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Sudden change makes capacity, demand predictions more difficult

( Photo: Shutterstock )

For years we’ve heard arguments about how better supply chain visibility will lead to a logistics environment that is easier to predict, plan, and manage.  Many of these arguments have proven to have value over time as supply chain technology has improved the level of visibility each participant has of its own inventory, and then improved the visibility each participant has of the inventories held by its suppliers and the inventories held by its customers. 

We understand that there are notable exceptions, but in general, logistics managers have unprecedented visibility into the entire supply chain. Indeed, the first tangible result has been a dramatic lowering of the inventory to sales ratios at the manufacturing, wholesale, and retail levels of the economy. So, if supply chains have better visibility and inventories are more closely monitored, why isn’t it easier to manage logistics? Why does the volatility in transportation seem to have become worse, instead of better?

We see this as yet another example of our old friend “the law of unintended consequences” coming around and biting most logistics professionals in the backside. Because supply chain visibility has grown better and better over the last couple of decades, because inventory levels at each node of the supply chain have been managed lower and lower, there is no longer any slack anywhere in the supply chain.  Each small change in the level of end use consumption of any tangible good creates a whiplash effect throughout the supply chain. Small changes in end use demand create big changes in the demand for transportation as everyone scrambles to cover loads. More supply chain visibility and the ability to manage inventories to ever-lower levels are resulting in greater volatility in the demand for transportation, not less. The balance between capacity and demand in every mode of transportation is becoming harder to predict, plan, and manage, not easier.

That has recently been proven out in the two modes: rail – which we will talk about this week; and truck – which we will talk about next week.

Increased Volatility in Rail

Before the hurricanes hit Texas and then Florida, both housing and auto appeared poised to disappoint through the end of the year. Building materials (especially lumber and primary forest) were trending well below last year’s levels. Automotive volumes shipped via rail were signaling that auto sales could be on pace to be down 8 to 10% by the end of 2017. Then hurricanes Harvey and Irma paid us a visit and everything changed. 

It remains to be seen how long the current surges in demand for building materials and automotive will last, but capacity for shippers serving these two large industries has gone from relatively slack to extremely tight in just a few short weeks.  Stay nimble and stay tuned…

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Donald Broughton, Principal & Managing Partner, Broughton Capital

Prior to starting Broughton Capital Mr. Broughton spent nine years as the Chief Market Strategist and Senior Transportation Analyst for Avondale Partners. Before that, Mr. Broughton spent over twelve years at A.G. Edwards. At A.G. Edwards, in addition to being the Senior Transportation Analyst, he was the Group Leader of the Industrial Analysts and served on the firm’s Investment Strategy Committee. Prior to going to Wall Street, Mr. Broughton spent eight years in various distribution and operations management roles in the beverage industry, including serving as the Corporate Manager of Distribution for Dr. Pepper/Seven-Up companies and Chief Operating Officer for Bevmark Concepts.