Supply chain contemplates post-recession future

The bombardment is over, or at least it has abated. Shell-shocked logistics executives have emerged from their foxholes to face a future that they can only hope is better than the recent past.

The recession has left indelible scars on the supply chain. No one with two digits to their age is likely to recall a decline so swift and severe. Few would doubt that the industry is now in recovery mode, but fear still trumps optimism.

"Many of our customers went through a near-death experience," said Vincent W. Hartnett, president of Penske Logistics.

Given the recession's ferocity, it might appear that the industry would treat the recovery—for as long as it lasts—with sober reflection. But some veterans say history indicates otherwise.

"When you come out of a recession, only 10 percent of the costs you save [during it] are sustainable," said Thomas W. Speh, James Evans Rees distinguished professor of distribution at Miami (Ohio) University's Richard T. Farmer School of Business, at a press conference following the early June release of the 2010 State of Logistics Report. "My concern is we are going to forget some of those lessons."

Detlef Trefzger, a member of the board of management for contract logistics and supply chain management for the German giant Schenker AG, disagrees with Speh over the extent of the industry's collective amnesia. He thinks the change in customer attitudes has staying power.

"People are more focused and more committed to solutions," Trefzger said in an interview later in June. "Before the recession, we discussed strategies with our customers that were nice to talk about but never implemented. That has changed."

Trefzger doesn't think the crisis has passed. However, he sees growth continuing across all of Schenker's regions and is optimistic about next year.

One sign of customer skittishness can be found in the absence of even an intermediate-term outlook. John P. Lanigan, executive vice president and chief marketing officer of BNSF Railway, said at the State of Logistics Report press conference that a customer told him the "last four to six weeks have been great. But I'm scared to death about the next four to six weeks."

Trefzger said it has become virtually impossible to forecast volume patterns beyond three-month cycles, especially in industries like auto manufacturing that have volatile sales activity. "We have tried to reduce our lead times for future investments and have tried to not end up in long-term commitments," he said.

Jim McAdam, president of APL Logistics, the logistics arm of shipping giant APL, has a different view, He said that importers, many of them in the retail trade, have seen their order books "strong and strengthening" throughout the year and heading into the end of the peak holiday season inventory replenishment period. McAdam said he sees nothing on the horizon to support concerns about a marked economic slowdown. (Trade in and out of North America accounts for 60 percent of APL Logistics' revenue.)

McAdam said an enduring lesson from the downturn is for customers to develop tight strategic bonds with service providers instead of jumping back and forth looking for the best rate. "I think many customers wished they had worked a little bit closer with their supply chain partners instead of chasing different providers over a few dollars," he said.

Another trend, according to McAdam, is that businesses that took their logistics functions in-house for any number of reasons are re-examining, and in many cases restoring, their relationships with third-party service providers.

Put away the gloves
If the recession was a boxing match, it was an awfully bloody affair. As demand fell faster than carriers could withdraw capacity, shippers held the iron fist and were not afraid to wield it. On the inbound side, shippers pressured their suppliers for the lowest prices for their products.

As the recovery takes hold, the chickens are coming home to roost. Demand is up, capacity is tight, and many suppliers—especially second- or third-tier vendors hit by the double-whammy of weak demand and scarce credit—have gone out of business. Bereft of traditional supply sources, companies are now preaching collaboration and are talking about a "new normal" in supply chain matters.

"Consolidation of suppliers is something we should all expect in the future," said Hartnett of Penske.

The more candid shipper executives say they will need to lie in the bed they've made for themselves. "Shippers took advantage of the situation a year ago and jeopardized long-term relationships" with their providers, Don Ralph, senior vice president, supply chain and logistics for Staples Inc., said at the June press conference. "These levels of rates are not sustainable."

Kate Vitasek, founder and president of consultancy Supply Chain Visions, said the climate is ripe for a concerted push to "vested outsourcing," where, distilled to its base elements, companies nurture relationships with suppliers so they are first or near-first in line for product without having to pay a premium for it.

"The power has shifted to the suppliers," she said. "People came out of the gate with massive cost-cutting. But you can't beat up suppliers for very long. You will, at some point, face retaliation."