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?
This weekend provided tragedy and natural disaster for residents and workers in China and Taiwan.
On Saturday, a China based Tier Two auto parts factory experienced a severe explosion involving combustible metal dust that killed at least 75 workers and injured 187 other workers. Photos of the factory from various China media outlets and the BBC depict a charred building façade with many injured workers being treated by emergency responders. The factory belonged to Kunshan Zhongrong Metal Production Co. and is located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai. Reports indicate that upwards of 260 workers were in the plant at the time of the explosion which occurred at 7:37am local time.
The plant performs plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. According to the supplier’s web site, the processor is a subcontractor to auto wheel maker Citic Dicastal Wheel Manufacturing Co. based in Hebei province. Various reports confirm that this factory was an indirect supplier of car wheels to General Motors cars produced in China, although other automotive OEM’s are suspected of having a reliance on Citic Dicastal Wheel.
A report published in today’s Wall Street Journal describes the subject factory as paying higher wages, ranging from 7000 to 8000 yuan per month, but demanding high rates of production. It cites two workers as indicating pervasive levels of metal dust accumulation within the facility’s polishing area. The report also cites workers as indicating that a small fire occurred within the polishing workshop four months ago. According to a posting on ZD Net citing inside sources, the National Work Safety Authority has sent dust experts to carry out investigations and ordered all polishing workshops across China to stop production and begin self-inspection on production safety. As a result, the source expects the production of the pending iPhone 6, Xiaomi 4, and MX4 smartphones to be affected.
Previously within China, incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011,a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers.
This latest incident involving combustible metal parts is sure to raise more concerns regarding workplace safety standards involving the hazardous production byproducts.
Meanwhile a strong earthquake in southern China’s Yunnan province toppled thousands of homes on Sunday, killing at least 367 people and injuring more than 1,881. China’s official Xinhua News Agency reported that about 12,000 homes collapsed in Ludian, a densely populated county located around 277 miles northeast of Yunnan’s capital, Kunming, The magnitude-6.1 quake struck at 4:30 p.m. local time at a depth of 6 miles, according to the U.S. Geological Survey. Its epicenter was in Longtoushan township, 14 miles southwest of the city of Zhaotong.
Late last week, a series of consecutive deadly explosions caused by a natural gas leak killed at least 25 people and injured 257 in the southern Taiwanese city of Kaohsiung, Taiwan’s second-largest city. The underground explosions’ triggered fires that ripped off manhole covers on roads and cratered large boulevards. Local television footage showed roads exploded with flames, overturning cars and collapsing houses. Reports further indicated that 12,000 people fled in fear of additional explosions but have since returned to their homes. As we pen this commentary, concerns remain regarding when the restoration of natural gas supply will be returned to the impacted area which includes various suppliers.
It was obviously not a good weekend in the region. Our thoughts remain with many of those impacted.
It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news.
In this capsule commentary, we include the following topics:
- UPS Memphis Facility Expansion
- Foxconn Plans for New Plant in China’s Guizhou Province
- Mondelez Continued Re-Structuring,
- A New SCRM Standard,
- Typhoon Impacts the Philippines
UPS Kicks Off Expansion of Memphis Facility
Global transportation and parcel giant UPS indicated this week that the services provider has kicked off construction related to the expansion of its Memphis Tennessee package distribution facility. According to the announcement, the expansion will add an additional 140,000 square-feet of building space with an estimated cost of $70 million. The UPS Memphis facility controls processing of air and ground gateway hub operations processing and reports further indicate that UPS is leasing upwards of 27 acres from the Memphis Airport Authority to support an 80 percent expansion in package processing. Early improvements are expected to be operational by November, to accommodate expected holiday peak shipment volumes.
Readers will recall that on the day before last year’s Christmas holiday, UPS was thrown under the bus for its admission that its network was overwhelmed and unable to deliver all of parcels in time for the holiday. While the Worldport facility was the prime focus at the time, the announced expansion in Memphis is an obvious response to have more capacity in place for the upcoming peak holiday shipping period.
Foxconn to Build New Environmentally Friendly Production Facility in Interior China
Global contract manufacturer Foxconn Technology has disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek report, a 500 acre park will be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang.
Plans call for an environmentally focused facility to produce smartphones, large-screen televisions and other products that will employ upwards of 12,000 workers. Production processes within this new plant will include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The facility will also include a 2160 square-meter state-of-the-art data center that will be cooled by prevailing natural winds. Bloomberg makes no mention of advanced robotics for assembly but we suspect that may also be included.
This facility will also be constructed from 100 percent recycled steel and include patent protected heat-reflective glass that was designed by Foxconn. The plant is scheduled to be operational by March of 2015.
Mondelez to Separate European Cheese and Grocery Unit
In late January, we noted in a commentary that an activist investor was granted a board seat a global snacks and foods provider Mondelez. The Wall Street Journal reported at that time that Mondelez management agreed to this move to quell public criticism of the company as well as avoid a public proxy fight. Having a board seat, activist investor Nelson Peltz could escalate his calls for added profit margins.
Last Friday, the company announced that it would separate its European cheese and grocery products groups into separate business units as it prepares to jettison its coffee business into a new company. Rumors among the Wall Street community reflected on eventual sale of the European grocery and cheese businesses as well. According to reports, both European groups represented 3.9 percent of total sales.
ASIS Releases New Supply Chain Risk Management Standard
ASIS International, a society of global security professionals released a new supply chain risk management standard to assist organizations to address operational risks within their supply chains. This standard was developed by a global cross-disciplinary team in partnership with the Supply Chain Security Council. An Executive Summary of this new standard can be viewed at this web link.
Typhoon Strikes the Philippines
Typhoon Rammasun barreled across the Philippines this week, killing at least 38 people and leaving the capital city of Manila without power most of Thursday. The eye of the storm passed just south of Manila after impacting the island of Luzon. The storm was reported to have destroyed about 7,000 houses and damaged 19,000, with more than 530,000 being evacuated. Offices and commerce were expected to reopen by late week.
Meanwhile, southern China and Northern Vietnam are bracing for the arrival of the Typhoon on Friday, with wind gusts expected to surpass 140 kilometres per hour.
Supply Chain Matters News Capsule July 11: Google Shopping Express, Typhoon Neoguri, Accellos and High Jump Software Merger
It’s the end of the calendar work week and we continue with our news update series related to previous Supply Chain Matters posted commentaries or news developments. In this capsule commentary, we include the following topics: Google Shopping Express, Typhoon Impacts Japan, Accellos and High Jump Software Merge.
Google Shopping Express
While there is lots of attention being directed at Amazon, Wal-Mart and other online retailer same-day delivery capabilities, Google is about to invest serious money to provide its own capabilities.
A posting on ReCode.net: Inside Google’s Big Plan to Race Amazon to Your Door, Jason Del Ray writes that the Google Shopping Express service has been piloting in select cities and is about to receive some serious investment money from Google. He writes that the search provider who has been displaying local shopping results is now coupling a same-day delivery capability.
Rather than operating a network of physical fulfillment centers, Google will rely on inventory from local retail outlets. Rather than compete directly with retailers, Google’s thrust is to become an ally and complement a retailer’s local brick and mortar presence. Shoppers in select cities visit a dedicated web site and select the goods such as groceries, clothing or consumer staples, that they desire to purchase. A network of local couriers is then marshalled to pick-up the goods at local retailers and delivers them. Del Rey indicates initial retail partners are Costco, Target, Toys ‘R” Us and Whole Foods. For its efforts Google charges retailers a transaction fee while consumers pay a $4.99 delivery charge. Eventually, Google plans to charge shoppers a flat membership fee, similar to Amazon Prime. Retailers themselves are reported to be taking a cautious approach to the service for fear that that Google may assume more of the direct consumer connection including the mining of valuable shopping trends.
The posting cites a source familiar with the company’s plans indicating that Google executives have set aside upwards of $500 million to expand the service nationwide. That obviously, is some serious money when one considers that the model does not require inventory or warehouse investments. This will be an important area to watch for B2C online fulfillment.
Typhoon Neoguri Continues to Impact Japan
After slamming the southern islands island of Okinawa, Typhoon Neoguri has continued on a path across the main island areas of Japan and is being classified as the most severe storm to have impacted the country in the past 15 years. While the storm was recently downgraded to a tropical storm, there remains a concern for very heavy rains and subsequent flooding. According to the latest media reports, this storm is likely to reach areas near the tsunami-crippled Fukushima nuclear power plant sometime today.
Neoguri impacted the mainland yesterday near Akune City on the southern main island of Kyushu, which is home to 13 million people. Kyushi lies next to the country’s biggest island of Honshu where major cities including Tokyo and Osaka are located which could also be impacted by the storm. The storm’s strength weakened somewhat overnight, packing gusts of up to 126 kilometres (80 miles) per hour as it moved east. Latest reports indicate that the storm passed just to the southeast of Tokyo but concerns remain for torrential rains and landslides across the country.
Although the storm does not represent the massive supply chain impacts that occurred from the 2011 earthquake and subsequent tsunami that impacted the country, there could be some impacts depending on the amount of flooding, landslides or other damage to factories or transportation infrastructure.
The next few months represent the monsoon season across eastern and coastal Asia and this may just be the beginning of other super storms.
High Jump Software Acquired by Accellos
Warehouse and logistics management software providers Accellos Software and High Jump Software have announced a merger, but that appears very much like an acquisition. According to the announcement, “the combination of the two companies creates a product portfolio that is uniquely positioned to meet the advancing needs of retailers, distributors, manufacturers, and logistics service providers to manage complex order fulfillment cycles and collaborate with supply chain partners.” The merged company will operate under the name HighJump and continue to use the Accellos brand for midmarket supply chain execution technology. Accellos founder and CEO Michael Cornell was appointed CEO of the merged company. Terms of this merger have not been disclosed.
A posting on the Minnesota based StarTribune news site headlines the merger as an acquisition. It notes that the merger is driven in large part by the need among retailers for added online fulfillment process flexibilities including the ability to deliver goods quickly from a warehouse, as an online-only retailer would, if such goods are not available in a store. Both High Jump and Accellos have backing from respective private equity partners which implies that this was an engineered marriage.
The news from the July 4th weekend included a significant supply chain focused news item, which the Wall Street Journal characterized as “upsetting a finely tuned supply chain.”
A 19 car Montana Rail Link train carrying major airplane component assemblies bound for Boeing’s final assembly facilities in the state of Washington derailed near Rivulet Montana. According to media reports, the train was carrying complete 737 aircraft fuselages, fuselage panels for the 777 aircraft and wing parts for the 747 aircraft. Photos of the accident feature 3 complete 737 fuselage bodies that slid down an embankment and into the Clark Fork River, and reports indicate a fourth fuselage may have been torn apart during the derailment.
Most of these components originated from Spirit AeroSystems in Wichita Kansas, Beoeing’s prime airframe supplier. According to a Wall Street Journal report, Boeing contracts with the BNSF Railway to transport these parts from Kansas to Billings Montana, where the Montana Rail Link crews assume transport to Spokane Washington, before switching back to BNSF for the final leg to the Seattle area. These components travel on specialized rail cars developed especially for Boeing’s logistics needs. Reports indicate that the train was traveling just over 30 miles-per-hour at the time of the derailment which would be an indicator that speed was not a prime factor in the accident.
Boeing operates its commercial aircraft final assembly operations from a just-in-time flow perspective and supply chain teams are obviously in the process of assessing the situation and any implication of this disruption to ongoing production schedules.
Boeing’s teams have been conditioned to supply chain disruptions. In April of 2012 a series of 97 tornadoes impacted the state of Kansas causing widespread damage, including multiple production facilities of Sprit AeroSystems, including the facility that produces 737 barrel fuselages. Spirit quickly marshalled over 1000 construction workers and was able to resume normal production operations roughly 10 days after that major incident. Readers might recall that in November of 2013, a specially fitted Boeing 747 Dreamlifter cargo plane carrying components parts to Spirit’s Wichita facility landed in the wrong airport. That plane had to be gingerly turned and flown out by a highly specialized crew.
No doubt, Boeing’s supply chain teams will rise to the current disruption challenge.
With the expiration of the labor contract among west coast dockworkers and the Pacific Maritime Association (PMA) expiring of July 1, labor contract talks appear to be continuing with no significant port disruptions. From all the various media reports that we have been monitoring, the situation is described as uncertain but hopeful that port operations will continue during extended contract negotiations.
Both parties issued a joint press release earlier this week indicating that while there will be no contract extension, cargo will keep moving, and normal operations will continue at the ports until an agreement can be reached between both sides.
There are high stakes on both sides, both labor union and port operators. The International Longshore Warehouse Union (ILWU) has raised issues related to health and pension benefits, work jurisdictions and facility automation and technology deployment concerns. Meanwhile the port operators remain concerned about increased competition from Canada, Mexico. Gulf and East Coast ports along with needs to increase overall efficiencies and automation levels, particularly concerning the newer mega container ships that have entering or plan to enter service.
On the one hand, shippers can be a bit more hopeful that west coast ports will remain open, at least for now. With the critical Fall and back-to-school as well as holiday merchandise inbound inventory movements about to surge in next 2-3 months, this uncertain period will add to concerns for reliable shipping scheduling and the need to perhaps augment critical safety stocks. Labor negotiations could drag on for several more weeks. There may be considerations for re-routing container traffic to other than PMA ports, and decision planning periods are fast approaching.