THE WEEK THAT WASN’T

The next time someone comes to your door holding a suspicious looking package, look carefully before you call the police. If he or she is wearing a blue vest, it may be a Walmart store employee delivering your on-line purchase on their way home from work. Walmart has just announced a pilot program in one Arkansas store and two stores in New Jersey to test the idea of having store employees deliver customers’ on-line purchases. This is yet another delivery angle being considered in the Amazon-inspired “instant gratification” retail environment. Details of the program are sketchy, and only time will tell if it is successful. But in the Walmart/Amazon battle for rapid delivery supremacy, no idea seems to be too outrageous.

On the national scene, last week was declared “Infrastructure Week” by the White House, designed to generate enthusiasm for the president’s infrastructure plan. To most observers however, it was not a rousing success. In fairness, almost all the happenings in the country was overshadowed by the Senate testimony by dethroned FBI director James Comey. Anything other than what he had to say, was relegated to second place in the news.

So what did happen during Infrastructure Week? On Monday, in a ceremony in the Rose Garden, President Trump kicked off the week with an summary of his $1 trillion plan to upgrade the country’s roads, bridges, inland waterways and other parts of the infrastructure. The plan calls for the federal government to invest $200 billion, with the remainder coming from the states and/or private investors. This idea of course, has not been well accepted by many who believed that the original commitment was for the government to provide the $1 trillion. The idea of private investors suggests more toll roads and other user charges on top of state taxes and fees. (Because of the government’s failure to act, half the states have already increased their fuel taxes.)

At the ceremony, the president also announced the first major initiative of the infrastructure program – the privatization of the air traffic control system. This was a campaign promise that had been well received by most of the airlines and some former FAA officials. They, and other advocates believe that provide ownership will provide the more stable funding necessary to keep the NextGen technology upgrade on track. NextGen will upgrade the system from a radar base to a satellite-based GPS to manage aircraft in flight. This program could have a very positive impact on air operations, economics, and safety. As to be expected, the plan has  critics that believe there is nothing wrong with the current system or that privatization is not the solution.

Later in the week, President Trump stood on the north bank of the Ohio River, with coal barges as a backdrop, and promised to create a “first class” system of waterways, roads, and bridges. Waterway advocates were pleased to see some interest but are concerned about the higher user costs that would be encountered.

Mayors, governors, and other state officials criticized the entire plan because it leaves them pretty much holding the cost bag.

I don’t believe anyone could have logically deduced that the federal government can come up with $1 trillion to finance the many necessary projects. Someone has to pay. The real problem is that this issue has been ignored by so many, for so long, fixing it is going to be painful. Taxpayers and users will pay the bill, however it is disguised.

 

Written By: Clifford F. Lynch

THE TOLLING DISCUSSION IS BACK

Industry watchers have been sitting on the edges of their seats waiting to see how the administration plans to fund the huge infrastructure investment the president has promised; and the fiscal 2018 budget request has given us some insight into their plans. And it comes as no surprise that the White House and DOT see tolling the interstate highways as one of the cornerstones of the public/private funding that has been discussed for several years and resurrected in the new budget. The new budget would allow individual states to levy tolls on interstate highways.

Congress banned tolls on all interstates when the 46,000-mile system was created in 1956, although a few exceptions have been made in the last few years. North Carolina, Missouri, and Virginia, for example, have been granted an exemption under a pilot program. Generally speaking however, only those highways that already had tolls were allowed to keep them. This latest idea of the administration will be a major cause of concern for many, and already the “fors” and “againsts” have begun to solidify their positions.

Several influential firms and organizations, such as the membership of the Alliance for Toll Free Interstates (AFTI) which includes FedEx, ATA, UPS, and others are opposed to tolling. The ATA in particular, has long held the position that the fuel tax should be the primary source of funds for the highways. AFTI cites the failure of several attempts at tolling interstates, as well as a number of other perceived inefficiencies. According to the Transportation Research Board of the National Academy of Sciences, a typical toll facility spends 33.5% of its revenue on administration, collection, and enforcement. The administrative cost of collecting a fuel tax is about 1% of revenue. Another I believe, legitimate concern is that we would be exposed to double taxation in that drivers would pay tolls, state taxes, and some federal taxes on fuel. This concern is being reinforced as many states are increasing their own fuel taxes to fund improvements that the federal government has failed to make.

On the other side, we have the International Bridge, Tunnel, and Turnpike Association (IBTTA).

IBTTA cites the ability of toll ways to generate revenues to support their operations and investment needs. The country’s 5000 miles of tolled highways, tunnels, and bridges generate over $12 billion in annual revenues. In testimony before House Committee on Transportation and Infrastructure, the organization took a clear and strong position, stating, “While MAP-21 allows for tolling of new Interstate capacity, IBTTA strongly encourages the committee to consider allowing the expansion of this funding tool to include existing mileage on the Interstate System.”

Personally, I cast my lot with ATA, the U.S. Chamber, and the other proponents of an increased fuel tax, and believe that some reasonable increase  would be a much more fair and equitable solution. Admittedly, the resulting revenue would not be enough to completely solve the problem, but it would be a good start. Whatever the result, the issue is surely to generate a contentious debate within the Congressional walls when it comes up for discussion. The ranking member of the House transportation panel already has warned that there is no way the expansion of nationwide tolling will gain support, particularly from those who live in rural areas. If he is correct, it is difficult to see how an investor would gain a return on building highways and repairing bridges.

Written By: Clifford F. Lynch

WANT TO BE A PILOT?

On a stormy February night in 2009, Colgan Air Flight 3407 crashed on a flight from Newark to Buffalo. The Colgan aircraft, flying under a code share arrangement with Continental Airlines, went into an aerodynamic stall from which it could not recover and crashed into a house, killing the crew, the passengers, and one person on the ground.

The National Transportation Board ruled that the crew did not react properly to the stall warnings because of inadequate training for such an occurrence. As a result, more attention was directed toward regional carriers and their pilots; and Congress passed legislation mandating 1500 hours of flight training and an Airline Transport Pilot certification prior to becoming a commercial pilot. This was a six fold increase over the 250 hours required before the crash. Primarily, as a result of that accident and the more strenuous requirements, we now find ourselves facing an increasing shortage of pilots. The truck driver issue has spread to the skies. In years past, the airlines have depended heavily on ex-military pilots on whom the government has spent millions of training dollars; but cuts in defense spending have reduced that pool significantly. Now, one whose ambition is to be a pilot, must have a large checkbook to fund his or her training and certification. It is long, expensive road, costing as much as $150,000-175,000. When you consider the starting salary of $50,000-60,000 annually for a regional pilot, the numbers simply don’t add up.

A recent Air Cargo World article pointed out that U.S. flight schools are still turning out a number of qualified pilots, but most are from foreign countries. Students come here for the training, funded by foreign airlines that employ them after they are certified. With 20,000 pilots expected to retire over the next five years, there are not enough pilots in the training pipeline.

So what is the answer? JetBlue thinks they have it. In March, they introduced their Gateway Select program. For $125,000, prospective pilots can complete a four year training course, the end result of which will be a pilot’s seat on JetBlue. Candidates must be 23 years old (by the end of the program), have a minimum of a high school or GED diploma, be in good physical condition, be able to obtain a passport, be able to read, write, and speak English, and have $200 with which to apply.

While the tuition can be paid over 15 months, still it is a substantial sum. One has to wonder if that money might be better spent on a college education. If ambition to be a pilot overrides this, it seems to be that JetBlue and others could absorb more of the cost. Profits of the airlines are at record highs, and if they need more pilots to perpetuate this, I believe they need to loosen up on the purse strings. Other industries train their workers. Why shouldn’t the airlines?

Written By: Clifford F. Lynch

WHEN THE CIRCUS CAME TO TOWN

This month, after 146 years of featuring the “Greatest Show on Earth”, Ringling Brothers Barnum and Bailey Circus is giving its last performance. As with some of those things many of us have enjoyed over the years, changing tastes, higher operating costs, and in this case, animal rights activists, have forced the drop of the final curtain. But not to worry! What has proven to be a wonderful replacement for Ringling Brothers is alive and well in Washington.

Since the days of FDR, it has been customary to grade new presidents on their first 100 days in office. Saturday was Day 100 for Donald Trump; and by most accounts, he has not turned in an exemplary performance. His immigration orders have met considerable juridical resistance; and the promised repeal of Obamacare is going to be a long time coming, if at all. Trying to squeeze a tax reform bill into the first 100 days was a minor disaster; and we barely escaped a shutdown of the Federal government when Congress passed a stopgap, one week funding bill.  All we needed to complete the 100 day circus was an elephant act.

In fairness, it has not been all bad. I think most will agree we have a new Supreme Court justice who is well qualified, regardless of his party affiliation.

I suppose the things President Trump will be most remembered for are his broken promises and frequent changes in position. For example, it now appears the Chinese are not currency manipulators, and NATO is no longer obsolete. But turning to the supply chain, one promise is better off broken. Throughout the campaign, Trump promised to withdraw from NAFTA which he one called “the worst deal ever”. As recently as last Saturday he was prepared to terminate U.S. participation. But as often has been the case with his advisors, they were deeply divided on the subject. What apparently swayed him however, were two telephone calls – one from President Pena Nieto of Mexico and another from Canadian Prime Minister Justin Trudeau. Both asked him to reconsider and renegotiate, rather than withdraw. In agreeing to so, at least he brought some semblance of order to the table. Last month I wrote about NAFTA and its benefits (“Why Kick a Winner?”); and hopefully, the “renegotiation” will not be too heavy handed on our part. Mexican officials already have said they would not negotiate with a gun to their head; and for the U.S. this very well could be one of those “be careful what you wish for” moments.

The first 100 days yielded a deafening silence on the infrastructure funding legislation. Supposedly, the White House was going to advance a plan right after dealing with health care; but false starts with that, as well as tax reform, no doubt kicked the infrastructure can down the road.

Another interesting and well-received promise was the privatization of air traffic control, a major priority for most airlines. They and other advocates, believe that private ownership would provide the more stable funding necessary to keep the NextGen program on track. NextGen will upgrade the system from a radar base to a satellite-based GPS to manage aircraft in flight. This program would have a very positive effect on air operations, economics, and safety. Hopefully, this is a promise that will be kept.

Last weekend, President Trump said the job wasn’t as easy as he thought it would be. I hope this means he will listen to sound advice from those who understand how things work in the political circus – Secretary of Transportation Elaine Chao, for example. But as they say in every circus, the show must go on – regardless.

Written By: Clifford F. Lynch

WILL TRUCK DRIVING EVER BE FUN AGAIN?

There has been so much written about the over- the- road truck driver shortage that everyone in the industry is, or should be aware of the issue, its reasons, and consequences. The American Trucking Associations (ATA) has predicted that by 2024, the shortage will be 175,000 drivers, about four times the current shortfall. This does not take into account the impact of future regulations. The industry continues to have difficulty recruiting younger drivers to replace those who are moving to other fleets or are simply getting out of the business through retirement and career shifts. For those who are working, driving is just not as attractive as it used to be. Low pay, unpleasant working conditions and creeping government regulation, are quietly take their toll.

It appears that the hours of service rule changes have for the most part, been absorbed by the industry; and hopefully, they will not change again. Notwithstanding this, the government continues to chip away at what it believes are potential carrier and driver safety issues; and the results are not exactly user friendly. For example, hours of service regulations are going to be enforced through the use of electronic logging devices (ELD). These have been mandated to be in place by the end of this year and will eliminate the opportunity for fudging on the paper logs. Pilot programs have indicated that more accurate reporting actually has resulted in productivity losses of 3 to 4%. However, a recent study by Transplace revealed that 81% of large fleets are already in compliance, and virtually all are working toward Compliance. A number of smaller fleets have been unwilling or unable to move ahead with installation, and some are still hoping for governmental intervention.

The Owner-Operators Independent Driver Association (OOIDA) continues its uphill legal battle against ELD’s; and on April 12, appealed an unfavorable lower court decision to the Supreme Court, citing violation of the Fourth Amendment’s guarantee of “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures.” The chances of the higher court blocking ELD’s at this point is probably slim to none, however.

Last week, there was a Supreme Court decision that left in place a Crete Carrier policy that allows the carrier to test selected drivers for sleep apnea. Crete requires all applicants with a body mass of 35 or greater to be screened. A Crete driver was fired because of his refusal to take the test, and filed suit, pursuing it all the way to the Supreme Court. The testing may not be a bad idea, but drivers will see it as just another aggravation.

Other regulations are pending. CSA rules, speed governors, and new driver training requirements are all in some stage of planning or discussion; and if autonomous trucks continue to show promise, we will no doubt be faced with changing traffic and driver regulations and qualifications. There may be a point in the future when drivers are not required at all, but for the foreseeable future, they will be an absolute necessity. The ATA recently compared the highway situation to modern aircraft. Today’s planes can take off, fly, and land themselves; but no one has given serious consideration to eliminating the pilots.

I am very much in favor of government efforts to improve highway safety, but sometimes it appears we are simply adding more inhibitors to already unattractive careers. Supposedly, President Trump is opposed to regulation. In the motor carrier industry however, it is a necessity, and hopefully, the new DOT can find a level that protects all of us, but does not over penalize drivers, carriers, or shippers.

Written By: Clifford F. Lynch

WHY KICK A WINNER?

One of the first campaign promises that President Trump made was the renegotiation or outright termination of the North American Free Trade Agreement (NAFTA). First conceived in 1987, during the Reagan administration it was signed into law in 1994, by president Bill Clinton. Simply stated, NAFTA eliminated most tariffs among the U.S., Canada, and Mexico, allowing for an unencumbered flow of products across North American borders, thus forming the largest free trade zone in the world. Today, about $3.5 billion worth of good move across the borders every day. Although Canada is a major player in the agreement, Trump has focused on Mexico as the major culprit, blaming it for the loss of manufacturing jobs in the U.S. He wants to place a 35% tariff on products manufactured in Mexico and exported to the U.S. Between these discussions and those about the famous “Wall”, relationships with Mexico are a little strained, to say the least.

Is Trump right in his assumptions? It is true that some U.S. firms have moved manufacturing to Mexico; and lately, as the economic and political unrest have increased in China, an increasing number of firms are exploring the possibility of near-shoring from Asia to Mexico. As wage rates increase in Asia, and political and human rights issues continue to be problematic, more firms are considering returning closer to home, and Mexico has emerged as the country of choice for many. While wage rates there are higher than those in Asia, they are significantly lower than U.S. salaries. In addition, the economic climate and transportation infrastructure are improving as well. Security has been a concern, but the Mexican government has taken major steps in improving both prevention and enforcement.

After the passage of NAFTA, the automobile manufacturers were early entries into the Mexican market. Mexico accounts for about 20% of North America’s auto production, up from 3% in the 1980’s, and is expected to reach 25% by 2020. Honda, Nissan, Audi, Ford, General Motors, and Chrysler all manufacture in Mexico, and the industry has set the pace for other industries through their labor education and quality initiatives. Additionally, the periodic West Coast port problems are painful reminders that a lot can go wrong on shipments from Asia to the U.S. Obviously, the auto makers have profited from NAFTA because of the lower wage rates they have enjoyed, and would stand to lose if a 35% tariff was slapped on each auto they sent to the U.S.

But did NAFTA cost us jobs? According to the Economic Policy Institute, about 800,000 jobs were lost to Mexico between 1997 and 2013; but it is not that simple. This is far less than the number of jobs that have been created by NAFTA. The U.S. Chamber of Commerce estimates that about 6 million jobs depend on trade with Mexico.; and there have been studies that have shown that we lost more jobs to automation than to Mexico. On that note, many feel Trump’s emphasis is misplaced. According to a recent report from Pricewaterhouse Coopers, 38% of U.S. jobs are at high risk of being replaced by automation over the next 15 years, far more concerning than Mexico.

Most informed experts believe that terminating NAFTA would be disastrous. In a recent presentation to a Canadian business audience, Tom Donahue CEO of the U.S. Chamber of Commerce said., “Withdrawing from NAFTA would be devastating for the workers, businesses, and economies of our countries”.

Killing NAFTA would cost us millions of jobs that depend on the trade with Mexico, and if Mexican costs rose because of it, companies would not just shut their doors and move back to the U.S. They probably would take a hard look at the next cheapest company. Somehow, antagonizing our next-door neighbor doesn’t seem like real good politics to me, especially when they bring so much to the table.

Written By: Clifford F. Lynch

WILL THIS BE THE YEAR OF THE 33 FOOT TWINS?

Two years ago, several LTL and parcel carriers urged Congress to pass legislation that would have allowed the use of 33 foot twin trailers on the nation’s highways. Although the proposal had a fair amount of backing in Congress, the legislation did not make it to the President’s desk. The new law, had it been enacted, would have allowed the use of the longer trailers, in lieu of the 28 footers now in use, allowing about 18% more volume and requiring fewer trailers to move the same amount of freight.

This year, with a new administration and a new Congress in place, Fred Smith, Chairman of FedEx. Is leading the charge to get this legislation passed. FedEx, joined by UPS, Amazon, YRC, U.S. Chamber of Commerce, National Association of Manufacturers, and others have formed a group called Americans For Modern Transportation. According to its press release, the group was established with the intent to improve infrastructure and transport policies in order to “more efficiently address the needs of the industry.” In explaining this central goal, the group went on to say: “To continue moving America forward, infrastructure investment cannot simply be improved roads and bridges. We need to lay the groundwork for a modern transportation system. Central to this goal is combining infrastructure enhancements with efficient trucking and policies, as well as incentives for better safety and fuel technology.” Not surprisingly, the group’s major initiative is to seek approval of the 33-foot legislation.

Since truckload carriers use 53-foot trailers, the movement is spearheaded by the LTL and parcel carriers who use the twins, but the Truckload Carriers Association has opposed the adoption of the new rules, citing competitive disadvantage, issues with TOFC equipment designed for 53 and 28 foot containers, and other concerns. (Frankly, these and their other arguments seem weak.) Other groups have expressed safety concerns with the longer rigs on the highways. In fairness however, 33 foot twins already are allowed on portions of highways in 20 states, without disruptions to the marketplace of safety problems.

AMT commissioned a study to determine the feasibility and economics of operating the longer trailers, and the conclusions published last week were very positive. The consultants concluded that in 2014, widespread adoption of the 33 foot trailers would have resulted in 3.1 billion fewer vehicle miles traveled, 4500 fewer truck crashes, $2.6 billion saved in shipper costs, 53.2 million fewer hours saved due to less congestion, 255 million fewer gallons of fuel, and 2.9 million ewer tons of CO2 emissions. The 19 page report explains these conclusions and also addresses specifically each of the concerns of the TCA.

If one takes this report at face value, and so far, there is no reason not to, it would be difficult for legislators to ignore these positive impacts on infrastructure and environment. No doubt, there will be lengthy discussions, but at this point, the prospects of passage look good. In addition, with the lobbying power of the AMT membership, and the new president’s apparent bias against regulation, my prediction is that the proposal will be approved during this session of Congress.

Written By: Clifford F. Lynch

INFRASTRUCTURE CONFUSION CONTINUES

Prior to President Trump’s speech to Congress, many of us were looking forward to hearing more about his plans for improving the infrastructure. Unfortunately, he simply restated what he had said before, “I will be asking Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States – financed through public and private capital – creating millions of new jobs. Crumbling infrastructure will be replaced with new roads, bridges, tunnels, airports and railways gleaming across our beautiful land.” – 139 words out of a 5006-word address.

Okay. By now, most of us are aware of our deteriorating infrastructure and the billions of dollars it would take to bring highways and bridges up to acceptable standards. But still, we have not seen a firm plan for generating the necessary funds. Many industry organizations and experts, including the U.S. Chamber of Commerce, feel that the federal fuel tax should be increased. The fuel tax is the primary source of revenue for the Highway Trust Fund, but the $.184 per gallon tax on gasoline and the $.244 on diesel fuel have not been increased since 1993. Whenever an increase has been considered it has sparked a political firestorm that Congress was reluctant to walk into.

Both Trump and former president Obama have spoken several times about “public/private” partnerships (referred to as P3s) which most feel can be translated into “tolling our interstates”. Congress banned tolls on all interstates when the 46,000 mile system was created in 1956, although a few exceptions have been made in the last few years. Generally speaking however, only those highways that already had tolls were allowed to keep them. These comments from the administration have been a major cause of concern for many, and already the “fors” and “againsts” have solidified their positions.

A number of influential firms and organizations, such as the membership of the Alliance for Toll Free Interstates (AFTI) which includes FedEx, ATA, UPS, and others are opposed to tolling. The ATA in particular, has long held the position that the fuel tax should be the primary source of funds for the highways. AFTI cites the failure of several attempts at tolling interstates, as well as a number of other perceived inefficiencies. According to the Transportation Research Board of the National Academy of Sciences, a typical toll facility spends 33.5% of its revenue on administration, collection, and enforcement. The administrative cost of collecting a fuel tax is about 1% of revenue. Another I believe, legitimate concern is that we would be exposed to double taxation in that drivers would pay tolls, state taxes, and some federal taxes on fuel. Already, several states have increased their own fuel taxes to fund improvements that the federal government has not made.

On the other side, we have the International Bridge, Tunnel, and Turnpike Association (IBTTA).

IBTTA cites the ability of toll ways to generate revenues to support their operations and investment needs. The country’s 5000 miles of tolled highways, tunnels, and bridges generate over $12 billion in annual revenues. In 2012, in testimony before the House Committee on Transportation and Infrastructure, the organization took a clear and strong position, stating, “While MAP-21 allows for tolling of new Interstate capacity, IBTTA strongly encourages the committee to consider allowing the expansion of this funding tool to include existing mileage on the Interstate System.” I am sure their position has not changed.

Personally, I cast my lot with ATA, the U.S. Chamber, and the other proponents of an increased fuel tax, and believe that some reasonable increase would be a much more fair and equitable solution. Admittedly, the resulting revenue would not be enough to completely solve the problem, but it would be a good start. Whatever the result, the issue is surely to generate a contentious debate within the Congressional and state legislature walls when it comes up for discussion.

Written By: Clifford F. Lynch

WANT TO BUY SOME PORK BELLIES?

Just the other day, I learned of a startup company that was developing a vehicle for trading derivatives and futures in the domestic transportation market. A similar idea was advanced ten years ago when capacity was short in the industry, and the presumption then was that a firm could lock in future pricing and capacity. The current thrust seems to be simply to create a new marketplace for speculators and hedgers. The first effort never got off the ground, and while I do not profess to be an expert in either futures or derivatives, I am somewhat skeptical of the current plan. While the idea sounds good, we need to keep in mind that what works for soybeans and pork bellies might not work for transportation.

In its purest form, a commodity is an item that has value and is produced in large quantities with uniform quality. Whether it is something tangible like oil or intangible like electricity, a commodity is a homogeneous, undifferentiated product. When it is traded, it is solely on the basis of price. Some would argue that transportation service fits that category. As they see it, transport service is just a way of getting something from point A to point B. It doesn’t matter who provides the service, as long as the product gets there.

I am concerned that this kind of thinking can get shippers in trouble. As those in the business know, there is much more to transportation than simply hauling something between two points. It’s also about on-time pickup and delivery; it’s about planning and satisfying shippers’ needs in a mutually satisfactory way. Most important, it is about relationships.

Granted, there is a futures market for ocean capacity, but I believe that is quite different from domestic truck capacity. First of all, there is less variability in the product. In ocean service, standard sized containers move over standard routes on pre-determined schedules. Although there may be some serve variability due to weather or unforeseen circumstances at ports, container movements are fairly predictable. This is a far cry however, from the type of capacity needed to move a shipment of hair dryers to Wal-Mart and deliver it within a two hour window.

If the periods of capacity shortage have taught us anything, it’s this. When he or she is between a rock and a hard place, the shipper who comes out on top – the one who manages to find a carrier when it needs one – is not the one who wins a bidding war, but the one with the best relations with the carrier. In study after study, it has been confirmed that during these trying periods, those shippers who had fared best were those who had developed collaborative relationships with their carriers. They were the ones who gave carriers timely projections of future shipments, who held regular meetings with their carriers, and who tried to be better customers in general.

It is important to remember that a shipper and a carrier have basically conflicting objectives. True, both want (or should want) their customers serviced well, yet they also want to maximize their own profits. Working through these conflicting objectives to everyone’s satisfaction requires some careful relationship building.

Managing today’s global supply chains is quite complicated. Managers are encountering new technology, new cultures, new currencies, and in some cases new modes of transportation. More than ever before, transportation is, and I believe will continue to be, a relationship business.

If you want to trade something, try pork bellies – that market looks a little less volatile than the one for feeder cattle.

Written By: Clifford F. Lynch

IN DEFENSE OF DISRUPTION

For several years, and particularly recently, we have been hearing or reading about “disruptive technology” or “disruptive innovation” in the supply chain. To many, the word disruption suggests some negative event. I can recall several notes from elementary school teachers informing my parents I was disruptive in class. It was not interpreted as a positive attribute. The dictionary in fact, defines disruption as causing disorder or turmoil.

So what is disruptive technology? Like many modern business terms, it is a product of the Harvard Business School. In his 1997 book, The Innovator’s Dilemma, HBS professor Clayton M. Christensen coined the term disruptive technology. He separated new technology into two groups, sustaining and disruptive. Sustaining technology consists of improvements in existing technology while disruptive developments are brand new, often still unproved innovations. Some of the past examples cited by Christensen were such things as E-Mail, cell phones, and the personal computer. All were major disruptions to some other industry, (Think typewriters, the post office, and land lines.)

McKinsey & Company identified twelve emerging disruptive technologies that have the potential to “transform life, business, and the global economy”. These ranged from advanced robotics to renewable energy. Within this context, while these disruptive developments may cause pain in certain industries, they can be generally viewed as positive and even life-changing. Keep in mind, they may not affect any existing industry but rather, may create a brand new one.

What are the major disruptive technologies in the supply chain? On January 27, Stifel Capital Markets hosted a conference call featuring Steve Sashihara, CEO of Princeton Consultants, who discussed a recent Princeton study about those underway in transportation and logistics.

Drones. Already being used in several industries, they have a future in supply chain deliveries if weight capability and energy consumption can be improved.
Self-Driving/Autonomous Trucks. With all the issues surrounding drivers, these self-driving vehicles could have a very bright future.

Uber for Freight. This is not a new idea by any means, but new technology makes on-line freight scheduling a more economic and efficient process.

The Internet of Things. Here again, as fork lifts, packages, tractors, trailers, and robots are equipped to communicate with each other, human intervention becomes less necessary.

Big Data. Everyone is aware of the increasing amount of data and information that is available to the supply chain manager. The issue is not the amount of the data, but what you do with it.

There are others Sashihara did not mention. Such things as 3 D printing, artificial intelligence, and robotics in general certainly qualify as disruptive technologies. He did say however, that the innovators of disruptive technologies tend to be small companies that are willing to take a risk and do not have to worry about disrupting core businesses.

To me, who develops them is really beside the point, however. Supply chain managers need to stay alert and when there is a new development that can enhance their efforts, they should be prepared to seize it. Better still, do not hesitate to take a risk and introduce your own disruptive innovations. They may not be as far-fetched as you think. Certainly, improving present methods has value, but jumping way “outside the box” may be even more rewarding.

Written By: Clifford F. Lynch