Before looking at the trends that will drive transportation activity in 2012, it is helpful to review the year that was...2011. For the past three years, supply chain managers have dealt with relative extremes throughout the supply chain. From fuel prices that hit records in 2008 to a global recession that played dangerously close to a global depression just six months later, markets have still not returned to what many of us remember as a "traditional" supply chain period.
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Consider just some of the challenges supply chain managers and public transportation managers faced in 2011 alone:
New changes to hours of service trucking regulations - directly affects operational constraints on the truckload sector and reduces productivity/driver shortages worsen.
- CSA certifications - eliminate some driver capacity while theoretically making the trucking component of the supply chain more secure.
- Driver shortages because of industry consolidation and retirements - nearly 10,000 Baby Boomers retire each day. A portion of these will come out of the truck driver industry.
- Crimps and then active breaks in the supply chain (largely events in Japan and Thailand) - these disruptions forced managers to seek flexibility and redundancy in their supply chain and sourcing strategies. If the global economy had been growing at "normal" levels, supply shortages would have been significant and more drastic changes to the supply chain would be inherent today.
- Fiscal budgetary challenges in local and state governments - spending on infrastructure will come from more creative and use-based taxation and tolling. It will also force mass transit systems to more closely reach for fiscal operational profitability (after capital expenditures).
- Non-passage of a surface transportation bill - risks future funding of the national highway and bridge infrastructure, increases long-term congestion, increases fuel usage (from less efficient traffic flows), and decreases safety and risk of infrastructure failure.
- Oversupply of capacity in maritime shipping - places pressure on maritime companies to find profitability. Some maritime providers are at risk of bankruptcy. Tracking the Baltic Dry Index, the current level of the index is roughly in 1,800 point level. Historically, the index has seen a high near 11,000 in 2008 only to fall to 667 by the following January.
- Port competition evolving between East, Gulf, and West Coasts - not only is US port competition increasing, but the expansion of the Panama Canal will increase competitiveness by 2013. Increased usage of the Suez Canal route has also increased East Coast port activity. With the dollar gaining strength against the Euro, US imports from Europe also have a chance of increasing.
- Steady growth and success of freight rail and intermodal - and the implications to supply chain strategy as a result (slightly slower transit times but highly competitive rates and efficient fuel use).
- Transference of JIT inventory management from manufacturing to retail and the subsequent effects on supply chain management - companies of all types and industries saw inventory levels remaining at 20 year lows compared to sales volumes in 2011. We continue to see this strategy of using low inventory levels to reduce cost of capital and cash flow.
- Changing global trade dynamics - challenges and trade disputes in some of the largest trading partner markets forced companies to rethink certain sourcing contingencies during 2011.
- Deliberate slowdown of China to try and prevent an inflation-driven recession - despite the effort to slow growth to control inflation, concerns of real estate bubbles and reliance on export-driven growth (and subsequent volatility in the event of a European recession) continued to filter through China in 2011 - continuing through December and into early 2012. The Chinese Central Bank used deposit ratios in the banking sector to try and slow real estate valuation escalation.
- Economic slowdown in Europe and sovereign debt concerns - many analysts thought several European nations would default on debt in 2011. Although help through the European Central Banking system and several EU bailout actions helped to prevent defaults, analysts still believe that a default of one or more countries is inevitable. More on that in the emerging trends section later.
- Continued constraints upon capacity across all modes and the subsequent rise in load factor (and profitability) - generally most segments of the transportation sector worked to reduce capacity over the past two years. Citing their need to quickly match cost expenditures to revenue and business volumes, many companies cut capacity well below current economic demand and refuse to begin to add new capacity. The only significant exceptions to that rule late in 2011 came from UPS/FedEx and elements of the rail sector. Trucking hired where possible, but only to fill expected capacity demand for late in 2011 (not expanding based on pure speculation that business volumes would improve in 2012).
- Risk of airline bankruptcies and consolidation of that industry and the effects upon airports, particularly regional airports - reductions in the number of flights and the number of airports serviced by certain airlines have pushed ticket prices higher for the flying public. Jet fuel prices also rose throughout the year because of supply concerns (reductions in primary jet fuel producers from Libyan capacity and disruptions in refineries in Japan early in 2011 reduced overall global supply of jet fuel). At least one major airline sought restructuring protection in 2011.
- Volatile global fuel and crude oil challenges - 2011 saw a rise in supply concerns stemming from the Arab Spring and volatile geopolitical situations around the world. This year, actual environmental challenges in the producer markets (aside from flooding in the US) were less than in 2010. Hurricane activity in the Gulf was subdued and major producer areas in the North Sea were able to continue to produce through most of the year without disruption. However, it was geopolitical tension in Libya, Egypt, Yemen, Nigeria, Syria, Algeria, Bahrain, Iran, Iraq, and even Saudi Arabia threatened supply. The drug war that has erupted in Mexico even threatened to disrupt certain production volumes for crude oil. Adding to that condition a favorable spread in the gap between West Texas Intermediate and Brent North Sea Crude coupled with a weaker dollar, and US crude oil inventory reduced even in a period of lower US consumption of oil. If the XL pipeline were completed to provide more comprehensive transportation of crude oil to Gulf ports, that volume of US crude oil exports would have increased.
- Non-incidence of terrorist activity stateside but no guarantor of none in the future - despite several attempts, the US has largely been able to avoid another domestic terrorist attack on the scale of 9/11 or recent attacks as seen in Spain, the UK, Japan, and other developed nations over the past several years. Security professionals reiterate that the US is still vulnerable to attack and it could be a "matter of time" before terrorists are able to successfully hit the country again. Spending on security softened slightly in 2011 because of budget woes and even police forces around the country were hit a bit more than expected with reductions. This could leave the country more vulnerable in the future.
- Environmental extremes from drought, seismic, and flooding weather conditions and effects on several branches of the supply chain - 2011 seemed to bring in the worst of certain weather conditions around the world. The positive was likely a respite from severe tropical storm activity for the United States - only to be replaced by record drought conditions throughout much of the south and southwest this year. But, considering the environmental extremes the globe was subjected to in 2011, it was truly one of the bigger headline events affecting supply chain management during the year - possibly continuing to be a headliner in 2012.
- Surprise on the upside of transportation volume in final quarter of 2011 - despite many of the challenges faced by the supply chain management sector in 2011, we saw the year end strong across the board. Supply chain managers found that they were resilient and the global supply chain has become attuned to sales activity and volume - and responds quickly and efficiently. As a result, stronger manufacturing activity across many sectors pushed stronger demand than expected for transportation activity. As a result, indexes such as the TranSystems Transportation Activity Index registered a surprising spike in December.
- Retail sales volatility as they played out throughout the year - volumes in the retail sector were surprisingly high at times and disappointingly weak at others, changing the way retailers were forced to think about inventory management and how to handle the peak season. A responsive set of suppliers and transportation partners became more critical as the year went on - likely spilling over well into 2012 and creating one of our long-term supply chain trends.
- Low dollar values through most of the year - currency exchange rates have always played a significant role in the value of commodities and the flow of goods. But, in 2011, dollar volatility worked to create some of the most difficult global sourcing markets in recent history. With the high volume of global trade activity and the ability to move trillions of dollars over the course of the year through various global stock exchanges, commodities can spike rapidly. This affects the transportation sector in fuel costs, steel and industrial metal costs for assets and infrastructure, the rate and direction of goods flows, etc.
- Integration of personal device technology in social media and its influx into private and corporate transportation - 2011 ushered in the first wave of social media revolutions - literally. The Arab Spring can be blamed on a number of geopolitical and economic issues - but it was helped and fueled by the speed of communication and organizing power of social media. Retailers and businesses around the world are starting to get on the social media wagon, understanding that it can be a powerful attractant or detractor. There is a bigger trend here that needs to be addressed. In 2011, we saw more advanced technologies and spending on technology increase at a personal consumer level, transportation carrier level, and at a corporate capital expenditure level. With better technology getting into the hands of supply chain managers, the actual performance of the supply chain and links along it also are expected to rise to the challenge and meet the information and connectivity requirements of the supply chain operator. Last year, advancements in technology and broader adoption of all types of innovations continued without interruption, even in a period of weaker economic growth than projected.
- Challenges for the USPS - although not resolved in 2011, the USPS was one of the big stories in the year which will spill over into 2012. Facing a budget deficit of nearly $15 billion annually, the USPS must make changes via Congressional approval - and it fostered debate and change as a result. As the USPS worked to reduce costs, it started to change its service mix. The result is a reduction in certain types of services - many of which will require that companies look to FedEx or UPS for service or change their business operational strategies to adjust to these changes. Namely, there are changes to overnight delivery coverage and possible elimination of Saturday delivery pending. Again, business operations are likely to change a bit as a result of these changes - especially over time.
- Continued explosive growth of e-commerce and the package/parcel sector - following on the heels of the prior issue, e-commerce retail growth continues to explode. In 2011, there was a significant increase once again in retail sales versus e-commerce. That changes distribution patterns, return goods management, inventory tracking and management, and perhaps most importantly : demand planning. E-commerce is not bounded by geography and an aggressive move by one competitor can capture market share in an instant - especially if they are successful in utilizing viral marketing to make it happen. One significant reference from a popular personality in the social media world can attract tens of thousands of followers quickly. In any case, 2011 saw a significant increase in business for FedEx and UPS and others directly impacted by the growth of e-commerce. In all likelihood, these companies will need to prepare for "what happens when 'normal' economic activity returns". If UPS saw an additional million packages a day during the Christmas week - what happens when the US economy is growing at 3.5%-4%? That's a prospect that many retailers and transportation companies alike are grappling with.