We continue with our series of Supply Chain Matters postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard theses predictions as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As a reminder, our self-scoring process is based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.
In our Part One posting, we revisited 2014 Predictions One and Two related to economic forces to expect in 2014.
In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
In our Part Three posting, we rated Prediction Five, our specific call out of extraordinary supply chain challenges among three specific industries.
In the Part Four posting of this series, we revisited Predictions Six and Seven.
In this Part Five posting, we conclude with a look at the final three predictions declared for this year.
2014 Prediction Eight: Industry Re-Structuring of Global Transportation Surface and Air Networks Increase Momentum as Carriers Adjust to Realities
Our prediction in this area was predicated on a continued uncertain global economy, along with the after-effects of severe recession in the Eurozone motivating industry supply chains to rely on more economical and cost effective surface transportation modes. However, multiple years of excess shipping capacity across global ocean container fleets continue to be exacerbated by the ongoing delivery of massive new mega-ships designed to carry far more containers at a lower overall cost. The result was a relative no-brainer prediction- namely that industry consolidation was inevitable.
In March of 2014, industry watchdog Fitch Ratings once again declared that consolidation in the container shipping segment via alliances or mergers was likely to accelerate due to persistent overcapacity and freight rates pressures. The CEO of industry leader Maersk Lines also predicted that excess ocean container capacity would extend through 2016.
As a consequence, number of industry alliance or consolation announcements permeated 2014. There was an attempt among the top three global ocean container carriers to form the P3 Network which was thwarted in the end by Chinese maritime regulators. That was followed in July with the announcement of the 2M Alliance as industry leader A.P. Moller-Maersk announced a ten year vessel sharing cooperation agreement with Mediterranean Shipping Company (MSC) for designated Asia-Europe, Transatlantic and Transpacific routings. In August, global maritime regulators gave the go-ahead to the merger German based Hapag-Lloyd and Chile based CSAV which was expected to create the fourth-largest global shipping company in terms of capacity. In September, the Ocean Three Sharing Alliance was announced as French container shipping group CMA CGM entered into a service alliance with China Shipping Container Lines (CSCL) and United Arab Shipping (UASC).
As 2014 came to a close, a perfect storm crisis crippled U.S. west coast ports as the compounding issues of ongoing labor contract negotiations, larger ocean container vessels requiring more time to unload and load, an overall shortage of container transport carriages and labor disputes among trucking companies and independent drivers all intersected to form a bottleneck for crucial holiday fulfillment supply plans.
In June, the 25rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals (CSCMP) reported cost of the U.S. business logistics rose by another $31 billion in 2013. The report further confirmed that both U.S. trucking and rail networks were running at near 100 percent capacity, leading to spot shortages of specialized trucks and/or railcars. The boom of rail car shipments of crude oil from the North Dakota Bakken region fueled such shortages along with more incidents of railcar accidents and explosions. The last months of 2014 featured the first overture of a major railway, Canadian Pacific, calling for network consolidation within North America rail networks.
More use of surface transportation motivated international air freight carriers to further cutback on overall capacity in an effort to uphold rate structures and profitability goals.
The sum total of this 2014 prediction is that industry supply chains experienced longer transit times, increased costs and further heartburn as to the overall reliability of transit times. Industry consolidation and constrained logistics networks thus far has been for the benefit of asset owners or carriers vs. shippers.
2014 Prediction Nine: Internet of Things Picks Up Considerable Momentum
The Internet of Things (IoT) provides a new era of interconnected and intelligent physical devices and/or machines that will revolutionize supply chain processes related to production, transportation, logistics and service management. Our 2014 prediction was that IoT interest and development efforts would expand globally and would feature more announcements from well noted global based players in manufacturing, services and technology circles. That turned out to be exactly the case, and as we approach the end of 2014, IoT has become the buzz of industry and global supply chain news.
In consumer dimensions, Google kicked off the year by announcing its acquisition of home monitoring provider Nest Labs for $3.2 billion. Automobile manufacturers continued with strategic efforts focused on connected automobiles, while General Electric became the leadership icon for connected industrial equipment. The industrial conglomerate recently disclosed that it has already garnered over $1 billion in revenues related to its connected industrial products and services.
Increased market momentum naturally fueled vendor interest in positioning or jockeying interoperability standards. That led Supply Chain Matters to speculate whether the market was positioning for a replay of the RFID standards mess. In March, AT&T, Cisco, GE, IBM, and Intel officially formed the Industrial Internet Consortium (IIC) to accelerate work on areas such as interoperability standards for IoT in industrial markets. In July, a handful of tech heavyweights, namely Intel, Broadcom, Dell and Samsung Electronics unveiled a new non-profit termed Open Interconnect Consortium (OIC) with a mission to come-up with certification standards for devices operating in IoT environments. That announcement came after a December 2013 announcement from nonprofit Linux Foundation in conjunction with names such as Microsoft, Panasonic, Qualcomm and others that calls for the AllSeen Alliance to come up with a similar goal.
Technology vendor moves included product lifecycle management (PLM) and service lifecycle management (SLM) technology provider PTC initiating two strategic acquisitions to position the company to be able to leverage IoT platforms. In December as we published our prediction, PTC announced its $112 million acquisition of ThingWorx, a provider of platform that allows firms to build and run applications that leverage machine to machine information exchange. In July the provider announced the acquisition of Axeda, an IoT cloud-based technology provider offering technology that connects machines and sensors to the cloud, for a reported $170 million in cash. SAP recently announced a series of supply chain, service management and manufacturing applications enhancements that can leverage IoT platforms, along with an intent to develop applications support in this area over the next two years.
In 2014, strategy consulting firm McKinsey included the IoT as one of the ten truly disruptive technologies for the next decade that will be adding several tens of trillions of dollars to the global economy by 2025. Increased momentum and interest in IoT and its potential business benefits was a prediction that indeed played out throughout 2014.
2014 Prediction Ten: Continued Technology Investments in Cloud Computing, Predictive Analytics and Select Supply Chain Services.
Our assumption for 2014 was that a more optimistic global economy would motivate industry supply chain and line-of-business teams to increase levels of investment in specific areas of supply chain business process needs. Areas we highlighted were enhanced sensing of product and geographic demand , deeper lower-tier visibility to supply risk areas, more emphasis on leveraging B2B network platforms and added investments in more predictive or prescriptive supply chain intelligence capabilities. We further predicted that the attraction of cloud-based applications technology would continue to gain market adoption, primarily due to the needs for quicker time-to-value.
Our monitoring of both technology vendor and end-user communities throughout 2014 indicated for us that this prediction area generally played out with a couple of exceptions. Buying activity focused on cloud-based options for supply chain related business processes is indeed on the increase, validated at double-digit growth rates among various by many of the quantitative market research firms.
In the area of enhanced sensing of product demand, in 2014 we discerned a movement on the part of a select number of supply chain planning vendors to enhance their connectivity and support of demand sensing processes. In March, SCP vendor ToolsGroup announced the application of “machine learning” applied to product demand forecasting. In the case of Steelwedge, it was manifested by release of initial supply chain and S&OP focused “apps” released on the Salesforce.com platform.
Increased interest in leveraging B2B business networks for broader end-to-end visibility captured the interest of many industry supply chains and we observed vendors in this area branching out beyond their core vertical industries. SAP communicated a strategy focused on “Integrated Business Planning Network” eventually leveraging elements of the AribaB2B platform with elements of supply chain planning, execution and S&OP support. The year 2014 brought added emphasis for including new product introduction (NPI) and PLM focused information within B2B networks and motivated E2open to acquire Serus Corporation, a provider of network-enabled NPI information.
Supply chain focused cloud technology also captured renewed interest from the venture capital community. In February Elementum, which describes itself as the first mobile platform for end-to-end supply chain management, formally announced its market launch after securing $44 million in Series B funding from Lightspeed Ventures. In late May we called reader attention to a CB Insights blog posting titled: Software Eats the Supply Chain which provided succinct quantification of the renewed interest and that further indicated that over the prior four quarters, investors poured $359M into 63 deals in the logistics & supply chain software industry segment. Early stage investments in mobility, same-day delivery and cloud based end-to-end platform investments were of the most interest. Oracle made added strides toward availability of its public cloud version of supply chain applications support.
On the services side, more industry supply chains opted to outsource supply chain logistics and fulfillment processes to external third part logistics (3PL), transportation or BPO services firms. The increased pressures for cost reduction coupled with needs to serve Omni-channel market and fulfillment segments motivated these moves. However, firms may well discover in the coming months the hidden costs of such moves. As noted in our scorecard related to Prediction Eight above, the costs related to business logistics and 3PL services continues to rise with little relief in sight.
This concludes our series of looking back on 2014 to assess how our Supply Chain Matters Predictions fared. We trust our readers were able to gain benefits from following our series. Again, feel free to share your own observations regarding the key supply chain, procurement and B2B developments in 2014.
As we move toward the latter stages of December, we will shift our attention to what to expect in 2015.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
In March of 2012, Amazon agreed to acquire privately-held warehouse automation and robotics provider Kiva Systems in an all cash deal of $775 million. At the time, there was much speculation regarding Amazon’s strategic intent in acquiring this warehouse and distribution center robotics automation provider at such a hefty price. Speculation primarily centered on what was Amazon’s strategic intent. That speculation changed shortly thereafter when external sales of Kiva based technology was no longer offered to new external customers. In essence, Kiva was to become an in-house fulfillment center automation innovator for Amazon.
In June of this year, Supply Chain Matters highlighted reports noting that at Amazon’s annual investor meeting, founder Jeff Bezos indicated that the Internet retailer would have upwards of 10,000 Kiva based robots deployed by the end of this year.
Last week, The Wall Street Journal reported (paid subscription or free metered view) that during the current surge of holiday orders across the Internet retailer’s 80 distribution centers, Amazon will be able to now leverage its Kiva deployments. Readers further have the opportunity to view information relative to the results of some deployments.
According to the WSJ, in the first nine months of this year, Amazon’s fulfillment costs averaged 12.3 percent of net sales compared with 8.9 percent in 2009. Wall Street investors are obviously quite concerned with the size and current growth of that number. But, with full deployment of robotics, fulfillment center workers who previously recorded upwards of 100 order picks-per-hour are expected to average 300 picks-per-hour. A security equities analyst is quoted as indicating that Amazon could reap $400-$900 million in annual cost savings as a result of Kiva technology deployment. If those savings are accurate, they more than justify the original acquisition cost and would provide some buffering to the growth of Amazon’s fulfillment costs.
In our June commentary, our view was that Amazon has a broader strategy, one that allows robotics to buffer the often perplexing need to flex fulfillment center human resource requirements during seasonal peak periods. For the current 2014 holiday fulfillment surge, Amazon has brought in 80,000 temporary workers, an increase of 10,000 from the 2013 period.
In September, Supply Chain Matters called reader attention to Amazon’s efforts in testing deployments of new sortation centers to mitigate shipment delivery congestion and provide added flexibilities in the selection of last-mile delivery carriers.
Amazon’s supply chain leadership has numerous technology enablement strategies underway and we will all have the opportunity to observe the initial results of these efforts over the next few weeks.
Supply Chain Matters provides a brief contrast to our prior posted commentary regarding Wal-Mart’s efforts to spread out holiday promotions in the coming holiday surge. The Wall Street Journal reports that yesterday, which was China’s celebration of Singles’ Day, online provider Alibaba set a record for China’s largest online shopping day. The online provider’s various online properties processed a reported $9.3 billion in sales, most likely the equivalent to the Black Friday or Cyber Monday shopping holidays in the United States.
The WSJ notes that last year, Alibaba processed $5.9 billion in Singles’ Day sales. China’s premiere online provider also offered a number of pre-holiday promotions which allowed consumers to order ahead of time and complete their sales transaction on the holiday. Keep in mind that for the most part, Chinese consumers shun the use of credit cards in favor of cash or mobile based payments.
In its fiscal year ending in March, Alibaba recorded the equivalent of $275 billion in various online sales which the WSJ notes is bigger than the combined online sales of Amazon and eBay combined. Included in the information surrounding its recent initial public offering of stock the online provider noted that it is just tapping the enormous potential of its online market.
We can sometimes get enamored with names such as Amazon and Wal-Mart but Alibaba is indeed an evolving player to reckon with in the coming era of online commerce and retail supply chain customer fulfillment.
The synchronization and management of the Omni-channel customer fulfillment experience has fast become a complex problem for retail industry business management and supply chain teams. The added dimensions of taking orders online or from physical stores and fulfilling from multiple channels adds complexity and needs for smarter and more-informed decision-making. Cost to serve and determining impact to profitability become ever more a challenge.
Yesterday, in conjunction with the Focus Connect 2014 event being held in Barcelona, JDA Software and IBM made a joint announcement that Supply Chain Matters believes demonstrates the ongoing importance and continued evolution of Supply Chain Control Tower (SCCT) support capabilities in the supply chain technology market. This announcement could also portray a possible broader relationship among these two technology providers in the months to come.
The specific announcement involves a joint collaboration among JDA and IBM development teams to address the need to process and fulfill retail industry Omni-channel orders in a more efficient and more intelligent manner. The approach calls for combining the elements of JDA’s warehouse management, demand planning and workforce planning business support capabilities (JDA Intelligent Fulfillment and Labor Productivity) with IBM’s Sterling Distributed Order Management network platform capabilities. In essence, this approach marries elements of supply chain planning and execution with an end-to-end order management and fulfillment platform that connects all channel participants. The combined capability is expected to be offered in either an on premise or cloud deployment option, the latter being supported by IBM’s SoftLayer business arm. The joint development effort is currently underway and according to the announcement, is expected to be available in late spring of 2015.
This author had the opportunity to speak with IBM regarding the joint announcement. Discussions among these two technology providers began in January of this year at the National Retail Federation (NRF) conference. Both companies have a rather strong market presence among global retailers and each was hearing customers speak to the increasingly complex challenges currently manifested in Omni-channel customer fulfillment, including the dynamic aspects of having to manage the tradeoffs of inventory, appropriate fulfillment location, transportation and labor requirement needs. In May of this year, our Supply Chain Matters commentary associated with attendance at IBM’s Smarter Commerce Summit highlighted the evolving dimensions of Omni-channel and the needs to provide more predictive and prescriptive decision-making capabilities into the process.
The joint press release includes a quote from joint customer Lowe’s Home Improvement, and we were informed that both firms have identified interest from other unnamed retailers as well. Apparently, the original timetable called for announcement of joint product integrating JDA and IBM elements later in 2015, but it was obviously pushed-up to coincide with this week’s JDA customer event.
Our supply chain and B2B business community education series regarding SCCT has articulated that the concepts of control towers involve efforts to bring together supply chain planning and execution business process elements with enhanced intelligence and more predictive decision-making that can be provided in near real-time dimensions. There have been a number of strategic movements underway among multiple supply chain, enterprise and ERP technology vendors to build, broaden or position SCCT capabilities. We view this JDA-IBM joint announcement as yet another dimension of such efforts. JDA has the potential to leverage a broader more feature-rich distributed order network platform that supports more dynamic process parameters while IBM garners access to deeper retail-specific supply chain planning and execution support functionality. We have been informed that JDA is building and architectural framework that supports plug-in capabilities from other vendors, similar to what we have heard from supply chain planning providers such as Steelwedge and its connection to the Salesforce.com platform. Similarly, supply chain business network provider E2open augmented supply chain planning and product management support capabilities with the acquisition of Icon-SCM and Serus Corporation respectively.
As noted in our previous commentaries, IBM has been integrating elements of Sterling order management and B2B messaging capabilities with its IBM Emptoris sourcing and procurement business suite, and has communicated efforts to bring the predictive elements of Watson decision-making to online fulfillment and supply chain synchronization challenges. Thus, the SCCT business process support elements continue to broaden from many dimensions and are a sign of what will transpire from SCCT support technology down the road.
In the meantime, readers and joint JDA and IBM customers should watch the ongoing joint efforts among both providers for further signs of what is to come. Just like the prior announcement of the partnership among IBM and Apple, both parties provide the potential to remove the information integration burden for today’s highly complex supply chains.
Disclosure: IBM, E2open and Steelwedge have current or prior business relationships with the Ferrari Consulting and Research Group, parent of the Supply Chain Matters blog.
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.
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.