As we have often noted in our commentaries, when businesses need to communicate bad news, it is often done late in the Friday new cycle. Thus, we often check our news feeds on a Saturday morning for any meaningful supply chain focused news.
Yesterday, UPS pre-announced expected fourth quarter 2014 results which communicated added unforeseen expenses related to its support of the all-important holiday surge shipping quarter. Noted in the release: “While package volume and revenue results were in line with expectations, operating profit was negatively impacted by higher than expected peak-related expenses.”
Of further note was this statement from UPS CEO David Abney:
“Clearly, our financial performance during the quarter was disappointing,” said David Abney, UPS chief executive officer. “UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double. Though customers enjoyed high quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season.”
In today’s edition of The Wall Street Journal, the headline article is aptly titled: UPS Has a Holiday Hangover. It reports that UPS surprised Wall Street in its pre-announcement indicating an unplanned $200 million in additional expenses to handle the holiday rush. According to the report, $100 million of the added expense was attributed to low productivity while the remaining $100 million attributed to higher vehicle rental and staffing costs. While Brown was prepared to support the Thanksgiving holiday to Cyber Monday surge, slower than anticipated volumes in the first two weeks of December led to the overhang in expenses. UPS further warned that its 2015 earnings projection is now likely out of reach.
The initial reaction from Wall Street was a decline in UPS stock of nearly 10 percent.
So much for Wall Street’s view. Let’s instead attempt to put a supply chain operations view to what might have occurred.
As Supply Chain Matters has noted in pre-holiday surge commentaries, UPS and FedEx planned and invested considerable resources to avoid the snafus that occurred during 2013 when UPS was thrown under the bus for not being able to deliver holiday packages during the final days before the Christmas holiday. Beyond resource planning, both carriers actively worked with retailers to influence the pace of promotional activity to avoid a last-minute surge of volume that would exceed network capacity. Both worked with manufacturers and retailers when significant slowdowns occurred at U.S. west coast ports supporting requirement for alternative routings or flex air freight capacity. As we and other media have reported, that planning paid off, and holiday surge delivery performance occurred pretty much flawlessly.
Now let’s speculate on the internal organizational aspects of “We Love Logistics”. Those that have first-line experience in operations management can attest to management directives or zeal, perhaps to the notions that our network is not going to be cited as the point of failure ever again. It could have been: We will not be the party that gets thrown under the bus and will do what’s necessary to insure that does not happen. Thus, UPS operations teams may have well taken on that challenge and flawlessly executed what needed to be done, including the hiring of even more temporary workers, added equipment and staging space. The network and its added resources performed at the expense of planned budget.
For consumers, retailers and B2B firms, there is now a dilemma. UPS will now initiate efforts to restore its Wall Street cred and more importantly, respond to perceptions that E-Commerce or Omni-channel commerce has become a high-cost, low margin trap for transportation and logistics providers. As noted in the UPS statements, businesses can anticipate higher peak ground pricing in 2015. That’s in addition to the new dimensional pricing that was implemented this year.
Remember this date, since it may foretell the start of a new dynamic for parcel shipment and delivery. We anticipate that major online retailers will initiate a different form of planning for the 2015 holiday surge, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. We should not be surprised if new or different business models and strategies begin to emerge in the coming months.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Within our 2015 Predictions for Industry and Global Supply Chains (now available in complimentary research report- see note below), Prediction Five indicates a turbulent upcoming year in global transportation.
Supply Chain Management Review recently featured highlights from an interview with the Research Manager of Drewry Supply Chain Advisors regarding the state of the ocean cargo industry. We call attention to this interview because portions point to what can be expected in ocean shipping this year. For readers unfamiliar with Drewry, the firm is globally recognized in sea freight market intelligence and benchmarking and a specialist advisor in international sea freight procurement.
In the interview, Drewry Research Manager Marin Dixon indicates another year of freight rate market volatility and that supply-demand equilibrium will not return until 2017 at the earliest. Ocean container carriers will continue to be challenged by overcapacity.
Regarding the ongoing disruption involving U.S. west coast ports, Drewry expects U.S. port congestion to remain an issue with cost implications throughout 2015. The consequence is noted as more shippers considering options to protect themselves against future labor disruption risks by shifting routings to alternative ports.
Regarding ocean container shipping lines, Drewry expects more alliance consolidations over the next few years as carriers seek to leverage economies of scale and respond to market dynamics for unit cost leadership.
All in all, and as noted in the previous posting, another reinforcement of continued industry turbulence.
Note: We are experiencing technical issues within our Supply Chain Matters Research Center. If you desire a complimentary copy of our 2015 Predictions for Industry and Global Supply Chains, please send an email to: supplychaininfo <at> theferrarigroup <dot> com. Please insure you include your name, role and return email address.
Two of the busiest ports, estimated to represent upwards of 40 percent of container volume in the United States, are the Ports of Los Angeles and Long Beach. Both have recently announced their highly anticipated annual operational volume statistics for 2014.
By now, most industry supply chains are aware of the significant disruption and gridlock conditions that occurred at these ports in the latter-half of 2014 that have cascaded to other supply chain dimensions. Our community remains rather concerned that conditions will worsen or the ports will themselves temporarily shutdown because of the ongoing gridlock. The open question is what the 2014 numbers provide for insights relative to addressing operational gridlock, whether the latter-half disruption was one-time or a far broader set of challenges at play. In this Supply Chain Matters posting, we share some initial observations.
The Port of Los Angeles announced that overall container volumes increased 6 percent in 2014 with total volumes exceeding 8.3 million TEU’s (twenty-foot equivalent units). That overall number is somewhat higher than those that were reported in 2012 and almost equivalent to total volumes reported in the pre-recession years of 2006-2008. Recall that 2012 was the period of the last port disruption brought about by labor contract negotiations.
The first question that popped for us was what would the 2014 numbers have been if operations were running normally in the latter half of the year? Would that percentage increase be 8 percent or 10 percent, exceeding pre-recession numbers? In the wake of a global trend toward more U.S. sourcing of production, what is behind the increase?
A review of the detail provides other indicators. While loaded inbound containers increased 4.4 percent, loaded outbound or export container shipments dropped nearly 12 percent. Traditional and social media now includes reports that exports, especially agricultural exports, were significantly impacted, and how shippers have scrambled to seek alternative ports to export commodities and goods. Another interesting but concerning statistic was that empty container shipments increased slightly over 7 percent, Both of these trends warrant further analysis.
Let’s turn our lens to the adjacent Port of Long Beach which announced this week that 2014 was its third-busiest year ever. Total volume exceeded 6.8 million TEU’s and according to reported history dating back to 1995, the other two busiest years were roughly 7.3 million TEU’s in both 2006 and 2007, again, just prior to the severe recession. Same impression, what would these numbers have been without gridlock?
By our calculation, loaded inbound containers at Long Beach increased 1.8 percent, while loaded outbound containers decreased 5.8 percent. Empty container shipments increased a little over 8 percent. At summary glance, inbound containers are on the rise while outbound is declining, a similar trend. Empty containers shipments seem to be lower than the far higher peaks of 2005-2007.
There have been various conflicting accounts of what caused both of these U.S. west coast ports to gridlock. Obviously, ongoing labor contract renewal negotiations had an impact, but certainly not all. In 2014, more container mega-ships called on these two ports which in theory required added unloading and processing time. A missing statistic that would prove interesting is how many total ships called on these ports in 2014 vs. prior years.
We do not portray ourselves as experts in shipping statistics and trends and perhaps some of our readers versed in these trends can shed additional observations. However, the focus needs to be directed at addressing underlying logistical challenges that are perhaps driving more important needs, not just for these two ports, but others as well.
In the latter-half of 2014, there were reported shortages of container carriages for surface transport causing a backup in unloading operations. Ownership of these carriages was generally outsourced to other parties by shipping lines, probably to reduce their operating fixed costs. Reports indicated continual mismatching of where carriages were required to be or congestion points for moving such carriages among ports. Ongoing labor disputes among independent contract truck drivers working at trucking companies serving ports led to slowdowns, especially when rigs were constantly tied-up or idled, awaiting to enter or exit the port. New unionization efforts were prompted by driver frustrations that as independent contractors, they were losing wages and benefits.
Intermodal transfers to rail lines likewise were impacted when operations became increasingly backlogged. This week, the CEO of Union Pacific indicated to analysts that congestion at the ports is hurting the railroad’s first quarter volumes. Echoed in a published Wall Street Journal report was the reality that railroads cannot risk another disruption to networks, and that if the ports were to encounter a total shutdown, rail traffic destined to and from such ports would temporarily cease. Compounding backlogs further led to double-digit numbers of vessels at anchor awaiting an available berth. Some moved to other alternative ports to unload because of unacceptable scheduling disruption.
The takeaway is that high level operational performance numbers while providing some overall performance indicators, can be sugarcoated, and hopefully, port management teams are conducting far deeper analysis of the multiple logistical forces at-work that can permanently alter port throughput volumes in 2015 and beyond. Today’s global transportation and logistical customer business requirements demand synchronized networks. As highlighted in our previous Supply Chain Matters commentary, speed and cost of logistics are an ultimate determining factor in global product sourcing decision-making.
A focus on optimization or cost-avoidance of certain segments impacts other segments. We trust that a tendency to sugar-coat annual performance in spite of such extraordinary challenges hides the jagged rocks beneath the surface. The ongoing labor contract negotiations are one symptomatic cause, but operators and organized labor need to be concerned with other equally if more important logistical challenges that are compounding themselves.
Port paralysis is no longer the purview of just U.S. west coast ports, but a far broader combination of logistical challenges that have impacted the global transportation industry and industry supply chain abilities to compete and deliver expected financial results. While continual pressures call for mediation and resolution of labor disputes, they should not be the panacea for not addressing ongoing serious logistical challenges that are compounding themselves in the surface transportation sectors. This an industry problem as well as a local one.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Throughout 2014, Supply Chain Matters featured commentaries related to the North America railroad industry, specifically capacity, safety and specialty car backhaul operational challenges that impacted multiple industry supply chains. General business and supply chain media noted incidents of severe congestion, marginal service and other operational issues effecting rail traffic last year.
To no surprise, The Association of American Railroads (AAR), an industry policy, research and technology organization, reported increased freight rate traffic for 2014. As is always the case in this new world of rapidly changing business dynamics, 2015 may present a different set of industry challenges and circumstances.
According to the AAR, total combined freight traffic for U.S. railroads in 2014 increased 4.5 percent to over 28.6 million carloads, containers and trailers, the highest annual total since 2007. To no surprise, shipments of petroleum and petroleum products increased 12.7 percent. Other reported shipment highlights included intermodal shipments up 5.2 percent to nearly 13.5 million containers and trailers while grain shipments were reported up by 13.5 percent.
AAR predicts that 2015 will be another challenging year which is echoed by a report in today’s edition of The Wall Street Journal which reports that Wall Street expects most railroads to continue to demonstrate double-digit earnings increases this year.
The current plunging price levels for crude oil however 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. New technology mandates outlined in the Rail Safety Improvement of 2008 calls for the full implementation of Positive Train Control (PTC) by 2015. While progress is described as substantial, the industry is already on-record as declaring this objective “an unprecedented technical and operational challenge. “
For their part, individual railroads indicate that they have made the necessary investments in new equipment, personnel and infrastructure to address prior service issues. Last week, U.S. Secretary of Agriculture Tom Vilsack spoke at farmers conference and indicated that U.S. transportation systems were not prepared as they should have for the spike in crude by rail shipments and their impacts to other rail network service levels.
Consequent reductions in diesel fuel prices now make trucking freight a more economical alternative for bulk shippers if trucking capacity is available, which is another separate challenge. Lower oil prices are further expected to change the dynamics of demand for the coal industry.
In the coming months, Supply Chain Matters will continue to feature commentaries related to railroad industry dynamics. We are in the process of planning interviews with academic and industry spokespersons to provide perspectives from both transportation operator and shipper.
Stay tuned for our first interview in the coming weeks.
Late yesterday, in response to a joint request, the Federal Mediation and Conciliation Service, a U.S. agency responsible for mediating labor disputes was asked to intervene in contract talks among the Pacific Maritime Association, operator of 29 U.S. West Coast ports, and Longshoremen.
According to various media reports, tensions among the PMA and labor union negotiators escalated substantially on Friday of last week after the PMA announced a move to lower the number of workers unloading cargo ships at both the ports of Long Beach and Los Angeles at night. The PMA indicates that it had to reduce night shift requirements to slow the number of containers filling storage yards.
One report indicates that early this week, nine container ships were waiting for unloading berths at either Long Beach or Los Angeles. That is an indicator that port operations remain backlogged at the same pace as November and December.
This development will fuel added concerns that the west coast port disruption of the past few months may be headed toward more crises if Federal mediators do not help in moving these labor talks forward. Even more important is the resolution of the multiple operational problems that created the “perfect storm” of port dysfunction during these past few months.
The U.S. west coast port crisis continues to bring unoptimistic developments and that should be a continuing concern for multiple industry supply chains.
As we approach the start of the New Year, B2C and Omni-channel focused supply chains teams can begin to take a much needed breather. While reverse supply chain activities continue to ramp over the remaining days of the calendar year, it’s a good time to reflect on the initial learning from the 2014 holiday surge.
From all the sources Supply Chain Matters has tapped thus far, it would appear that the many weeks of pre-planning have yielded a rather smooth fulfillment period. If there is to a single headline related to the supply chain Grinch of the 2014 season, it remains the very ill-timed west coast port disruption and its impact on multiple other supply chain and logistics fulfillment teams.
A National Retail Federation (NRF) sponsored Holiday Consumer Spending survey released in mid-December indicates that the average holiday shopper had completed nearly 53 percent of shopping activity by mid-month, up from nearly 50 percent reported during this same time period in 2013. The survey pointed to two profiles of shoppers, those who were compelled to act on early, hard to pass up in-store and online promotions, and others waiting to the last minute to wrap-up their shopping. That data is generally what was reported as shopper profiles in 2013. Regarding last-minute shopping, the NRF survey indicated that nearly 34 percent of those last-minute shoppers were planning to buy the last holiday gift before December 18. For us, that is an indicator that consumers helped in avoiding a last-minute crunch.
Today’s Wall Street Journal cites data from online tracking software developer Shipmatrix indicating that 98 percent of express packages reached their destinations on time by December 24th. Shipmatrix calculated its reliability metrics from data on the millions of packages tracked for retailers and customers. The 2013 data reflected 90 percent on-time reliability for FedEx and 83 percent for UPS. At this point, we all know how UPS was thrown under the bus in 2013. The added infrastructure investments by both FedEx and UPS in surge capacity and added seasonal workers coupled with a lot of up-front pre-planning with retailers paid off this year. Heavy volume prompted FedEx to continue delivery activities on Christmas day but UPS curtailed on the 24th. Fewer retailers risked last-minute shipping promotions because they faced caps from both package carriers that limited last-minute shipping capacity, and because they headed the warnings. We suspect the shortage or late arrival of certain inventories had some play in the final on-time results but we will all have to wait for those results to come forward.
We rechecked online sales analytical data tracked by IBM’s Digital Analytics Benchmarking service and it further reinforces that order surges in both November and December were generally in-line with Black Friday, Cyber Monday and pre-holiday surge order volume periods. (See below extracts) The final peak of online activity in December was between December 15 and 17.
Rather interesting is the chart reflecting average order values among the various weeks. It reflects average order values of $115-$125 per order with mobile-based ordering reflecting a lower average.
Winter weather across the U.S. cooperated as well, with some minor exceptions. Our own Supply Chain Matters smaller-scale experiments in last-minute online ordering all turned out in on-time delivery. Amazon released a post-holiday summary of its holiday season activity which indicated that nearly 60 percent of its customers shopped using a mobile device and that trend accelerated later into the shopping season. That is a significant development.
Further, 10 million additional members joined Amazon Prime (free shipping) for the first time. That is yet another indicator of the power of free shipping in hitting the online Place Order button. Among other important supply chain and online fulfillment highlights:
- Amazon shipped to 185 countries and this holiday, Amazon customers ordered more than 10 times as many items with same-day delivery than in 2013. The last Prime one-day shipping order was placed on December 23 at 2:55pm EST and shipped to Philadelphia PA. The last Prime Now (same day) order was placed on December 24 at 10:24pm and delivered at 11:06pm. We won’t attempt to comment on the listed contents of that order.
- Sunday delivery expanded this year. As noted in our previous commentary, the U.S. Postal Service was the prime recipient.
The Amazon release further includes an extensive listing of holiday best-selling items which is in itself rather interesting. To no surprise, Disney’s Frozen Sparkle Elsa Doll topped the toys category while Disney Kids’ Frozen Anna and Elsa Digital Watches topped that category. What we do for our children and grandchildren! Chromebooks topped the computer category.
While we have not heard from Wal-Mart.com as yet, we anticipate that they had a very good holiday season as well.
For combination brick and mortar and online retailers, 2014 featured more cross-channel fulfillment experimentation including more direct ship from nearest retail store. We anticipate that challenges in distributed order management, inventory pooling and supply chain segmentation may come forth from 2014. Some readers may have noticed some not so flattering packaging, a sure sign of immaturity in pick and pack operations. It will be interesting to note the results of those efforts in the weeks to come when retailers report on their financial and operational results for the quarter. The open question is whether these efforts add or take-away from profitability.
The learning of the 2014 holiday surge is finally not complete without the ongoing byline of the west coast port disruption and ongoing contract labor talks. A previous Supply Chain Matters commentary highlighted the impacts among inbound and outbound container activity as well as how carriers like FedEx and UPS rallied to assist in added air capacity and multi-modal re-routing efforts. Even at this point at we close out calendar 2014, the two parties cannot agree as to how much progress is being made in resolving both contract and port productivity issues. The NRF’s latest news release continues to add scathing comments regarding the ongoing situation. We repeat our view that at this point, industry supply chains care less about the full resolution of labor contract renewal talks and more about the implications and learning associated with this series of events. There will be less tolerance for this magnitude of disruption and one of our 2015 Predictions is to anticipate alternative inbound and outbound container port inter-modal routings in 2015. The difference in financial bottom-lines may well be those supply chain teams that anticipated this disruption ahead of time to be able to initiate alternative planning.
More will go regarding the 2014 peak holiday season and like every other year, the learning will help in planning for the coming years.