@ Supply Chain Management

Adrian Gonzales ruminates on his eleven year stint at Arc Advisory in the post: The Accidental Analyst: My 11 years at ARC. It’s an interesting read about the progress of an analyst. Adrian talks about what has changed and what hasn’t changed in this arena:

[The dotcom era]. era served as a catalyst for companies to “think differently” about how they could leverage Internet technologies to transform their supply chain and logistics processes.

and,

Data quality remains a huge problem in the industry, and it’s only getting worse. Garbage still flows in, and garbage still flows out.

Companies still want their 3PLs to be more proactive, and 3PLs still want their customers to view them as partners instead of suppliers.

Everyone talks about collaboration, but when times get tough, as it did last year, it’s every company for itself.

Forecasts are always wrong.

It’s about people, processes, and technologies, but not necessarily in that order.

Data quality is never going to improve because data means different things to different people and so also the classification of what is garbage and what is not. The Internet is one big garbage dump but that’s no reason not to dive in – there’s a pony in there somewhere. Look at it this way, we’re in the stage of global search aka Google, Bing and what have you. Next, will come local search – simply because people will become attuned to the notion that they understand data better than some bot running on a google server in Sunnyvale, CA. And so on.

Forecasts are always wrong just as such statements that imply the same. Forecasts are mostly wrong because it is about the future. I’ve talked about that on my blog several times – there are two extremas to making forecasts – very detailed ones and a few milestones here and there. In my opinion, what is critical is not forecasting and its accuracy but execution and its implied capability. I’d focus more on short run forecasting with rapidly adaptable capability than the converse. When the converse is the case, people lament about the fact that “Forecasts are always wrong.” Yes, but that need not trouble anyone nor detain them.

Let me leave you with a sanguine observation about bubbles. The last bubble cannot be reflated because of the knowledge everyone has about it, especially about its bursting and the fact that a majority of the people are still vested in the last bubble and have yet to realize that it is not coming back. That implies that the mania of housing is over for a good while and that asset class has to go back to being a stodgy preserver of wealth (whatever little there is of it).

The consequence is that without an asset class so commonly found and the method of extracting value from it as the asset grew to bubble proportions, consumption cannot be financed at the previous pace. That has many implications for those who create goods for consumption and those who supply it (and transport it).

So all hail to the next bubble – contrary to the notion that the masters of our fate are pulling the strings that bind us; it is only that we’re so poor string pullers that we end up stringing ourselves up nice and dandy.

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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