In last week’s Update Three commentary regarding the current crisis involving the near paralysis among the U.S. West Coast ports of Los Angeles and Long Beach, Supply Chain Matters highlighted that conditions on the ground were not showing any signs of improvement. As this week draws to a close, the situation appears to be deteriorating even more, and now involves clear impacts and continued disruption for both U.S. exports as well as imports.
Last week, the National Retail Federation (NRF) published an editorial with the statement: “The sudden change in tone is alarming and suggests that a shutdown of the ports — either from a walkout by labor or a lockout by management — is imminent.” The NRF has since been joined by other industry associations including the National Association of Manufacturers (NAM) the U.S. Chamber of Commerce, and 60 other organizations representing agricultural growers.
Agricultural exports such as apples, forest products, potatoes and other crops are now jeopardized. Growers indicate that Far East buyers are now cancelling orders and moving to alternative sources of supply. According to a report from industry trade group, Agriculture Transportation Coalition, the consequences of the current port congestion are being felt throughout the United States. The railroads are unable to bring agriculture products from the Midwest and the South to West Coast ports because of the port congestion crisis. In addition, ocean carriers continue to attempt to pass on their increased costs by imposing draconian congestion surcharge fees on U.S. exporters and importers.
A published report in American Shipper (registered sign-up or paid subscription) now indicates that formal labor negotiations among the lead negotiators of the international longshoreman’s union and the Pacific Maritime Association (PMA) are currently in recess and not expected to resume until December 2. The publication characterizes this development as: “bad news for importers and exporters hoping for a quick agreement and rapid restoration of normal operations at West Coast ports.”
A new wrinkle concerning labor work stoppages expanded earlier in the week as independent truck drivers contracted by trucking firms serving both ports initiated multi-day job actions seeking fair wages and better working conditions. These job actions expanded to five trucking firms serving the port complex as of Monday. Truck drivers, mostly hired as independent contractors, have had longstanding grievances with local trucking firms and now the Teamsters labor union has taken the current port crisis as an opportunity to leverage driver demands to be recognized as full-time employees.
We again echo our Supply Chain Matters advice that industry supply chains impacted by the current west coast port disruption should be in full response management mode and seeking alternative options for both imports and exports from these ports. The situation is such that there appears to be little indication of improvement and further indications of shutdown, lock-out or government imposed mediation. Response time to save holiday revenue budgets is in critical stages, too late to save the Black Friday-Cyber Monday holiday weekend, and essential to save customer December and January holiday fulfillment commitments.
We may well observe that the winners and losers of the 2014 holiday buying surge were those individual industry supply chain teams that demonstrated the most resiliency and responsiveness to the west coast port debacle.
We are a mere two weeks before the Black Friday holiday shopping kick-off, and a mere six weeks before the actual Christmas holiday and the severe congestion that is crippling U.S. west coast ports essentially remains the same.
In last week’s Supply Chain Matters commentary we described what many are calling the “perfect storm” of supply chain disruption. Another week later, the crisis is cascading across industry and transportation channels, affecting both imports as well as time-sensitive exports. An NBC News broadcast in the U.S. notes that as of yesterday, 13 ships are anchored off the coast waiting to be unloaded and describes container shipping at “full stop”. While that may be a bit of journalistic sensationalism, it is descriptive.
The on-the-ground realities seem little changed from last week’s situation.
Public finger-pointing among the ILWU labor union and the Pacific Maritime Association (PMA) has become a public spectacle vs. any perceived constructive progress. Union officials continue to point to chronic shortages of truck chassis, the impact of having to unload far larger container ships and rail bottlenecks. Meanwhile, at least one container shipping line, U.S. Lines, is placing a Port Congestion Surcharge, effective November 17, amounting to $800 for a twenty-foot container and $1000 for a 40-foot container. That is sure to add additional heartburn for retailers and manufacturers alike.
A published report from the Journal of Commerce reports that air freight forwarders with operations in the Asia Pacific region are observing space shortages with shipping costs rising dramatically. That should not be a complete surprise considering that Apple and other consumer electronics providers had previously locked-up air freight capacity to overcome their own production backlogs.
The National Retail Federation (NRF) continues to lobby for the personal intervention of President Obama but that effort, even if it did occur, is unlikely to relieve the current congestion any time soon.
As we stated last week, regardless of the finger-pointing, the situation is indeed the perfect storm scenario that many had feared and industry supply chains need to deal with the current realities. Noted in this week’s Wal-Mart commentary, retailers have already kicked-off holiday promotional merchandising and are de-emphasizing the singular Black Friday shopping event in favor of a steady stream of promotions extending through the end of November and probably well into December.
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 inching closer to being the Grinch’s of Christmas.
This week, AP Moller-Maersk, parent of global leading ocean container shipping line Maersk reported rather positive Q3 financial results. For the third quarter, the shipping concern reported an overall net earnings increase of 25 percent on flat revenues. However, Maersk did take the opportunity to once again warn its investors of a continuing slowdown in global trade.
Financial highlights for the Maersk Line unit included revenues of $7.1B and profits of $554M. Return on invested capital was 13.5 percent compared with 10.9 percent a year earlier. Volumes increased by 3.7 percent, average rate increased by 0.9 percent while unit costs decreased by 0.9 percent. Fuel costs decreased 2.4 percent from the year earlier period.
According to reporting from the Financial Times (paid subscription or free metered view), aggressive cost cutting and lower use of fuel has made Maersk Line the most profitable in the industry. The publication notes that current operating margin of 10.5 percent is considerably higher than the average of industry rivals. Once more, Maersk boosted its operating margin over two percentage points in one quarter, and has the opportunity to continue boost future margins through the announced 10 year 2M vessel sharing alliance with rival Mediterranean Shipping Company (MSC).
Maersk CEO is again quoted as indicating that in essence, the glory days of rapid industry growth in containerized trade is over. Operators must now assume lower single-digit volume growth.
In the midst of continued industry-wide overcapacity and little industry volume growth, Maersk continues to demonstrate that it will aggressively compete for additional business and market-share. In September, Maersk Line announced a renewed ship acquisition program. It announced plans to invest upwards of $3B per year, for the next five years to acquire the equivalent of 30 new 14,000 TEU capacity vessels. That is despite its recent investments and delivery of new Triple-E vessels capable of handling upwards of 18,000 TEU’s. The new acquisition of more technologically advanced and more fuel efficient vessels further provide the opportunity to scrap older, less efficient vessels.
Included in our Supply Chain Matters Predictions for Global Supply Chains for the current year, we forecasted continued industry consolidation in surface transportation. Maersk’s continued financial performance and aggressive competitive stance adds further kindling for the industry’s lower-tied players to make additional moves or be left behind.
Supply Chain Matters will be scorecarding each our 2013 Predictions in the not too distant future.
Global retailer Wal-Mart indicates that it will abandon its prior emphasis on the singular one-day Black Friday buying holiday and will instead spread promotional incentives over an extended five day period beginning in the last week of November. By our lens, this is good news for consumers but not so for certain retail competitors.
Wal-Mart’s efforts at spreading out online and in-store buyer incentives allows shoppers greater flexibility to shop for bargains and avoid the craziness and frenzy of Black Friday mobs in stores and online. The retailer’s employees hopefully get some brief time to celebrate the Thanksgiving Holiday with family and friends. Reports indicate that Wal-Mart will extend promotions thru the entire Black Friday weekend, with an additional flurry of bargains on Cyber Monday. The retailer further indicates that it will be matching online prices from its website as well as in its physical stores.
Other retailers including Amazon have scheduled their holiday promotions to begin earlier in November as well. Already, our inbox contains promotional emails for holiday bargains. What thing is certain, the largest online retailers including Wal-Mart and Amazon will be playing even more hardball in holiday promotions.
All of these efforts can hopefully avoid what occurred in 2013, consumers waiting to the very last days and hours prior to the Christmas holiday to make their purchases only to discover the weakest link, the last-mile of delivery from parcel shipping companies. Both FedEx and UPS have been urging retailers to spread out their promotions and avoid multiple delivery network surges. However, UPS anticipates that its peak day will be December 22. 6 days later than what the package delivery firm planned for in 2013. UPS is planning to process 585 million packages in the month of December.
An added dimension this year is the U.S. Postal Service and its efforts to be a more mainstream player in last-minute last mile parcel delivery. A final dimension in 2014 will be how Amazon and Google’s efforts in piloting their own pilot delivery networks fare in supporting or mitigating surge fulfillment periods.
The not so good news concerns retailers who are still scrambling to get inbound inventories moved through highly congested and near dysfunctional U.S. West Coast ports. With competitive promotional programs about to kick-off, some retailers will have to fess-up to not having inventory to satisfy consumer holiday needs, or be notified by suppliers that inventory is delayed.
This is all a game of competitive positioning and the stakes are high. Some business and social media outlets, knowing what may be forthcoming, are advising consumers to wait to the very last-minute before initiating holiday gift purchases. The premise is that certain retailers might be more motivated to offer more attractive bargains once they assess their inventory situation.
Another certainly is that retail and B2C focused S&OP forums and their supporting supply chains can expect a steady stream of intense activity, and perhaps more surprises now and through the end of December. It will not be pretty and the winners will be those that can plan and anticipate consumer actions and those that can best respond to changing events.
Keep your web browser pointed to Supply Chain Matters for continuing updates and insights regarding the 2014 holiday surge.
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.
Two years ago. Supply Chain Matters called reader attention to an important milestone in Asia and North Atlantic Ocean transit. At the time, a Chinese icebreaker was successful in completing the first ship voyage that utilized an Arctic Ocean and polar icecap route to travel from China to an Icelandic port.
Last year, we highlighted reports that a Chinese cargo ship successfully made the first ever commercial transit of the Northwest Passage. The Yong Sheng, a cargo vessel operated by state-owned Cosco Group set sail from the port of Dalian for Rotterdam.
This week, the Wall Street Journal reported (paid subscription) further volume increases for this northern shipping route. The article cites data from the Artic Institute in Washington DC indicating that 71 ships carried 1.3 million tons of cargo via the Artic route in 2013. That was up from 46 vessels in 2012.
The Institute indicates that most of the volume was either one-way shipments of fossil fuels from Northern Europe to Asia, or inter-port voyages among Russian ports. Only 30 vessels carried cargo for the full length of the Arctic shipping lane. One other interesting aspect was that more goods were shipped from Europe to Asia than the other way around, which was the initial promise for the Northern Passage route.
The WSJ report indicates that rather than the promise of a new seaway from Asia to Europe, the current effort is more about developing Arctic sea ports which has become an important objective of the Russian government.