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.
Included in our Supply Chain Matters 2015 Predictions for Global Supply Chains (available for complimentary download in our Research Center) was our prediction for a turbulent and noteworthy year involving the global transportation. And so it has become.
Global package delivery and transportation provider FedEx announced today it has reached a conditional agreement of intention to acquire Europe based TNT Express in an all cash offering for TNT stock. According to the announcement, the transaction represents an implied value for Netherlands based TNT of approximately $4.8 billion. That value is noted as being a 42 percent premium over the average volume weighted TNT shares over the last three calendar months. The transaction has received the recommendation and support by TNT’s Executive and Supervisory Boards. Both carriers currently expect this tender offer to close in the first-half of calendar year 2016, thus allowing ample time for regulatory and other reviews.
This news has significant implications not only for potentially augmenting FedEx’s existing capabilities in Europe and globally, but also can be viewed as a competitive shot across the bow at rivals UPS and DHL.
Our readers might recall that in 2012, UPS set its sights on acquiring TNT for a reported value in excess of $6 billion. However that deal ran into stiff resistance from the European Commission relative to potential impacts within the existing European parcel delivery industry segment, and was later terminated. In the case of this latest offer, both companies indicate initial confidence that anti-trust concerns can be addressed adequately and in a timely fashion.
This news comes on the heels of FedEx’s late December announcement regarding the acquisition of both GENCO and Bongo International.
TNT’s web site notes that the package delivery carrier is one of the world’s largest express delivery companies with a global reach to 200 countries and a very strong position in Europe.
The tender announcement notes that the parties have agreed to have European regional headquarters of the combined company located in Amsterdam, and to respect existing employment terms of TNT Express. TNT Express airline operations are expected to be divested in compliance with applicable airline ownership regulations. The TNT Express brand name will be maintained for an “appropriate period” and three new FedEx selected members will join the Supervisory Board of TNT.
Further outlined in the agreement are provisions indicating certain termination fees related to material breaches of either party or failure to secure regulatory approval which calls for FedEx to pay TNT a €200 million breakup fee.
Obviously there will be more developments related to this news in the weeks and months to come. Many transportation industry observers expected FedEx to eventually make a move to acquire TNT when the time was right. Obviously, the value of TNT has declined since 2012 and the carrier likely needs an infusion of capital in order to grow.
The new challenge is how much lobbying power existing European package delivery carriers such as DHL, or even UPS exhibit with the European Commission. An open question is whether another carrier will also elect to tender an offer.
As other initial reports have noted, FedEx has had a good track record in assimilating successful prior acquisitions. The coming months perhaps provide another, perhaps more contentious episode.
Since the beginning of the 2014 holiday fulfillment surge period in September of last year, Supply Chain Matters has featured commentaries related to potential impacts to multiple industry supply chains located in the United States. This week, the ISM PMI Index provided quantification of such impacts.
We provided numerous commentaries, insights and updates related to the U.S. west coast port disruption that dragged on past December and into early this year. Those ports are still trying to recover and multiple manufacturing and retail focused industry supply chains were impacted by the delayed arrival of components and finished products. We featured two commentaries on the current surge in the value of the U.S. dollar, and its impact on U.S. imports and exports. Finally, weather patterns brought severe cold and winter storm conditions across the U.S., particularly among the northeast states and across the New England region.
Earlier in the week, the Institute for Supply Management (ISM) disclosed the PMI value for March which indicated the fifth consecutive month of decline and the lowest reading since May 2013. The March value of 51.5 while a continued indication of expansion is considerably below the average PMI reading of 57.7 recorded for the 3 months in Q4. U.S. supply chain activity led all global regions throughout 2014 but has since fallen back due to headwinds.
According to ISM, PMI survey participants indeed pointed to lingering problems from the west coast port disruption, unusual winter weather and the stronger dollar as current challenges. Noted was that 11 industries reported slower supplier deliveries in March. Export orders declined for the third consecutive month. Eight industries reported higher inventories in March which could likely be an indicator of select shortages of key components or unplanned contraction in product demand. According to the ISM report, customer inventories were noted as being too low, yet another indicator of disruption. The Backlog of Orders index declined two percentage points from the February reading. There were mixed indications relative to the current lower cost of crude oil.
However, based on trending data, ISM indicates some optimistic news indicating a likely rebound in the index in the coming months. Of the total 18 industries reported in the index, 10 of these industries reported growth in March. Nine industries reported growth in New Orders as well as growth in Production.
We will have further insights when we produce our review of select global-wide PMI Indices in our March quarterly newsletter. All registered subscribers of this blog automatically receive a copy of our quarterly newsletter. You can register via the Join Our Mailing List box located on the right side panel.
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.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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.