Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for More Active Planning – Part Two
It’s the last Monday in June and as we pen this part two Supply Chain Matters advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. Our part one posting of this series addressed our initial perspectives and recommendations regarding Brexit. In this part two advisory, we will address yesterday’s formal opening of an expanded Panama Canal.
Yesterday, after nine years and in excess of $5 billion in investment, the Panama Canal Authority formally opened new locks on both the Pacific and Atlantic Ocean facing entries to accommodate the transit of far larger ships. The first ocean container ship to transit the expanded canal, the renamed Cosco Shipping Panama, operated by Costco Shipping Lines traversed an expanded canal from the Atlantic to the Pacific side.
The opening of this well-known expanded waterway was completed after nearly two years of delay, and considerable cost overruns. At one point in 2014, a stalemate raised doubts as to whether this huge infrastructure project would ever be completed. Container vessels with capacity in excess of 12,000 TEU’s are now expected to be able to take advantage of the widened canal with promised faster direct transit times from Asia based ports directly to eastern United States ports, thus avoiding inter-modal movements across the United States. The other opportunity is for east coast based regional shippers to now have a direct transit route to East Asia.
There has been much anticipation as well as speculation regarding the benefits of an expanded Panama Canal. About a year ago, The Boston Consulting Group (BSC) and C.H. Robinson released a joint study-How the Panama Canal Expansion is Redrawing the Logistics Map, and predicted that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. East Coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing Ports of Savannah and Charleston. The study concluded that this container routing shift will permanently alter the competitive balance among U.S. East and West Coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing. The BSC study concluded that time-sensitive cargo may continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings.
Since then, other studies have pointed to new opportunities in logistics and transportation related to direct Asia to U.S. and converse goods transit, including the operation of new inland ports.
However, the one current gating factor is that many of the key U.S. East Coast ports are still working on infrastructure projects that would allow larger vessels to call on such ports. The ports currently best prepared to handle these larger vessels are the Ports of Miami and Savannah. Both the Ports of Baltimore and Charleston have active dredging projects underway while the combined Ports of New York and New Jersey still have significant infrastructure requirements yet to be overcome including a bridge near Bayonne New Jersey.
As we noted in a previous Supply Chain Matters commentary, a current boom in distribution and warehouse development includes large investments in east coast regions. The State of South Carolina is aggressively positioning its logistics and distribution infrastructure to be an economic beneficiary of the new routing. Over six million square feet of warehouse space is under construction in the Greenville- Spartanburg region mostly being attributed to the ability to support direct ocean container movements from Asia to the U.S. An inland port at nearby Greer South Carolina is connected by rail to the Port of Charleston. From the Greenville- Spartanburg area, trucks can transit goods to the rest of major eastern U.S. cities or to U.S. Midwest manufacturing regions within a day’s drive. Thus, an alternative option opens up for direct transit and distribution of goods.
A lot will depend on active analysis and modeling by logistics and transportation as well as S&OP teams on the various cost and service options related to ocean movements to U.S. West Coast ports with intermodal truck and mail inland vs. direct ocean transit to U.S. East Coast ports with adjacent inland distribution and transit. A factor in modeling will be assumptions on port and infrastructure readiness as well as direct labor environment. Another uncertain factor is the all-important long-term cost of fuel, which is currently still hovering at unprecedented low levels.
Needless to state, global supply chain logistics and distribution routing has no changed. Active global supply chain network modeling and assessment has become an all-important necessity followed by capability elements for ensuring broader supply chain wide visibility. The expanded Panama Canal now opens a long anticipated new opportunity but comes with differing and changing assumptions.
Be prepared with people, technology and more informed decision-making capabilities.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for Active Planning- Part One
It’s the last Monday in June and as we pen this advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. The other is yesterday’s formal opening of an expanded Panama Canal. Supply Chain Matters features two commentaries related to both developments. We begin with the Brexit vote.
The results of the Brexit referendum took many by surprise, including this author. On Friday, alone investors wiped away nearly $2 trillion in market value from various global equity markets in reaction to the news.
By voting to exit the EU, British voters have set off a series of events that many are describing as unprecedented. The most cited analogy seems to be- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the U.K., but on the EU alliance itself if other select countries take a similar course. Some fear the unwinding of Europe itself, which seems somewhat extreme at this point. However, it will add more political and governmental dimensions to this ongoing crisis, along with building pressure to accelerate Brittan’s exit to stave-off other efforts at similar separation.
Many of the implications currently reflect such uncertainty and caution. After all, the timeline of Brittan’s exit would likely span two or more years. None the less, there will be short and longer term industry supply chain impacts and various supply chain and S&OP teams need to begin thinking about and educating management on certain strategy scenarios. We view these impacts coming from specific industry, trade and transportation as well as people related dimensions.
Two major industries dominating UK based manufacturing are automotive and aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing.
Two of the most dominant stakeholder brands of autos in the UK are Volkswagen and Tata Motors, The latter is currently the leading car maker in sales of various VW, Audi and Porsche branded vehicles and has a significant manufacturing presence in these brands as well as that of Bentley. For VW, the news is especially troubling given its current crisis for dealing with the financial and brand fallout stemming from the diesel emissions scandal across Europe and the United States. It adds yet another challenge to protecting its market interests. Tata Motors is the producer of Jaguar and Land Rover branded vehicles and the U.K. represents its single biggest market and source of profits. The shares of both of these manufacturers were impacted by the news of the exit EU mandate.
According to published business media reports, most global auto manufacturers seem to be collectively in reassessment mode regarding their current UK based operations. Concerns center on impacts on tariffs, uncertain currency fluctuations and the local market, as U.K. consumers themselves deal with new uncertainties and any economic consequences related to exit. According to a published report by The Wall Street Journal, registrations for new autos amounted to 18.5 percent of all European registrations last year. The WSJ cites forecasting firm data indicating that there could be as much as an $8.9 billion hit to auto OEM earnings and a nearly 14 percent decline in U.K. new car registrations in 2017. With the broader European auto industry coming off multiple years of retrenchment and downsizing as a result of the past global financial crisis, news of the UK exit, coupled with potentially other subsequent impacts, has many industry executives at-pause.
According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. From our lens, the most significant company to watch will be that of Rolls Royce which was already struggling with growth and profitability challenges. Many of these providers exist in supply chain ecosystems being challenged to ramp-up production but at the same time, reduce overall costs. With such presence from many component manufacturers and actual commercial and military aircraft producers the open question is whether the reliance on a local currency and broken ties with EU trade policies will have an impact on the economics of the local industry. Only time will tell if they do.
From the independent trade and transportation lens, we had already predicted at the beginning of the year that major geopolitical developments centered on global trade agreements would present new concerns and challenges for industry supply chains. With a U.K. exit from the EU, industry supply chains need to factor another border crossing in their logistics and transportation plans, not to mention the potential for different tariffs or duties to emerge.
With major trade pacts such as the Trans Pacific Partnership (TPP) and the Transatlantic Trade Investment Partnership (T-TIP) still in ratification stages, a new unknown is entered, namely the U.K. as a separate negotiating party. With many pushing for quicker ratification because of the current anti-trade political environment, these agreements could be faced with having to factor the U.K. as an unknown until exit is achieved and new trade policies adopted, not to mention a possible change in political leadership. The implication extends to product labeling, country of origin, intellectual property protection and other unknowns at this point.
Finally there is the issue of people, both in talent attraction and retention. An advisory from CBI Insights notes- “The free movement of workers between the U.K. and the EU arguably made London into a top tech startup talent pool in all of Europe. The decision to leave the EU may cause a brain drain that could hamstring innovation in London.” Some others take issue with the notion of brain drain. However, multiple industry supply chains have already been impacted by the need for new talent and as supply chains become deeper invested in new technology needs and requirements, UK based producers, service firms and tech companies will need to assure that workers will find the U.K. economically and workplace attractive.
Brexit has ongoing implications beyond the U.K. that could conceivably impact other geographic regions, specific countries and industries. We advise supply chain and line-of-business teams to take on a precautionary approach towards any impacts brought about by Brittan’s exit from the EU. Rather than alarm, now is the time for active supply chain modeling and scenario planning to advise senior management of various business or financial implications, if any? Clearly, with overall global supply chain activity levels already trending toward contraction, and with this new politically active and vocal electorate, the global economy and global markets are becoming less uncertain. This is a time of constant strategy awareness and attention to needs for contingency planning with added visibility to ongoing global events. We highly recommend that industry teams be vested in market and industry intelligence, supply chain risk mitigation and technology that brings added intelligence and insights to both customer-facing and supply-facing operational, financial and global trends.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
In February of 2015, Lumber Liquidators, at the time, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America was involved in a supply chain expose. Approaching 18 months later, the retailer continues to deal with the customer, brand and financial impacts of that disclosure.
In 2015, a broadcast report from CBS News’s 60 Minutes television program turned a public light on the retailer’s supply chain in terms of sourcing and product composition. That report declared that much of the retailer’s laminate flooring that was sourced and produced in China may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.
In May of 2015 the retailer announced that it is suspending all of its China sourced laminate flooring products. The retailer took further action as well. According to its web site, the retailer has systematically enhanced its compliance and sustainability practices across all of its business sectors. That included the hiring of a skilled and experienced senior executive to be the company’s Chief Compliance Officer (CCO), reporting directly to the CEO, John Presley. This CCO has led a team of professionals through an intensive evaluation of policies, processes and of the firm’s supply chain. That evaluation process included:
- Reorganizing our company to better align processes with a commitment to quality and safety.
- Installing a new risk assessment and evaluation process of every Lumber Liquidators supplier in every location.
- Terminating relationships with suppliers who do not meet standards.
- Adopting a detailed code of business conduct that, among many other requirements, mandates that each Lumber Liquidators employee be accountable for compliance in his or her area of responsibility.
Lumber Liquidators and the U.S. Consumer Product Safety Commission further agreed to a “recall to test” action, which is the term the CPSC uses to describe a testing program where the retailer agreed to initiate an in-home air quality testing program for consumers who purchased Chinese-made laminate flooring between February 2012 and May 2015. That testing program continues and consumers are offered a test kit for no-charge.
The retailer currently reports that tests involving over 1,300 floor samples have been completed without one testing above the designated CPSC’s remediation guidelines.
The latest development came last week when the retailer agreed not to resume sales of its previously sourced laminate wood flooring from supply sources in China.
According to news reports, more than 600,000 consumers bought the Chinese sourced laminate flooring over an estimated four year horizon. That would indicate that there are a lot more flooring installations that have yet to be tested thus far. After consultation with U.S. regulatory and consumer product safety agencies, the impacted consumers have been informed to not remove the flooring, because removal could cause added, more harmful exposure to formaldehyde. Rather, regulators want consumers to work directly with Lumber Liquidators on additional testing and remediation needs. If the emission level is elevated, the retailer has agreed to work with homeowners to increase the air flow in affected homes or remove a small plank of wood flooring and conduct additional tests, free of charge.
The retailer continues to assure affected consumers that the China sourced flooring meets acceptable standards of chemical emissions.
Readers can gain any additional information and guidelines at this specific CPSC web site.
The financial, brand and other fallout from this incident continues. Shares of the company’s stock have reportedly dropped nearly a quarter this year, and the retailer reported its first annual financial loss in a least a decade. In its latest quarter, the retailer reported revenues down 10 percent with a wider loss.
Consumers directly affected by the China sourced laminate flooring obviously have their own impressions, now having to deal with guidelines that are somewhat less-specific as to remedies.
It is important to reiterate our previous takeaway to supply chain audiences regarding this ongoing incident. It is yet another example of the needs for transparency across the global supply chain, particularly when an individual country’s or state’s product safety standards considerably differ. As business and industry media have acknowledged, there is no apparent recognized national U.S. standard for indoor formaldehyde concentrations and global wide standards vary among agencies. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring and risk awareness.
Lumber Liquidators has learned an important lesson in supplier sourcing and in standards interpretation. Affected consumers continue to learn an important lesson as-well.
The Wall Street Journal has reported that General Motors will allow 400 U.S. and Canada based component suppliers for GM vehicles being produced in Brazil and Mexico to be able to periodically renegotiate their supply contracts. These suppliers are currently challenged with the effects of a volatile foreign currency environment causing rising material and labor costs. At least once per year, suppliers can renegotiate terms when impacted by unexpected external economic factors.
This development is newsworthy because among long time automotive industry watchers, GM has developed somewhat of a past reputation as a strict negotiator with what the WSJ describes as “ironclad” contracts with suppliers. Annual industry surveys ranking the relationship of suppliers with various global OEM’s have consistently ranked GM much lower in past surveys.
This latest move is attributed to support a new GM strategy that involves investing $5 billion over the next ten years to develop a new line-up of Chevrolet branded vehicles for consumer markets in Brazil, Mexico and foreign markets such as India and China. Thus, procurement strategy has taken on a more active strategy to longer-term support product development needs. GM’s new chief procurement officer, Steve Kiefer has reportedly been exploring alternative supplier management efforts with GM’s supplier base since taking on the CPO role in late 2014.
What we believe should go unnoticed is that Keifer’s previous industry background included roles at Tier One industry supplier Delphi Automotive, thus providing a fresh bottoms-up perspective on supplier relationship management. Since taking over leadership of GM procurement, he has reportedly fostered the creation of longer-term supplier contracts that include co-innovation in component design or automotive sub-systems for areas such as safety and more intelligent vehicles. The WSJ report quotes a marketing executive for supplier Magna International as reinforcing that GM has taken on a more collaborative approach with that supplier.
We wanted to highlight this report for Supply Chain Matters readers because it is indeed noteworthy. We thought about extending our “Thumbs-Up” recognition but we will hold off somewhat until there is further history in these ongoing efforts.
However, in the meantime, well-done, GM…
Supply Chain Matters has provided our readers visibility to emerging industry disruptors who are leveraging advanced technology and platforms directed at supply chain related business process and asset needs. Such visibility included the entry of Uber and Lyft and their potential to move beyond people transportation.
We now bring visibility to Nikola Motor Company and its ongoing development of a Class 8, 2000 horsepower electric powered semi-tractor truck that will be named the Nicola One.
According to this manufacturer’s founder, the name Nicola was named from electrical engineer Nikola Tesla, whose last name is now affixed to one of the most visible automotive industry disruptors. Similar to electric car manufacturer Tesla, even before the first prototype truck is produced, Nicola’s founder indicated last week that the manufacturer has booked 7000 reservations, each accompanied by a $1500 deposit, totaling more than $2.3 billion in cash. Any tractor-trailer fleet manager will probably view $1500 as a pittance sum when considering the purchase of a Class 8 semi-tractor truck. None the less, the fact that 7000 organizations are willing to queue-up in line, with five months remaining until physical product unveiling, indicates something special in product development.
Founder and CEO Trevor Milton indicates that Nicola’s technology is 10-15 years ahead of any heavy equipment truck manufacturer in fuel efficiencies and emissions. According to the firm’s web site, the Nikola One will feature 4 times the horsepower, 2.2 times the torque and twice the miles per gallon of a standard diesel powered Class 8 tractor. Acceleration from zero to 60 miles per hour under load is claimed as 30 seconds, twice as fast as an average diesel powered vehicle. The vehicle features six-wheel drive, allowing the vehicle to both push and pull loads. With 6X6 regenerative braking and air disk brakes, the combined electric and compressed natural gas (CNG) powered semi-truck claims to stop nearly two times faster than any other semi- truck on the market – cutting stopping distance in half.
Once more, this upstart is offering a compelling opportunity that will allow owner-operators and fleets to get into a new Nikola One and know their total cost of ownership every single month, regardless of fluctuating fuel costs and miles driven. The Nikola Complete Leasing Program will offer unlimited miles, unlimited fuel, warranty and scheduled maintenance, all for only $5,000 per month. Then for no additional cost, tractor-trailer fleet operators’ can trade-in for a new Nikola One every 72 months or 1,000,000 miles, whichever comes first. Whether a customer drives 8,000 miles per month solo or 16,000 miles per month as a team, total fuel cost is covered by Nikola. Tax, title and license not included.
As noted in a recent press release, the average diesel truck burns over $400,000 in fuel and racks-up $100,000 in maintenance costs over a million miles, and Nicola claims these costs are eliminated with its lease program.
That seems to be quite a compelling financial proposition, hence the current pent-up interest. Class 8 truck sales have been very depressed of-late because operators have been very reluctant to invest large sums of investment in new trucks with the current financial dynamics of fleets and today’s lower cost of fuel. Nikola could add a whole new dimension, but obviously, has to convince transportation operators that the technology indeed performs as claimed and what Tesla is generating for customer advocacy, Nikola can do the same among a highly conservative lot of buyers.
There has long been skepticism as to whether anyone could develop a compelling electric powered heavy duty truck. It is only a matter of time before a manufacturer addresses such skepticism and it seems that Nikola is positioning itself to be that manufacturer.
Obviously, this is a manufacturer to watch over the coming months. The company indicates that it has completed a seed round of funding and is working of a milestone of $300 million in round A funding to be completed by the truck’s initial launch, which is currently targeted for early December of this year.
Sustainability efforts could well get a huge boost is this technology does come to market. Then again, with all of the advanced hype and pre-orders, other established manufacturers may have something to say or an action to initiate regarding such a disruptive technology.
© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.