In last week’s Update Three commentary regarding the current crisis involving the near paralysis among the U.S. West Coast ports of Los Angeles and Long Beach, Supply Chain Matters highlighted that conditions on the ground were not showing any signs of improvement. As this week draws to a close, the situation appears to be deteriorating even more, and now involves clear impacts and continued disruption for both U.S. exports as well as imports.
Last week, the National Retail Federation (NRF) published an editorial with the statement: “The sudden change in tone is alarming and suggests that a shutdown of the ports — either from a walkout by labor or a lockout by management — is imminent.” The NRF has since been joined by other industry associations including the National Association of Manufacturers (NAM) the U.S. Chamber of Commerce, and 60 other organizations representing agricultural growers.
Agricultural exports such as apples, forest products, potatoes and other crops are now jeopardized. Growers indicate that Far East buyers are now cancelling orders and moving to alternative sources of supply. According to a report from industry trade group, Agriculture Transportation Coalition, the consequences of the current port congestion are being felt throughout the United States. The railroads are unable to bring agriculture products from the Midwest and the South to West Coast ports because of the port congestion crisis. In addition, ocean carriers continue to attempt to pass on their increased costs by imposing draconian congestion surcharge fees on U.S. exporters and importers.
A published report in American Shipper (registered sign-up or paid subscription) now indicates that formal labor negotiations among the lead negotiators of the international longshoreman’s union and the Pacific Maritime Association (PMA) are currently in recess and not expected to resume until December 2. The publication characterizes this development as: “bad news for importers and exporters hoping for a quick agreement and rapid restoration of normal operations at West Coast ports.”
A new wrinkle concerning labor work stoppages expanded earlier in the week as independent truck drivers contracted by trucking firms serving both ports initiated multi-day job actions seeking fair wages and better working conditions. These job actions expanded to five trucking firms serving the port complex as of Monday. Truck drivers, mostly hired as independent contractors, have had longstanding grievances with local trucking firms and now the Teamsters labor union has taken the current port crisis as an opportunity to leverage driver demands to be recognized as full-time employees.
We again echo our Supply Chain Matters advice that industry supply chains impacted by the current west coast port disruption should be in full response management mode and seeking alternative options for both imports and exports from these ports. The situation is such that there appears to be little indication of improvement and further indications of shutdown, lock-out or government imposed mediation. Response time to save holiday revenue budgets is in critical stages, too late to save the Black Friday-Cyber Monday holiday weekend, and essential to save customer December and January holiday fulfillment commitments.
We may well observe that the winners and losers of the 2014 holiday buying surge were those individual industry supply chain teams that demonstrated the most resiliency and responsiveness to the west coast port debacle.
In last week’s commentary we echoed comments from observers that described a logistical nightmare that could undermine the best laid plans for the all-important holiday fulfillment surge period. One week later, various media and on-the-ground reports paint a picture indicating that the crisis is worsening and that retailers and manufacturers are well into contingency scenario planning. The situation has further spread to other ports including Seattle and Tacoma, with a report indicating that truck queues at Tacoma stretching several miles long. On this Friday afternoon there is no doubt that Sales and Operations and supply chain execution teams are manning the phones, terminals and supply chain business network systems to figure out their scenario options.
A report this week from business network CNBC clearly points to the confluence of forces undermining this building crisis. Shipping companies and port operators are pointing their fingers at the ILWU labor union for orchestrating work slowdowns in the shadows on ongoing labor contract talks. A spokesperson for west coast port operator, Pacific Maritime Association (PMA) is quoted as indicating that terminals that had averaged 25-35 moves per hour were experiencing less than 10. Yesterday, the PMA indicated that the union was not dispatching adequate levels of highly skilled crane operators to unload ships. Union representatives are pointing to a severe shortage of truck chassis and of truck drivers as causes. As of yesterday, a report indicates that 14 ships are now anchored off Los Angeles and Long Beach waiting for space, double the number of last week.
The National Retail Federation (NRF) is now seeking the personal intervention of President Obama citing an obvious sudden change of tone among the PMA and the ILWU and suggesting a full shutdown of every west coast port may be imminent.
Regardless of the finger-pointing, the situation has fast become the perfect storm scenario that many had feared and industry supply chains need to deal with the realities. This perfect storm has a strong potential to cascade further into the upcoming holiday fulfillment surge, dragging consumer product manufacturers into the effects. Need we painfully remind our readers that the Black Friday and Cyber Monday shopping events is a mere three weeks from today.
A published report in today’s edition of The Wall Street Journal indicates that Wal-Mart and Kohl’s had shipments arrive earlier than usual, and while caught-up in the current crisis, delays are not having a major impact on current merchandising plans. In contrast, the parent of Ann Taylor and Loft stores blamed a shortfall of sales in the recently completed quarter because of delayed shipment and the shifting of inbound goods to more expensive airfreight channels. These are all indicators of the impact of proactive risk planning on the part of retailers. However, larger retailers often have the resources to be able to cushion disruption or finance earlier pre-holiday inventory movements than smaller or cash-strapped brick and mortar or online retailers.
We therefore re-iterate that retail supply chains are now too-deep into the holiday execution window with little tolerance or patience for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, which is now not very likely, it will do little to salvage the current backlogged condition. It will take additional weeks to dig out of the current mess.
Supply chain teams need to be in full-on contingency planning mode since supply chain execution is now the bogey of the all-important holiday business goal revenue attainment. For some retailers, financial survival is at-stake.
The obvious question now turns to making good on critical holiday focused revenue expectations. From our lens, last year’s last-minute shipping snafu’s for destined holiday goods are in-jeopardy of repeating. Retailers who did not plan for the current crisis will have to figure out ways to offload products in December leading to our previously described doomsday scenario- that retailers delay their most aggressive promotions until the very last days before the Christmas holiday when inventory is hopefully in-place.
The west coast port crisis by default, now engages FedEx, UPS and other surface and air carriers as retailers turn the emphasis toward priority movements and just-in-time inventory offload promotions. Further, it will be especially interesting to observe how Amazon, Google, Wal-Mart and other large online players respond or take competitive advantage to the developing logistics perfect storm scenarios.
As for port operators, organized labor, ocean container lines and their logistics partners, best you address and solve the confluence of forces that resulted in this muddle. Yes, ongoing labor contract negotiations are a factor, but there are other industry shortcomings becoming evident that point to lack of proper surge planning.
Last year, UPS, and to some extent FedEx, were thrown under the proverbial bus by retailers for non-performance at the most critical time period. In 2014, the creditability of west coast ports and indeed the surface shipping industry is at-stake for being the Grinch’s of Christmas.
This evening The Wall Street Journal Technology blog is reporting (paid subscription or free metered view) that the hackers behind the recent massive data and credit card breach at home improvement retailer Home Depot gained access from username and password information stolen from a services vendor. The WSJ cited informed sources as indicating that after two months of investigations, Home Depot was the victim to the same infiltration tactics hackers used in the Target stores data breach that occurred a year ago, namely hijacking the credentials of a contracted services supplier. Once inside Home Depot’s internal systems the hackers reportedly were able to jump the barriers between the peripheral vendor system and the retailer’s more secure retail network by exploiting security vulnerabilities.
It is now believed that 53 million email addresses were exposed in addition to the previously reported compromise of 56 million credit card accounts. The revelation comes after Home Depot recently declared to its customers that its retail systems were now safe.
The timing of this added information concerning Home Depot also comes at an in-opportune time, with the holiday fulfillment season right around the corner.
In our prior Supply Chain Matters commentary related to the Target incident, we noted important ramifications for B2C and B2B customer fulfillment or Omni-channel processes that involve third-party services or supplier vendors. With this latest revelation that the Home Depot breach indeed succumbed to similar vulnerabilities, retail industry IT and supply chain teams will be under increased scrutiny as to system and information security practices and vendor access credentials.
Business media continues to note that Target is still trying to bounce back from a loss of consumer confidence, recently announcing the closure of an additional 11 retail stores by February 2015. Today, Target announced the appointment of a Senior Vice President and Chief Risk Compliance Officer reporting directly to Target’s CEO and Chairmen. Jacqueline Hourigan will lead continued efforts to overhaul information security and compliance that umbrellas centralized leadership of enterprise risk management, including vendor management. That model may well be replicated by other large retailers.
Consumers must be assured that information security remains a top priority and strict standards are being adhered. That unfortunately will lead to further scrutiny of supply chain wide information security practices.
Throughout the summer months, Supply Chain Matters as well as other supply chain management focused media have been monitoring the ongoing threat of potential west coast port disruptions. The primary threat resulted from the expiration of the labor contract among the Pacific Maritime Association, representing 29 U.S. west coast ports, and the International Longshore and Warehouse Union (ILWU).
During July, a Supply Chain Matters commentary cited a published report in Logistics Management made the observation that the threat of U.S. West Coast port disruptions raised an open question as to “peak shipping season” this year. Logistics Management further conducted a reader poll of 103 buyers of freight transportation and logistics services. That survey indicated 68.1 percent of respondents expecting a more active peak shipping season this year. Some respondents were reported to be concerned about potential transportation lane disruptions in the fall. Perhaps, in retrospect, that was insightful thinking by some.
In September, there were reports of significant progress in labor talks with a tentative deal reached on the critical knotty issue of healthcare benefits. The other remaining issues involving compensation, job security and workplace safety implied that contract negotiations would continue for several additional weeks.
As we pen this latest Supply Chain Matters, reports indicate that congestion within the critical Ports ofLos Angeles and Long Beach has reached levels not seen since 2004. A report published on Friday by the Los Angeles Times (paid online subscription or free metered view) describe a logistical nightmare that could undermine the best laid plans for supporting the all-important holiday fulfillment surge. As on Friday afternoon, there were a reported seven container ships anchored and queued off the coast awaiting to be unloaded at both ports.
In a situation which one trucking firm executive describes as “a meltdown on the harbor”, and what LA’s Port Director describes as “a perfect storm”, the unloading and throughput of goods from both ports is now taking 7 to 10 days, and perhaps longer. Four of the seven container terminals in Los Angeles are reported to be currently operating above 90 percent capacity.
Concerns are raising that apparel, toys, electronics and other holiday merchandise may not arrive in time to meet holiday promotional windows. While retailers are initially optimistic that consumers will open their wallets in the coming weeks, this threat for inbound supply delays adds more challenges for retail focused sales and operations planning teams. Already, manufacturers and retailers are being forced to ship critically needed goods via alternative but far more expensive air cargo methods.
The current severe port bottlenecks are being attributed to a combination of factors. They include the increased use of mega-container ships which take longer to unload, a shortage or misbalancing of trailer chassis required for unloading and transporting loaded containers to destinations. Shipping lines have for the most part excited the ownership of trailer chassis to third-party leasing companies. While the operators of the two ports have offered the use of extended free storage time and overflow storage yards, there are little takers due to confusing work rules. Accusations of work slowdowns as a result of a lack of a signed labor contract have reportedly added to the current congestion and calls for acceleration towards a final labor agreement. It is indeed the “perfect storm” scenario that is unfolding.
Supply Chain Matters recently re-visited the port container volumes for the Port of Los Angeles for the periods of July through September, which is the traditional high volume inbound period, contrasting TEU volumes in 2013, vs those this year. For the three months, 2014 TEU inbound load volumes this year were trending up roughly 6 percent from 2013 levels, thus, some retail S&OP teams were planning for a potential disruption scenario. However, it seems now that there were other bottlenecks and choke points beyond the threat of a work stoppage or slowdown.
Retail supply chains are deep into the holiday execution window and there is now little tolerance for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, the ratification and sign-off process will do little to salvage the current port condition. This is a time for creative action.
The optimistic holiday retail sales forecast scenario can well be in jeopardy or compromised by late arrival of needed holiday inventories. Need we further mention the other doomsday scenario- that retailers now delay their most aggressive promotions under the very last days before the Christmas holiday when inventory is in-place.
We will all have to wait and observe as one disruption cascades through the remainder of retail fulfillment channels.
There are many ways to remediate a perceived supply risk management problem and Constellation Brands has just exercised its bold and approach.
The beer and spirits producer recently reported fiscal 2015 second-quarter results. While total revenues increased 10 percent, the company had to reverse approximately $37 million of net sales in the quarter as a result of a product recall at the height of the seasonal beer consumption period in August. This recall was prompted by the discovery that some glass beer bottles contained tiny bits of glass. In what the company describes as an abundance of caution regarding these glass bottles, two million case shipments of Corona Extra branded beer were recalled from wholesalers and retailers during several weeks in August. Perhaps some of our readers experienced the effects of this recall, not being able to drink their favorite beer brand. According to Constellation, there have been no reported injuries due to the defective bottles.
The supplier of the subject beer bottles was Anheuser-Busch In-Bev, specifically a bottle producing plant located at its Mexican based subsidiary. Beer drinkers may recall that the Corona brand was sold to Constellation in order for In-Bev to conform to regulatory restrictions for one of its product acquisitions.
To alleviate this type of problem in the future, Constellation additionally announced its intent to acquire from Anheuser-Bush InBev’s glass plant and associated warehouse facility that was associated with the prior recall. This bottle producing facility sits adjacent to the Corona brewery in Nava Mexico.. The company is investing the sum of $300 million in a vertical supply strategy to gain more control of quality conformance processes and to boost production. The deal further calls for a 50-50 joint venture ownership with Owens-Illinois to own and operate both the Mexican bottling facility and to source Owens-Illinois as a secondary glass bottle supplier.
According to the announcement, the glass plant currently has one operational glass furnace and plans are in-place to scale to four furnaces over the next four years at an additional cost of $300-$400 million, costs that are expected to be equally shared by Constellation and Owens-Illinois. When fully operational, the Nava Mexico bottle facility, operating under the leadership of Owens-Illinois is expected to supply more than 50 percent of the glass needs for Constellation’s U.S. beer business. Constellation also has a long-term bottle supply agreement with bottle supplier Vitro.
While we can all speculate that some of these plans were in the works leading up to the bottle recall, Constellation has indeed taken a bold step in assuring long-term bottle sourcing supply along with added assurance of quality conformance.
General Mills Reports Another Disappointing Quarter While its Supply Chain Remains Challenged with Conflicting Goals
Within our Supply Chain Matters 2014 Predictions for Global Supply Chains published in late 2013, we specifically called out the existence of extraordinary challenges for Consumer Product Goods supply chains in 2014, which is indeed playing out in many dimensions. Economically distressed but more health conscious consumers continue to drive fundamental challenges involving product demand, especially in specific meal, nutritionally based or convenience categories.
In an August posting, Supply Chain Matters highlighted a number of blunt statements from CPG industry CEO’s amidst continued disappointing financial and operating results. Such results are triggering additional cost saving directives for respective supply chain organizations, cutting more flesh from previous cost reduction efforts. In some cases, such cost savings are being applied to fund accelerated product development, sales and marketing efforts to more aggressively promote additional product demand.
While all of this is occurring, packaged food and beverage supply chains have been called upon to support higher levels of product innovation, SKU growth, and aggressive product promotional campaigns that are having mixed results.
Last week provided yet more evidence of this spiral. General Mills, a diversified CP products company behind such brands as Cheerios, Total and Wheaties cereal, Betty Crocker, Pillsbury and Bisquick in baking, Green Giant frozen vegetables and Progresso soups reported earnings for the period ending in August. Included in the results were a 2.4 percent reduction in overall sales, an additional 5 percent reduction in U.S. retail revenues and a near 25 percent reduction in total profits. A week prior to its earnings report, the company announced an $820 million acquisition of Annie’s Inc., an organic and natural foods provider. The company was willing to pay what has been described as a 37 percent market premium to add additional product and brand innovation in the area of organic foods. Also during the recently completed quarter, the company introduced 145 new products, described as a pace of 20 percent higher above the year earlier period.
In the earnings briefing, General Mills CEO Ken Powell exclaimed to analysts:
“The operating environment for food and beverage companies remains quite challenging and trends weakened for some markets in the latest quarter.”
Much more noteworthy, something that Supply Chain Matters has rarely observed was that John Church, Executive Vice President for the Global Supply Chain was invited to be an executive participant in the earnings briefing.
Mr. Church’s statements included the following:
“We’re continuing to deliver strong HMM (Holistic Margin Management) levels each year. Back in fiscal 2010, we set a goal of achieving a cumulative $4 billion in COGS HMM through fiscal 2020. I’m pleased to say that we’re already halfway to our goal. We are targeting another year of strong HMM delivery in 2015, with more than $400 million in COGS HMM in this year’s plan. I have great confidence that by the time we get to 2020 we will have met or possibly exceeded our $4 billion goal.”
Obviously, Mr. Church has described a supply chain being driven by a strategy of cost reduction or cash transfer to fund other strategic initiatives. This has become a common pattern for many CPG supply chains. By our lens, it is another form of financial engineering. None the less, it provides a conflict in capabilities which current supply chain leaders must deal with.
Mr. Church went on to describe that 2015 plans include contributions from all areas of the supply chain and will include involvement of external partners through an initiative termed GEOS or General Mills End-to-End Optimization Solutions. He further described Project Century whose objectives are directed at streamlining and simplifying North American operations and positioning the supply chain for future growth. (aka: Emerging market areas) This effort includes targeting an additional $100 million in cumulative cost savings by fiscal 2017 with material savings realized in beginning of fiscal 2016.
To support these efforts, the company further announced its decision to close a cereal plant located in Lodi California, which employs upwards of 400 people, by the end of 2015, subject to labor union negotiations. Also announced was the closing of a yogurt production facility, located in Methuen Massachusetts, which employs upwards of 100 people, in the summer of 2015.
In the question and answer period, a JP Morgan equity analyst asked whether the industry has reached a self-destructive period of heavy promotional marketing spending with marginal revenue growth payback. Management’s response was that product innovation and capitalizing on consumer trends would fuel higher levels of growth. Thus, the acquisition of Annie’s.
Thus presents a further ongoing challenge to the General Mills supply chain team, namely supporting higher levels of product innovation and market responsiveness. In a previous Supply Chain Matters commentary, we praised a conference keynote delivered by Steven Melnyk, Professor of Operations and Supply Chain Management at Michigan State University, whom this author has long admired. Professor Melnyk expressed a supply chain in harmony as being:
- Supportive of corporate objectives while making achievement of desired business outcomes inevitable
- A strategic asset to the business
- Helping in the identification and support of new business opportunities
Especially insightful was Professor Melynk’s differentiation of output-driven, such as reduced costs, vs outcome-driven supply chain strategies. His observation: “too many supply chains are driven by output-driven perspectives.” He instead defines five possible supply chain outcome models, each requiring different skill and leadership requirements. According to Melnyk, a supply chain can be either: responsive, security, sustainable, resilient or innovative driven. Each of these outcomes is not mutually exclusive, but rather blended according to market or business needs.
For General Mills, it would appear that its supply chain may well be challenged by the conflicts of aggressive cost cutting (output-driven) initiatives required to support and fund product transformation support (outcome-driven) business outcomes. This is yet another specific example of the challenges currently underway among today’s consumer product goods supply chains.
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