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Summary Highlights of the 2017 ISM Conference

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This author had the opportunity to attend the annual conference of the Institute for Supply Management (ISM) annual conference held in Orlando Florida this week. This conference brings together supply management professionals spanning areas of direct and indirect supply sourcing and procurement. In this blog posting, we touch upon highlights and some important takeaways and learning expressed by those attending.  ISM2017 logo 002 Summary Highlights of the 2017 ISM Conference

This year’s conference drew a rather large number of attendees, much more than last year’s event.  We estimate attendees were more than 2500, and sensing from some hallway discussions, many came to seek added knowledge and understanding to rapidly changing industry and business environments.

The ISM organization deserves praise for recruiting two keynote speakers that spoke first-hand to the current wave of geo-political and economic events that could well impact industry supply chains in the months to come.

General Colin Powell, former U.S. Secretary of State and Chairmen of the Joint Chiefs delighted the conference audience with his comments on topics related to global events, politics, and industry supply chains. Regarding the latter, General Powell noted that Operation Desert Storm was won by superior logistics, and he shared some rather humorous stories relative to the challenges of moving vast amounts of material, supplies and personnel. He described today’s global landscape as a pressure cooker in the notions of the rise of populism, accelerated by the information revolution. General Powell voiced his view that the U.S. rejection of the Trans Pacific Partnership was an “unfortunate decision”, one that can likely benefit China as a larger influencer in global trade.

Former UK Prime Minister David Cameron’s address came on the morning of the tragic terrorist attack at a concert in Manchester England. Mr. Cameron spoke of the long struggle to defeat terrorism across the globe and on the renewed resolve of his country to march on. On the topic of supply chain management. Mr. Cameron observed: “What you do is extremely important to the global economy.” The Prime Minister later noted that he is a huge supporter of global trade, yet acknowledged that the rising tide has not lifted all boats. He noted that societies must reject tendencies toward protectionism because they failed miserably in the nineteen-thirties. He also addressed the rising tide of populism in observing that the pace of change has perhaps been too-fast, the scale of immigration too great, causing many to be fed-up with mainstream political parties. Addressing specific supply chain topics, he observed that ethical and sustainable supply chains are good for the brand and for society.  During a Q&A sit-down with ISM CEO Tom Derry, Mr. Cameron spoke of the implications of Brexit and what supply management teams can expect in scenarios of a hard or soft Brexit. Finally, responding to the question of what countries will likely be economic stars in the next five years, Mr. Cameron specifically mentioned India and Vietnam as emerging global commerce leaders.

A combined news conference featuring ISM CEO Tom Derry, Hans Melotte, Executive Vice President, Global Supply Chain for Starbucks Corporation, and Kristopher Pinow, Vice President and Chief Procurement Officer for B/E Aerospace, addressed some common themes impacting the supply management area. One was clearly the area of technology, described as quickly changing the current and future practices in supply management, which have typically been more transactional in-nature. Mr. Melotte observed that many in the profession are underestimating the impact of new technologies on processes, which he feels are coming sooner rather than later. CEO Derry observed that procurement managers are becoming much more aware of the importance of the Sales and Operations Planning (S&OP) processes, and the expansion of scope that it implies. This author had a later discussion with Jim Barnes, ISM Professional Services Director who shared feedback from various ISM regional chapters has reinforced the need for added education and involvement in S&OP, and why that involvement pulls procurement into the scope of the end-to-end supply chain.

Another top-of-mind topic remains talent management with an acknowledgement that absolutely, supply management does not have the talent to be able to leverage the tide of new technologies impacting the profession. Melotte noted- “We need to learn how to ask different questions as well as to sharpen our intellectual curiosity as to technology trends impacting our businesses.” Mr. Pinow noted- “We have to recognize that we do not know everything” and he quoted Shelly Stewart, Vice President, and CPO at Dupont in his observation that procurement leaders need to be more actively curious, including what is occurring external to procurement.

While attending other conference sessions, we further noted some rather consistent themes, especially from several panel discussions addressing timely topics. Addressing the challenge of CPO’s in making B2B networks work better together, Beverly Gaskin, Executive Director, Global Purchasing at General Motors observed that procurement has to improve practices in the science of marketing, namely how well procurement leaders sell and influence value to the business and to suppliers. Thomas Linton, CPO and Supply Chain Officer at Flextronics noted that procurement needs to understand the different management cultures of both internal and external partners and can build successful alliances based on different cultures. Many panelists addressed the need for leveraging knowledge and talent in today’s business environments, and that knowledge extends across the product value-chain to include close collaboration with supplier teams.

There were other common themes and takeaways and we will be sharing some of them in subsequent Supply Chain Matters commentaries.

A final note- after attending two subsequent ISM conferences, this author has noted a rising tide of desire and zeal among supply management professionals to become more recognized providers of business value, beyond procurement cost savings. It behooves other teams that make-up today’s broad supply chain management umbrella that spans product design to after-market services to include supply management in collaboration and to recognize suppliers for the partnership value that they can provide. That obviously includes S&OP teams.

Yes, the reality of increased supply chain cost saving needs is not going away and must be accommodated. However, it remains important that supply chain wide teams jointly recognize what capabilities in process, technology and people skills need to be preserved or augmented by trading-off cost savings for key investment needs.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


The Demise of Brick and Mortar Stores and of Traditional Retail Distribution

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For the past three years, Supply Chain Matters has been predicting a radically changed business environment across retail channels because of permanent shifts by consumers to favor online buying.

Last year, and updated for this year, our research report: The New phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains (Available for Complimentary Downloading in our Research Center) called for retail line-of-business and supply chain teams to unify organizational leadership and supply chain alignment among traditional store and online logistics and distribution strategies.

Last week. The Wall Street Journal provided more updated and quick frankly, sobering data indicating that:  Brick and Mortar Retail Stores as Shuttering at a Record Pace. (Paid subscription required)   Reported was that so far, this year, at least 10 retailers have filed for bankruptcy protection, which compares to 9 retailers that declared bankruptcy with a t least $50 million in liabilities, for all of 2016.

What we found to be more sobering was a cited prediction from Credit Suisse that retailers could close more than 8600 locations this year, which would eclipse the number of store closings that occurred during the 2008 recession.

The noted causes of the current wave of store closings are cited as decades of shopping center and retail store overbuilding along with the permanent shifts towards online shopping. Another cited cause was noted as the excessive debt burdens that retailers took on through leveraged buyouts or efforts to fund expensive share buybacks. The WSJ cites Moody’s Investor Service as indicating that the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years.

There are obviously significant supply chain implications implied from this trending which we wanted to echo for our Supply Chain Matters readers, implications that may seem obvious, but need to be stated.

Traditional retail distribution strategies were predicated on purchasing high volume merchandise from lowest-cost and highest value suppliers, moving that merchandise into large owned or leased warehouses, and pushing that merchandise into individual stores based on selling forecasts, merchandise promotional plans, or store replenishment needs. The operations of the warehouses and the distribution to physical retail stores was for the most part, straight-forward.

Now, with so many brick and mortar stores subject to closing, coupled with the permanent moves toward online and Omni-channel merchandising and selling, the logistics and distribution model is significantly changed, and as retailers have now come to understand, can be far more expensive if not planned and executed properly.

Warehouses are now customer fulfillment centers that store inventory in volume and move that inventory to contiguous pick and pack operations within the same building, all responding to individual online orders.  Fulfillment center locations are now more predicated on a combination of population density and access to major transportation and logistics hubs, as Amazon and other online providers have artfully demonstrated. Inventory management requires far more sophistication and requires far more detail related to item-level demand across selling and customer pick-up channels. Overall management of transportation costs becomes more essential, since online consumers are now patterned to shop where free shipping is offered.

Remaining physical stores will increasingly serve as extension of the online business model, meaning stores can serve as customer pickup, merchandise return, or merchandise demonstration centers. In-store labor has shifted to customer fulfillment center labor, and in-essence, the fulfillment center becomes a key presence and capability of the retail brand in the minds of online consumers.

The closing of so many physical stores comes about because of the needs or existing retailers to dramatically reduce their cost structures to deliver required profitability goals. However, we again need to reiterate that the traditional notions of viewing transportation, warehousing and logistics as purely cost center, or outsourced expenses that can be adjusted at-will is not necessarily a wise decision when considering the changed distribution and logistics considerations of today’s online world.

Retail and B2C and B2B2C supply chain capabilities must be far more agile in the ability to support an integrated Omni-channel strategy. We caution that this is not solely investments in further distribution and fulfillment center automation, since that may well be one-dimensional.  Instead, it should include more sophisticated supply chain planning and inventory optimization supported by advanced analytics related to being more predictive and responsive to constantly changing online customer fulfillment needs manifested by multiple customer touch points.

The takeaway is that slashing distribution, logistics and customer fulfillment operations budgets without a context to an integrated online business model could prove to be short-sighted.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Deep Dive on 2017 Prediction Nine: Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Initiatives

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The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

 Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

Prediction Four- Increased Anti-Trade Geo-Political Forces Provide Added Global Sourcing Challenges

Prediction Five- Continued Global Transportation Industry-wide Turbulence

Prediction Six- A Renaissance in Supply Chain Focused Business Services and Technology Investments

Prediction Seven: Enhanced Supply Chain Intelligence Capabilities Among B2B Network Platform and Managed Services Providers Will Pay Dividends for Industry Supply Chains

Prediction Eight-Amazon and Alibaba Continue to Position for Global Online Platform Dominance

 In this deep-dive series posting, we drill down on our next prediction.    Paris COP21 Deep Dive on 2017 Prediction Nine: Business Self Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Initiatives

2017 Prediction Nine: Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Focused Initiatives

Despite the declarations by U.S. President Trump that climate change has not been proven to be an issue, we predict that individual business and supply chain self-interest needs, along with the track record of benefits to-date, will continue multi-industry green and supply chain sustainability initiatives and momentum.  There is literally too much positive momentum on a global basis to motivate senior executives to derail such efforts in 2017.  The need remains compelling.

Where Emissions Emanate

Scientists point to three sectors that are most critical toward reduction of GHG emissions:

Energy– the engine and most influential cost aspect of global business and of industry supply chains represents upwards of 30 percent of global CO2 emissions. Throughout modern history, the cost of energy and fuel has been the principal driver of a majority of industry, manufacturing, distribution, and global supply chain strategies. Reduction opportunities reside in the consumption of alternative and low carbon renewable energy sources, smarter and far more efficient energy, and logistics utilization practices.

Agricultural, Land Use and Forestry Practices account for an additional 30 percent of global-wide emissions. With world population growth expected to reach 9 billion people by 2050, our planet cannot tolerate an unsustainable food production system. Farming practices, fertilizer, water use, animal husbandry all add to considerable emissions.

City Infrastructure, Buildings and Transportation can be responsible for upwards of 40 percent of global emissions. More of the world’s population is expected to be concentrated in larger cities, (mega-cities) and thus will be the hubs for economic growth, commerce, delivery, and fulfillment logistics. The potential of smarter, more connected cities coupled with advances in more sustainable, renewable energy sources provides the opportunity for a complete re-thinking of urban logistics and transportation. Global trade must now stem from advances and efficiencies in global, regional, and local transportation networks.

To address these three imperatives, more and more organizations have discovered that the firm’s supply chain can be responsible for up to four times GHG emissions beyond that firm’s direct in-house operations.  Industry supply chains are therefore one of the most critical areas of opportunity to enable GHG reductions and climate chain resilience.

Sustainability is further not limited to emissions and natural resource protections, it further umbrellas global-wide social responsibility as a business and corporate citizen, and in the treatment and respect of labor provided by individuals. Here, the latter is especially pertinent to industry and global supply chains who elect to source production, component supply or business services in low-wage, limited protection geographies.

Current Status

As we begin 2017, scientists indicate that the Earth reached its highest temperature on record during 2016, breaking an earlier record set in 2014. This development represents the first time in the modern era of global warming data that average temperatures have exceeded prior levels for three years in a row.

The 12th Edition of The Global Risks Report 2017, sponsored by the World Economic Forum, observes that extreme weather events, climate change and water related crisis have each consistently been noted as among the top ranked global risks for the past seven editions of this report. However, according to this latest report, the pace of change is not yet fast enough to curb current warming trends.

The Artic sea ice had a record melt in 2016 and the Great Barrier Reef suffered an unprecedented coral bleaching event last year. Estimates are that GHG emissions are growing by 52 billion tons of CO2 equivalent per year even as the share from industrial and energy sources may be peaking because of investments in green and sustainability initiatives among multiple industries and countries.

Much has been accomplished these past few years, but more difficult work remains.

The Paris COP21 Agreement on climate change entered force during November 2016. This agreement has now been formally ratified by 110 countries with another 196 countries including China, now indicating strong support. The Global Risks Report 2017 cites data indicating: “The reality remains that to keep global warming to within two degrees Celsius and limit the risk of dangerous climate change, the world will need to reduce emissions by 40% to 70% by 2050 and eliminate them altogether by 2100.

Moving Forward

This new era of the Paris COP21 Agreement provides both a profound call to action as well as a significant opportunity- an opportunity for bolder collaboration and joint goal-setting to not only address greenhouse gas reduction imperatives and to saving our planet, but the imperative of sustainable business itself. It literally should change our perspectives and goal-setting for sustainability strategies surrounding industry supply chains, moving such initiatives beyond supply chain functional to line-of-business level efforts.

Across many industry supply chains, a lot has already been accomplished in identifying opportunities related to reducing industry supply chain related GHG emissions, preserving natural resources including water, and insuring sustainable supply of Earth dependent commodities. Multi-year objectives have been established that include annual tracking of performance to each objective. The benefits of these initiatives are meaningful in relation to savings on supply chain related costs, reductions in responsible emissions, insuring adequate supply of key strategic supply needs and a more positive perception to one’s corporate and product branding.

Opportunities to Further Leverage Technology

With the era of COP21, industry supply chains are presented opportunities to seize upon the tenets outlined in Jeremy Rifkin’s book, the Third Industrial Revolution as well as other Industry 4.0 thought leaders that point to the compelling convergence of technologies that are before us. One that leverages the convergence of green and renewable technologies, new more renewable energy sources, IoT enabled predictive-focused analytics and the digitization of manufacturing and supply chains. All are converging over the not too distant future, and collectively can foster insured business continuity through strategies that are directed at long-term sustainability of commodity, raw material, and natural resource supply.

Our Takeaway

In 2017, despite any U.S. political notions that climate change may or may not be a significant factor for business risk, industry supply chains and the respective businesses and customers they support and serve, will be at a disadvantage in de-railing or slowing down sustainability efforts.

Benefits have already been recognized along with added opportunities. From our lens, the ongoing convergence of digital and physical business processes manifested by IoT, more predictive analytics, autonomous decision-making and additive manufacturing will provide added opportunities towards sustainability needs and objectives.

The challenge remains insuring a sustainable business within domestic and global dimensions, and that momentum is likely to continue in the coming year.

 

This concludes our Prediction Nine drill-down. In our final posting of this series, we will explore Prediction Ten which addresses certain industry-specific supply chain focused challenges in the current year.

Stay tuned.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Update on Pratt and Whitney- When All Eyes Remain Focused on Your Supply Chain

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In October of last year, Supply Chain Matters published a blog commentary: Good and Not So Good News When All Eyes Are Focused on Your Supply Chain. Our commentary focused on ongoing developments involving certain commercial aircraft and aerospace industry supply chains, and specifically aircraft engine manufacturer Pratt & Whitney. We committed to our readers to follow through on this stream of ongoing developments to provide added insights and learning. This week, Pratt parent United Technologies briefed analysts and shareholders on Q4 and 2016 performance and there were even more nuggets of information and learning. Pratt PW1100G Production Line 2 450 300x200 Update on Pratt and Whitney  When All Eyes Remain Focused on Your Supply Chain

Once again, we alert readers to the overall length of this particular commentary, but we want to make sure that full context is presented.

The commercial aircraft industry remains challenged by conflicting goals. They include the ability to more rapidly scale-up overall aircraft production levels. However, that sometimes conflicts with the industry dynamics of OEM dominants Airbus and Boeing in their respective desires to deliver higher margins, profitability, and more timely shareholder returns.

Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity, process innovation and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings. We will have more to state on this dynamic when we get to our 2017 Prediction deep-dive on unique industry-specific challenges for the coming year.

In response for airline industry needs for more fuel-efficient and more reliable aircraft, Pratt has designed and introduced a revolutionary new geared-turbofan (GTF) aircraft engine.  However, a series of supply chain glitches and volume production ramp-up challenges directly impacted the aircraft delivery production plans of both Airbus and Bombardier in 2016, causing both final manufacturers to now incur some financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link was Pratt. There are others as well, such as interior seats for new wide-body aircraft, but in this new world of ubiquitous visibility, any one supplier can bear the brunt.

In September, UTC, the parent to Pratt, and specifically CEO Gregory Hayes, warned the conglomerate’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers.  Haynes acknowledged the obvious in that Pratt’s airline customers were not happy with the news.  Neither were UTC stockholders who initiated an immediate 2 percent sell-off in the company’s stock. During that time, Haynes briefed analysts and investors on many of the operational details of Pratt’s supply chain challenges which was an obvious indication of high levels of visibility and detailed briefings that the CEO was obtaining.

Also at that time, Hayes indicated that of the approximately 800 parts for the high-level bill of material for the new GTF Pratt engine, five parts were causing the most pain due to supplier challenges in meeting Pratt’s volume production and quality needs. One critical problem was the heart of this new engine, its newly designed aluminum titanium composite fan blade, noted as a breakthrough in material design and expected performance. Initial production yield problems of the fans had averaged an unacceptable 20 percent.

To help our readers follow developments, we reviewed the entire transcript of UTC’s senior management briefing to equity analysts and shareholders regarding Q3-2016 financial and operational performance delivered in October. It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain, hence the title of this commentary stream. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and it’s going to be fixed this quarter.” He later stated that UTC senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway related to process and yield improvements, lead-time reductions and additional added capacity. The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more of Pratt and its supply chain challenges.

We can now update this Supply Chain Matters commentary stream with some highlights of this week’s Q4 2016 and year-end investor briefing.

CEO Hayes declared a solid year for UTC in terms of business and financial results. He praised the Pratt division on GTF accomplishments and reiterated that this engine is now powering 46 in-service Airbus A320 neo’s with more than 82,000 operational hours.

For the year, Pratt delivered a total of 138 GTF engines, 62 of which were in the final Q4 quarter. Moving to the question and answer period with equity analysts, we noted seven specific questions related to Pratt, the GTF engine, and the Pratt supply chain. Among the more detailed information that was shared in executive responses:

  • On the positive news side, executives stressed that Pratt’s supply chain challenges are in a far better state than that of June last year. Production yields on the critical fan blade are now up to 80 percent production yield, a new partner manufacturing facility begins production this quarter and excellent progress is being made in opening a second facility in Michigan scheduled to begin production at mid-year. Reiterated was that Hayes monitors such numbers from his Pratt division on a weekly basis.
  • There have been some issues with GTF in-service reliability, specifically the engine’s combustor liner and an oil seal. Regarding the combustor, issues are related to what was described as harsh operating environments of which India was specifically cited. Hayes indicated a component re-design is underway and will be retrofitted in operating engines later this year. Premature failure of an oil seal was noted as supplier related, with a fix identified with a modified seal available by May. Hayes characterized these issues as “typical of a new product introduction.” Hayes emphasized that the engine’s fuel burn performance metrics are being met right out of the box, its revolutionary designed geared-turbo fan is performing as designed, and again stated his confidence in the Pratt leadership team to resolve any supply chain or component related issues.
  • In addressing this year’s production plan for the GTF, Pratt plans to build 350-400 engines, 50 of which, (roughly 7 percent of production) will be designated as spares to support customer uptime while the above described component performance issues are addressed.
  • One analyst from Bank of America Merrill Lynch specifically questioned whether this was the fifth iteration of the combustor design. Hayes emphasized that not all airline operators are experiencing combustor performance issues, only those in harsh operating environments. The overall timeline for the combustor seal was described as three design iterations. The first 17 engines had the first design which Pratt was aware had to be upgraded because of durability issues. The ‘B” version was described as not having met expected life in harsh environments and thus the third design is expected to be in-place by the end of this year. Again, spares will be made available to airline customers as these component design changes are completed.
  • This same equity analyst asked a follow-up question. If the GTF engine has 30 percent fewer parts, does that translate to a goal that these engines can be sold a breakeven profitability at introduction? Hayes reply was that Pratt is currently losing money on each GTF engine that is shipped, but that is the reality of commercial aircraft engine development. Returns come in later years, and in the case of GTF, that is planned for the 2018 time-period. Another analyst continued to probe on breakeven expectations.

 

We have highlighted the above year-end UTC briefing summary statements to provide our readers reinforcement as to how visible supply chain challenges can become in today’s world of ubiquitous information and especially on how investors and equity analysts can now hone-in on supply chain vulnerabilities. The supply chain indeed matters, and investors are becoming more well informed to this tenet.

We expect many Supply Chain Matters readers to have added impressions or feelings regarding UTC’s latest supply chain related disclosures. Questions such as whether Pratt teams were aware of combustor or oil seal issues earlier in the program or whether pressures to meet first and subsequent customer ship milestones were overriding.  There may be other questions related to multi-tiered supply chain visibility or early-warning from suppliers. That is not for this specific commentary to address. Certainly not without speaking to those with knowledge.

As noted in October, operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. This is where the learning comes in.

The looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast of today’s industry supply chains.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Ocean Container Industry Consolidation Forces Moving at a Faster Pace

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Developments concerning the ocean container shipping industry are now moving at a faster and more discernable pace. Last week featured the news of the consolidation of Japan’s three largest shipping lines. This week adds even more perspective to an industry that is now facing even more structural and other changes. Shippers, transportation procurement teams and indeed maritime regulators need to be prepared to respond to the ongoing implications and not be lulled into predominant one dimensional cost savings strategies.

Yesterday, industry leader A.P. Moller-Maersk announced financial performance for the September ending quarter and the news was not good, not even for the industry leader.  The headline was a 43 percent plunge in overall profits. Maersk Line, the ocean container business unit incurred a loss of $122 million from a $243 million profit in the year ago quarter, despite container shipping volumes rising 11 percent in the quarter. That double-digit volume rise is noticeably above actual industry shipping demand, implying that market-share volume shifts are perhaps underway.

Maersk CEO Soren Skou indicated that shipping rates bottomed at the end of the first quarter and are slowly rising due to the departure of Hanjin Line shipping vessels from global routes. He further indicated that Maersk has observed a general rise in rates averaging 5.5 percent since the second quarter, but keep in-mind that the spot rate base remains below break-even profitability. Of more interest, the CEO validated that industry consolidation is set to continue and that nobody could have expected how fast it is now occurring.

Of far more interest to this author was what was further indicated to The Wall Street Journal. The CEO declared: “In 1996 the top three carriers had 17 percent combined market share. By next year the top three carriers will have 43 percent market share, and it’s not going to stop there.”

That statement, by our lens should be of concern to shippers and regulators alike.  While most shippers may be inclined to appreciate the cost saving benefits of historically low transport rates, it seems rather obvious that the battle for market share and industry dominance is underway among top-tier carriers. The winners will obviously be those with the largest financial pockets and backers and the prize is global scale and industry dominance. The WSJ reported this week that cumulative financial losses for this year could be as high as $10 billion, which is double the recent forecast from industry advisory group Drewry.

We would add that the formation and approval of existing multi-line shipping alliances could possibly be a further enabler to market-share dominance. Competing or non-aligned shipping lines are therefore under even more pressure to further consolidate or risk intolerable financial losses. Meanwhile industry leader Maersk has already indicated that it will seek further opportunities to acquire other attractive lines if the opportunity presents itself.

In a separate interview with the WSJ, the vice-chairmen of CGA CGM, the third ranked global shipping line indicated that none of the 20 top shipping companies are likely report operating profitability this year. He further indicated that his firm is not looking to further acquisitions after recently acquiring Singapore based Neptune Orient Lines.

This week, the Boston Consulting Group added its industry research perspectives in a report: The New Normal in Global Trade and Container Shipping. (Sign-in account required) The report forecasts that shipping capacity will continue to outpace shipping demand by a range of 8.2 percent and 13.8 percent compared with a 7 percent imbalance today. BCG expects annual growth in global container traffic to range between a bear scenario of 2.2 percent and a bull scenario of 3.8 percent, with a base scenario of 3.2 percent through 2020. Further estimated: “that by the end of 2020, oversupply of vessel capacity will stand at 2 million to 3.3 million TEUs.”

These are yet further indications that industry supply and demand imbalance will extend for an additional four years without changes on either end. That again reinforces the building tide of industry consolidation or the opportunity for further market share penetration by the largest and more financially strong carrier groups. Dominant operation of today’s newer mega-ships has another implication, that being the current limited amount of ports that have the infrastructure and modernization to be able to load and unload such vessels on a timely basis. The timing and availability of leased container truck chassis remains a shipper and industry concern.

For shippers and services procurement team, the financially motivated strategy is to try and lock-in today’s historically low rates in longer-term contracts, before further consolidation changes the negotiating picture. That goal is sometimes complicated when transportation services are outsourced to a third-party logistics provider or global services provider, and whether savings are being passed along. However, with such a shipping industry supply and shipping demand imbalance compounded by added consolidation threats, it may be wise to allow for opportunistic spot-rate contracting for shipping, especially concerning carriers or global shipping routes that continue to be highly competitive.

The most prominent criteria for multi-industry internal transportation and logistics teams is, as always, to ensure that any ocean transportation services provider or third party logistics provider consistently delivers reliable on-time services and is responsive to unplanned events. The memories of the 2015 U.S. West Coast port disruptions and consequent implications for lost business remain top-of-mind. The need for planning and collaboration among internal finance, procurement, internal and contracted supply chain operations teams is therefore paramount.

Finally, we advise that shippers, brokers and logistics operators provide added pressures in 2017 for shipping lines and respective shipping consortiums to move beyond pooling of vessels and one-sided optimization of global routes and more into insuring consistent on-time and predictable delivery performance, augmented multi-modal container tracking, routing visibility and other customer focused improvements. The time is long overdue for industry-wide data and information exchange standards.

The takeaway is that ocean container transportation planning cannot be taken for granted in such turbulent times.

 

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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