Blue ocean strategy

Seminar in Supply Chain StrategyCase Assignment: 2018 State of Logistics when Traditional Strategy meets Blue Ocean StrategyDirections: My company is ECHO LogsticPlease read and refer to the reading on eLearning that pertain to discussion on April 12 and 17. The readings pertain to the State of Logistics Report, Blue Ocean Strategy, Porter’s 5-Forces, and a couple of articles describing new approaches to leveraging logistics to open new markets.Your group has selected a company within a specific logistics industry segment for your semester project. This case assignment will help you to think about how your company may leverage the new and forthcoming industry innovations to create new logistics and supply chain strategies.You are to focus on your project company and industry for this case assignment. You are to read the readings on eLearning referred to above to complete this assignment.Deliverables:1. This is an individual assignment.2. Details are important to supporting your viewpoints. Your paper should be 3 to 5 pages, 1” margins, and uploaded to eLearning Dropbox titled Blue Ocean Case by 5 p.m. on April 19. Assignments uploaded after that time period and up to 10 p.m. on April 19 will receive a 25% reduction in grade prior to grading.3. Evaluate your company and industry. Use the readings to extract specific information that supports your evaluation.a. Follow the Porter’s 5-Forces model and evaluate the competitive environment. Be specific with your evaluative statements. Make a section to discuss each force as it pertains to your company and industry.b. Use the article, “What is a Blue Ocean Strategy?” and answer the questions that are contained within the article that guide readers in creating a Blue Ocean Strategy.c. Use the additional readings from this section on eLearning, and information from the internet (pertaining to your company and industry), to state specific information that supports your evaluations in 2a and 2b above.4. Using the Blue Ocean Strategy article by Kim and Mauborgne detail a Blue Ocean Strategy for your company. Reading the whole article will provide you with examples to help you identify examples pertaining to your company. Also, focus on the table on page 7 that compares specific details of a Red Ocean to a Blue Ocean Strategy. Describe your company according to how they are currently competing in a Red Ocean and how they can create a Blue Ocean Strategy.
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Accelerating
into Uncertainty
Accelerating into Uncertainty
1
Table of Contents
Introduction
1
Executive Summary
2
Macroeconomics: Optimism Amid Uncertainty
5
The Logistics Industry in 2016
11
Motor Carriers: Back in Gear
11
Parcel: Torrid Demand Reshapes Networks and Relationships
16
Rail: Another Down Year, Followed by an Upturn
19
Water: A Stormy Year
21
Air Freight: Gravity Reasserts Itself
23
Pipeline: Pullback Positions Industry for Growth
25
Freight Forwarding: Disruption Stalks a Slumping Sector
28
Third-Party Logistics: Growth and Change
29
Warehousing: Growing Pains at the Heart of the Supply Chain
31
Logistics Trends and Outlook:
Technology Drives the Action While Policy Sets the Pace
34
Technological Innovations: Firm Steps on a Long Journey
34
Regulation and Policy: A Game of Dice
37
Appendix
40
Estimating USBLC
40
Historical Comparisons
42
Introduction
“It behooves us to adapt ourselves to the times if one wants to enjoy continued good fortune.”
—Niccolò Machiavelli (1469–1527)
Welcome to the 28th Annual Council of Supply Chain Management Professionals (CSCMP) State
of Logistics Report. This year’s report reveals an industry buffeted by crosswinds as the pace of
change accelerates, a state of affairs we refer to as Accelerating into Uncertainty.
This year’s report shows the first decline in United States business logistics costs (USBLC) since
2009, even as a surging e-commerce sector propelled demand for parcel delivery services.
Other sectors—namely motor carrier, rail, and water—were challenged by the familiar millstones
of overcapacity, rate pressure, and sluggish demand. When coupled with nominal GDP growth
of 2.93 percent, USBLC as a percentage of GDP declined 34 basis points to 7.50 percent. At the
midpoint of 2017, we see a backdrop of economic and political uncertainty. An array of mixed
signals vexes decision-makers, who see consumer confidence rise while GDP growth disappoints,
and government officials struggle to take clear action related to stimulating growth, addressing
infrastructure requirements, and trade policy. The logistics industry appears destined for a
prolonged bout of cognitive dissonance, coupling frustration over subpar growth with the
optimism reflected in rising stock market values, technology investments, and consumer
confidence data. Yet uncertainty hasn’t slowed the pace of change. On the contrary, industries
are churning with disruption as newcomers and incumbents vie for market share, and innovation
undermines old business models. One thing is certain: “business as usual” won’t return.
Similar in structure and content to last year’s report, in this 28th edition we provide a narrative
on macroeconomic factors affecting logistics, insights from industry leaders, discussion of
important trends, detailed analysis of each major logistics sector, and a strategic assessment
of the industry. This year, we added a new section on warehousing and expanded the industry
outlook section with a greater focus on technology. Also unchanged is the method of calculating USBLC, co-developed by A.T. Kearney, CSCMP, and a diverse set of industry partners.
Once again, A.T. Kearney is honored to partner with CSCMP and Penske Logistics in authoring
the State of Logistics Report. In compiling the report, we collaborated with a long list of contributors, including: Marc Althen, Penske Logistics; James Welch, YRC Worldwide; Ties Soeters,
AB Inbev; Scott Leveridge, TForce; Miguel Gonzalez, DuPont; Scott Collignon, Cabela’s; Ravi
Shanker, Morgan Stanley; Evan Armstrong, Armstrong & Associates; Roxane Bullard, Truckstop.
com; Charles Clowdis, IHS Markit; and Drewry Shipping Consultants Ltd. We thank all of them,
and others too numerous to name, for sharing their time and perspectives with us.
We hope the data and analysis in this report helps you plan your business strategy for 2017 and
beyond. Please contact us with any questions or comments on the issues covered in the report
or to suggest improvements that could make next year’s edition more useful.
Accelerating into Uncertainty
1
Executive Summary
The global economy emerged from a sluggish 2016 poised for faster growth. The International
Monetary Fund predicted 3.5 percent worldwide growth in 2017, and burgeoning consumer and
business confidence augured well for logistics demand across a range of sectors.
Expectations collided with reality early this year, when US GDP rose an underwhelming 1.2 percent
in the first quarter—ahead of last year’s 0.8 percent but only the fourth-fastest first quarter in the
last six years. The disconnect was the latest unsettling discrepancy between soft indicators of
sentiment and hard data on actual economic activity.
The conflicting signals leave shippers and logistics providers with little clarity on economic fundamentals for the remainder of 2017. Further complicating the outlook are variables such as currency
exchange levels, interest rates, and political trends. Against that uncertain backdrop, executives
must make vital decisions about capacity, pricing, technology deployment, and strategy.
Along with lackluster economic growth last year came the first decline in USBLC since 2009
(see figure 1). USBLC dropped 1.5 percent in 2016 after rising at a 4.6 percent compound annual
rate from 2010 to 2015. Costs fell across all three USBLC components: transportation costs,
inventory carrying costs, and other costs. The declines reflect overcapacity, slack volumes,
and rate pressures in several sectors, even as demand and prices rose in others.
Figure 1
2016 saw the first drop in US business logistics costs since 2009
($ billion)
5-yr. CAGR
2016
YoY 16/15
269.4
–1.6%
4.3%
58.0
0.5%
–1.2%
Transportation costs
Full truckload
Less-than-truckload
Private or dedicated
Motor carriers
268.1
0.7%
5.7%
595.5
–0.4%
4.3%
86.3
10.0%
6.4%
Carload
52.6
–13.8%
–1.4%
Intermodal
19.3
–2.5%
–0.5%
71.9
–11.0%
–1.1%
Parcel
Rail
Air freight (includes domestic, import, export, cargo, and express)
66.9
1.5%
2.4%
Water (includes domestic, import, and export)
40.6
–10.0%
–0.1%
Pipeline
Subtotal
33.6
1.1%
4.2%
894.7
–0.7%
3.6%
Inventory carrying costs
Storage
143.5
1.8%
3.6%
Financial cost (WACC x total business inventory)
143.4
–7.7%
–2.2%
Other (obsoloscence, shrinkage, insurance, handling, others)
Subtotal
122.9
–3.2%
0.5%
409.8
–3.2%
0.5%
4.2%
Other costs
Carriers’ support activities
44.7
0.7%
Shippers’ administrative costs
43.3
–4.6%
2.8%
Subtotal
88.1
–2.0%
3.5%
1,392.64
–1.5%
2.6%
Total US business logistics costs
Note: YoY is year-on-year. WACC is weighted average cost of capital.
Sources: CSCMP’s 28th Annual State of Logistics Report; A.T. Kearney analysis
Accelerating into Uncertainty
2
Notably, overall spending on logistics dropped despite a rise in energy prices. This marks the
second straight year in which the two have moved in opposite directions, indicating energy
prices are no longer the primary factor in logistics costs. We suggested last year that consumers
have become the driving force behind logistics spending, and this year’s results confirm the
powerful impact of rising consumer demand for e-commerce deliveries.
While overall transportation costs fell 0.7 percent last year, spending on package delivery
services jumped 10 percent. Parcel and express delivery has surpassed railroads as the secondlargest logistics sector behind motor freight. Meanwhile, energy-sensitive pipelines and
railroads saw rates and volumes stall or drop as oil prices remained at historically low levels
despite the upturn in 2016.
Cross-currents also affected inventory carrying costs last year. Storage expenditures rose 1.8
percent and are now as important as the financial carrying cost of inventory. Until last year,
storage costs grew at a compound annual rate of 4.7 percent. Nevertheless, a 54-basis-point drop
in weighted average cost of capital pulled down overall inventory carrying costs by 3.17 percent.
After modest progress in 2015, logistics efficiency posted a sharper improvement last year.
USBLC dropped 34 basis points as a percentage of nominal GDP, reaching levels not seen since
the great recession of 2009–2010 (see figure 2).
During 2016, a few common trends drove the action across various logistics sectors.
Overcapacity and rate pressures fueled cost-cutting and consolidation, particularly among
motor carriers and ocean freight companies. Cutting-edge technologies brought new
efficiencies to sectors such as warehousing, parcel delivery, and motor freight. Along with
technological advances came new business models in third-party logistics (3PL), freight
forwarding, and rail, among others. Parcel carriers and warehouses capitalized on surging
e-commerce volumes to raise rates and continued reconfiguring their networks to meet
consumer expectations for faster delivery.
Figure 2
Business logistics costs have fallen to 7.5 percent of GDP
US business logistics costs as a share of nominal GDP
(%)
10
8.59%
–34 bp
8.46%
7.89%
7.89%
7.91%
7.89%
8
7.84%
7.50%
7.37%
7.53%
6
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Note: bp is basis points.
Sources: CSCMP’s 28th Annual State of Logistics Report; A.T. Kearney analysis
Accelerating into Uncertainty
3
“The good news is that supply chain activity is accelerating. Warehousing is very active, and
demand for our technology solutions is strong. On the other hand, excess capacity is squeezing
profit margins. We estimate that 115,000 surplus Class 8 trucks are
on the road today, up from 75,000 a year ago. Our investment in
connectivity technology is delivering more value to clients and
improving our efficiency. Technology investments pay off in the
long run, enabling us to step in when shippers facing more
complex transportation challenges look for an outside expert
to take over. We also believe autonomous vehicles are the next
technological wave. We’ll see exit-to-exit platooning within two
to three years and evolve from there. But even with automation,
there will be a need for interaction between the parties involved
in moving goods.”
Marc Althen, President, Penske Logistics
Looking ahead, 2017 could be a pivotal year for logistics. Demand patterns are shifting, technological advances are altering industry economics, and new competitors are challenging old
business models. This year could bring significant moves that reshape individual sectors and
even the industry as a whole. Major business combinations, large-scale shifts in distribution
flows, deep capacity cuts, massive infrastructure investments—anything is possible.
As company leaders weigh options in a fast-changing business environment, they also face
increasing political risk. Rising protectionist sentiment around the world threatens to constrict
global trade flows, the lifeblood of logistics. Trump won the US presidency with a mixed message
of tax relief, regulatory reform, and trade restrictions. His agenda could cut both ways for
logistics, and it’s still not clear which proposals will become law.
Beyond 2017, logistics is moving toward a fully digital, connected, and flexible supply chain
optimized for e-commerce and last-mile, last-minute delivery. The next-generation supply chain
will enhance fulfillment capabilities and drive efficiencies through technologies ranging from
big data and predictive analytics to artificial intelligence and robotics. Inevitably, winners and
losers will emerge as companies that make the right technology investments and strategic
choices outperform others. The industry must also reckon with the social cost of rapid technological evolution as automation tempers employment growth or eliminates hundreds of
thousands of traditional jobs in warehouses, trucking, and other sectors.
We foresee four potential scenarios for logistics in the coming years. We call the first plain sailing,
as regulatory constraints recede, global trade flourishes, and technology improves efficiency.
Under a choppy waters scenario, new policies favoring US manufacturing force shippers and
logistics companies to adapt, spurring faster adoption of technologies. A stemming the tide
scenario brings tighter regulations that increase operating expenses and accelerate investment
in cost-saving technologies. The worst case puts logistics in the doldrums as regulatory costs
rise and tough economic conditions deter technology investments.
Although some scenarios may seem more likely than others, successful companies will prepare
to thrive under all four.
Accelerating into Uncertainty
4
Macroeconomics: Optimism Amid Uncertainty
After a lackluster 2016, the global economy is expected to strengthen in the next two years.
The International Monetary Fund predicts 3.5 percent worldwide economic growth in 2017 as
prospects brighten in key developed and emerging markets. An improving outlook should lift
consumer spending, a key driver of demand for logistics services, particularly in parcel, air
freight, and third-party logistics.
Stronger performance in the United States is a big factor in global growth expectations this
year (see figure 3). Resurgent domestic demand lifted growth in the second half of 2016, and
businesses added inventory to keep pace with anticipated sales growth. Optimism carried over
into 2017 as incomes rose, job prospects improved, household wealth increased, and inflation
remained low. Consumer spending has averaged 4.5 percent monthly growth since last fall, and
the National Retail Federation forecasts 3.7 to 4.2 percent retail sales growth in 2017. Retailers
account for a big share of business at third-party logistics providers, while surging digital sales
channels drive growth at parcel delivery companies and others involved in e-commerce
fulfillment.
Figure 3
US economic growth is projected to be strong in the near term
Real GDP growth
(%)
3.0
2.5
2.0
2.4
2.2
2.6
2.3
1.7
1.6
2.5
2.1
1.6
1.5
1.0
0.5
0.0
2011
2012
2013
2014
2015
2016
2017f
2018f
2019f
Source: International Monetary Fund
At the same time, logistics providers will contend with a side effect of the stronger US economy:
the rising American dollar. Although the dollar has reversed some of its late-2016 gains, interest
rate hikes are expected to lift a US currency still trading at high levels relative to recent years,
making American goods even more expensive abroad while foreign imports become cheaper
in the United States (see figure 4 on page 6). As a result, logistics companies will have to adjust
their networks to handle more US-bound shipments and a related decline in outbound
American cargo.
Another concern is the gap between hard and soft US economic data. Measures of consumer
and business confidence are soaring, but actual economic activity is lagging. For example, the
University of Michigan’s consumer sentiment survey in March signaled a 2.7 percent rise in
Accelerating into Uncertainty
5
Figure 4
Rising interest rates and an appreciating US dollar could increase the costs
of doing business
Average monthly interest rate, US dollar value
(US prime rate, US dollar trade-weighted index)
100
4.25
US prime rate (left axis)
4.00
90
US dollar (right axis)
3.75
80
3.50
70
3.25
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
60
Jan-12
3.00
Note: Upward movement of the US dollar trade-weighted index indicates an appreciation of the US dollar against major currencies.
Sources: FRED, Federal Reserve Bank of St. Louis
consumer sentiment this year, but first-quarter GDP posted a disappointing 1.2 percent increase
(see figure 5). Similarly, orders for non-defense capital goods (a proxy for business investment)
edged down even as business confidence indicators remained sky-high. More broadly, economic
growth models based only on hard data forecast 1 percent growth this year, compared with
3 percent for models incorporating hard and soft data.
Figure 5
Consumers are watching the administration’s economic policies closely
University of Michigan Consumer Sentiment Index
100
80
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
60
Sources: University of Michigan: Consumer Sentiment© [UMCSENT], FRED, Federal Reserve Bank of St. Louis
Accelerating into Uncertainty
6
Figure 6
Business inventory productivity improved during the second half of 2016
Business inventory and inventory to sales ratio
($ billion)
2,000
1.45
1,500
1.35
1,000
1.25
Business inventory
500
Inventory to sales ratio
0
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
1.15
Sources: US Bureau of the Census, Total Business Inventories [BUSINV], FRED, Federal Reserve Bank of St. Louis; US Bureau of the Census,
Total Business: Inventories to Sales Ratio [ISRATIO], FRED, Federal Reserve Bank of St. Louis
Retail inventory and inventory to sales ratios
($ billion)
700
1.55
600
500
1.45
400
300
1.35
Retail inventory
200
Retail inventory to sales ratio
100
0
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
1.25
Sources: US Bureau of the Census, Retailers: Inventories to Sales Ratio [RETAILIRSA], FRED, Federal Reserve Bank of St. Louis; US Bureau of the Census,
Retailers Inventories [RETAILIMSA], FRED, Federal Reserve Bank of St. Louis
Uncertainty is also evident in business inventory-to-sales ratios, which continue to fall after
peaking in mid-2016 (see figure 6). Strong consumer demand and improved supply chain
efficiency may explain part of the decline. But companies unsure about future demand appear
to be holding inventory levels closer to actual retail sales numbers rather than stocking up in
anticipation of faster growth. Continued uncertainty over future economic trends impedes
longer-term planning throughout the supply chain, forcing companies to continuously monitor
inventory levels and exacerbating month-to-month fluctuations in freight volumes (see figure 7
on page 8).
Accelerating into Uncertainty
7
Figure 7
Fluctuations in truck tonnage demand are expected to continue as businesses
adjust their outlook over time
Personal consumption expenditures and truck tonnage
(Base 100)
125
115
105
Personal consumption expenditures
95
Truck tonnage
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
85
Note: January 2012 = 100
Sources: US Bureau of Economic Analysis, Personal Consumption Expenditures [PCE], FRED, Federal Reserve Bank of St. Louis;
US Bureau of Transportation Statistics, Truck Tonnage [TRUCKD11], FRED, Federal Reserve Bank of St. Louis; A.T. Kearney analysis
Mixed economic signals are likely to persist throughout 2017, as business leaders assess not
only conditions on the ground but also administrative progress in turning pro-growth campaign
promises into governmental policy. The administration’s economic platform of lower taxes, less
regulation, and more infrastructure spending has been a major catalyst for the rise in business
confidence after Trump’s unexpected victory in November. The Organisation for Economic
Co-operation and Development’s US business confidence index has been rising since
November, when it surpassed 100 for the first time in two years.
Economists expect business optimism to trigger more investment and hiring, which would s …
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