors for DTCI.

DTCI was a project that I worked on in my previous firm GENCO for a considerable amount of time – it was a stretch experience for me and so I truly enjoyed it. I blogged about it previously here – Uncle Sam’s looking for a few good bids (Something I worked on)

What I didn’t know then and I know now is the composition of the teams that competed for the project. I didn’t know the teams because the DTCI project was split up into an analysis component which GENCO competed on and won and the execution component which Menlo (or rather Con-Way Inc) has just won.

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About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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