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Compounding U.S. Port Congestion with Little Concerted Industry Actions

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Today, The Wall Street Journal announced the launching of an editorial vertical to be termed WSJ Logistics Report, with the prime sponsor being global package delivery provider UPS whom will supplement this site’s dedicated subject-matter coverage with sponsored content, (supposedly to be cleared labeled). The fact that our broad-based supply chain management community will have a business media resource destination for dedicated logistics and transportation news and editorials is a noteworthy step.

We at Supply Chain Matters will continue to do our part in insuring that readers are alerted to noteworthy news and editorials and that such content represents what we consider to be a balanced view of developments.

To kick off reader interest in the topic, today’s U.S. printed edition of the WSJ featured a front page article, Bigger Ships Snarl U.S. Ports. (Paid subscription or free metered Container_Termview) This article reinforces what you have perhaps already experienced within your supply chain or read on this blog, namely that the introduction of far larger container ships into operational service is adding increased logistical challenges and congestion among many U.S. ports.

In the wake of the proposed February settlement of labor contract talks involving U.S. West Coast ports, Supply Chain Matters has posted advisories to industry supply chain teams to not assume that the logistical challenges and port gridlock that were amplified last fall would not happen again.  Today’s WSJ article succinctly reinforces that message.

Reported is that congestion is becoming increasingly common among both U.S. West and now East coast ports, and according to the article authors: “ … a problem that could have profound implications for the $900 billion worth of goods transported to and from the U.S. each year by container ships.”

Increasingly larger container carrying vessels are overwhelming ports that were not designed nor equipped to handle such volumes carried by a single vessel. The WSJ cites American Association of Port Authorities data indicating that of the 10 busiest U.S. ports by container volume, at least seven are struggling with daily congestion.  The effect is much more time required to unload and load vessels with extraordinarily longer waiting times for trucks to unload and load containers at port facilities. The WSJ cites specific examples occurring of late at the Port of Newark and Port of Virginia. In March, rising container volume and backups exacerbated by frequent winter storms reportedly pushed the Virginia International Gateway (Port of Portsmouth) beyond capacity prompting the need for overtime work, only to have to clear a subsequent backlog caused by the subsequent arrival of a single mega-ship.

Just this week, hundreds of frustrated truck drivers serving the Ports of Long Beach and Los Angeles went on strike, refusing to service the ports citing wage theft grievances. Four of the largest trucking firms servicing these ports classify truckers as independent contractors and thus drivers incur financial penalties with excessive wait times since payment is predicated on deliveries vs. an hourly compensation.

Compounding the problem are misplacement and/or unavailability of container chassis required for on-road travel. And as many industry experts have noted, the situation will only get worse without concerted industry actions and added investments in port automation. The WSJ quotes a retail industry strategist at Kurt Salmon indicating that shipping delays could reach $7 billion this year and climb as high as $37 billion by 2016.

That is a significant quantification of a multi-industry problem that requires resolution.

The problem itself stems from a combination of economic and industry forces on many sides. Ocean container lines, plagued by overcapacity and high costs, elected to invest in the larger vessels to save on operating costs.  Larger ships and lower shipping volumes compounded into the need for multiple shipping lines to form capacity alliances with the implication that a single mega-ship will carry containers representing multiple shipping lines with different administrative and logistical processes.

While many industry supply chain teams are now re-evaluating shipment routing and logistics flows in the wake of the U.S. West Coast ports crisis these past months, the realty they are facing is that U.S. east coast ports are subject to the same logistical challenges and perhaps work stoppages.

The takeaway from our Supply Chain Matters lens is that while all of the industry is focused on solving ever increasing logistical challenges among U.S. ports, there appears to be little concerted industry and government actions related to long-term resolution. Carriers, ports, organized labor and transportation carriers are each addressing their specific business and financial agendas with little consideration of the overall global logistics implications being unanswered and unaddressed.  Perhaps the assumption is that governments, public agencies, consumers and taxpayers will each have to determine and fund a resolution.  That is not feasible.

In closing our commentary, we urge industry wide forums, legislative leaders, publications and media such as the WSJ Logistics Report to shed more light, attention and resolve toward required efforts among all stakeholders to address the root causes and required remedies of U.S. port congestion.

We concur that there are considerable industry supply chain impacts, both financial and operational at-stake.

Bob Ferrari


A Stark Advisory for Ocean Container Shipping Lines With Multi-Industry Implications

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Ocean container shipping and logistics are the lifeblood of global supply chain movements. For over two years, Supply Chain Matters has been advising our multi-industry supply chain readers about the effects of substantial overcapacity conditions occurring among major shipping lines, and their consequent impacts for service, cost and logistics.  Efforts directed at introducing ever larger mega-ships, multi-carrier capacity agreements, outsourcing of certain services and increased transit times and tariff rates continue to compound themselves.

All of this places industry supply chains on the short end of any semblance of voice of the customer outcomes. The literal final straw has been the effects of the recent five month U.S. West Coast port disruption, which will take additional weeks or months to unravel.

Now, strategic advisor Boston Consulting Group (BCG) has weighed in with a recent bcg perspectives report, Battling Overcapacity in Container Shipping. This report concludes: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declare that overcapacity has fueled a downward spiral of decreased earnings and marginal shareholder value.

The report describes four destabilizing changes occurring in the industry, and observes that there are just two industry participants actually making money. They are two termed “global-scale leaders”, namely CMA CGM and Maersk Line, and the termed “niche-focused specialists” who have developed sustainable competitive advantage serving specific regions.

BCG advises the industry that in order to lift profitability, carriers will have to extract more value from commonly used cost and revenue-improvement levers and pursue scale by further unlocking synergies and more aggressively pursuing acquisitions. BCG argues that carriers have yet to tap the potential of multi-carrier capacity agreements. In the short-term, BCG  warns that the current low cost of bunker fuel may provide a false sense of security for shipping lines. They define further opportunities as extended joint procurement agreements, joint operations and equipment pooling in the short-term, and joint back-offices, shared service centers and IT development over the long-term.

If shipping industry players actually embrace these BCG recommendations and advisory actions, industry supply chain teams can well anticipate even more heartburn in the months to come.

Implied is more wholesale M&A among large and mid-tier shipping lines.  Joint carrier containers on single ships and back office shared service centers could well be predicated on decades old information technology, not tuned for today’s nor tomorrow’s customer service and container tracking needs. Investments in larger, more efficient vessels has not as yet been matched by corresponding investments in modernized IT and productivity directed at enhanced shipper intelligence and port throughput needs.

Larger mega-ships implies even more port congestion, since it will take longer to unload and re-load these vessels without solving the challenge of modernizing individual port infrastructure. Bottom-line: Solving the business challenges of ocean container shipping lines transfers burdens to existing  ports and multi-modal logistics centers.

Supply Chain Matters advocates for a more comprehensive multi-industry approach, one that spans beyond ocean container shipping.  A highly fragmented industry with competing interests, motivations and stakeholder needs can elect to continue to pass current challenges to the next tier of the value-chain, or come together to focus on the primary objective of serving shipper and multi- industry recipient needs in the new age of integrated physical and digital value-chains. A clear missing piece of the strategy is modernized technology, work practices and multi-segment and inter-modal collaboration.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


Report Card on Supply Chain Matters 2014 Predictions for Industry and Global Supply Chains-Part One

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While global industry supply chain teams continue to work on enabling 2014 operational and business performance objectives, this is the opportunity for Supply Chain Matters to reflect on our 2014 Predictions for Global Supply Chains that we published in December of 2013.

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  We not only publish our annualized predictions, but score our predictions every year.  After we conclude the self-rating process, we will then unveil our 2015 Annual Projections for Industry Supply Chain during the month of December.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

But now is the time to look back and reflect on what we previously predicted and what actually occurred in 2014.

 

2014 Prediction One: An optimistic yet uncertain global outlook in 2014

Self-Rating: 3.5

Our 2014 prediction concerning industry economic outlook summarized key economic forecasts in late 2013. Based on our review, we believed that the global economy would continue to present an environment of uncertainty in many dimensions, and turned out to be the case. However, we did note that economic forecasts at the time concerning 2014 were a bit more optimistic but come with many cautions or caveats. That turned out to be the case as well.

Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) originally forecasted 3.6 percent global-wide for 2014 and both agencies point to notable downside risks. In its early October update, The IMF adjusted its 2014 global growth forecast to 3.3 percent.  The weaker than expected forecast was attributed to setbacks to economic activity in the advanced economies of the Eurozone Japan and Latin America. The agency acknowledged an ongoing higher than expected growth rate for the United States, following a temporary setback in Q1. For the emerging market countries, the IMF scaled back its growth projection for this area to 4.4 percent, while nailing China’s growth rate at a current 7.4 percent rate.

In its mid-September update, the OECD also noted solid growth for the United States with growth strengthening in India, and around trend in Japan and China. That agency also reinforced tepid growth for the Eurozone, but generally reports sub-par world trade growth with a slow pace of improvement in labor markets.

Our own tracking of select global PMI indices further reinforced a mixed global picture with the United States outpacing other regions in production and supply chain activity.  Overall, and as predicted, 2014 has been a challenging for industry S&OP teams to plan, adjust and respond to product demand trends within individual geographic regions.

 

2014 Prediction Two: Stable commodity and supplier prices with certain exceptions

Self-Rating: 3.5

As predicted, commodity costs continued to moderate this year. As of mid-November 2014, the Standard and Poor’s GSCI Commodity Index was down 16.25 percent year-to-date. Prices advanced early in the year as a result of an overly severe winter, drought conditions in Brazil and fear of continued hostilities within the Ukraine. With the exception of the U.S. west coast, U.S. farms recovered from 2013 severe drought conditions and produced record crops of corn and soybeans.

China continues to be the largest consumer of a large variety of commodities and continued moderating growth in that region caused commodity prices to generally slide. Lower global demand caused a general contraction in commodity markets with certain exceptions. Aggregating the overall decline has been a stronger valuation of the U.S. dollar amongst other global currencies.

Exceptions remain in global supplies of coffee and beef, brought about by severe drought conditions, and cocoa, which could be impacted by the current outbreak of Ebola in West Africa.

One of the most significant and noteworthy commodity trends in 2014 remains an overall 23 percent decline in the price of crude oil. At the beginning of this year, the U.S. Energy Information Administration (EIA) had forecasted a 2.8 percent in the price of West Texas Intermediate (WTI) crude oil with a 5.9 percent reduction in the per gallon cost of gasoline and diesel.  At this writing, the price of crude has plunged to the mid-seventy dollar per barrel range.  Retail prices for gasoline have broken through the $3 dollar per gallon barrier, 25 cents lower than a year ago and the lowest in nearly four years. The average price of diesel, currently $3.68 per gallon in the United States, is 16 cents lower than a year ago. Once more, current projections indicate oil prices will range in the $80 to $90 barrel range in 2015. This is all good news for global transportation and industry supply chain networks.

Summing-up, the easing of inbound pricing pressures afforded procurement teams the ability to hopefully turn attention to other important areas including deeper supplier collaboration, sustainability initiatives and joint product innovation.

This concludes Part One of our report card on our Supply Chain Matters 2014 Global Supply Chain PredictionsStay tuned as we assess the remainder of our 2014 predictions in follow-on postings.

Bob Ferrari

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


Maersk Reports Stronger Earnings but Continued Industry Warnings

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This week, AP Moller-Maersk, parent of global leading ocean container shipping line Maersk reported rather positive Q3 financial results. For the third quarter, the shipping concern reported an overall net earnings increase of 25 percent on flat revenues. However, Maersk did take the opportunity to once again warn its investors of a continuing slowdown in global trade.

Financial highlights for the Maersk Line unit included revenues of $7.1B and profits of $554M. Return on invested capital was 13.5 percent compared with 10.9 percent a year earlier. Volumes increased by 3.7 percent, average rate increased by 0.9 percent while unit costs decreased by 0.9 percent. Fuel costs decreased 2.4 percent from the year earlier period.

According to reporting from the Financial Times (paid subscription or free metered view), aggressive cost cutting and lower use of fuel has made Maersk Line the most profitable in the industry. The publication notes that current operating margin of 10.5 percent is considerably higher than the average of industry rivals.  Once more, Maersk boosted its operating margin over two percentage points in one quarter, and has the opportunity to continue boost future margins through the announced 10 year 2M vessel sharing alliance with rival Mediterranean Shipping Company (MSC).

Maersk CEO is again quoted as indicating that in essence, the glory days of rapid industry growth in containerized trade is over.  Operators must now assume lower single-digit volume growth.

In the midst of continued industry-wide overcapacity and little industry volume growth, Maersk continues to demonstrate that it will aggressively compete for additional business and market-share. In September, Maersk Line announced a renewed ship acquisition program. It announced plans to invest upwards of $3B per year, for the next five years to acquire the equivalent of 30 new 14,000 TEU capacity vessels. That is despite its recent investments and delivery of new Triple-E vessels capable of handling upwards of 18,000 TEU’s. The new acquisition of more technologically advanced and more fuel efficient vessels further provide the opportunity to scrap older, less efficient vessels.

Included in our Supply Chain Matters Predictions for Global Supply Chains for the current year, we forecasted continued industry consolidation in surface transportation. Maersk’s continued financial performance and aggressive competitive stance adds further kindling for the industry’s lower-tied players to make additional moves or be left behind.

Supply Chain Matters will be scorecarding each our 2013 Predictions in the not too distant future.

Bob Ferrari


The State of U.S. Logistics is Once Again, Even More Concerning

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The 25rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals (CSCMP) was released earlier this week (free for CSCMP members and can be purchased for $295). This report has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and procurement professionals.  inventory

The report reflecting 2013 activity again notes a continued trend for increased logistics, transportation and inventory costs.  More than ever, this should be of continued concern to manufacturers and retailers and their associated supply chain and product management teams.  Similar concerning observations were noted by Supply Chain Matters in last year’s annual report.

Highlights and some observations of the latest report numbers are noted below.

The cost of the U.S. business logistics rose 2.3 percent in 2013 to $1.39 trillion, an increase of $31 billion from 2012. Logistics costs as a percent of nominal GDP were reported to have dropped to 8.2 percent, just about the same 8.3 percentage reported for 2012.

Most concerning from our lens, inventory carrying costs in 2013 rose another 2.8 percent, albeit less than the 4.0 percent increase reported for 2012. While interest costs rose slightly, inventory levels inched up leading to increased costs for taxes, insurance, warehousing, depreciation and obsolescence. By our calculation, the former components rose 9.2 percent or $28 billion from that reported in 2012. According to the report authors, the cost of warehousing was up 5.6 percent in 2013, as rates for warehouse space continue to rise. As a wise sage once exclaimed to this author, “warehouses are monuments to inefficient inventory practices.” That sage advice continues to reflect itself.

Overall inventory levels continued to rise despite the advent of advanced inventory management practices and historically low interest rates. The report includes a chart reflecting Total U.S. Business Inventories that visually indicates that total inventories in 2013 now surpass levels recorded in 2008, the peak before the great recession. With relatively low GDP growth levels, these numbers are alarming. With carrying costs increasing, industry supply chain teams need to seriously analyze why more overall inventory is being maintained.  Consider that interest rates remain at historic lows, and what would be the incremental cost if they were not. We suspect that with high levels of global outsourcing and slower global transportation, that larger levels of pipeline inventory are being planned. We further suspect that planning and optimization models are not reflecting up-to-date inventory cost factors.

Another important concern brought out in the report is the current fragile state of the U.S. trucking industry with utilization rates remained close to 100 percent and fleet and driver capacity declining. High costs and regulatory issues are deterring new entrants to the industry.  With the U.S. railroad industry operating at near capacity, reflecting building shortages of available specialty railcars, supply chain teams need to remain concerned about this area.

Data compiled in the 2013 report indicates the revenue growth trajectory of U.S. non-asset based services and Third Party Logistics providers continued in 2013 with revenues pegged at $146.4 Billion, an increase of $4.6 billion over 2012. Revenues broken out for 3PL’s rose 3.2 percent in 2013, lower than the 5.9 percent growth recorded in 2012. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 7.2 percent in 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones, funded by a new wave of private equity interest. We believe that these trends are troubling and imply additional consolidation and structural change in the months to come.  Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.

Supply Chain Matters submits that the overall takeaways from the 2013 State of Logistics are once again dependent on the reader frame-of-reference. If you reside anywhere in the transportation and 3PL logistics sector, your reaction may be positive. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding delivery of services. Distribution center operators and real estate interests are included.  If your frame of reference involves a constant diligence for controlling overall transportation procurement and supply chain related operating costs, we again submit there are troubling areas that should motivate concern and attention.

Thus far in 2014, U.S. manufacturing activity continues to surge. According to the report authors, freight shipments are up 13.1 percent and so are rates.  The global ocean container industry remains in a capacity crisis, and so is the U.S. rail and trucking industry. The State of Logistics, by our view is rather fragile, fueled by private investors looking to cash in on opportunities to make quick money without holding hard assets.  That is not a healthy outlook.

Once again we offer the following insights:

  • Procurement, supply chain planning, B2B and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs.  By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost.

 

  • Procurement teams who context transportation spend in the singular dimension of cost reduction remains not wise, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes.

 

  • Similarly, S&OP teams must re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point trade-offs and costs of carrying inventory. With more sophisticated tools available to manage and optimize end-to-end supply chain inventories, the open question may be in the quality of the data that is fed into these tools, especially the realities of increased carrying costs. Teams are not fooling anyone by allowing data to remain static.  Today’s global logistics environment is not static, but rather highly dynamic and complex. Decision-making data must reflect this state.

 

  • The recent announcements from both FedEx and UPS regarding the initiation of dimensional pricing on ground shipments in 2015 will have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy. Be watchful of this area.

As was the case in last year’s Supply Chain Matters commentary, the U.S. economy continues to show even more promising signs of manufacturing renewal and export recovery.  All of this is dependent on a business logistics infrastructure that demonstrates world-class competitiveness. If there is a clear learning from the past three to four years, it has been on reality that supply chains exist and are now dependent on a global network of business logistics. The major decisions related to supplier and product manufacturing sourcing is now more vested in the tradeoffs of global logistics and transportation costs and the industry coming to grips with troubling capacity constraint trends.

We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication toward shifts in global sourcing, and implication on current operations planning and procurement management processes.

Bob Ferrari

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 

 


Why the Blame on Factory and Supply Chain Weakness?

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This week, U.S. and select global equity markets experienced a significant selloff in stocks. The principle headline for the Wall Street Journal and other business media was that markets are spooked from a round of weak manufacturing activity reports, primarily concerning the United States.  It is amazing that Wall Street now pays so much attention to supply chain and manufacturing indices, a rather clear sign of how procurement, manufacturing and supply chain activity across the globe has become so indicative of the state of the global economy.  That is why we now include a trending summary report of key PMI activity across the globe in our Supply Chain Matters Quarterly Newsletter.

Candidly, we do not view the latest January PMI activity as overly concerning, rather an indication of the dynamic planning of today’s industry supply chains responding to supply and demand needs in their particular markets.

The Institute of Supply Management (ISM) PMI reflecting manufacturing activity across the United States posted a 51.3 reading in January, which was a decrease of 5.2 percentage points from the December level of 56.5.  While the headline may be concerning, that level of 51 was the same as reported in December 2012 and again in March 2013. It remains an indicator of expanding activity. A look into detailed indices reflects that the contraction probably had more to do with lousy winter weather, coupled with supply and inventory adjustments.  Of the 18 total manufacturing industries that make-up the index, 11 reported growth in January.  Many were in the lower tier of industry supply chains such as metals, plastics, rubber and electrical components. While the new orders index indeed decreased by 13.2 percentage points, customer and other inventories also decreased reflecting a work down of current inventory.

If there is a concern, if should be directed at increasing input prices where the index rose 7 percentage points.  It was our prediction that commodity prices would hold level in 2014 given the trends going into the start of the year.  Procurement teams need to be especially vigilant regarding this trending.

Business media has further reported that the current sell-off across global equity markets has been motivated by concerns regarding ongoing turbulence among former growing emerging market economies and the effect that will have on corporate profits. Supply chain leaders should share that concern.  However, we advise a continued monitoring of overall global supply chain activity, which up to January, indicates continued positive trending.  Including January, the J.P. Morgan Global Manufacturing & Services PMI which is an indication of the combined output of the world’s manufacturing and service sectors has risen for 16 successive months. In January, the Markit Eurozone Composite PMI reflecting manufacturing activity across the Eurozone, a huge global market, posted its highest reading since June 2011 indicating momentum across Europe is finally on the upswing.

The one concerning manufacturing indicator is that of China, which dropped below the 50 mark in January, to a reading of 49.5, which is an indicator of contraction. That indeed should remain the concern of industry supply chains and investors.

It is unfortunate that Wall Street continues to take such a narrow, in the quarter perspective concerning corporate growth and profitability.  While industry supply chains are becoming much more adept at responding and synchronizing product demand and supply imbalances  on a quarterly, monthly and even daily basis, Wall Street continues to view manufacturing activity in a rather short term, in-the-quarter mentality.

That does not help companies and supply chain teams in their efforts to continue to invest in capabilities for managing complex, dynamic and ever changing global supply chains.

Bob Ferrari

© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain matters Blog. All Rights Reserved.


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