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.
The added costs for fulfilling online orders are likely to increase over the coming months because of the current boom in overall demand for large-scale distribution and warehouse space across the United States as well as other regions.
Reuters reports that real estate investment trusts (REITs) that weight their portfolios towards warehouse and distribution real estate holdings have now become the favorite of Wall Street interests because of the current pent-up demand for additional space from retailers. The report specifically mentions logistics real estate services provider Prologis, which counts Amazon as its largest customer, as raising rents a record 20 percent in the first three months of this year. The report cites Morningstar data as indicating that fund ownership in real estate investment firms such as Prologis and Duke Realty Corp. has increased 30 percent or more in the last quarter.
The trend was further reinforced by a recent announcement from the world’s largest commercial real estate services and investment firm, CBRE Group that indicated that- “Voracious global demand for e-commerce fulfillment centers fueled a 2.8 percent year-over-year increase in prime logistics rents globally, led by double-digit percentage gains in U.S. coastal markets.”
According to a recent CBRE report, six of the top 10 markets with the fastest growing prime logistics rents globally were within the United States. Among what CBRE ranks as the Top 10 Global Logistics Hubs by Prime Rent Growth:
- New Jersey
- Inland Empire
- Midlands, United Kingdom
- Santiago Chile
- Ciudad Juarez Mexico
- Los Angeles- Orange County
- Dallas- Fort Worth
- Seoul South Korea
The Wall Street Journal recently published an infographic indicating current areas of warehouse space under construction across the U.S… That mapping indicates the largest double-digit increases in construction of warehouse space focused in the Dallas-Fort Worth and Houston areas, Los Angeles and Inland Empire, Chicago, Atlanta and Greenville/Spartanburg SC areas. From our lens, that data would indicate broad geography coverage for online fulfillment needs.
And, cost increases are not just confined to warehouse and distribution space.
We have brought reader attention to increasing rate increases by the major parcel transportation and delivery firms, including added surcharges and handling fees. As consumers continue to purchase online items that are larger, more bulky and heavier, there has been increasing demand for logistics delivery services. That is providing opportunities for traditional less-than-truckload (LTL) carriers who are increasingly being called on to provide additional delivery services to support online purchases of hard line goods. This will likely require some LTL providers to invest in augmented technology and logistics assets, which will add to rates charged.
As we have further highlighted, the largest high profile retailers such as Amazon and Wal-Mart continue to aggressively invest in more internal and owned resources in augmenting their own parcel transportation, logistics and last-mile delivery networks under the banner of premium, free shipping services. That is obviously part of the reason for the current building and investment boom underway. A continued competitive battle fueled by multi-billion investments adds to the supply-demand imbalances and speculators to drive up costs further.
However, other retailers with limited financial resources are now faced with the realities of even more increasing cost challenges associated with online customer fulfillment. No doubt, something will have to give. Either retailers will become more creative in prime, no-cost free- shipping membership programs that can offset the effect of added fulfillment costs or the largest retailers with financial scale will become more dominant retail fulfillment platforms.
Our takeaway for retail and B2C focused supply chain organizations and procurement services teams is to up your game in supply chain network modeling and strategy implications. Insure that you factor the real possibilities of more added costs in distribution, logistics, transportation and inventory carrying costs. The coming months may well be very challenging, including the upcoming 2016 holiday online fulfillment surge which will more than likely test limited capacity in certain key areas, forcing teams into more costly alternatives. Be wise, be pro-warned, and conduct rigorous scenario based planning.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This week, The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney, published its 27th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions of this year’s report.
Before we begin, let’s take a step back.
For the past several years, we have raised a number of concerns and added perspectives regarding the state and overall costs of logistics across the United States. Our chosen editorial commentaries reflecting on the 2012 thru 2014 reports expressed concerns towards a continued trend for increased logistics, transportation and inventory costs and in 2014, we again cited our growing concerns regarding cost and service trends. Regarding the 2015 report, our headline takeaway moved toward action, indicating that industry supply chain teams required to take attentiveness to the implications of what was occurring in various logistics and transportation channels.
We quote one of our Supply Chain Matters key takeaways from last year’s report:
“With the latest (2015) report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.”
Similarly in our annual predictions for industry supply chains published prior to the beginning of every New Year, we have continually raised awareness to increasing forms of ongoing disruption occurring in various logistics and transportation sectors.
This year’s report was compiled by a different research partner, AT Kearney. Thankfully, the current report authors are finally acknowledging that change is occurring, with the main theme being- Logistics is in Transition. Other sub-headlines and takeaways in this year’s report include:
- The logistics industry is entering a new era of disruptive forces that involve technology investments and operational constraints that will fundamentally change the rules of the game.
- Growth in the parcel and express segment continues to be fueled by the ongoing explosion in online B2C E-commence and Omni-channel retail growth.
- Overcapacity and buyer’s market state conditions continuing in the ocean container, air freight and now the U.S. rail segments.
- Technology continuing to play a key role in the future transformation of the 3PL industry.
Regarding that latter headline, the CSCMP sponsored report indicates:
“The pace and breakthrough nature of technological innovation- and the rate of which it is adopted- will heavily impact supply chain assets, processes and people.”
A further perspective we urge are multi-industry supply chain readers to dwell upon is that according to this latest report, while business inventory growth flattened in 2015, it was countered by a 42 basis point increase in the weighted cost of capital resulting in a 5.1 percent overall increase in inventory carrying costs in 2015. Part of the explanation can be found in the Appendix section of the current report. The new authors elected to modify the calculation of inventory carrying costs because prior reports multiplied the total value of business inventories by a fixed percentage- 19 percent in prior years. The new authors elected to calculate the value by utilizing other matrices more reflecting actual values of weighted cost of capital.
The implication going forward is that pressures to add additional inventory to mitigate risk or respond to customer needs for same-day delivery will come with a stiffer financial cost beyond zero interest rate conditions.
Thus, if you chose not to consider what we have been pointing out in the last 18 months, you now have a renewed industry perspective. Therefore, we need not dwell in broader or different perspectives,, rather we urge our readers and followers to just read and absorb the report for yourself.
The latest report is available for download on the CSCMP web site. Existing CSCMP members can download the report at no-cost, while non-members must pay a publication fee.
A few added comments related to the changes in this year’s report. We applaud CSCMP and AT Kearney for the changed methodology and added internal logistics industry and external multi-industry perspectives and insights brought forward in the new format. We encourage both organizations to continue that effort in future annual reports. Previous reports featured more added color and current data points in the current year and we trust the authors will take that into effect in future reports as well.
We re-iterate our ongoing key Supply Chain Matters takeaways:
The “new normal” of logistics and transportation is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of continuing data is to insure that the cost, service and inventory benefits derived by contracting or outsourcing logistics and transportation services outweighs the continuing pattern of increasing services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s and total logistics providers will have to invest more in technology and services, adding more motivation to increase fees or institute risk sharing methodologies.
If you require another proof-point- reflect on the actions that Amazon has been taking to take more control of its logistics and transportation capabilities for premium fulfillment services. If your organization spent billions on transportation and logistics, you would probably be just as motivated.
A final note:
At this year’s annual CSCMP conference being held in late September, this author will be collaborating with The Washington Post in moderating a specific panel discussion related to ongoing logistics and transportation industry trends and how specific industry supply chain organizations are responding to these changes. Stay tuned for further details.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
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.