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Ocean Container Industry Dynamics Moving Faster


Starting in late 2011 and early 2012, we began alerting our Supply Chain Matters readers to the building signs of potential consolidation and restructuring for the ocean container shipping industry. That was the time when the major container shipping lines began the pooling of capacity under various formed shipping alliances. Since that time, we believed it was important to provide continual updates, both on this platform, our annual predictions and other research. Gantry_Load_2

Our update in April of this year re-iterated business media reports that the industry had, in-essence, three options: either shrink, merge or continue to ride out the worst downturns in decades.

Industry media also began to question whether shipping lines have chosen to ignore the implications of introducing larger mega-ship sized container vessels within an industry wide environment that was demonstrating anywhere from 10 percent, to as much as 30 percent excess capacity. Current freight rates for the industry are barely compensating for the cost of fuel let alone overall operating costs. The financial pressures continue to mount and the smaller carriers continue to operate under enormous financial stress.

Of late, shippers have been benefitting from the fallout of severely depressed freight rates but paying the price in slower transit times and unreliable scheduling of vessels.  Some questioned whether shippers have been lulled into a perspective of sticking one’s head in the sand and assuming that excess capacity and depressed freight rates would eventually work itself out.

The current wake-up call has been the ongoing financial crisis that has been impacting Hanjin Shipping, as thousands of in-transit ocean containers were stranded by the declaration of bankruptcy protection of the south Korean based carrier. The latest development for Hanjin came earlier this week when a South Korean bankruptcy court ordered the shipping line to return its chartered ships back to their respective owners and to sell off as many of its owned vessels as possible. Neither the carrier’s banks, owners, or South Korean government are indicating any intent to bailout this shipping line to its original presence. Business media reports indicate that this is the strongest signal yet that the heavily debt loaded Korean carrier will either be liquidated or transformed into a much smaller, regionally based shipping carrier. We view the Hanjin developments as a definitive sign that the ocean container shipping industry can no longer continue to ride out the current industry dilemma.

The newest significant development will be this week’s announcement by Danish shipping giant A.P. Moller-Maersk indicating that it would split its current business operations into two separate operating businesses. Maersk Line, the world’s most dominant ocean container carrier will be the center point for a new container transport and logistics division that will consist of other owned businesses such as APM Terminals, Damco and Maersk Container Industry businesses. According to a report from The Wall Street Journal (Paid subscription required): “The split is intended to give Maersk Line more flexibility to grow through acquisitions in what is expected to be an acceleration of industry consolidation in coming months.” Further reported is a view by shipping executives that three existing Japan based carriers, along with Hong Kong based OOCL and Taiwan based Yang Ming Marine will likely be the target of bigger industry players.

Thus, the next phase for further merger and consolidations is about to commence, and shippers need to stay informed and be ready with what-if contingency planning.

At best, 2017 could be viewed as a year of continued industry consolidation. Ocean container freight rates are expected to continue at depressed and unsustainable levels with carriers idling additional vessels to protect margins and financial performance.

We advise global shippers and transportation services procurement teams to continue to plan for slower transit times and supplemental needs for adequate safety stocks.  It would be wise to have some contingency plans in place to avoid being disrupted by another Hanjin type of development.

Beyond 2017 is anybody’s guess as the larger industry players absorb certain other existing players. The open question, by our lens, is whether global maritime regulators step-in to protect shipper and industry interests.

Stay vigilant and up-to-date.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Supply Chain Matters Highlights of Oracle OpenWorld- Commentary Two


This Editor is once again attending the Oracle Open World conference here in San Francisco and Supply Chain Matters is publishing impressions throughout the week. We began our coverage with highlights of Oracle’s Q1 FY17 financial performance last week, along with our initial Commentary One posting.

In our previous commentary we observed that Oracle has been sharing the customer uptake counts for Oracle HCM Cloud and Oracle CX Cloud. While there was again specific mention of Oracle SCM Cloud (Oracle’s complete suite of Cloud based supply chain management and manufacturing applications) there was no customer data shared from the podium in Larry Ellison’s opening keynote. We stated our goal for the remaining sessions of this year’s OpenWorld is to probe deeper on current market uptake.

Yesterday, Supply Chain Matters specifically attended the 90 minute session: Oracle Supply Chain Management and the Intelligent Supply Chain. This session featured seven people on the podium including two of Oracle’s most senior supply chain development executives. Executive vice-president Rick Jewell specifically addressed what he termed as the “state of the union of Oracle SCM Cloud.” Here are the highlights:

A current total of 1090 SCM Cloud customers was indicated. (Note: This author later confirmed with a senior Oracle executive that there is the possibility of some double-counting of customers among ERP Cloud and SCM Cloud.)

A detailed listing of current SCM Cloud applications customer uptake and entry points indicated:

  • 290 adopting inventory management
  • 200 adopting product innovation management and PLM
  • 160 adopting transportation and global trade management
  • 90 adopting order management
  • 40 adopting manufacturing and planning control

Jewel further shared current highlights of operating statistics concerning the Oracle SCM Cloud platform which included:

  • Managing 28 million product lines
  • $40 billion freight spending under management
  • 600,000 plus named users
  • 3000 plus trained partners

Also during the session, the profile of four early-adopter customers were shared and included:

  • Canadian based medical device manufacturer Profound Medical Corp
  • UK based life sciences company Abcam
  • S. based energy fuel cell provider Ballard Power Systems
  • High tech consumer electronics manufacturer Western Digital which is currently embarking on a three year deployment window of all-in for Oracle SCM Cloud

There was lots of other information shared in this session including future applications releases planned for 2017

We will cover more of this detail in other subsequent other OpenWorld dedicated commentaries.

Suffice to note at this point that Oracle is achieving some initial momentum with its Oracle SCM Cloud suite and the ongoing development cycle is accelerating.

Stay tuned to our continuing coverage of Oracle OpenWorld 2016.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Hanjin Shipping Receivership- The Financial Shot Heard Across the Globe


Ocean container shipping and logistics are the lifeblood of global supply chain movements. For over three years, Supply Chain Matters has continually warned of pending disruption concerning the deepening global overcapacity conditions among global ocean container carriers. This week marks a clear definitive statement of that disruption, the unraveling of the financial implications. The declaration of receivership by Korean based Hanjin Shipping Company should be viewed as the first of many other cascading developments and consequent implications of multi-industry supply chains. It could not come at the most critical period for shippers, the ongoing peak period of inbound holiday related products and components.

Developments concerning Hanjin began on Tuesday when South Korea’s sate-owned Korea Development Bank withdrew its financial support indicating that a funding plan by the carrier’s parent group was not adequate enough to address outstanding debt of $5.5 billion. The South Korean government then indicated that it wanted domestic rival Hyundai Marine to buy designated healthy assets of the financially troubled Hanjin, in-effect eliminating the option of a merger among the two Korean carriers. Hyundai itself had already embarked on a creditor-led restricting program of its own On Wednesday, Hanjin management had little option but to declare the firm in receivership, a form of creditor protection. According to industry sources, the ocean carrier represents the seventh-largest shipping line by overall capacity.

As global transportation managers are well aware, a carrier’s filing of receivership precipitates another of subsequent actions.  Many global ports will not accept nor export cargo on the carrier’s vessels because of uncertainties as to whom we pay charges or more importedly, whether specific vessels will be seized by creditors as captured assets in jurisdiction outside the control of Korea’s legal system.  We noted reports of two vessel seizures thus far, one involving the Port of Singapore, the other Shanghai.

According to business media reports, a South Korea court has yet to determine whether he carrier should be liquidated or given the opportunity to survive under an extended creditor-enforced restructuring, which has been in-effect since May. From our lens, we would be surprised if extended restructuring is approved given the history of events.

Today, The Wall Street Journal reports that the repercussions of the carrier’s receivership were nearly instantaneous. The carrier has stopped accepting cargo as U.S. and other global ports began turning away its inbound ships. Ports have further indicated that they will not accept outbound containers routed for Hanjin vessels, causing exporters to now scramble to rebook on other ocean carriers and secure other non-Hanjin containers. Other industry sources are quoted as indicating that shippers are now experiencing new rate surcharges by remaining carriers. That is to be expected since the entire container industry is experiencing current market rates that just cover the cost of fuel.

Once more, the WSJ reports that the receivership would likely lead to the carrier’s exclusion from the six-member shipping alliance termed The Alliance.

Compounding the developments concerning Hanjin Shipping are reports of major cutbacks and restructuring among Korea’s shipbuilding industry, the major producer of new container ships.  Last week, STX Shipbuilding, Korea’s fourth-largest shipyard, announced a sweeping restructuring including the potential sales of a profitable shipbuilding yard in France. Three of the other major Korean shipbuilders, Hyundai Heavy Industries, Daewoo Shipbuilding and Samsung Heavy Industries are each under restructurings from creditor banks.

Likewise, other existing global ocean container lines have reported recent financial performance amounting to aggregated operating losses amounting to billions of dollars. Thus on both the supply of new vessels, and the demand for ocean container shipments, meaningful developments are occurring that will lead to further developments.

We therefore conclude that the ocean container industry has now reached the point of inevitable financial crisis, and our multi-industry readers should expect consolidation related consequences in the weeks and months to come. Global financial networks and interrelationships are now coming to the realities of an industry that has been too slow to address its gross overcapacity situation.

In March of 2015, The Boston Consulting Group published an industry perspective concluding: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declared that overcapacity had fueled a downward spiral of decreased earnings and marginal shareholder value. Obviously, that spiral has now reached a phase of far more consequence and the question will be which carriers survive and which carriers are forced into other actions.


Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

The U.S. Postal Service Has Reached a Critical Crossroads


This week, the United States Postal Service (USPS) reported its financial performance for the latest quarter, and from our lens, there are distinct indications that the agency has reached a critical juncture in its ability to be a sustaining competitor and service provider to the world of online fulfillment. As the agency handles more and more package volumes, its transportation and operating costs have risen significantly. Readers, those residing in small and medium as well as large businesses, need to continue to be aware of the implications of this trend.  USPS Delivery_sized

In September of 2014, Supply Chain Matters declared that the USPS had suddenly changed the industry dynamics of parcel shipping, online commerce and customer fulfillment.  The agency established a whole different dynamic for B2C/B2B online commerce by aggressively reducing parcel shipping rates and by declaring to online retailers and businesses that the USPS intended to be a parcel transportation and last-mile delivery partner in the ongoing explosion of online. Suddenly, e-retailers who wanted to maintain attractive free shipping options discovered a potential new alternative to control costs of such programs, and entities such as Amazon were quick to make leverage.  Both FedEx and UPS were not all that pleased with the pricing move and began logging protests claiming foul, even though both relied on the agency for completing more costly last-mile delivery needs.  However, both were forced to deal with a different competitive landscape in terms of rates and customer alternatives.

Then we viewed the evidence of the results from the all-important 2015 holiday fulfillment quarter, as the agency actually surpassed UPS in total delivered packages. USPS letter carriers delivered about 660 million packages, up from an initial anticipated volume of 600 million packages. UPS reportedly delivered 612 million packages as compared to its initial forecast of 630 million. The postal agency offered the equivalent of as many as 25,000 Sunday delivery routes, up from a normal 4000 pattern.  In essence, the USPS became the de-facto go-to carrier for Amazon’s needs for Sunday deliveries. Financially, the agency recorded its first quarterly profit since 2011, earning $307 million, a significant milestone.

In the latest June ending quarter, while total revenues increased 7 percent, the agency reported a controllable loss of $552 million compared with a year-earlier controllable loss of $197 million. Overall volumes were down slightly while package volumes increased 14 percent, an indication of offsetting declining volume in standard mail. The agency reports that it is now delivering to one million additional addresses across the U.S..

In the latest quarter, operating expenses increased 12 percent. The agency’s CFO indicated that transportation and compensation costs continue to rise despite strict cost controls, and according to The Wall Street Journal, the majority of compensation cost increases were related to the growth in package volumes.  Further noted was that transportation costs rose in part due to added air freight expenses to meet customer expectations.  According to a statement from the Postmaster General, while a recent package rate increase helped to boost revenues in that segment, it was not enough to offset rising costs. By the way, the principle air freight services provider to the agency is FedEx, who obviously benefitted from increased USPS package volumes.

From our lens, the USPS cannot continue to sustain its growth in package deliveries related to current and more expanded online commerce package volumes without investments in newer equipment, systems, and more flexible people resources. Most current delivery vans are over 20 years old and added package volumes are obviously taking a toll on these trucks. The agency is close to awarding contracts in evaluating new delivery van prototypes with larger cargo capacities while consuming less fuel, but the timetable obviously needs to accelerate.  Most of the agencies inter-city and cross-country surface delivery needs are established with external transportation firms or independent trucking contractors. As noted, air freight resources are contracted as well.

Scalability of this model does not equate to added efficiencies and cost control. As a government agency, beholden to the U.S. Congress, there are obvious political constraints.  Some in Congress want to be rid of direct government ownership yet many current and retired postal workers as well as associated contractors are voters who expect their interests to be considered. Add to this a heightened and highly partisan Presidential campaign environment and readers can get the picture.

The agency and its associated postal workforce have proven viability as an option in package delivery and last-mile fulfillment. The latest TV commercials depicting USPS vans branded with virtual retail branding has purposeful meaning for online consumers. But, the crossroads has been reached in terms of added scalability without losing additional monies.

It is time for the U.S. Congress to act.  Either allow the agency to manage, invest and compete as an alternative e-commerce delivery provider or take action on other options.

The analogy is perhaps a teenager that proves to his or her parents that they have finally grown-up and matured, and desire to launch on a chosen career, and seek the support to do so. So is the situation with the USPS and the Congress. The crossroads is at-hand.

In the meantime, businesses need to stay aware to the implications of these trends especially in the light of continual evidence indicating that supporting online customer fulfillment has become more expensive with every passing campaign.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved


Supply Chain Matters Praise to an Airline CEO


No sooner had Supply Chain Matters raised our awareness to the collective march to the bottom of the U.S. airline industry came this week’s network-wide computer systems disruption impacting Delta Airlines.  As we observed, it is looking more and more like the industry is being led by financial types who seem to have completely ignored the tenets and principles of basic operations and network management.

But, Supply Chain Matters wants to extend direct praise to Delta Chief Executive, Ed Bastian. The primary reason- as the CEO he stepped-up and took full responsibility for the systems failure resulting in the cancelling of thousands of flights and inconvenience to countless customers. He further praised all of his employees for the extraordinary effort in delaing with this crisis and efforts to assist impacted customers.  Delta_Airlines_seats

The airline further posted a video where the CEO directly apologized to Delta customers.

According to Bastian, the disruption began when a power switch failed causing a power outage that subsequently led to other cascading incidents including a transformer blow out in Delta’s data center. The entire system crashed and backup systems did not perform as expected. Bastian indicated openly: “This is our responsibility- the buck stops here.”

What impressed us even more was Bastia’s statement:

“It’s not clear the priorities in our investment have been in the right place. It has caused us to ask a lot of questions which candidly we don’t have a lot of answers for.”

Unlike some other airlines, Delta has invested in operational capability both in aircraft and in supporting systems. In 2012 we praised Delta’s bold supply chain vertical integration initiative in acquiring its own oil refinery. We have also highlighted innovation in aircraft re-purposing.

Yet, this week, the system failed, and the airline has taken full responsibility to find out why and hopefully correct flaws.

Too often in times of major operational or supply chain disruption, CEO’s turn silent and de-facto let operational executives take the arrows and blowback. Some are arrogant enough to openly blame disruption on suppliers, partners or equipment, not acknowledging the principles of ownership and accountability.

Hopefully this week’s incident may provide a watershed for the U.S. airline industry. The compass of services focused on customer needs for a convenient, somewhat pleasant and reliable travel experience has been pointed in the wrong direction, and the consequences and cost of these decisions are coming home to roost.

Praise to a CEO who demonstrates accountability and leadership. We need more of this.

Bob Ferrari

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