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A Stark Advisory for Ocean Container Shipping Lines With Multi-Industry Implications

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Ocean container shipping and logistics are the lifeblood of global supply chain movements. For over two years, Supply Chain Matters has been advising our multi-industry supply chain readers about the effects of substantial overcapacity conditions occurring among major shipping lines, and their consequent impacts for service, cost and logistics.  Efforts directed at introducing ever larger mega-ships, multi-carrier capacity agreements, outsourcing of certain services and increased transit times and tariff rates continue to compound themselves.

All of this places industry supply chains on the short end of any semblance of voice of the customer outcomes. The literal final straw has been the effects of the recent five month U.S. West Coast port disruption, which will take additional weeks or months to unravel.

Now, strategic advisor Boston Consulting Group (BCG) has weighed in with a recent bcg perspectives report, Battling Overcapacity in Container Shipping. This report concludes: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declare that overcapacity has fueled a downward spiral of decreased earnings and marginal shareholder value.

The report describes four destabilizing changes occurring in the industry, and observes that there are just two industry participants actually making money. They are two termed “global-scale leaders”, namely CMA CGM and Maersk Line, and the termed “niche-focused specialists” who have developed sustainable competitive advantage serving specific regions.

BCG advises the industry that in order to lift profitability, carriers will have to extract more value from commonly used cost and revenue-improvement levers and pursue scale by further unlocking synergies and more aggressively pursuing acquisitions. BCG argues that carriers have yet to tap the potential of multi-carrier capacity agreements. In the short-term, BCG  warns that the current low cost of bunker fuel may provide a false sense of security for shipping lines. They define further opportunities as extended joint procurement agreements, joint operations and equipment pooling in the short-term, and joint back-offices, shared service centers and IT development over the long-term.

If shipping industry players actually embrace these BCG recommendations and advisory actions, industry supply chain teams can well anticipate even more heartburn in the months to come.

Implied is more wholesale M&A among large and mid-tier shipping lines.  Joint carrier containers on single ships and back office shared service centers could well be predicated on decades old information technology, not tuned for today’s nor tomorrow’s customer service and container tracking needs. Investments in larger, more efficient vessels has not as yet been matched by corresponding investments in modernized IT and productivity directed at enhanced shipper intelligence and port throughput needs.

Larger mega-ships implies even more port congestion, since it will take longer to unload and re-load these vessels without solving the challenge of modernizing individual port infrastructure. Bottom-line: Solving the business challenges of ocean container shipping lines transfers burdens to existing  ports and multi-modal logistics centers.

Supply Chain Matters advocates for a more comprehensive multi-industry approach, one that spans beyond ocean container shipping.  A highly fragmented industry with competing interests, motivations and stakeholder needs can elect to continue to pass current challenges to the next tier of the value-chain, or come together to focus on the primary objective of serving shipper and multi- industry recipient needs in the new age of integrated physical and digital value-chains. A clear missing piece of the strategy is modernized technology, work practices and multi-segment and inter-modal collaboration.

Bob Ferrari

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


An Important Milestone Reached in RFID Enabled Item-Level Tracking

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It was nearly 10 years ago when the initial hype of item-level tracking enabled by RFID began to emerge across retail and other consumer and industrial focused supply chains. The vision for the ability to connect the physical and digital aspects of the supply chain was within grasp and the hype cycle was extensive. Our readers might recall Wal-Mart’s highly visible corporate initiative for mandating RFID-enabled tracking across its supply chain as well as the U.S. Department of Defense efforts to do the same. But something happened, namely learning that seems to be rather consistent with advanced technology initiatives.

In the early days of RFID, there were challenges involved with the economic cost of individual RFID tags. Recall the threshold number of tags eventually costing less than 5 cents each. The IT infrastructure of required mobile and fixed readers, antennae, and database systems was more expensive than vendors were communicating.  Industry-wide consistent information transfer standards development was elusive because either technology vendors continued to advocate for certain proprietary standards, hoping to cash in on the new technology wave, or specific industry groups themselves favored certain standards.

It is therefore very noteworthy to reflect on results of a recent survey conducted by GS1’s US Apparel and General Merchandise Initiative. For those unfamiliar, GS1 is a global information standards based organization that fosters trading-partner collaboration through adoption of global-wide consistent item numbering and identification electronic information exchange. Keep in-mind that apparel and merchandise supply chains operate on narrowest of product margins, with cost, inventory and shrinkage being prime challenges. Apparel and general merchandise was one of the prime targets of the early RFID mandates.

Last week the organization released the results of a 2014 survey providing indicators for how apparel and general merchandise manufacturers and retailers are utilizing item level Electronic Product Code (EPC) enabled RFID tracking. That survey indicates that nearly half of the manufacturers surveyed now indicating that they are currently implementing RFID, with a further 21 percent planning to implement within the next 12 months.

Of the retailers surveyed by GS1, more than half reported current implementation efforts underway with another 19 percent planning to implement in the next 12 months.  Retail respondents indicated that on average, 47 percent of items received in their supply chains have RFID tags. In the news release, an Auburn University researcher indicates that retailers are garnering greater than 95 percent inventory accuracy, decreased out-of-stocks, increased margins and expedited returns.  That phrase should sound familiar since it was the original declared benefits of the prior mandate efforts.

In the current clock-speed cadence of business where results are measured and expected in weeks and short months, 10 years is a lifetime. Yet, that it what was required for the technology maturity and economics of RFID item-tracking to reach what appears to be the dawn of mainstream adoption.  This GS1 survey announcement should be viewed in that light.

For RFID enabled item-tracking, the early innovators have paved the way of learning and economics, as well as what worked and what did not. We at Supply Chain Matters have already brought to light the next wave of item-level tracking, sensor tags that can monitor the composition, state and movement of products across the global supply chain utilizing today’s mobile technologies and near-field communications (NFC). These tags will eventually provide for use cases in supply chain settings requiring higher levels of monitoring and detailed visibility such as fresh foods, pharmaceuticals, aerospace and others.

What is ever more important is that as a community, we learn from previous technology adoption curves where elements of business process adoption, standards and cost-effective technology all interplay.  One obvious conclusion is that supplier mandates for technology implementation will not work if these elements have not been realistically evaluated.

Beyond all the hype are the inherent realities. Advanced technology does provide meaningful business benefits when applied to well-understood business process needs, challenges and cost factors. Technology adoption is not driven by vendor product marketing but by business education, process maturity, people and process realities.

Bob Ferrari

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


More on FedEx Acquisition of GENCO and Bongo International

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This is additional supplement to our previous Supply Chain Matters commentary highlighting FedEx’s latest fiscal third quarter earnings.

In mid- December of 2014, Supply Chain Matters called attention to the FedEx announced acquisition of GENCO, billed as one of the largest 3PL’s in North America operating more than 130 warehouse and distribution facilities. At the time, we also called attention to FedEx’s acquisition of Bongo International, an e-commerce platform that facilitates international customers purchasing items from domestic websites

Based in Pittsburgh Pennsylvania with reported revenues of $1.6 billion, GENCO provides a rather diverse collection of forward and reverse logistics services including distribution, contract packaging, customer returns processing product refurbishment, disposition and recycling. FedEx executives positioned this acquisition as significantly expanding FedEx services to further include returns, test, repair and remarketing of products.

In late January, FedEx reported that it had closed on the acquisition and that GENCO would operate as a subsidiary led by Todd R. Peters, GENCO’s Chief Executive Officer with future revenues reported under the FedEx Ground business segment.

Today, in a short news brief, The Wall Street Journal indicated that according to its recent quarterly report with the U.S. Securities and Exchange Commission (SEC), that the price paid by FedEx for GENCO was $1.4 billion. FedEx reportedly funded the acquisition using a portion of proceeds from a January debt issuance.

This is rather interesting news since it indicates that FedEx paid less than current GENCO’s existing earnings.  It is perhaps an indication of further factors or monetary considerations or that the close relationship among the two companies was indeed close.

Additionally, FedEx disclosed it paid $42 million in cash from operations for the acquisition of Bongo International LLC.


FedEx Impresses Wall Street with Positive Fiscal Third Quarter Results

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It seems as though the U.S. west coast port disruption as well as the recent holiday period provided positive benefits for some global carriers. Earlier this week FedEx reported rather rosy fiscal third-quarter financial results reporting a 53 percent surge in earnings as a result of a highly successful holiday shipping season as well as significantly lower fuel costs.

Total reported revenues were up 4 percent to $11.8 billion and operating income nearly doubled from the year-earlier period. Total profit for the quarter increased to $580 million, 53 percent higher than year earlier period.

In briefing analysts, executives pointed to reduced costs as a significant contributor to earnings growth.  Higher volumes across all transportation segments and improved yields at FedEx Ground and FedEx Freight were reported as key drivers of operating results.

According to its recent quarterly filing, average per-gallon fuel costs for ground vehicles have dropped from $3.69 per gallon in fiscal Q1 to $2.71 in the latest quarter.  Similarly, average FedEx per gallon costs for jet fuel have dropped from $3.08 per gallon in fiscal Q1 to $2.07 per gallon in the latest quarter. A significant restructuring undertaken in the largest segment Air Express division resulted in the buyout of 3600 employees while fleet modernizing and route optimizations contributed to reduced costs.

Further noted was that the January introduction of dimensional pricing has already provided positive financial benefits with average revenue per package increasing 3 percent from the combination of base rate increases and new pricing. One important statistic shared by FedEx CEO Fred Smith was that about 85 percent of shipments from the top three online e-commerce shippers average less than 5 pounds in weight.  That, by our lens is another indication of the magnitude of change implied by dimensional pricing on carriers and eventually on online shopping practices.

FedEx’s Freight division nearly doubled operating income from the year earlier period.

Executives additionally forecasted revenue and earnings growth to continue into the fourth quarter of 2015, driven by ongoing improvements in the results of all transportation segments.

So while FedEx impresses Wall Street, is the same perception shared by shippers large and small, as well as industry supply chains?


Global Trade Management Technology Provider Amber Road Acquires ecVision

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Global trade technology provider Amber Road has announced its acquisition of cloud-based global sourcing and collaborative supply chain platform ecVision for a reported net cash value of $24 million, along with $9 million in future incentives.

With primary offices in the United States and Hong Kong, ecVision has a niche industry support concentration servicing apparel, footwear and retail related supply chain processes. The provider describes its technology as creating a single collaborative application for private label brands, retailers and their trading partners. Named customers are Brown Shoe Company, Coach, Li&Fung, New Balance, PVH Corporation, among others. The cloud based provider has been funded by Fung Capital USA, the private equity partnership among Victor and William Fung of Li and Fung Limited. Li and Fung itself is often characterized as the global logistics go-to firm within the apparel industry offering retailers nearly 15,000 global suppliers in over 60 countries.

Amber Road is a provider of cloud based global trade management (GTM) applications that automate import and export processes to enable goods to flow across international borders in in a compliant and profitable manner. According to the announcement, the combination will extend Amber Road’s presence in the Asia Pacific region while providing more services at lower tiers of the industry supply chain.

At initial glance, the sum of $24 million for a cloud-based B2B supply chain collaboration platform is quite low by today’s M&A standards, considering an industry rule-of-thumb of current software company acquisitions averaging in the range of 3x-4x future earnings, and B2B platforms, much higher. In early February, supply chain business network cloud provider E2open was taken private for a reported sum of $273 million.

That obviously provides Amber Road the opportunity to considerably grow ecVision’s platform revenues applications in broader industry coverage and depth of applications.

Bob Ferrari

Disclosure: E2open is one of other named sponsors of the Supply Chain Matters blog


An Incredible 24 Hours of Headlines Involving Transportation Related Incidents in the United States

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This past 24 hours  have been incredible and noteworthy for transportation-related incident headlines within the United States. Continued occurrence of severe winter storms and specifically a large and broad snow and ice storm that blanketed the U.S. Midwest, West, South and Northeastern regions created a lot of transportation havoc.  Fortunately, no lives were lost and injuries were minimal.

Here’s the unfortunate tally:

Commercial Aircraft Skidding Incident in New York

A Delta Airlines MD-80 commercial aircraft attempting to land on a snow and ice covered runway at New York’s LaGuardia Airport skidded off the runway and eventually struck a retention barrier, just a few feet short of reaching nearby water. Fortunately, all passengers and crew were able to successfully evacuate the aircraft with only minor injuries. News reports indicated that one of the fuel tanks of the aircraft had ruptured and was leaking fuel when rescue official reached the plane, but there was no fire or explosion. The accident resulted in one of the busiest airports in the U.S. having to be closed for all operations for upwards of eight hours. As we pen this posting on the morning after, flight delays at LaGuardia are averaging upwards of two hours or more for arrivals and departures.

Commercial Aircraft Fire and Evacuation in Denver

On Wednesday evening a US Airways Airbus A321 operated by American Airlines was AmericanAirlinesPlaneDIA~p1forced to evacuate its passengers after a suspected fire broke out in the aircraft’s cabin at the airport in Denver. This flight originated in Charlotte North Carolina. Thick smoke filled the cabin forcing an emergency evacuation. Social media provided passenger photos of the evacuation. A calm evacuation among passengers avoided any injuries.

Another Crude Oil Train Derailment

A BNSF Railway train hauling over 100 tank cars containing crude oil derailed near Galena Illinois, causing a massive explosion and fire. Initial reports were that 8 cars derailed, six of which rolled over. As has been the case with these accidents, the fire was so intense that safety and fire officials have elected to let the fire burn out, which is expected to take several days.  There have been no reports of deaths or major injuries thus far.

There have been little specifics regarding the origin of the crude, nor of the class of tank cars involved, but speculation is obviously that the shipment may have involved Bakken crude from North Dakota, headed for Midwest of Northeast refineries. More specifics will obviously come forward in the next several days.

Last month, a CSX train hauling Bakken crude derailed and precipitated massive explosions and fire near Mount Carbon West Virginia. That accident is obviously fresh in the minds of U.S. regulators and now, there is yet another fiery incident.

Hundreds of Travelers Stranded on Kentucky Highways

Hundreds of travelers and commercial trucking rigs were stranded overnight on Northern Kentucky interstate highways I-24 and I-65 when snow and ice conditions amounting to over 2 feet of cumulative snow deteriorated so quickly that snow plow Kentucky Snowstorm1crews could not keep up.  This caused multiple tractor-trailer rigs to lose traction and subsequently block the highway for all motorists, most of which were stranded overnight. The ambient temperatures were reported as 30 degrees below normal and reports indicated that the traffic gridlock extended nearly 26 miles. Kentucky’s governor was forced to activate the state National Guard to assist in aiding and evacuating stranded motorists and haul-out stuck rigs and automobiles.  The real-time photos featured on Facebook and Twitter provided an ample sense of the gridlock.

The volume of tractor trailer traffic involved in this gridlock is because I-61 is a major east-west interstate highway that supports logistics traffic supporting many U.S. southern based manufacturing and distribution facilities.  The gridlock occurred just south of Louisville, home of UPS World Hub, and Toyota’s largest vehicle manufacturing plant in North America is located in Georgetown Kentucky, just north of Lexington Kentucky.  More than likely, manufacturing and logistics teams within these areas have experienced the effects of this winter storm gridlock.

Amtrak Passenger Train Stranded near Providence Rhode Island

An Amtrak Acela high speed train providing northeast corridor service and enroute to Boston was stranded by ice accumulation hampering the train’s electrical system.  This train which sopped operation near Providence Rhode Island was subsequently stranded for hours without power or heat until a rescue train could be brought in to haul it to its destination. Passengers were obviously not pleased.

Obviously this has not been a positive 24 hour period in U.S. related transportation and perhaps these incidents are ever more reflections of aging infrastructure and equipment compounded by the cumulative effects of a severe winter.

If any of readers were impacted by these incidents, share your thoughts. In the meantime, Spring cannot come soon enough.


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