The World Health Organization (WHO) has declared the ongoing outbreak of the deadly Ebola virus in West Africa to be a Public Health Emergency of International Concern (PHEIC) and humanitarian organizations such as Doctors Without Borders continue to work on the front lines to control the outbreak. The consequences of further international spread of the virus coupled with fears of wider-scale contagion have created a call for coordinated global public health actions to stop and reverse the outbreak.
Other concerns should be the short or longer impacts to industry and global supply chains if the current outbreak cannot be adequately controlled. Within close proximity to the current effected region within West Africa is the country of Cote d’Ivoire, which is a major supply source for cocoa. Countries within the West Africa coastal and interior regions also produce supplies of palm oil, iron ore and other commodity materials.
Beyond local sourcing are the broader implications to global transportation and logistics networks if the current outbreak spreads to other countries and spawns additional travel and cross-border restrictions. In short, industry supply chain and sales and operations planning teams definitely need to monitor the current Ebola outbreak and have some form of scenario and backup plans identified.
This posting serves to alert our Supply Chain Matters readers who subscribe to Accenture Academy training and webinars that this author will overview the current Ebola crisis from an industry and infrastructure supply chain perspective and provide expert perspective on the areas to watch along with considerations for building risk contingency scenarios. Accenture Academy is launching a new series termed Trend Talks, which are more compact and two-way interactive webinars that address and provide collective discussion on important, rapidly developing trends among industry supply chains.
I am pleased and looking forward to delivering this inaugural Trend Talk webinar addressing this timely and rather concerning global topic. The session is scheduled for Wednesday, December 10th at 10am Eastern time with participation available only to Accenture Academy members. Readers can utilize this Accenture Academy web link for login and registration.
Earlier this year, severe winter conditions across North America coupled with the continued boom of bulk crude oil shipments originating from the Bakken region of North Dakota led to significant railcar bottlenecks and shortages. Business media was quick to note that the rail car shortage problems stemmed from pileups at the BNSF Railway, which was one of other railroads heavily burdened by surging demand for crude oil transport. The problem was a classic capacity-constrained network, as winter conditions incurred a heavy toll on equipment and schedules. At the time, the railcar shortage was expected in extend further into the year.
A recent published report from Bloomberg now indicates that grain farmers in the upper Mid-West region of the United States now have a compounding problem. The article quotes grain industry sources indicating that 10 to 15 percent of last year’s grain crop still remains stored in silos because of the continued lack of availability of specialized bulk rail cars to transport the crop. Some contracts for delivery of grain from as far back as March remain unfulfilled.
This problem is expected to now compound further because the harvest of spring wheat is about to take place. Grain elevators still contain storage of the prior harvest while an expected large harvest needs to be stored and transported to designated domestic and export markets. According to the U.S. Department of Agriculture, the U.S. spring wheat crop will rise to a four year high in the coming weeks, the bulk of which coming from the Dakotas, Minnesota and Montana. The president of the North Dakota Grain Growers Association is quoted as indicating: “With the railroad situation the way it is, it almost looks hopeless as far as catching up.”
From our Supply Chain Matters lens, the key railroad carriers, BNSF and Canadian Pacific seem to be taking the classic rear-view mirror approach to the problem. A BNSF group vice president reports to Bloomberg that the backlog is expected to be down to less than 2000 past-due railcars by the middle of September. Bloomberg further reports that as of the end of July, the Canadian Pacific reported in excess of 22,000 requests for grain cars in North Dakota being an average 11.7 weeks late while over 7000 rail cars are over 12 weeks late in Minnesota.
We strongly suspect that farmers, agricultural distributors and consumer goods companies are more interested in the plans that railroads will put in-place to avoid both the past and expected upcoming railcar backlogs. What are these railroads specifically addressing to get in front of the problem? More than likely the resolution involves broader considerations including crude-oil shipments taking up the bulk of line capacities, along with compounding specialty rail car supply and demand imbalances.
Last winter, rail bottlenecks and delays rippled not only to grain and crude oil, but to other bulk commodities such as sugar and fertilizer, and to the shipment of automobiles and steel. According to this latest Bloomberg report, rail lines anticipate the backlog of grain rail shipments could extend through the October-November period, which overlaps with other agricultural harvests. Some railroads may not recover at all, which will present additional shipping challenges for farmers, grain operators, and indeed other industry supply chains in the coming months. As noted in previous commentaries, ongoing capacity and driver shortages among U.S. trucking companies cannot be relied on to solve this problem, nor is it economical for shippers and producers.
U.S. rail transportation infrastructure remains challenged and there needs to be concerted efforts to address both short and longer-term resolution of consistent reliability in rail shipping networks.
To our readers directly involved in the impacts of these bottlenecks, let us know what you are observing. How can and should railroads resolve these bottlenecks?
According to the 2014 Semiannual Economic Forecast issued by the Institute for Supply Management (ISM), purchasing and supply management executives across the United States remain optimistic concerning the growth of revenues for their firms.
Manufacturers are planning for an average 5.3 percent growth in revenues in 2014, up from a forecasted 4.4 percent at the end of last year. Estimates for spending on new equipment and plants presents an even more optimistic perspective, with an indication of a 10.3 percent increase, compared to a forecasted 8 percent increase in December 2014. However, the outlook for employment was little changed from December’s forecast, projecting a 1.5 percent increase.
From our lens, these forecasts are a stronger indicator that new equipment spending is being directed squarely at automation and increased productivity. They further reflect the prediction that the current momentum in U.S. manufacturing continues across many industry supply chains.
Last week, Germany’s BASF SE announced what was described as the single largest plant investment in its history. The global chemicals provider indicates that it was considering investing upwards of $1.4 billion to build a gas complex somewhere in the Gulf Coast region of the United States that will convert low-cost natural shale gas into propylene. According to report published by the Wall Street Journal, BASF estimates that it could save upwards of $500 million per year in energy costs if this new chemical plant is located in the U.S..
Another incident involving hazardous crude oil rail transport has occurred in the United States.
Various media outlets are reporting that a CSX train carrying crude oil from Chicago to Virginia derailed and burst into flames in downtown Lynchburg Virginia, spilling crude into the nearby James River. Hundreds of people have been forced to evacuate within a half-mile radius of this accident.
A published Reuters report quotes CSX as indicating that 15 cars derailed at 2:30pm local time and that three railcars were still on-fire as of 4pm. This derailment occurred a short distance from nearby office buildings and according to Reuters, is sure to bring added calls for stricter regulations and oversight for shipping crude by rail. Reuters notes that CSX has been positioning itself to deliver more crude to East Coast refineries and terminals and that in January, its CEO told analysts the company planned to boost crude-by-rail shipments by 50 percent this year.
The U.S. Department of Transportation is dispatching Federal Railroad Administration inspectors to the scene of this latest accident. This would be the second train derailment involving crude oil so far this year amid continuing calls for improved tanker car safety standards. Last week, Canada’s Transport Ministry introduced stricter measures concerning railroad tank cars. The agency ordered railcar owners to phase out DOT-111 model cars in the next 30 days. At this point it is unclear what the type and age of tanker cars involved in this latest incident in Virginia actually were.
Ironically, last week the National Transportation Safety Board NTSB) conducted a two day Rail Safety Forum focused on the transportation of crude oil and ethanol standards. Outgoing NTSB chairperson Deborah Herseman attended this session and has been making rounds of various U.S. media talk shows and news programs. Her primary message to viewing audiences was her concern for rail safety and that industry and government interests need to do more in this area. We had the opportunity to view Ms. Herseman’s interview on the CBS This Morning program and her conclusions were quite powerful, leaving an impression that other accidents will occur without stepped-up action. These messages will resonate even more after today’s incident and the effects may impact the availability of rail tanker cars across the U.S. in the months to come.
Today’s Wall Street Journal reports (paid subscription or free metered view) what many commodity shippers spanning the Western portions of the United States are already experiencing first-hand, an erosion of rail service levels that are beginning to noticeably impact industry and services supply chains. The surge in bulk tank car shipments from the Bakken region of North Dakota, coupled with the severe winter conditions that have been experienced throughout this region have led to what is reported to be a major snarl in rail traffic that is now cascading itself among various supply chains. Once more, this situation may extend itself much further into 2014, which is not good news for supply chains that are often anchored in just-in-time inbound materials flows.
The WSJ indicates that many of the problems stem from pileups at the BNSF Railway, which has been one of other railroads heavily burdened by surging demand for crude oil transport. The problem is a classic capacity-constrained network, as winter conditions have taken a toll on equipment and schedules.
The ripple effect extends to other bulk agricultural and commodity shipment needs across the U.S. Midwest and Great Plains regions, where rail car deliveries are reported to be running two to three weeks late. Specific notations are made for shipments of bulk sugar to various consumer product goods companies, coal shipment to various utilities and grain and other agricultural products to ports or food processors. Impacted suppliers cited in the article are American Crystal Sugar Co., a supplier to General Mills, Kraft Foods and Kellogg, potato producer Black Gold Farms and fertilizer producer Mosiac Co. Hershey, on behalf of the Sweetener Users Association, has written a letter to regulators stressing the need for an urgent fix. These backlogs have the potential to cost shippers hundreds of millions of dollars in unplanned costs and the longer this service situation continues, the more upstream companies within supply chains will be impacted. The BNSF itself is reported to be scrambling to secure additional locomotives and train crews while shippers are turning to the more expensive option of shipping by truck.
As our U.S. reader community is already aware, there has been an ongoing capacity shortage among U.S. trucking companies, thus the problem cascades itself even more as trucking resources continue to fill-in for rail. Commodity procurement and logistics teams will obviously continue to deal with this situation, including coming up with alternative scenarios to keep material flows moving to upstream customer expectations. Those residing upstream should be exercising their own scenario planning options to manage through this ongoing operational disruption.
In mid-May, Supply Chain Matters called reader attention to a study issued by Alix Partners that cited a narrowing gap in the sourcing of production in China vs. the United States. Last month the Boston Consulting Group reiterated its prior message that the increased competitiveness in United States based manufacturing will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade. In an August 20th published BCG Perspectives report (no-cost sign-up required), BCG declares that the current momentum in U.S. manufacturing is just the beginning, and that by 2020, higher U.S. exports combined with production work that will likely be “re-shored”, could create 2.5 to 5 million additional factory and service jobs. The strategy firm declares that its analysis suggests that the U.S. is steadily becoming one of the lowest-cost countries for manufacturing in the developed world, as much as 8 to 18 percent lower than countries such as France, Germany, Italy, Japan and the United Kingdom. The full impact of the shifting cost advantage is expected to take several years to be felt and BCG advises that manufacturers and retailers should recognize that structural cost changes underway represent a potential paradigm shift in global manufacturing sourcing. At the same time, BCG advises supply chain teams to maintain diversified manufacturing operations around the globe.
Some well-known retailers and manufacturers are now demonstrating more noticeable awareness to these trends, for obvious business reasons.
On August 22nd, global retailer Wal-Mart sponsored a U.S. Manufacturing Summit. At the event, Bill Simon, President and CEO of this retailer’s U.S. based operations delivered what seems to be a passionate address to the attendees where the transcript was captured on the Wal-Mart web site. Simon declared his belief that this is a transformative period in history, that opportunity in America and growth of the middle class was predicated on a job at the local factory. His argument is that the current U.S. “hourglass” economy has caused a rift, with groups calling for reform of either too much wealth or too little unskilled wages. He argues that filling in the middle through a revitalization of U.S. manufacturing could help boast the U.S. economy. He reiterated a takeaway from this Wal-Mart sponsored summit that: “the next generation of production will need to be built closer to the points of consumption.”
Of course, Wal-Mart has skin-in-the-game on these arguments since its core customers represent a good portion of middle class consumers, and they have been showing a tendency of late to shop at other lower-cost outlets. None-the-less, Wal-Mart continues in its effort to commit $50 billion, no small sum, toward increased sourcing of products among goods manufactured in the U.S. The retailer has appointed a senior team to lead this effort and has stated its willingness to sign long-term supplier agreements when it makes sense to provide manufacturers more certainty in sourcing. Simon implored other retailers to do more in their sourcing commitments. Some other passionate statements were: “I tell my team all the time that that our $50 billion commitment is our starting point. If we put our minds to it, there’s no question to me that we can achieve and exceed it. I want us to think bigger.”
Supply Chain Matters readers will recall that our numerous ongoing commentaries regarding Apple and its supply chain, cite CEO’s Tim Cook’s commitment to bring forward a U.S. based manufacturing presence it its assembly of end-products, albeit an initial small presence. That announcement was been communicated in the declared commitment to produce a new line of Mac computers in 2013 at a U.S. based facility. In late May, Cook declared to a U.S. Senate Subcommittee that the new Mac assembly facility would be in Texas. According to his testimony” “The product will be assembled in Texas, and include components made in Illinois and Florida, and rely on equipment produced in Kentucky and Michigan.” While we and other sites speculated that the new U.S. presence would be overseen by contract manufacturer Foxconn, a mid-June posting on Mac Rumors.com quotes a Taiwanese equity analyst as indicating that Apple will actually be partnering with contract manufacturer Flextronics for the new upcoming Mac Pro. The 450,000 square foot Flextronics facility near Fort Worth is also reported to be the manufacturing site for Motorola’s new Moto X smartphone. Astute readers may also pick up on the fact that Texas is a no-income tax state, which provides an added incentive and economic justification to make it the home of Mac Pro production.
Yesterday, Parade Magazine featured an article, Made in the U.S.A., which cited other manufacturers upping their commitment to increased U.S. manufacturing including General Electric and a host of non-U.S. automotive brands. One interesting statistic: “according to Libby Newman, a vice-president at the American International Auto Dealers Association, about 55 percent of all light vehicles sold in the U.S. through July were foreign brands- but more than half were built in America.”
While readers might argue that some of the cited companies we note in this commentary have obvious motives behind their renewed interest in U.S. based manufacturing sourcing, the economics and the noticeable shifts in momentum towards a re-discovery of U.S. based manufacturing attractiveness is underway. Supply Chain Matters has further cited structural shifts in global transportation that reinforce a paradigm shift in supply chain related economics.
Each supply chain organization will have to analyze their own business factors but take heed to these messages since more noticeable momentum and commitment towards favoring U.S. manufacturing is underway.
Has your senior management teams been advised of these trends?