Supply Chain Matters has brought previous attention to a significant trend occurring in global transportation.  Large numbers of manufacturers and service providers have placed a greater focus on transportation cost efficiencies and/or flexibilities.  That is good news for bottom line budgets but rather troubling news for global carriers or global logistics services providers who have invested in expensive capacity and infrastructure.  Recent earnings report from FedEx, UPS, Ceva Logistics and other global transportation providers, to name just a few, reflect this building shift within the industry.  More sophisticated planning has allowed global supply chains to not rely on priority shipping modes but rather rely on non-premium or multi-modal surface transportation options.  Erosion in global transportation rates has in-turn provided global shippers’ added flexibilities in the modes they elect to move goods to consuming markets.

One of the most time-sensitive industries is that of fresh-cut flowers.  The Wall Street Journal recently reported that even this $14 billion industry has responded to increased premium air freight costs.  In essence, the floral industry is responding to cost conscious retailers who want to reduce the input costs for flowers. A spokesperson for Netherlands based FloraHolland, the world’s largest floral  wholesaler predicts that upwards of 30 to 40 percent of floral shipments from Latin America, along with 20 percent of shipments from Africa to Europe could be routed by ocean container in the next five years.  That is a rather significant shift emanating from a stalwart industry that had total reliance on global air freight.

According to the WSJ, improvements in chilling and container monitoring technologies have prompted this building shift toward ocean shipping modes, particularly for imports to Europe which is a rather large market. Industry sources were cited as indicating that certain roses, carnations and other floral varieties do not suffer ill effects from sea voyages provided temperature environment is consistently maintained.

Transportation professionals are fully aware that ocean container carriers are making big and rather expensive bets in bringing a new generation of larger, more efficient mega-ships into service during the next five years.  Today, there is far too much ocean container capacity chasing lowered volumes. Industry leader Maersk has again downgraded its outlook for global trade while the industry itself endures its 15^th consecutive week of declining market shipping rates.  Maersk now forecasts global container demand to grow just 2-4 percent in 2013 vs. a prior forecast of 4-5 percent in February.  While newer ships will address needs for more efficiency and flexibility, the industry itself is in a Darwinian struggle as to which players can financially survive the transition. The Financial Times recently reported that a fifth of global container capacity has now been idled worldwide.

Global multi-modal transportation and logistics providers are obviously noting the building momentums in this modal shift and will invariable adjust their business strategies in the coming months.  However, the biggest question mark is how many existing ocean container carriers, suffering building economic loses from the current gross condition of excess capacity, will survive to serve a different global transportation landscape several years from today.

There are other industry shifts to cite as examples.

Today’s Wall Street Journal notes that the proposed $2 billion Freedom pipeline project that is proposed to ship refined oil products from the lucrative oil field of Texas to California based refiners has failed to gain the interest levels of the major oil refiners in that region.  Instead, they are relying on existing tank car shipments via rail lines to feed fuel hungry west coast markets.  According to the Association of American Railroads, rail carloads of oil nearly tripled from 2011 to 2012. A recent boom has also come from new sources of crude in the U. S. Northern Plains and Appalachian regions that now increasingly rely on rail tank car movements to core refining distribution points. According to WSJ’s reporting, refiners are relying on rail shipments because of the flexibilities it provides in allowing firms to access crude supplies from different geographic regions at different prices, a flexibility not offered in a fixed pipeline.

This week, global 3PL CEVA Logistics, which provides logistics services to service sensitive consumer, healthcare, pharmaceutical and major high tech markets, reported a 6 percent decrease in earnings citing an overall soft global logistics markets, under performing contracts and impacts of business switching to ocean transport.  CEVA , an asset light 3PL, has already taken steps to re-capitalize its balance sheet and raise new capital and has taken actions to offload some remaining fixed costs.  At this week’s Smarter Commerce Summit, IBM announced a four year contract with CEVA to utilize the cloud-based IBM Sterling Commerce B2B platform and integration services for its customers. At the time of its re-capitalization efforts in April, L.M. Schlanger, CEVA CEO interviewed with Logistics Management and was quoted: “… customers are demanding more transparency and more visibility and more traceability and control of their supply chains at any given point in time.”  He alsopointed to increased internal IT investments and applications to meet the increased needs of customers.

Thus, multiple shifting forces are impacting global transportation.  The current economic crisis that has severely impacted Eurozone markets, and the building momentum toward nearshoring occurring in some industries are impacting current shipping volumes and rates.  Longer term, more sophisticated shippers with better planning capabilities and leveraged use of advanced technology have discovered means to rely on more economical or more flexible modes of transport. That is the long-term trend.

Insightful industry officials are now or should be connecting the dots.  Investing in appropriate technologies and services our beginning to yield savings in a cost area that has begged attention for many years. At the same time, carriers and logistics providers that have to invest in rather expensive assets and global transportation capacity are making their bets on where the long-term industry trends end up.

The takeaway for procurement, supply chain and product management teams are to not at all assume business-as-usual in short and longer-term transportation strategy and contracting.  Do your homework, stay informed of continuing industry shifts and implications. Select your partners wisely, those that can fulfill both today’s and tomorrow’s business needs. Teams should also be evaluating investments in more synchronized fulfillment execution across the end-to-end supply chain including the journey toward supply chain control tower.

We are here to help you sort out these trends and implications.

Bob Ferrari

It has been six days after a tragic building collapse involving multiple garment factories in Bangladesh. The death toll continues to rise as hopes of finding any remaining survivors is fading. The final death toll could be staggering.

We again join other voices in the shock and sadness of this incident.

Our Supply Chain Matters initial commentary this latest incident noted an environment of see no evil, tell no evil among retailers and other contractors for apparel sourced across Bangladesh.  We joined other voices in urging the apparel industry to initiate a serious call to action regarding current global sourcing practices and supplier standards.

Since that time, business and global media has provided much more attention to conditions and challenges involving the apparel industry and its current sourcing practices. On Tuesday of this week, the Wall Street Journal published an article (paid subscription or free metered view) that indicated that the factory owners involved in the recent building collapse were under enormous pressures to produce orders because ongoing political unrest and work stoppages has scared off buyers. It quoted the Bangladesh Garment Manufacturers and Exporters Association as indicating that $500 million in orders had been lost as a result of the earlier turmoil. It described how retailers and customers, as in previous incidents, were denying that valid orders ever existed for the subject factories.  Italy’s Benetton Group initially denied any connection to a destroyed factory but later had to acknowledge a relationship after labor groups found labeled clothing and production documents in the damaged building. Other global based retailers and customers were also mentioned, some in denial.

However, we would like to call special attention to our readers to an Opinion column published in today’s edition of The Financial Times which is titled Business must take the lead on Bangladesh’s Working Conditions. (Paid subscription or free metered view)  This opinion piece penned by John Gapper is in our view, is well written. It urges western companies to not take the current easy path to withdraw sourcing from the country but instead come together to collectively raise overall standards. Gapper notes that it is easy to forget that even in the U.S., there was a previous history of inferior working conditions and garment factory fires, which helped to establish the International Ladies” Garment Workers Union and subsequent improved health and safety laws.

He calls for retailers to stay in the country and keep providing jobs for women which has helped to collectively raise the poverty levels across Bangladesh by almost 30 percentage points. Workers in the country earn an average of $37 a month, and are a bargain based on current global rates. The World Bank estimates that productivity among the most run-well factories is on par with China, while wages are one-fifth of China’s average. There are far more garment factories in the country and Gapper quotes a McKinsey survey that indicates that 50 to 100 of the total 5000 garment factories have “very high” compliance standards and he argues that this presents an opportunity to improve standards without threatening overall global  competitive advantage.

The editorial outlines two other actions including retailers banding together to push the Bangladesh government to overcome corruption, and to open the doors to labor unions. That latter imperative is arguably going to be the most controversial and contested.

The argument presented by this FT editorial s that the industry itself can play a big role in getting the country out of severe poverty, while developing a safer environment of working conditions. It is unacceptable for hundreds, and perhaps thousands of workers to perish in preventable industrial tragedies.

For our part, we do not dispute the difficult challenges that lie in apparel sourcing within low-cost manufacturing regions.  But, at the same time, retailers and contractors cannot continue to turn a blind eye or hide behind sub-contracted chain of custody regarding unsafe working conditions.  Neither can global social responsibility standards continue to be ignored.

As consumers of apparel and clothing, we need to insure that we are willing to pay a higher retail price to retailers who adhere and enforce safe working conditions in global factories that they do business with. We need to stick with brands committed to helping factory workers to work their way out of severe poverty and provide for their families, while working in safe factories or distribution centers.

As a supply chain community, we need to get more serious about our responsibilities to foster more diligent and dedicated labor social responsibility practices across the globe and to stand for good practices vs. a few additional points of product margin, or giveaway promotions.

It would be a real shame if the industry walks away from Bangladesh because it is the easier solution.

Bob Ferrari

As the Q1 earnings and economic forecast cycle winds down it should be somewhat clear to supply chain teams that the planning for product demand and associated resources across the Eurozone, and in some cases, China, will continue to be challenging at best.

Last week, the International Monetary Fund trimmed its forecast for total European output to a negative 0.3 percent this year. The agency also trimmed its 2013 forecast for global-wide growth from 3.5 percent to 3.3 percent.

As Supply Chain Matters has noted in our previous commentary concerning global output activity, PMI levels for Europe continue to trend further downward. Uncertain signs are now appearing concerning China. The Wall Street Journal reported today that industrial profits in China for the March timeframe rose just 5.3 percent, down from the 17.2 percent growth rate posted for the first two months of this year.

Financial media reporting reflecting on the latest Q1 quarterly results from manufacturers have specifically taken note on the negative aspects of the Eurozone. Some of the examples across various tiers of industry supply chains include:

• Dow Chemical reporting a 12 percent decline for sales volumes across Western Europe.
• Air Products and Chemicals reporting a 5 percent decline in European revenues with a reduced outlook for the remainder of the year and prompting the need to cut additional costs.
• General Electric, who was one of first multinational companies to warn of European trouble signs last year, recorded a 17 percent decline in European sales.  GE indicated that the contraction was broader and worse than initially thought.
• The Wall Street Journal recently reported that five of the biggest auto manufacturers in Europe reported grim Q1 performance. This included an uncharacteristic 26 percent decline in operating profits at Volkswagen, a 12 percent revenue decline at Renault SA, and a 6.5 percent revenue decline for PSA Peugeot Citroen. Ford Motor Company reported a $462 million operating loss in the region, and despite initial bold efforts to close 3 European factories, expects to take a $2 billion loss by year-end. Even German premium brands such as Mercedes and BMW have begun to feel the effects of slowdown in both the home German and other Eurozone markets, as well as in China. BMW is now forecasting a single digit increase in China auto sales vs. a 40 percent increase last year.
• Global consumer goods company Unilever, previously demonstrating a rather agile and broad support for global product demand also felt the effects of a slowdown in Europe among its various product offerings.

• Global apparel and footwear producer Nike indicated a 20 percent decline in operating profits concerning China while restaurant services provider Yum Brands reported a 41 percent decline in Q1 operating profits in China following media accusations of antibiotic use by its suppliers.

All the above are continued reinforcement that supply chain organizations must be able to refine supply chain planning capabilities.  The ability to plan in more finite segments, by country, region and individual product area are obvious. Scenario-based planning and more insightful business intelligence by country are ever more important.

While the current news of contraction remains negative there will as we all know, eventually be a bottoming.  Some individual countries may bounce back earlier than others. Similarly some markets and product segments may rebound quicker than others.  The key is to be able to assess and determine when it occurs before your competitors.  With capacity and resources continuing to be cut-back across the Eurozone, it is equally important to have adequate lead time to plan for additional resource needs, when the time comes.

While contraction is the overriding headline for Europe, there will come an eventual bottoming and upturn.  Will your organization or S&OP process be able to determine that point quicker than your competition?

Bob Ferrari

The following global supply chain activity assessment posting will become a regular feature of our Supply Chain Matters and Ferrari Consulting and Research Group Quarterly Newsletter series, starting with the Q1-2013 Newsletter to be published later this month.  Readers automatically obtain a copy of our newsletter as registered subscribers to Supply Chain Matters.  If you have not done so, you can register as a subscriber by registering your email address in the Receive Posts via Email block on our right-hand panel.  It is our stated policy that no subscriber email addresses are shared with third parties.

Various reports of production activity indicators during the first three months of 2013 reflect somewhat resilient global supply chains with the exception of the Eurozone countries. Overall, the JP Morgan Global Manufacturing PMI rose to 51.2 in March from the 50.9 recorded in February. However, warning signs regarding higher input prices remain, along with threats for added supply chain disruption brought about by increased global tensions and continued frequent occurrences of natural disasters.

U.S. production activity reflected in the Institute of Supply Management (ISM) index recorded respectable readings of 53.1 in January, 54.7 in February, and dropped to 51.3 in March. While activities surged in the first two months, some headwinds were evident in March. On the positive side, employment growth increased 1.6 percentage points in March coupled with 2 percentage drop in inventories.  Both import and export indices grew in the final month. Of concern, however was a 6.4 percentage drop in new orders, and a 4 percentage point drop in backlog orders, both indicators of some continued slowdown in the weeks to come.  Separately, the U.S. Commerce Department reported a 3 percent rise in factory orders in February, essentially fueled by increases in orders for commercial aircraft and durable goods. There has also been evidence of some resurgence fueled by the housing sector. The report however, cautioned that measures for business investment had fallen, which may be initial indicators of the effects of business concerns regarding the current cutbacks in U.S. government spending brought about by “sequestration”.

PMI indices reflecting activity in China, South Korea, Taiwan, and India indicate little impact related to a global slowdown, but some localized warning signs. The HSBC China PMI recorded readings of 52.3 in January, 50.4 in February, and rebounded to 51.7 in March.  Keep in mind that the quarter included the celebration of the Chinese Lunar New Year where many manufacturers close operations for a week or more. Stronger new order growth was reflected in the March number, indicating increased momentum moving into Q2.  However, higher raw material input costs rose for the fifth straight month in February adding to profitability pressures.  Thus far, China has not been severely impacted by the slowdown affecting the Eurozone region.

South Korea increased its supply chain momentum in March, recording a PMI of 52.0, its highest reading in over a year. This compared with a 50.9 reading in February. Solid increases were reported for both output and new orders, no doubt fueled by increased activity related to the consumer electronics sector. Supplier delivery times were reported as being lengthened reflected in lower finished goods inventories and leaner overall supply chain inventories. Manufacturing employment increased for the fourth consecutive month. As we pen this commentary, heightened tensions with North Korea have however precipitated the closing of a border manufacturing economic zone with threats of military actions.

The Taiwanese manufacturing sector, another hub for high tech and consumer electronics supply chains, increased its activity for the fourth consecutive month in March. PMI readings were recoded as 51.5 in January, 50.2 in February, rising to 51.2 in March. New orders rose for the fourth successive month in March while manufacturing employment rates fell fractionally.  On the concerning end, average input prices rose for the sixth month in a row in March adding additional cost pressures.

Production activity in India has been impacted by persistent interruptions in electrical power. The PMI reading of 52.0 recorded in March was noted as the lowest reading in 16 months. While the March data signaled higher volumes of incoming orders, growth in new orders was the slowest in 16 months. Indian based manufacturers have further depleted their stocks of finished goods to meet order requirements while lead times are increasing due to the impact of power shortages.

In our Supply Chain Matters global PMI commentary in early January, we noted the alarming surprise of Singapore, a previous stalwart of global supply chain activity, where the country was in danger of falling into recession.  Singapore’s industrial output fell over 8 percent in January and February compared to the same period in 2012. According to PMI numbers released by the Singapore Institute of Purchasing & Materials Management (SIPMM), that country recorded a reading of 50.6 in March, somewhat higher than a 49.4 reading recorded in February, and a signal of more positive activity. New export orders and production activity increased during the month. A separate PMI for the electronics sector dipped from 51.9 from 52.1 recorded in January.

In contrast to rather steady supply chain activity in the above global regions, declines in the Eurozone sector intensified. The Markit Eurozone Composite PMI was noted as 46.5 in March, down from the 47.9 recorded in February and 48.6 recorded in January. According to Markit, the rate of decline is accelerating.  Of the four largest Eurozone countries, France had its steepest decline, with PMI falling to 41.9, while severe contractions were again recorded in Spain and Italy. Only Germany, with a PMI reading of 50.6 continued to experience higher supply chain activity but the rate of expansion is described as marginal. Markit notes that March reflected the largest fall in new orders for Eurozone manufacturers since December. Thus, the current Eurozone downturn shows signs of continuing well into Q2 and beyond. Of further concern is that input costs continued to rise while prices charged fell for the twelve consecutive month.  This is obviously a strong indicator of negative overall supply chain cost pressures, which manifests itself in needs to cut costs in capacity along with areas such as headcount, product support and technology spending.

As noted in Prediction One of the Supply Chain Matters 2013 Predictions for Global Supply Chains (available for no-cost download), continued uncertainties will challenge global supply chain management teams throughout the year. With the exception of the Eurozone sector, global supply chain activity has demonstrated a steady resilience during the first quarter of 2013 in maintaining positive momentum. While there are continued cautionary signs of concern within certain geographic regions, overall activity is trending surprisingly positive.  However, moderate challenges involving the Eurozone countries are deepening, and supply chain teams supporting this geographic area should anticipate continued pressures for cost containment, capacity and resource cutbacks.

Bob Ferrari

As readers can note from our various past commentaries, business media has had a field day these past months commenting on the various contract manufacturing related labor practices of Apple.  Now the lighting rod focus has shifted toward online fulfillment giant Amazon, and similar to what we concluded with Apple, competitors and other industry supply chains had better pay close attention.

Over the past few weeks, Amazon has received media coverage for its temp labor practices in both Great Brittan and Germany.  Earlier this month The Financial Times ran a full page expose article, Amazon unpacked- What it’s really like to work for the online behemoth.  Amazon has invested more than €1 billion in its UK distribution center fulfillment operations with plans to add an additional two warehouses over the next two years.  While local workers were initially pleased at the arrival of Amazon, they have since been taken aback by both the high pressure labor conditions and perceived lack of permanent full-timer employment.  The article describes how Randstad, a global employment agency under contract to Amazon, handles all employee recruiting, schedules work shifts, and compensates workers, with a select few of the workers offered opportunities to be a full-time Amazon employee.  Also in the article, employees note their beliefs that working at an Amazon fulfillment center are like working in a “slave camp.”

Last week, The Wall Street Journal and other business media reported that Amazon was forced to cut its ties with a German based security firm contracted to oversee security conditions at its German based fulfillment centers during the Christmas holiday period, because of reports that this security firm intimidated and harassed temporary immigrant workers.   A German public television station aired a documentary showing security guards searching workers for pilfered food, unannounced spot-checking of living quarters, with security guards wearing black uniformed clothing associated with German neo-Nazi groups. This documentary sparked outcries for consumers to boycott Amazon in Germany.  For its part, Amazon immediately severed its relationship with the security company and indicated it would investigate claims from temporary workers.

The use of temporary labor in times of temporary surge is a common practice in the distribution and customer fulfillment sector. What has now come under the looking glass is the practices of sub-contracting with labor agencies and firms to secure the bulk of workers, with the perception that big firms are hiding from their responsibilities to be a reliable permanent employer offering competitive benefits.

Supply Chain Matters readers may recall that in late December, Wal-Mart announced that will audit subcontractor warehouses in the U.S. in the same manner that it monitors labor standards at supplier factories across the globe.  The action was a response to claims by California and other state government regulators and labor activists of poor working conditions among a network of certain subcontractor warehousing and distribution facilities scattered across the U.S. The California Labor Commission’s office issued more than $1 million in fines last year to temporary staffing agencies at warehouses operated by Schneider National Inc., a major 3PL services provider for Wal-Mart. That was followed by citing a warehouse operated by NFI Industries with a fine for existing working conditions. Wal-Mart has argued that many of the labor rights violation allegations should have been directly focused toward the 3PL logistics firms which hold existing Wal-Mart contracts. That argument was not holding water with regulators, hence this new announcement of a third-party auditing process.

Similarly, Apple, Samsung, Hewlett Packard and others have taken proactive actions to step-up auditing efforts focused on production sub-contractors who violate recognized labor practices related to pay rates, working conditions, excessive overtime and potential harassment of workers in the workplace.

Economic conditions across the globe remained challenged, especially in Europe, where some countries have experienced double-digit unemployment levels.  In these environments, media and governments pay close attention to employers who are suspected of placing too high a reliance on the subcontracting of direct labor, production, distribution or fulfillment needs.  When the likes of the global giants noted above are swept into these investigations and actions, the ripple effect can and will be enormous.

As noted in our December commentary, retail, 3PL logistics and other industry supply chain teams had better keep a close eye on ongoing developments and take actions to correct any lapse in labor practices.  The issues related to sub-contracting and management of labor practices are gaining increased scrutiny, with huge potential for significantly more impacts in the months to come.

Bob Ferrari

Today’s edition of the Financial Times reports that two of Germany’s largest ocean container shipping companies, Hapag-Lloyd and Hamburg Sud, are engaged in talks over a possible merger of the two lines.  Both companies issued statements indicating: “if, and under what conditions, a merger of both companies would be of interest.”  FT notes that if this merger comes to pass, it would represent the world’s fourth largest container shipping line with a capacity of more than one million TEU’s, a combined fleet of 250 vessels and over €11 billion in revenues. The deal, if consummated, would represent a stronger challenge to industry dominants Maersk Line and Mediterranean Shipping Company.  FT further notes that the last time consolidation occurred in the ocean container transport  sector was six years ago.

Supply Chain Matters has been continually reinforcing our belief that the ocean container industry is currently anchored in way too much capacity and arrogance toward shipper needs. Current business and rate setting decisions are geared more toward justifying a level of profitability in spite of customer needs for reliable and cost efficient rates.   As more and more overseas shippers elect modes for surface transportation, ocean container lines respond by slowing down steaming times to lower fuel consumption costs while imposing multiple interim container shipping rate increases, all with a global economic environment of declining shipping volumes.

There is also another linking part of this ongoing problem for the global ocean container industry. Business news channel CNBC featured a recent New York Times story, that certain German banks have a problem of titanic proportions.  According to Moody’s Investors Services, 10 of Germany’s largest banks hold an estimated $128 billion in outstanding credit and other risks related to the global shipping industry. That amounts to double the debt held from countries such as Greece, Ireland, Portugal, Spain and Italy.  It turns out that financing ship purchases is a popular German tax shelter and thus these banks helped to fuel the glut in purchases of more and larger container ships.  We would add that these efforts also provided a boom for Germany’s shipbuilding industry. One German banking executive is quoted as indicating that grave mistakes were made in the years prior to 2009. Certain German banks are now making provisions for potential losses on industry loans.  Meanwhile, some estimates indicate that some 300 container ships continue to lie idle around the world while other lines can literally acquire an older excess vessel for the mere cost of its scrap metal. Great bargains abound for any existing shipping line or governmental agency in the market for a container ship.

The good news from this latest development is that finally, the ocean container industry may be moving towards efforts of consolidation which in our view, is good for shippers and the industry as a whole.  The status quo is obviously not sustainable and neither is targeting shippers to compensate for both container and banking industry missteps.

Bob Ferrari