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Maersk Line Reports Increased Q4 and 2014 Full Year Profitability: But at What Potential Price?

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This week, AP Moller-Maersk, the conglomerate parent for global container transporter Maersk Line reported extraordinary profits for 2014 as it continues with its strategy to  consolidate into certain core industries. The conglomerate sold its 20 percent stake in Danske Bank resulting in a $5.5 billion direct windfall profit for shareholders.

Regarding Maersk Line, the current global leader in ocean container shipping, continued strong performance boosted net profit to $2.3 billion in 2014, up from $1.5 billion reported in 2013. Total 2014 revenues were reported as $27.4 billion, compared with $26.1 billion reported in 2013. Operating cash flow was $4.2 billion.

During the earnings briefing, AP Moller-Maersk CEO Nils Anderson indicated that Maersk Line’s improved its competitive position during the year and that the startup of the 2M vessel sharing alliance agreement with Mediterranean Shipping Line (MSC) has gone very well. Maersk Line’s profitability increase was attributed primarily to the dramatic cost reductions in fuel costs along with increased shipping volumes. Volume increased by 9.8 percent, mainly driven by growth in North-South and Intra trades. Unit costs were reduced by 7.2 percent, helping to offset reported average rate reductions of 3 percent. Noted was an average cost reduction in bunker oil of nearly 11 percent. Once more, the carrier declared it has no plans of increasing vessel speeds across its network fleet because such changes require a sustained lower bunker fuel price level.

Maersk now anticipates the global demand for ocean transportation in 2015 to increase between 3 and 5 percent in 2015, which is considerably different than prior year forecasts. Consider that in October of 2013, Maersk declared that the glory days of shipping were over. If these optimistic growth projections turn out to accurate, there is little doubt that container shipping lines will attempt to continue pressures to raise and sustain higher tariff rates.

Our Supply Chain Matters readers who manage logistics and transportation requirements each and every day can certainly attest to the sub-standard, unreliable shipping performance of today’s ocean container carriers.  The recent severe disruption that occurred across U.S. west coast ports these past five months added more consternation and frustration, as well as added transportation costs. We read and heard reports indicating that re-routed containers destined to U.S. and/or Gulf coast ports experienced added cost surcharges.  Many industry supply chains were forced to opt for more expensive air freight transport to meet critical inventory needs.

While this turbulent period in global transportation continues, the industry leader in ocean container shipping can boast of lower operating costs and higher efficiency resulting in superior financial performance.

However, what was the cost in dimensions of customer loyalty and service?

The new Triple E vessels require more time to load and unload.  The industry outsourced the management of trailer carriages, resulting in gross mismanagement of inventory matching. Port operators play hardball with organized labor, with port throughput held hostage.

Supply Chain Matters will not sugar-coat the financial performance of the industry leader in container shipping, since it would appear that it smacks of a “throw it over the wall” approach to customer and multiple supply chain industry needs.

Bob Ferrari


Breaking News: Tentative Agreement Reached in Labor Contract Talks Involving U.S. West Coast Ports

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To the obvious relief of many industry supply chains, an announcement that a tentative agreement has been reached among the Pacific Maritime Association and longshoremen has finally come.  The announcement came late Friday night, Pacific Time after nearly nine months of ongoing contract talks and rancor.

According to reports, dockworkers are expected to conduct normal port operations beginning this evening. This tentative agreement averts what could have been an even more disruptive scenario of a total shutdown of ports.

This five year contract agreement still needs the approval of longshoremen union members as well as individual employers.  There may also be some local port issues needing resolution.  Thus far, no details of the new contract have been disclosed including the reported final contentious issue related to the selection or elimination of certain arbitrators for work rule disputes.  According to published reports, U.S. Secretary of Labor Thomas Perez, while declining to reveal any details, indicated that employers and the union have agreed to a new arbitration system.

As Supply Chain Matters opined in yesterday’s update commentary, when contract talks were eventually resolved, it will take months before any U.S. west coast port operations return to a state of normalcy, if at all. The underlying issues of the structural impacts of unloading and loading far larger container ships, the notion of proper scheduling of now outsourced trailer carriages and the consequences of trucking lines classifying truck drivers as casual, independent contractors remain ongoing challenges to be addressed.

Gene Seroka, executive director for the Port of Los Angeles indicated to the Los Angeles Times on Friday: “more than ever, we need labor and management working together.”  Those words have special meaning for all U.S. west coast ports.

Remember this date, it will serve as the baseline indicator as to how long before U.S. west coast ports return to operational service levels meeting shipper and industry supply chain expectations.  Much work remains, not only from an operations perspective, but also from a shipping lines management planning perspective.

Bob Ferrari

 


Supply Chain Matters February 20th Update- U.S. West Coast Port Disruption

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On this Friday, February 20th, Supply Chain Matters provides another reader update and advisory on the all-important and unfortunately, all-consuming disruption occurring at U.S. West coast ports that is impacting multiple industry supply chains.

Various published reports indicate U.S. Secretary of Labor Thomas Perez has set today as a deadline for the Pacific Maritime Association and the west coast dockworkers union to end a long-running labor dispute that has clogged West Coast ports. The sides reportedly negotiated late into the Thursday night in San Francisco, but no agreement was reached.

According to a published report by the Los Angeles Times, City of Oakland Mayor Libby Schaaf, who has participated in a nightly call with Perez and mayors of other West Coast port cities, told the Associated Press that if a deal isn’t reached today, Perez plans to force the parties to Washington, D.C., next week to finish negotiations.

All reports seem to indicate that the one remaining issue of contract talks center on the union’s desire to have a unilateral say on the removal of an arbitrator called in to alleviate work disputes.  According to the LA Times, the union is focusing on one specific arbitrator who handles contract grievances at the ports in Los Angeles and Long Beach.

From our lens, most of this week’s reports indicate that the pressure for both parties to resolve this ongoing dispute has become far more intense.  We have viewed reports indicating that as of yesterday, 32 container ships were at anchor near the ports of Los Angeles and Long Beach, awaiting an available berth.  The repercussions continue to involve other West Coast ports and shipping lines with reports of on-time performance at dismal rates.

It has further become more expensive for industry supply chains to mitigate the current disruption with a new report from Drewry indicating that rates for container ships destined for U.S. East Coast ports are also skyrocketing.

The Journal of Commerce (paid subscription required) reported yesterday that even Wal-Mart is being affected, indicating that shipment delays are hurting its business and threaten its Spring and Easter holiday inventory needs.

The bitter reality for multiple industry supply chains however, remains that even if contract talks are resolved, it will take months before any U.S. west coast port operations return to a state of normalcy, if at all. As we have opined in our previous postings, the underlying issues of the structural impacts of unloading and loading far larger container ships, the notion of proper scheduling of now outsourced trailer carriages and the consequences of trucking lines classifying truck drivers as casual, independent contractors remain challenges to be addressed.

By our lens, the shipping industry is in a state of denial and blindness to customer needs for on-time reliability and effectiveness. Instead, the industry remains focused on individual interests.  That unfortunately foretells that 2015 will indeed be a year of continued turbulence for global transportation.

Bob Ferrari

© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


Another U.S. Train Derailment Involving Crude Oil Transport with Far Broader Implications

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Yet another incident involving hazardous crude oil rail transport has occurred in the United States.

This week’s West Virginia train derailment involving a CSX train hauling a 109-car oil tanker train of crude oil from the Bakken North Dakota fields has significant repercussions.  News media and the CSX itself have confirmed that this train was hauling the newer CPC 1232 tank cars, those that have been billed as being far more explosion resistant and safe.

This CSX train was enroute to an oil depot facility located in Yorktown Virginia. As of this Supply Chain Matters commentary, reports indicate the fire is still burning, two days after the accident, inhibiting further recovery efforts.

The train derailment that occurred near Mount Carbon West Virginia, a small town 33 miles southeast of that state’s capital of Charleston, caused fiery explosions that engulfed a reported 25 tank cars.  Initial reports immediately after the accident indicated far fewer tank cars aflame. The accident reportedly caused the destruction of one house and prompted the immediate evacuation of two nearby towns. Fortunately, no lives were lost and the real possibility for polluting the adjacent Kanawha River, a drinking water supply source seems to further been averted. According to a published Reuters report, this was the second derailment accident this year along this particular CSX rail routing. The other involved a crude by rail derailment near Lynchburg Virginia.  At the time of that accident, outgoing National Transportation Safety Board chairperson Deborah Herseman made her rounds of various U.S. media talk shows and news programs and communicated that other accidents will occur without stepped-up action. This latest accident will most likely turn federal regulator focus more toward rail line operating standards when crude oil transport is involved.

This accident will further place a new spotlight on the efficacy and overall safety standards of CPC 1232 category tank cars. The predominantly older DOT-111 tank cars have been targeted for replacement in favor of the upgraded CPC 1232 version.  However tank car lessors and oil industry interests have balked at the overall time scale for upgrading existing older specification tank cars. According to the Association of American Railroads (AAR), rail shipments of petroleum and petroleum products increased 12.7 percent during 2014. This is also a high margin business for rail operators. No doubt, various industry interests will be in active communications regarding the implications.

In a prior Supply Chain Matters commentary, we questioned whether the current plunging price levels for crude oil can potentially change the cost dynamics for “crude by rail” shipments as well as overall industry directives to upgrade crude carrying tank cars to new safety standards. This latest accident more than likely adds more concern for changing economics related to operating safety. New technology mandates outlined in the Rail Safety Improvement of 2008 further calls for the full implementation of Positive Train Control (PTC) by the end of this year, which the rail industry has been balking.

The picture seems very changed at this juncture.

Bob Ferrari


The U.S. West Coast Port Crisis and Increased Supply Chain Risk

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Last week, we were reading a recent report produced by the Chartered Institute for Procurement and Supply (CIPS) in the U.K. indicating that its risk index reversed in Q4-2014 and reached a nine month high. According to this report:

The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs.”

That was in Q4, before the crisis involving U.S. west coast ports has made its cumulative impacts on industry supply chains.  Gantry_Load_4

Now, there are multiple business and general media reports of the severe toll that is cascading from the continuing backlog of ships destined to U.S. west coast ports that cannot be unloaded and reloaded on a timely basis. The latest news this weekend is that President Obama has dispatched the U.S. Secretary of Labor, Tom Perez, to California in an attempt to broker an agreement.

Today, a Reuters syndicated report featured on Business Insider provides ample evidence of the rippling effects beyond retail focused supply chains.  Honda Motor now indicates that it is slowing production at certain North America auto assembly plants because component parts in the replenishment pipeline are now impacting the production of this OEM’s Civic, CR-V and Accord models. Similarly, Fuji Heavy Industries, producers of Subaru cars indicates that it is already air freighting parts to U.S. factories through at least the end of this month.

An AP syndicated report featured on business network CNBC indicates that in addition to car parts, imported furniture, medical equipment, bathroom tiles, shoes and other goods are all impacted.  On the export side, meat, produce and other agricultural foods are not moving to Asia destined markets and are in danger of spoilage.

No doubt, the cumulative impact across industry supply chains will be in the billions of dollars if the current labor dispute is not resolved quickly.

Further reported is that the port crisis is impacting available capacity and shipping rates for both sea and air freight, making it even more expensive to implement contingency shipping and logistics plans. Air freight capacity originating from China and the Asia-Pacific region was reduced in 2013-14 due to declining demand and increased costs. Thus, the current surge in contingency shipping demand is chasing limited supply, and no doubt, bigger more influential shippers will be garnered preferential services.

As is often the case with these types of multi-industry supply chain crisis, small and medium businesses will bear the bulk of the economic burden.

Within the U.S. itself, a current period of severe winter weather featuring unprecedented snowstorms and extreme cold weather have paralyzed the U.S. northeastern and Midwest regions and its economies, adding more economic burden.

Tomorrow (Tuesday), west coast dockworkers are supposed to return to work.  All industry eyes are affixed on a speedy and final resolution of the current crisis. Amen to that!

Industry supply chain teams do not need to concern themselves with supply chain risk indices for this quarter and beyond. They will be off the charts and indeed, the perception of global supply chain risk will be at an all-time high.

Today, sensing and real-time awareness across the end-to-end global supply chain network as to where inventory resides and the daily condition of global transportation networks and contingency plans is far more important.  The current crisis will continue to worsen before it gets better.

Longer-term, once the current U.S. west coast port labor contract is resolved, shipping industry interests had better get their acts together and figure out solutions to a number of current industry choke-points and structural deficiencies.  Larger mega container ships will not address the needs of shippers for reliable and efficient logistics and transportation.

The notion of the flexibility and/or cost effectiveness of global supply chains has reached a critical crossroad.

Bob Ferrari

 


Sentencing Begins from One of the Largest Warehouse Thefts in U.S. History

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Supply Chain Matters has opined on more than one occasion that the wheels of justice seems too often crank very slow even though today’s clock speed of business moves at lightning speed. For pharmaceutical supply chains, the mitigation of such thefts remains a rather important component in supply chain risk management and mitigation.

One of the largest warehouse thefts in U.S. history occurred in March 2010 and involved the theft of an estimated $80 million worth of pharmaceuticals from an Eli Lilly warehouse in Enfield Connecticut. In May of 2012, federal authorities arrested two people in connection with the Eli Lilly incident.  According to reports at that time, the arrests were described as a takedown of a major prolific cargo theft ring. Two Cuban born brothers were indicted on federal conspiracy and theft charges and ten additional persons were also charged in federal court.

Since that time, the U.S. Attorney for the District of Connecticut accused five individuals in the conspiracy and participation in the theft that occurred in the Enfield Connecticut warehouse. All five have since pleaded guilty. According to evidence and statements collected, the thieves climbed through the roof, slid down ropes and disabled the alarm system and then loaded the 40 pallets of stolen goods into an awaiting tractor trailer utilizing existing fork lifts. The stolen goods were then transported to a public storage facility in the Miami Florida area for black-market distribution.

According to a report published by The Wall Street Journal, the stolen pharmaceuticals included Lily’s antipsychotic drug Zyprexa, antidepressants Cymbalta and Prozac, the cancer treating drug Gemzar, among other drugs. The thieves were obviously seeking high-value goods. These drugs were destined for retail distributors along the U.S. east coast.

Last week, a U.S. federal judge sentenced the first of these criminals, a Cuban citizen living in Florida, to a six year and three month prison sentence in regards to his role in the pharmaceutical theft. Prosecutors were seeking a seven to nine year sentence, citing the seriousness of the crime. However, defense attorneys argued leniency by the defendant’s guilty plea and subsequent actions.

Thus, roughly six years after this high visibility theft, the wheels of justice have begun to close the loop.

Meanwhile, pharmaceutical companies have since garnered a more astute understanding of the increasing occurrences of cargo and retail thefts and the risks that these incidents pose to legitimate pharmaceutical supply chains as well as public health. While the wheels of justice indeed move slow, deterrence, supply chain risk identification and mitigation remain important ongoing initiatives.

Bob Ferrari

 


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