There is positive news related to the U.S. west coast ports labor talk negotiations that impacted many industry supply chains during the latter-half of 2014 and the early months of this year.
The members of the Pacific Maritime Association (PMA), operators of the majority of ports along the U.S. West coast have voted overwhelmingly to ratify a new five-year contract with the International Longshore &Warehouse Union. The contract, when ratified by the ILWU, is retroactive to July 1, 2014 and will run through June 30, 2019. In early April, an ILWU Caucus delegation voted to recommend approval of the tentative agreement reached in February. Copies of the agreement were earlier mailed to longshore union members, who were afforded the time to discuss the ratified proposal at local union meetings. A secret ballot full union membership ratification vote was the final step in the process and the final tally is expected to be announced tomorrow.
The new five year widow should provide some comfort for industry supply chains in terms of avoiding labor slowdowns across U.S. west coast ports. The PMA announcement of ratification includes a statement from the CEO of PMA noting that port management looks forward to winning back the trust and confidence of the shipping community. That was obviously a required and long overdue statement.
As Supply Chain Matters has pointed out, there are ongoing infrastructure, productivity and automation challenges needing to be addressed as larger mega-container ships continue to enter into service. Any future snafu or disruption affecting the physical flow of containers and container chassis from foreign ports to U.S. posts will provide a likely impact on industry supply chains.
During the next five years, the expanded Panama Canal will finally open and shippers will be provided added options for shipping containers and goods directly to U.S. East Coast ports. Many of the U.S. east coast ports are preparing for that milestone by investing in deeper ship channels, expanded infrastructure, distribution facilities and transportation options. The open question is now which coast is better prepared to offer economic advantages.
Catching up on significant news impacting global supply chains, readers should note that A.P. Moller Maersk, the parent of market dominant ocean container shipping firm Maersk Line, reported Q1-2015 fiscal results this week. The overall financial headline for the Maersk Line business was a net profit level of $454 million in the latest quarter amid a 3.2 percent drop in overall revenues. By our lens, it is yet another indication that global dominant carriers are stressing increased profitability over service needs with increased implications for shippers, suppliers and B2B / B2C customer segments.
In both the earnings briefing and various interviews with traditional financial media, A.P Moller Maersk CEO Nils Anderson lauded the best first-quarter performance despite decreased volumes and falling rates on shipping spot-markets, declaring that Maersk Line almost doubled its results, its best performance ever. Return-on-invested-capital (ROIC), a key measure for the shipping industry reflected a 14.3 percent level amidst an overall shipment volumes decline of 1.6 percent. Cash flow from operations increased by nearly $200 million. Specific mention was made to the Asia-Europe shipment segment where Maersk has elected not to fully engage in a current price war among existing competitors who are apparently leveraging the current 30 percent decrease in the cost of bunker fuel. He acknowledged that Maersk was willing to absorb some market-share loss to protect profitability. CEO Anderson also confirmed eight successive quarters of in fuel consumption efficiencies in areas such as more efficient new vessels, slow steaming and the current depressed levels of bunker fuel costs. He further emphatically declared: “We have no intentions of speeding up the network” that current slow steaming practices would continue despite the current 30 percent lower cost of bunker fuel. He added that the company has continued plans to reduce overall costs by around 20 percent by the end of 2016.
Maersk Line additionally reported the completion of its vessel sharing alliance with Mediterranean Shipping Lines (MSC) at the beginning of April on the East-West segment.
Supply Chain Matters has previously called attention to the important takeaways reflected from the latest financial results for UPS, and earlier FedEx, namely that dominant carriers in their shipping segments are exercising strategies of maximizing profitability in spite of decreased fuel costs. Thus, shippers expecting some relief in the continuing trend of far more expensive surface and air transportation rates are going to be disappointed. The pressures on many industry supply chains, especially those in the B2C sector, for taking out additional cost has increased, and transportation is the major culprit. Once more, the new world of online and Omni-channel customer fulfillment requires higher levels of services and flexibilities. Hence the current vice for those responsible for transportation cost performance and rate negotiation.
Instead, this is undoubtedly a time for very active negotiation of transportation rates among carriers more willing to forgo near-tem profitability to capture needed market-share or added network volumes.
Perhaps lost in this current global-wide dynamic is the longer-term impact on smaller firms who do have the shipment volume leverage of global multi-national firms. Once more, for the ocean container segment, continued slower steaming without consequent major investments in customer service and in-transit container visibility implies continued high inventory investments to compensate for such inefficiencies.
Dominant carriers are obviously exercising a Darwinian strategy of shakeout of marginal players who may fall by the wayside. It would have happened earlier if the cost of fuel had not dropped so dramatically. If fuel costs continue to increase to former levels we may well all witness another round of turbulence.
Last week, Supply Chain Matters attended the JDA Software FOCUS 2015 conference in Orlando Florida providing a number of live update commentaries regarding this conference. In this final commentary related to this year’s FOCUS, we provide our summary impressions.
To view our prior observations and commentaries, please click on the below links:
In our view and in the view of others we spoke with, this was a far different JDA conference, one presenting a much broader cross-industry focus, a more succinct strategic agenda for customers and a less arrogant tone. For industry analysts such as this author, the sessions were far more open without restrictions and JDA executives were more open and willing to discuss strategic direction. It was fitting that the conference represented the 30th anniversary for JDA as a software firm.
As noted in our initial commentary, we were especially honed-in on the opening welcome address from JDA’s Chairmen and CEO, Bal Dail who outlined a three point strategy for JDA that included its plans to deliver for existing customers, continued corporate investments in technology and in partnerships. From the podium, he acknowledged that in the past, JDA had not especially listened to customers. He also acknowledged a culture of past arrogance in the persona of JDA. There were messages related to commitments for responding to customer needs for advanced technology, much broader partnerships with other providers, including the announcement of a new partnership with Google and the Google Cloud Platform for cloud services. Further emphasized was the ongoing partnership with IBM in Retail industry intelligent fulfillment needs.
We were further impressed with our 1-1 interviews with Jean-Francois Gagne, Chief Innovation Officer, Razat Gaurav, Executive Vice President, Global Industries, Fab Brasca, Vice President, Solution Strategy, Global Industries. As a reference, Gagne arrived at JDA with the acquisition of Red Prairie while Gaurav and Brasca in a long-time veterans. We touched upon a number of technology strategy and industry adoption topics and this author came away with even more reinforcement that JDA is indeed far more focused and aligned toward bringing more leading-edge technologies to its various industry customers. The takeaway for our readers is that JDA is far more focused on leading-edge cloud development and that should pay dividends in time-to-value down the road.
The day two customer keynote theme was important and powerful, especially since it featured PepsiCo’s supply chain transformation journey that dates back to the early nineties and including the former Manugistics and i2 Technologies technology applications. The relationship of PepsiCo with JDA technology is a 20 year legacy, which is somewhat extraordinary in the supply chain best-of-breed technology industry. That was the missing reinforcement that JDA supports manufacturing and distribution intensive supply chains, in addition to retail.
This year’s FOCUS indeed included a special emphasis on the needs to support Omni-channel customer fulfillment needs, especially the various aspects of JDA’s Intelligent Fulfillment and JDA’s Flowcasting applications. Suffice to indicate that we were impressed by the depth of functionality.
We were also updated on the progress of JDA’s partnership with IBM to address the needs to process and fulfill retail industry Omni-channel orders. The partnership calls for combining the elements of JDA’s warehouse management, demand and workforce planning support capabilities with IBM’s Sterling Distributed Order Management network platform. JDA communicated to conference attendees that the initial release of this functionality will become available in June.
That was indeed a rewarding conference and it reminded those several years past where a broad variety of customer, industry and vendor specific supply chain management business process and IT focused topics were presented, discussed and talked about among attendees.
Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters© blog.
Earlier this week, global package delivery provider UPS reported its first quarter operating results and provided a succinct message to online e-commerce customer fulfillment providers that the provider will protect its profitability in servicing this segment. The results were far different than the disappointing news delivered for the end-of-year quarter and an indication that last-mile delivery strategies associated with online commerce are subject to increased cost changes and implications. These results are a further indication of the revenue and profitability boost brought about by the change to dimensional pricing of shipments, along with other operational changes.
For the March ending quarter, UPS reported an overall 1.4 percent increase revenues and an 11 percent increase in operating profit to $1.7 billion, demonstrating profitability increases across all operating segments. Results for U.S. based operations reflected a 5.3 percent increase in revenues while profits rose over 10 percent to $1.02 billion. U.S. Domestic Package revenues, where dimensional pricing went into effect, experienced a 3.8 percent increase in revenues.
Total shipments increased 2.8 percent to 1.1 billion packages reportedly led by European export growth of 9.4 percent. No doubt, that was an indication of a positive impact from the increasing value of the U.S. dollar, allowing European goods to be more price-attractive in export markets such as the United States. For the quarter, UPS generated $2.4 billion in free cash flow. UPS raised rates and increased fuel surcharges across the board at the beginning of the year.
Brown further announced that it has declined to renew contracts with “a couple of substantial customers” whose business was not profitable enough, especially concerning e-commerce shipments. While UPS executives declined to name any specific customers, in its reporting, The Wall Street Journal indicated that children’s toys retailer Toys “R” Us was one of those customers. Reportedly, UPS raised it rates, prompting this retailer to move to FedEx in February. We would surmise that other customers were well-known e-tailors as well.
Further announced was an increase in the number of Access Point locations where online customers can pick up their purchases themselves, thus decreasing the number of overall package trips for UPS’s last-mile delivery efforts. UPS executives were quick to point out that the carrier’s business goal was not to just increase costs for its customers but rather to facilitate improved efficiencies in shipping methods and packaging of shipments. Obviously, industry supply chain teams accountable for transportation costs and delivering cost reduction goals will likely have a far different perspective.
As Supply Chain Matters observed in our June 2014 commentary, dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping. With recent operating results from both FedEx and UPS now indicating a renewed focus on carrier profitability, the implications are indeed broader from both shipper and carrier perspectives, especially in the light of online consumer preferences for same-day or Sunday delivery. Shippers and especially e-tailors will be responding with revised practices to protect their operating costs and margins. The overall effect can either be a different, more efficient delivery fulfillment process that emphasizes customer pick-up or the development of more innovative delivery strategies. The U.S. Postal Service as well as up and coming logistics disruptors may well benefit.
Supply Chain Matters continues to anticipate that major online retailers will initiate a different form of planning for the 2015 holiday fulfillment surge later this year, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. New or different business models and strategies will continue to emerge in the coming months as this dynamic unfolds and both B2B as well as B2C shippers need to be prepared for such industry changes.
© 2015 The Ferrari Consulting and Research Group LLC and the supply Chain Matters© blog. All rights reserved.
Today, The Wall Street Journal announced the launching of an editorial vertical to be termed WSJ Logistics Report, with the prime sponsor being global package delivery provider UPS whom will supplement this site’s dedicated subject-matter coverage with sponsored content, (supposedly to be cleared labeled). The fact that our broad-based supply chain management community will have a business media resource destination for dedicated logistics and transportation news and editorials is a noteworthy step.
We at Supply Chain Matters will continue to do our part in insuring that readers are alerted to noteworthy news and editorials and that such content represents what we consider to be a balanced view of developments.
To kick off reader interest in the topic, today’s U.S. printed edition of the WSJ featured a front page article, Bigger Ships Snarl U.S. Ports. (Paid subscription or free metered view) This article reinforces what you have perhaps already experienced within your supply chain or read on this blog, namely that the introduction of far larger container ships into operational service is adding increased logistical challenges and congestion among many U.S. ports.
In the wake of the proposed February settlement of labor contract talks involving U.S. West Coast ports, Supply Chain Matters has posted advisories to industry supply chain teams to not assume that the logistical challenges and port gridlock that were amplified last fall would not happen again. Today’s WSJ article succinctly reinforces that message.
Reported is that congestion is becoming increasingly common among both U.S. West and now East coast ports, and according to the article authors: “ … a problem that could have profound implications for the $900 billion worth of goods transported to and from the U.S. each year by container ships.”
Increasingly larger container carrying vessels are overwhelming ports that were not designed nor equipped to handle such volumes carried by a single vessel. The WSJ cites American Association of Port Authorities data indicating that of the 10 busiest U.S. ports by container volume, at least seven are struggling with daily congestion. The effect is much more time required to unload and load vessels with extraordinarily longer waiting times for trucks to unload and load containers at port facilities. The WSJ cites specific examples occurring of late at the Port of Newark and Port of Virginia. In March, rising container volume and backups exacerbated by frequent winter storms reportedly pushed the Virginia International Gateway (Port of Portsmouth) beyond capacity prompting the need for overtime work, only to have to clear a subsequent backlog caused by the subsequent arrival of a single mega-ship.
Just this week, hundreds of frustrated truck drivers serving the Ports of Long Beach and Los Angeles went on strike, refusing to service the ports citing wage theft grievances. Four of the largest trucking firms servicing these ports classify truckers as independent contractors and thus drivers incur financial penalties with excessive wait times since payment is predicated on deliveries vs. an hourly compensation.
Compounding the problem are misplacement and/or unavailability of container chassis required for on-road travel. And as many industry experts have noted, the situation will only get worse without concerted industry actions and added investments in port automation. The WSJ quotes a retail industry strategist at Kurt Salmon indicating that shipping delays could reach $7 billion this year and climb as high as $37 billion by 2016.
That is a significant quantification of a multi-industry problem that requires resolution.
The problem itself stems from a combination of economic and industry forces on many sides. Ocean container lines, plagued by overcapacity and high costs, elected to invest in the larger vessels to save on operating costs. Larger ships and lower shipping volumes compounded into the need for multiple shipping lines to form capacity alliances with the implication that a single mega-ship will carry containers representing multiple shipping lines with different administrative and logistical processes.
While many industry supply chain teams are now re-evaluating shipment routing and logistics flows in the wake of the U.S. West Coast ports crisis these past months, the realty they are facing is that U.S. east coast ports are subject to the same logistical challenges and perhaps work stoppages.
The takeaway from our Supply Chain Matters lens is that while all of the industry is focused on solving ever increasing logistical challenges among U.S. ports, there appears to be little concerted industry and government actions related to long-term resolution. Carriers, ports, organized labor and transportation carriers are each addressing their specific business and financial agendas with little consideration of the overall global logistics implications being unanswered and unaddressed. Perhaps the assumption is that governments, public agencies, consumers and taxpayers will each have to determine and fund a resolution. That is not feasible.
In closing our commentary, we urge industry wide forums, legislative leaders, publications and media such as the WSJ Logistics Report to shed more light, attention and resolve toward required efforts among all stakeholders to address the root causes and required remedies of U.S. port congestion.
We concur that there are considerable industry supply chain impacts, both financial and operational at-stake.
Late last week came the news that after a week of review, a membership caucus of International Longshore and Warehouse Union (ILWU) delegates have recommended approval of the new five year contract agreement reached with the Pacific Maritime Association in late February, representing the majority of U.S. west coast ports. This supposedly paves the way for the process of full ratification by secret ballot of all members of the labor union working at the various 29 ports. The final count is scheduled for late May, thus uncertainty still remains as to whether any local issues or disputes will stand in the way of full ratification.
Over the last weeks and months, the full impact of the U.S. west coast port disruptions as result of labor contract negotiations have come to light. Manufacturers and retailers, including Boeing, Lululemon Athletica, Restoration Hardware and even Wal-Mart have each cited the effects of shipping delays on their operating results.
As U.S. west coast ports continue efforts to dig out from cargo backlogs, underlying structural issues remain in areas of how to speed-up the unloading and re-loading of larger container mega-ships that now carry containers representing multiple shipping lines. The imbalance of available truck chassis pools and needs for higher levels of overall port automation and productivity remain as added challenges.
With the pending expansion of the Panama Canal, manufacturers and retailers continue evaluating further shipping and logistics options, and already there are reports of new warehouse and distribution investments being made at major U.S. east coast ports such as Baltimore, Miami and Savannah.
The U.S. west coast port disruption may be moving toward a new labor agreement ratification but the underlying port challenges will remain as uncertainties for many months to come.