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Drewry’s Declaration that the Global Shipping Market has Bottomed


This week, noted maritime and shipping industry research firm Drewry Maritime Research declared that the ocean container shipping market has now bottomed out.  The recent ongoing Hanjin Shipping bankruptcy and receivership development is noted as representing the trough of the container shipping market and that a gradual market recovery is now expected.Container_Term

While Supply Chain Matters has great respect for Drewry’s knowledge and research related to the maritime industry, we advise our readers to be somewhat cautious on the conclusions that ocean container transportation volumes and rates will bounce back in 2017.

The firm’s latest research predicts that ocean container shipping lines will record a record $5 billion in operating losses for this year, with industry profitability to recover to a modest $2.5 billion by next year. An important caveat is described as follows:

However, this anticipated recovery needs to be put into perspective. While average freight rates are expected to improve next year, this will follow several years of negative returns and will still leave pricing well below the average for 2015. A key unknown remains carrier commercial behaviour which has proven unpredictable and counterintuitive. Hanjin’s demise may mark a watershed in this regard, but liner complacency on the risks of insolvency may challenge this notion.

Obviously the noted caveat should have important meaning for multi-industry shippers and transportation procurement teams since this industry has yet to flush out upwards of 30 percent of excess ship capacity. The industry further must undergo a period of either consolidation via acquisitions or in the acceleration of scrapping older, less efficient vessels.

From our lens, the real caution for shippers to ascertain is whether the largest shipping lines garner much more industry influence through aggressive acquisition of other marginal lines and/or global shipping routes. Drewry’s stated viewpoint is: “Those carriers who can weather the prolonged storm have a chance of emerging the strongest in 2019/20.” That represents a 3-4-year window, a considerable time interval in the dynamic nature of global transportation volumes. Drewry acknowledges that industry players are more focused on maintaining or protecting market share and operating volumes at the expense of contract negotiations.

The other important unknown is how much global based maritime regulators will tolerate for major carriers garnering too much global market share.  Up to this point, our impression has been that regulators have taken an industry-friendly perspective, allowing for the continued existence of major shipping line global alliances that pool shipping capacity and global shipping route scheduling. At some point in the not too distant future, geographic based regulators will be forced into determining when multi-industry shipping interests within a specific region will be significantly harmed by consolidation or carrier consolidation events.  The ongoing example of Hanjin by our lens, reflects Korean maritime regulators favoring the interests of bankers and financial institutions that now longer could afford to support added debt to Korea’s shipping lines and shipping interests. Similarly, European and other geographic regulatory interests will be facing similar dynamics.

Previous indicators have consistently noted that the ongoing ocean container industry overcapacity condition will prolong itself for at least the next two years. Shippers and global transportation procurement teams re therefore wise to not favor long-term contracting or rate locking.  A lot more can and probably will happen in the months to come.

Bob Ferrari

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


Contrasts in the Planning for the Upcoming Retail and Online Holiday Surge Period


In the wake of overly optimistic forecasts of retail spending expected in the coming holiday fulfillment surge quarter, key online providers and parcel carriers are indicating their plans for temporary seasonal holiday related hiring.  However, it would seem that each comes with differing business assumptions.

On the parcel logistics, transportation and last fulfillment front, UPS recently indicated that it plans to hire upwards of 95,000 temporary workers, about the same as last year, to handle this year’s expected volume. UPS was caught totally off-guard with surge network volumes 2013 but has since invested in increased automation and advanced technology. Rival FedEx has also invested in automation technology and has indicated plans to hire 55,000 temporary holiday workers while anticipating a 12 percent increase in package volumes for the current year. Both carriers have been challenged with their past hub and spoke focused transport and delivery networks being able to handle increasing holiday related surge volumes of online focused orders and have since begun deploying mobile and flexible pop-up logistics centers to handle surge volumes related to specific high population areas. With online consumers now inclined to order larger dimensional sized items, both carriers are now focused on allocating separate sortation centers for handling such parcel shipments.

However, despite numerous parcel rate and package surcharge increases focused on higher dimensional packaging during these past two years, both carriers have exhibited a keen focus on increased profitability and shareholder returns.  However, according to data from Shipmatrix, FedEx and UPS together now make-up 40-45 percent of deliveries while the U.S. Postal Service representing most of the remaining volume.

Amazon, on the other hand, seems to be planning and anticipating a rather robust period of holiday activity during the next three months. The online provider has indicated plans to hire upwards of 120,000 seasonal workers in order to meet expected volumes.  That is a 20 percent increase from last year’s holiday related hiring. Once more, the online retailer indicated that it transitioned upwards of 14,000 2015 seasonal workers to regular full-time positions adding more significance to this year’s hiring requirements.  fba_sized

Readers will recall that last year, estimates were that upwards of 40 percent of all online orders originated on the Amazon online platform, a rather astounding number. Amazon’s reporting data related to last year’s holiday surge quarter indicated that the fulfillment By Amazon program allowed 3rd party merchants to ship over one billion units on behalf of merchants. During the latter stages of 2015, the industry further observed bold investments by Amazon in leasing its own air freight, ocean container, surface transportation and logistics sortation capabilities which are obviously now included in temporary worker requirements.

Another report indicates that Amazon is currently restricting the ability of new Fulfilled by Amazon merchants to position all categories of inventory at Amazon distribution centers in advance of the holidays. That appears to be another indication for anticipating even higher fulfillment volumes this year and Amazon apparently does not want to risk swamping its current warehouses with these added inventories. According to this report, the stocking restriction freeze for new merchants extends to December 19, too late for these merchants to benefit from the bulk of this year’s anticipated online orders. Last year, inventory of third-party merchants reportedly spiked Amazon’s operating costs, prompting investments in added warehouse capacity for this year.

Similarly, Wal-Mart current efforts for more aggressively investing in online fulfillment capabilities and compete more aggressively with Amazon would indicate more planning for higher volumes of online orders and customer fulfillment capabilities. Three additional fulfillment centers dedicated to online activity should be operational for the current quarter.

Thus is the contrast in planning for the current holiday surge.  Carriers are betting on increased automation and network flexibility to buffer the need for temporary workers.  The major online retailers, in particular Amazon, are aggressively planning for increased volumes and more overall control of customer fulfillment. Traditional brick and mortar retail outlets are going with optimistic sales forecasts and plans to further leverage online and physical store interactions. Each have even more sophisticated planning tools and strategists who have toiled most of this year to anticipated expected volumes, but with differing perspectives, assumptions and shifting business goals.

As always and once again, such planning shifts portray an interesting contrast in what we all get to observe during the coming weeks.

Stay tuned.


Bob Ferrari

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


Remain Cautious of Overly Optimistic Retail Sales Forecasts Regarding the Coming Holiday Fulfillment Quarter


Last week the National Retail Federation (NRF) issued its annual forecast concerning holiday related spending which painted a very optimistic picture regarding the upcoming holiday sales period.  We advise B2C and B2B retail planning teams to be very cautious and diligent regarding the applicability of such data. Actual retail sales activity pegged to each channel, coupled with end-to-end supply chain visibility and agility as to sudden shifts in demand will be far more important to planning and execution.

The NRF forecast indicates that it expects this year’s holiday sales, excluding automobiles, fuel and restaurant sales will increase 3.6 percent above last year’s levels. That amounts to approximately $656 billion in physical store and online retail sales.  Keep in-mind that the NRF is a trade organization made up of retailers, and thus has a track record for being fairly optimistic. Last year, the organization predicted holiday related retail sales to grow by 3.5 percent, but the actual number was closer to 3 percent. Once more, the organization literally missed on gauging the increased dependence of consumers towards online holiday sales, which grew dramatically last year. From the period of November 26 thru December 20 2015, one forecasting firm had indicated that online sales grew nearly 12 percent in just that period.

Retailers are betting that current levels of low inflation and dramatically lower costs of gasoline and heating oil will drive more optimistic holiday buying. That was relatively the same assumption as last year. However, we continue with our stated belief late last year that consumers have already fundamentally shifted their retail buying habits in favor of online purchases. Even the NRF acknowledges that consumer spending patterns are shifting, favoring more personal based experiences such as travel and customized unique experiences. Unless online buyers are provided an incentive for visiting a brick and mortar store, there will be little incentive for impulse buying.  In August, we issued our Research Advisory, The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, that in essence questions the long-term presence of existing brick and mortar storefronts.

Operationally, the retail industry as a whole is struggling with high levels of inventory. Muted U.S. economic growth and consumers’ increased desire for immediate availability and delivery on online goods have driven such trends to-date. If you have recently visited a physical retail store of late, you will see a visual manifestation of that challenge with lots of merchandise on the shelves but little of it moving.  Our recent mall visit provided such evidence as to markdown sales or sales promotional activities especially concerning clothing and accessory items.

Retail focused sales and operations planning, along with respective supply chain planning teams therefore need to constantly be diligent in their context of current optimistic retail sales forecasts for the upcoming holiday fulfillment holiday surge period. Evidence continues to indicate that costs of online fulfillment continue to rise and thus planning resources by means of sales forecasting expectations could well lead to more margin erosion and lost profits.

Transportation and logistics challenges will be yet another concern since major parcel carriers FedEx and UPS continue to experience some of the flaws of major hub and spoke networks during periods of high volume, as was experienced gain last year. Similarly, Amazon continues to build out its own transportation and logistics fulfillment capabilities to support massive holiday surge volumes, placing more pressure on the major parcel carriers to make their profit goals as the expense of shippers.

In all cases, being product demand driven vs. forecast-driven is fast becoming table-stakes. Advanced inventory management pegged to Omni-channel product demand levels and broader visibility to supply chain wide inventory exposure applies.  Once again, when multi-echelon inventory optimization is supported by higher and deeper levels of supply chain wide inventory visibility, better informed planning and supply chain wide decision-making can help in determining the various impacts on financial line-of-business business outcomes such as margins and profitability.

Bob Ferrari

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

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.

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