Last week, we were reading a recent report produced by the Chartered Institute for Procurement and Supply (CIPS) in the U.K. indicating that its risk index reversed in Q4-2014 and reached a nine month high. According to this report:
“The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs.”
Now, there are multiple business and general media reports of the severe toll that is cascading from the continuing backlog of ships destined to U.S. west coast ports that cannot be unloaded and reloaded on a timely basis. The latest news this weekend is that President Obama has dispatched the U.S. Secretary of Labor, Tom Perez, to California in an attempt to broker an agreement.
Today, a Reuters syndicated report featured on Business Insider provides ample evidence of the rippling effects beyond retail focused supply chains. Honda Motor now indicates that it is slowing production at certain North America auto assembly plants because component parts in the replenishment pipeline are now impacting the production of this OEM’s Civic, CR-V and Accord models. Similarly, Fuji Heavy Industries, producers of Subaru cars indicates that it is already air freighting parts to U.S. factories through at least the end of this month.
An AP syndicated report featured on business network CNBC indicates that in addition to car parts, imported furniture, medical equipment, bathroom tiles, shoes and other goods are all impacted. On the export side, meat, produce and other agricultural foods are not moving to Asia destined markets and are in danger of spoilage.
No doubt, the cumulative impact across industry supply chains will be in the billions of dollars if the current labor dispute is not resolved quickly.
Further reported is that the port crisis is impacting available capacity and shipping rates for both sea and air freight, making it even more expensive to implement contingency shipping and logistics plans. Air freight capacity originating from China and the Asia-Pacific region was reduced in 2013-14 due to declining demand and increased costs. Thus, the current surge in contingency shipping demand is chasing limited supply, and no doubt, bigger more influential shippers will be garnered preferential services.
As is often the case with these types of multi-industry supply chain crisis, small and medium businesses will bear the bulk of the economic burden.
Within the U.S. itself, a current period of severe winter weather featuring unprecedented snowstorms and extreme cold weather have paralyzed the U.S. northeastern and Midwest regions and its economies, adding more economic burden.
Tomorrow (Tuesday), west coast dockworkers are supposed to return to work. All industry eyes are affixed on a speedy and final resolution of the current crisis. Amen to that!
Industry supply chain teams do not need to concern themselves with supply chain risk indices for this quarter and beyond. They will be off the charts and indeed, the perception of global supply chain risk will be at an all-time high.
Today, sensing and real-time awareness across the end-to-end global supply chain network as to where inventory resides and the daily condition of global transportation networks and contingency plans is far more important. The current crisis will continue to worsen before it gets better.
Longer-term, once the current U.S. west coast port labor contract is resolved, shipping industry interests had better get their acts together and figure out solutions to a number of current industry choke-points and structural deficiencies. Larger mega container ships will not address the needs of shippers for reliable and efficient logistics and transportation.
The notion of the flexibility and/or cost effectiveness of global supply chains has reached a critical crossroad.
Labor negotiations among the Pacific Maritime Association (PMA) and the International Longshoremen and Warehouse Union (ILWU) have reached a crisis stage and industry supply chains, if not already, must have contingency plans underway. After months of elongated negotiations and near paralysis of operations, the stage appears set for a showdown.
The crisis boiled over yesterday when the PMA, operator of 27 U.S. west coast ports decided to temporarily shut down port unloading operations this weekend, indicating that the ports did not want to compensate overtime to workers it believes have been deliberately slowing down operations.
For its part the PMA has publically indicated earlier last week that it had placed on the table an “all-in” five year proposal that increases pay and pensions by about 5 percent each year for the life of the contract. The ILWU has publically indicated that that there are but a few issues to are resolves and calls the current PMA actions of temporary closing to be irresponsible. There are now growing fears of a potential lockout of union workers beginning next week. Interesting enough, U.S. federal mediators were brought into these negotiations in early January.
Yesterday, the National Retail Federation (NRF) issued a statement regarding the current U.S. west coast port situation which reads:
“Temporarily suspending port operations is just another example of the International Longshore and Warehouse Union and Pacific Maritime Association shooting themselves in the collective bargaining foot. The continuing slowdowns and increasing congestion at West Coast ports are bringing the fears of a port shutdown closer to a reality. The entire the supply chain – from agriculture to manufacturing and retail to transportation – have been dealing with the lack of a West Coast port contract for the last nine months. Enough is enough. The escalating rhetoric, the threats, the dueling press releases and the inability to find common ground between the two sides are simply driving up the cost of products, jeopardizing American jobs and threatening the long term viability of businesses large and small. Our message to the ILWU and PMA: Stop holding the supply chain community hostage. Get back to the negotiating table, work with the federal mediator and agree on a new labor contract.”
Supply Chain Matters applauds NRF for its candor and in stating the obvious, it is time that the two parties quickly resolve their differences and stop impacting global commerce. As we have opined previously, the damage is already been done and the effects will be longstanding.
What happens next is anyone’s guess. A shutdown of all U.S. west coast ports, albeit short in duration would have even more devastating effect. The White House could invoke the Taft-Hartley Act calling for a cooling-off period and forcing the parties to continue to negotiate.
In all scenarios, the port situation continues to worsen and any return to normal operations will take an enormous amount of days. U.S. railroads servicing West Coast ports have already indicated that will be delaying intermodal service to the ports because of the current congestion. Trucking firms continue to feel the impact with longer queuing lines along with times for pickup and unloading.
Industry supply chain and their respective sales and operations planning teams, both large as well as smaller company focused, need to have contingency plans underway to work around this messy situation since the prospects at this point, are not good for normalcy any time soon.
As we have often noted in our commentaries, when businesses need to communicate bad news, it is often done late in the Friday new cycle. Thus, we often check our news feeds on a Saturday morning for any meaningful supply chain focused news.
Yesterday, UPS pre-announced expected fourth quarter 2014 results which communicated added unforeseen expenses related to its support of the all-important holiday surge shipping quarter. Noted in the release: “While package volume and revenue results were in line with expectations, operating profit was negatively impacted by higher than expected peak-related expenses.”
Of further note was this statement from UPS CEO David Abney:
“Clearly, our financial performance during the quarter was disappointing,” said David Abney, UPS chief executive officer. “UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double. Though customers enjoyed high quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season.”
In today’s edition of The Wall Street Journal, the headline article is aptly titled: UPS Has a Holiday Hangover. It reports that UPS surprised Wall Street in its pre-announcement indicating an unplanned $200 million in additional expenses to handle the holiday rush. According to the report, $100 million of the added expense was attributed to low productivity while the remaining $100 million attributed to higher vehicle rental and staffing costs. While Brown was prepared to support the Thanksgiving holiday to Cyber Monday surge, slower than anticipated volumes in the first two weeks of December led to the overhang in expenses. UPS further warned that its 2015 earnings projection is now likely out of reach.
The initial reaction from Wall Street was a decline in UPS stock of nearly 10 percent.
So much for Wall Street’s view. Let’s instead attempt to put a supply chain operations view to what might have occurred.
As Supply Chain Matters has noted in pre-holiday surge commentaries, UPS and FedEx planned and invested considerable resources to avoid the snafus that occurred during 2013 when UPS was thrown under the bus for not being able to deliver holiday packages during the final days before the Christmas holiday. Beyond resource planning, both carriers actively worked with retailers to influence the pace of promotional activity to avoid a last-minute surge of volume that would exceed network capacity. Both worked with manufacturers and retailers when significant slowdowns occurred at U.S. west coast ports supporting requirement for alternative routings or flex air freight capacity. As we and other media have reported, that planning paid off, and holiday surge delivery performance occurred pretty much flawlessly.
Now let’s speculate on the internal organizational aspects of “We Love Logistics”. Those that have first-line experience in operations management can attest to management directives or zeal, perhaps to the notions that our network is not going to be cited as the point of failure ever again. It could have been: We will not be the party that gets thrown under the bus and will do what’s necessary to insure that does not happen. Thus, UPS operations teams may have well taken on that challenge and flawlessly executed what needed to be done, including the hiring of even more temporary workers, added equipment and staging space. The network and its added resources performed at the expense of planned budget.
For consumers, retailers and B2B firms, there is now a dilemma. UPS will now initiate efforts to restore its Wall Street cred and more importantly, respond to perceptions that E-Commerce or Omni-channel commerce has become a high-cost, low margin trap for transportation and logistics providers. As noted in the UPS statements, businesses can anticipate higher peak ground pricing in 2015. That’s in addition to the new dimensional pricing that was implemented this year.
Remember this date, since it may foretell the start of a new dynamic for parcel shipment and delivery. We anticipate that major online retailers will initiate a different form of planning for the 2015 holiday surge, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. We should not be surprised if new or different business models and strategies begin to emerge in the coming months.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
We strive to bring learning for our Supply Chain Matters readers that supply chains, and flawless execution of customer fulfillment do matter in business strategy.
Last week, the retail industry took special notice of the news that Target, after less than two years of making its presence in Canada, made a painful decision to close all 133 of its retail outlets in Canada. According to business media reports, Target is now expected to report a pre-tax write-down of $5.4 billion in its fiscal fourth quarter and release over 17,000 retail workers as a result of its decision, a rather expensive lesson on the importance of supply chain strategy and execution. Target’s Canadian operations reportedly incurred upwards of $2 billion in losses.
To be balanced, not all of Targets challenges related to Canada rested solely to supply chain strategy and execution, but Canadian consumers witnessed the most visible aspects, namely large stores that consistently lacked inventory and products that were not competitively priced.
A New York Times published article (paid subscription or metered complimentary view) observed that while Target stores in the United States were long popular over the border destinations for Canadian consumers, it struggled to translate that formula directly within Canadian stores. Differences in suppliers and what was described as a poorly executed distribution network made goods in Canadian stores far more expensive than U.S. outlets. Consistently empty shelves caused added consumer impressions “giving the appearance of the end of a going-out-of-business sale.” Consumers then avoided Target stores because of limited selection and an unproductive shopping experience. Further noted by the Times was that Target failed to distinguish its brand from other existing Canadian retailers such as The Loblaw Companies, Canadian Tire and others. Also noted is that Target was not the only large or even smaller specialty retailer to stumble in Canada because of in-depth experience in merchandising and distribution in international markets.
Fortune and CFO.com published articles noted that Target’s strategy was to take over existing retail stores operated by discount chain Zellers, which were located in predominately economically distressed Canadian neighborhoods. That turned out to be a conflict with Target’s upscale sheik retail branding in the U.S.
That theme was brought forward in an article published by Canadian Broadcasting, CBC, Target Canada’s Failed Launch Offers Lessons for Retailers. By our lens, it provides insightful perspectives on the unique retail challenges within Canada and that Target is one of many other retailers who have struggled. According to CBC, price matters: “The major sticking point is price.” It points out that if retailers are not providing a compelling experience and flawless execution, than price becomes the default decision criteria. Further noted is that many U.S. retailers turned their sights toward Canada after the severe economic recession of 2008-2009, since Canada was mostly spared from the economic effects. Target opened 124 of the former Zeller stores in less than a year: “a pace far too fast to execute the experience properly.”
In the end, Target’s Chairman and CEO Brain Cornell had to make and communicate the tough decision that enough was enough. It was time to pull the plug on the Canadian effort.
In contrast, U.S. based retailers such as Costco, Wal-Mart and Zara continue to exhibit successful retail execution strategies within Canada.
We amplify this Target experience because of the important learning it provides to retail and B2C focused supply chains with international presence. Know your market, understand its unique nuances and strive to have the voice of supply chain strategy and customer execution at the decision table. That may not always be easy, when marketing and merchandising teams have broad influence on senior management decision-making, but history provides constant learning that supply chain does matter. It is not just a cost center for conducting business.
In conjunction with last week’s Annual National Retail Federation (NRF) Conference held in New York, retail sales figures were released for the previous November-December 2014 holiday sales period. With the price of gasoline plummeting in the last two months of 2014, there were a lot of pent-up expectations that holiday retail sales would exceed the NRF’s original forecast of a 4.1 percent increase in 2014. The actual NRF figures came in at $616.1 billion, a 4 percent increase which shook Wall Street investor confidence for about a day before economists and forecasters eased speculation that consumers held back spending more than expected. According to NRF, the November-December sales data marked the first time since 2011 that sales has reached this level.
A separate ShopperTrak report, which tracks primarily brick and mortar sales at malls and retail outlets reported growth of holiday sales at 4.6 percent, higher than that firm’s initial forecast of a 3.8 percent increase and representing the largest increase since 2005.
From a supply chain lens, 4 percent retail sales growth was very good, given the challenges of retail inventory either arriving earlier or far later than expected because of the backlogged slowdown conditions among U.S. west coast ports. Online and brick and mortar focused retailers were influenced to run product promotions earlier rather than later, with some retailers kicking off holiday promotions in October. Other reports indicate that retailers were conservative on their overall holiday inventory investments, not wanting to end-up with overly excessive unsold inventory by the end of December. Considering another short holiday shopping interval between the Thanksgiving and Christmas holidays, coupled with all the logistical challenges that occurred, B2C supply chain teams deserve a pat on the back.
Of course, the real benchmark comes in the coming weeks when retailers begin to formally report their financial performance spanning the critical holiday period. The question is whether logistical challenges led to higher unexpected costs and lower margins.
Obviously, the most sensitive metric affecting global supply chain planning and budgeting activity is the cost of energy. The economics related to the cost of energy drive global product sourcing, transportation and forecasts of retail sales spending on consumer goods. What about all of the fuel surcharges currently tacked on existing transportation rates?
The most significant question for supply chain leaders, planners and sales and operations planning forums in 2015 is how long will the extraordinary lower cost of oil last? Will it be the rest of 2015? How will it impact product demand and product margins?
Beyond retail and online B2C supply chain product demand planning, assumptions on the cost of energy are going to be fundamental aspects of this year’s business plans.
This week, the National Retail Federation (NRF) is conducting its annual conference in New York where all forms of traditional brick and mortar and online retailer teams gather for the latest business insights. Perhaps as a prelude, digital analytics firm comScore released an estimate of 2014 desktop online holiday sales that by our lens, adds even more evidence of the permanent shift of consumers toward online channels.
According to data gathered by the analytics firm, U.S. retail e-commerce spending emulated from desktop computers for the November-December 2014 holiday surge period increased 15 percent to $53.3 billion as compared to this same period in 2013. The comScore data depicts the top ten desktop spending days and cites Cyber Monday (December 1) as the busiest online day with over $2 billion in order activity. Keep in mind that this data reflects desktops as the originating device. Mobile based estimates would add even more volume, especially in light of an Amazon end of year report indicating that nearly 60 percent of its orders were sourced from mobile platforms. When all the channel data is combined, Supply Chain Matters believes it will reflect more evidence of continued permanent shifts in shopping behaviors.
The data further reflects that the 2014 holiday peak periods were the three weeks spanning the weeks of November 30 thru December 14. That peak volume period was the blessing that package shipping providers such as FedEx and UPS had anticipated and planned with retail customers. We previously highlighted an NRF sponsored Consumer Spending Survey analysis and IBM’s Digital Analytics Benchmarking service each indicating that holiday order volumes peaked in mid-December. That pattern helped in avoiding a repeat of the 2013 scenario where last-minute shipments did not reach consumers before the Christmas holiday.