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Profile of the Airbus U.S. Commercial Aircraft Assembly Facility

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The New York Times Money Issue recently featured a profile of the Airbus factory in Mobile Alabama, complete with some stunning photo and video images produced with Samsung technology.

This profile provides evidence of Airbus’s extended global value-chain along with the overall logistics and transportation required to supply the relatively new U.S. aircraft assembly plant. As an example, completed major Airbus A321 aircraft components are loaded on a ship for transit to the Port of Mobile.

The profile provides other important observations, namely:

  • Airbus saves little money by assembling commercial aircraft in the U.S.- the move is more about competing in large markets where the planes are sold and in the notion of demonstrating to the U.S. government a commitment to the economy.
  • Lower wage rates across the Southern U.S. helped in the decision to source the plant in Alabama.
  • Airbus reportedly secured $158 million in state and local incentive benefits regarding the U.S. commercial aircraft facility including publicly funded training of factory workers.
  • Upwards of 20 Airbus suppliers have reportedly opened offices near the Alabama facility.

We highlight this interesting profile for the benefit and enjoyment of our Supply Chain Matters readers.

 


Calling the Bottom to the Ocean Container Shipping Market is One of Perspective

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Last week, executives of ocean container industry leader Maersk called a bottom to the container shipping market. Supply Chain Matters submits that the industry is now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to new nuances and declaring a bottom to the market is now a matter of by perspective.  Container Term 300x200 Calling the Bottom to the Ocean Container Shipping Market is One of Perspective

Maersk declared a bottom after observing that shipping demand had outgrown capacity for the second consecutive quarter. In fact, Maersk Line reported that average rates increased 4.4 percent in the first quarter. While, revenues and shipping volumes both increased 10 percent from the year-earlier period, Maersk Line recorded an $80 million loss in the March-ending quarter primarily because of increased fuel costs. That compared to a $155 million loss for Maersk Line in Q4. Maersk executives now anticipate that container demand will increase 4 percent for the full year, with capacity growth at 3.5 percent.

In October of last year, Supply Chain Matters called reader attention to a declaration by Drewry Maritime Research that the global ocean container market had bottomed. At the time, we advised supply chain transportation and logistics teams somewhat cautious on the conclusions that ocean container transportation volumes and rates would bounce back in 2017. That was before we had the opportunity to view the full 2016 ship scrapping rate.

Drewry had qualified its October declaration by stating that pricing would bounce well below the average for 2015. A key unknown for Drewry in October was carrier commercial behavior which was observed as “unpredictable and counterintuitive.”

In early April, we updated teams both on Supply Chain Matters and in our Q1-2017 Quarterly Newsletter noting that reinforcing data reflected a picture of spiking ocean container rates because of capacity shifts. In 2016, ocean container lines scrapped an estimated 3 percent of global tonnage. However, new tonnage in the form of larger capacity, more efficient vessels are forecasted to add an additional 8 percent more capacity this year.

April was also the kickoff of new global routings of the three major shipping alliance networks. The new global alliance networks place more emphasis on scheduling more megaships among the most popular global routes while cutting back on frequency of prior daily or weekly sailings.  A belief among industry observers was that shippers and exporters moved-up shipping plans of the April cutover because of the belief that rates would increase significantly.

Calling the bottom to one of the shipping industry’s worst downturns is therefore one of biased perspectives.  Container lines themselves are desperately anticipating that global container volumes will positively increase enough to offset new capacity scheduled to come into service this year.  Some carriers are also postponing deliveries previously anticipated later this year to next year. At the same time, the scheduling now in-effect under new global alliance networks pools capacity for upwards of 90 percent of major global trade routes. Some lines, such as industry leader Maersk, are weighting port calls to move in and out of owned global port operators to leverage new third-party logistics services, thus competing with existing industry service providers. Thus, some shippers and exporters, such as agricultural commodities may face increased routings and subsequent costs due to different export port routings. Another continuing unknown is whether major ports, such as those spanning the coasts of the United States can effectively unload and load the large container megaships according to carrier’s schedules, especially during peak shipping periods.

The takeaway for industry supply chain, logistics and transportation procurement teams remains one of caution and diligence.  Last week, the World Container Index, a composite of container freight rates on 8 major routes to/from the US, Europe, and Asia, was reported as $1557.38 per 40-foot container, up 40 percent from the same period a year ago. Granted, a year ago, rates were hovering below breakeven for carriers, but the market is changing. Shippers reliant on spot market rates are going to feel the impact of dynamic market forces.

Transportation procurement teams will have to do their homework regarding rate trending and shipping alliance contracts. Logistics teams will no doubt be closely monitoring port throughput performance for signs of container bottleneck delays, including the availability of empty containers for export needs.

The industry is now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to new nuances and declaring a bottom to the market is now a matter of by perspective.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


A Commentary on Proposed Surge Pricing for Online Retailers

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Earlier this month, United Parcel Service announced a new variation in surge pricing.  The global parcel carrier wants to charge the top retail shippers for inaccurate forecasting of shipments during peak holiday periods. In other words, if a retailer either floods the system with unplanned shipments, or does not produce expected planned shipments, there will be a surge financial penalty.

According to reports, the charges will apply to the typical peak holiday shopping periods such as the pre-Thanksgiving, Black Friday, Cyber Monday holidays extending thru the Christmas. It could also apply to other peak shipment holidays such as Valentine’s Day or Mother’s Day.

UPS CEO David Abney told reporters that this new surcharge is not meant to be punitive, but part of a broader negotiation with retailers over pricing during peak times. The carrier has cautioned that conversations with retailers have just begun and yet to be finalized. They are an obvious understatement since many competing carriers such as FedEx have not weighed-in on such an approach.

As a supply chain management social media voice, we felt compelled to weigh-in.

We suppose it could be stated that a carrier having the benefit to be compensated for both upside and downside risks is the best of all worlds.

It presents a very slippery slope from several dimensions.

We all get it in that adding augmented capacity and people during peak periods is expensive, but then again, UPS has been aggressive in added prior rate hikes and dimensional package surcharges to boost revenues, especially during peak periods. The carrier has dipped many times into the rate hike well in this new era of online and Omni-channel shopping.

It’s no secret that the traditional hub and spoke networks configured by both UPS and FedEx have been stress tested during the past peak holiday periods, to the extent that changes had to be made to offset obvious choke points.

There is also the presence of the new logistics industry disruptor, which is Amazon, and the new reality of being a logistics and transportation provider as well as a retailer.

The online shopping provider has implemented logistics and customer order fulfillment capabilities that have also exposed the weaknesses of traditional hub and spoke networks. Amazon often delays bulk air shipments of goods to various regional customer fulfilment centers until way after midnight, sometimes flying half-full aircraft if needed, to maintain overall logistics scheduling. Yes, Amazon’s peak volumes currently do not match those of UPS, but the online retailer has found creative ways to address bottlenecks, including fulfilling same-day or hourly delivery even during the height of peak shopping periods. Yes, Amazon partially funds its significant transportation and network costs via individual customer subscriptions to Amazon Prime. Customers however get in-return, many more services than Free or Guaranteed Shipping during the year, including access to other content services and benefits.

Amazon consistently demonstrates that customer agreements imply mutual win-win benefits for both parties. If UPS wants additional compensation for inaccurate planning by retailers, then the parcel carrier should be willing to step-up and commit to insuring its own performance, regardless of volume.

For example, UPS extends some of its stated expected delivery times to customer addresses during peak periods such as the holiday fulfillment quarter.  Coast to coast shipments are extended an extra day or two in customer expected delivery tracking to overcome network bottlenecks. While the customer might believe that the shipment is on-time, it is a longer transit interval than normal periods, and retailers must factor that delivery time in securing the customer’s order.  Likewise, if UPS fails to deliver at the guaranteed time, then retailers should have the ability to have an automatic credit applied to the entire shipment. UPS shields its exposure to guaranteed delivery by dynamically adjusting expected delivery times. If this new surge pricing proposal were to be adopted, UPS would be willing to commit to guaranteed delivery 7 days a week.

Retailers are now more than ever, acutely aware of the increased costs associated with online and Omni-channel online fulfillment.  The notion of a new twist on peak surge pricing adds more cost exposure, and plays right into the hands of ongoing industry disruptors such as Amazon and Alibaba. We do not profess to dictate to large volume retailers such as Wal-Mart, Target, or others, on how to negotiate with the likes of UPS. But something tells us that these negotiations are likely to be tense.

Either way, retailers will have to invest in more accurate surge planning, deeper levels of customer intelligence, augmented third-party logistics and last-mile transportation services including postal delivery.

Brown may be the gorilla in logistics but if one growls too much, one could get smarted by counteracting forces.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Another Tragic Air Cargo Plane Crash in the U.S.

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Tragically, there has been another fatal air cargo accident in the United States.

A twin-engine turboprop noted as a Short 330, operated by Air Cargo Carriers, a subcontractor to UPS, reportedly made a hard landing at the Charleston West Virginia Yeager Airport, and veered off-the runway, cartwheeled, and slid down a steep hillside. Both the pilot and co-pilot were reported as losing their lives in the accident after rescuers struggled to reach the aircraft remains.

According to a local news media report, the routine flight originated at the Louisville International Airport, taking off at 5:35 am local time and was scheduled to land at 6:20 am.  The aircraft crashed just before 7am local time.

Other news media reports note that the Yeager Airport has but a single runway and sit atop a flat mountain.

Obviously, a formal investigation by Federal regulators will follow to determine the cause of this accident.

Readers might recall the August 2013 cargo plane crash where a UPS aircraft bound for Birmingham Alabama from Louisville Kentucky crashed in the early morning hours just short of the airport runway, tragically killing both pilots on-board. The National Transportation Safety Board (NTSB) subsequently ruled that a series of pilot errors and deviations from company safety rules, as well as pilot fatigue, led to that accident.

We extend sincere condolences to the families involved in today’s crash incident, as well as to Air Cargo Carriers and UPS.


The Demise of Brick and Mortar Stores and of Traditional Retail Distribution

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For the past three years, Supply Chain Matters has been predicting a radically changed business environment across retail channels because of permanent shifts by consumers to favor online buying.

Last year, and updated for this year, our research report: The New phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains (Available for Complimentary Downloading in our Research Center) called for retail line-of-business and supply chain teams to unify organizational leadership and supply chain alignment among traditional store and online logistics and distribution strategies.

Last week. The Wall Street Journal provided more updated and quick frankly, sobering data indicating that:  Brick and Mortar Retail Stores as Shuttering at a Record Pace. (Paid subscription required)   Reported was that so far, this year, at least 10 retailers have filed for bankruptcy protection, which compares to 9 retailers that declared bankruptcy with a t least $50 million in liabilities, for all of 2016.

What we found to be more sobering was a cited prediction from Credit Suisse that retailers could close more than 8600 locations this year, which would eclipse the number of store closings that occurred during the 2008 recession.

The noted causes of the current wave of store closings are cited as decades of shopping center and retail store overbuilding along with the permanent shifts towards online shopping. Another cited cause was noted as the excessive debt burdens that retailers took on through leveraged buyouts or efforts to fund expensive share buybacks. The WSJ cites Moody’s Investor Service as indicating that the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years.

There are obviously significant supply chain implications implied from this trending which we wanted to echo for our Supply Chain Matters readers, implications that may seem obvious, but need to be stated.

Traditional retail distribution strategies were predicated on purchasing high volume merchandise from lowest-cost and highest value suppliers, moving that merchandise into large owned or leased warehouses, and pushing that merchandise into individual stores based on selling forecasts, merchandise promotional plans, or store replenishment needs. The operations of the warehouses and the distribution to physical retail stores was for the most part, straight-forward.

Now, with so many brick and mortar stores subject to closing, coupled with the permanent moves toward online and Omni-channel merchandising and selling, the logistics and distribution model is significantly changed, and as retailers have now come to understand, can be far more expensive if not planned and executed properly.

Warehouses are now customer fulfillment centers that store inventory in volume and move that inventory to contiguous pick and pack operations within the same building, all responding to individual online orders.  Fulfillment center locations are now more predicated on a combination of population density and access to major transportation and logistics hubs, as Amazon and other online providers have artfully demonstrated. Inventory management requires far more sophistication and requires far more detail related to item-level demand across selling and customer pick-up channels. Overall management of transportation costs becomes more essential, since online consumers are now patterned to shop where free shipping is offered.

Remaining physical stores will increasingly serve as extension of the online business model, meaning stores can serve as customer pickup, merchandise return, or merchandise demonstration centers. In-store labor has shifted to customer fulfillment center labor, and in-essence, the fulfillment center becomes a key presence and capability of the retail brand in the minds of online consumers.

The closing of so many physical stores comes about because of the needs or existing retailers to dramatically reduce their cost structures to deliver required profitability goals. However, we again need to reiterate that the traditional notions of viewing transportation, warehousing and logistics as purely cost center, or outsourced expenses that can be adjusted at-will is not necessarily a wise decision when considering the changed distribution and logistics considerations of today’s online world.

Retail and B2C and B2B2C supply chain capabilities must be far more agile in the ability to support an integrated Omni-channel strategy. We caution that this is not solely investments in further distribution and fulfillment center automation, since that may well be one-dimensional.  Instead, it should include more sophisticated supply chain planning and inventory optimization supported by advanced analytics related to being more predictive and responsive to constantly changing online customer fulfillment needs manifested by multiple customer touch points.

The takeaway is that slashing distribution, logistics and customer fulfillment operations budgets without a context to an integrated online business model could prove to be short-sighted.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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