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Breaking- Another Widespread Global Cyber Attack Impacting Multiple Companies and Shipping Terminals

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There are many facets to supply chain risk, and one such facet is the threat of cyberattacks disrupting global supply chain operations and compromising data.

Today, global news wires are abuzz regarding a spreading cyberattack that is spreading from Europe to other countries including the United States. Reports indicate that this attack has similarities to the recent WannaCity ransomware virus that struck in May but is likely a new variation that exploits vulnerabilities in the Windows operating system.

The attacks included widespread outages across the country of Ukraine, and spread across at least nine other European countries and into the United States, crippling thousands of systems. Computer experts are still attempting to figure out the components to this latest hack as well scrambling in efforts to ward-off continued attacks.

One multi industry supply chain area that has been affected is that of A.P. Moeller Maersk, operators of Maersk Line, one of the globe’s largest ocean container shipping firms. Maersk has confirmed that many of its IT systems are not operating and that multiple sites and business units have been temporarily shut down due to the cyberattack outage. Reports indicate that 17 shipping container terminals run by Maersk Con Ship 300x201 Breaking  Another Widespread Global Cyber Attack Impacting Multiple Companies and Shipping TerminalsAPM Terminals, a Maersk subsidiary, have been hacked including the Port of Rotterdam, one of the busiest ports in the world. The web site of the Port of New York and New Jersey has been alerting shipping concerns that the APM terminal there has also experienced a systems outage and operations are suspended for the remainder of today.

Among U.S. resident companies confirming computer outages thus far are Merck and Mondelez International. Both have confirmed via Twitter that they are experiencing systems outages.

We suspect there are other outages and disruptions affecting the movement of materials and goods but it’s too early to assess the extent or duration.

Industry supply chain teams are advised to keep-up with ongoing reports and collaborate with associated IT support teams to strengthen systems defenses.

 

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


The State of Logistics in 2016- Accelerating Into Uncertainty

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The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney and Penske Logistics, published the 28th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions and some takeaways relative to the report reporting on 2016 logistics industry activity.

The latest report headline reflects a U.S. and North America logistics industry “buffeted by crosswinds as the pace of change accelerates” as the authors term: “Accelerating into Uncertainty.” That contrasts with last year’s report theme- An Industry in Transition. Looking ahead, the report indicates that 2017 could be a pivotal year for the industry with the ongoing impacts of online altering industry economics, large-scale shifts in distribution flows and various other uncertainties pointing to “anything is possible.”   Container Term 300x200 The State of Logistics in 2016  Accelerating Into Uncertainty

That stated, the report indicates that U.S. logistics costs were somewhat down in 2016, to a value of 7.5 percent of GDP, compared to 7.8 percent reported for 2015. The was the first drop reported since 2009, but we should note that there has been a revision of how the data is compiled. The authors have included a redo of numbers previously reported from the last ten years with the revised calculation with the result being roughly a half-a-percentage point on average adjustment in the numbers.

In the important area of transportation costs, which represents the largest component of overall logistics cost calculation, that category fell by 0.7 percent in absolute. At the surface, that would be good news, with water, rail, full and LTL truckload costs all declining. Of course, it is important to keep in-mind the lower costs of diesel, LNG and other fuels that occurred last year, and continue at historically low rates.

One concerning aspect however was parcel transportation which was reported as a 10 percent increase in 2016, reflecting a five-year compounded annual growth rate of 6.4 percent, which far exceeds GDP growth. Parcel obviously relates to the ongoing explosive growth of online and Omni-channel commerce. Indications are very likely that this transportation area will continue to rise with the recent announcement from UPS on higher holiday parcel surge rates.

Another obviously important area is the category of inventory carrying costs, which were reported as declining by an overall 3.2 percent in 2016. Two important cost components are the financial costs (weighted average cost of capital multiplied by total business inventories) and overall warehouse and storage costs. Both categories are subject to increases this year, possibly significant.

As we noted last year, the average cost of capital has been influenced by the unprecedented low average cost of capital and consequent interest rates these past few years. With the U.S. Federal Reserve now gradually hiking interest rates, the financial costs of inventory are likely to rise. The second, and by our lens, far more concerning component is the cost of warehouse and storage space.  With the certain reality of increasingly retail sales stemming from online commerce, a structural cost burden shifts from the cost of operating physical stores, to an era that requires ever more expensive pick, pack, and parcel transportation costs. A recent CNBC Business Network report reflects the reality that the U.S. has too many shopping malls and not near enough warehouse space.  The investment firm Jeffries reports that Amazon’s needs for warehouse space has been growing at a 35 percent CAGR rate, and that is just one online retailer. Accordingly, Jeffries opines that if Internet retailers were to double their online sales, it would create the need for 600 million square feet of incremental warehouse space needs. With warehouse leasing or outfitting rates already reflecting double-digit cost growth increases, it is likely that the U.S. will experience certain increases in warehouse costs. We can well envision vacant shopping malls being converted to online distribution and fulfillment centers. Factor Amazon’s announced acquisition of Whole Foods, and the likelihood of physical grocery stores having annexed online customer fulfillment to assure one-hour or same-day delivery is very real.

A third area to comment on is the category of Other Costs (Carrier support and other administrative), which was reported down by 2 percent. Here again, there is the question of whether transportation providers and logistics services providers are investing adequately in new technologies to support industry supply chain needs for increased supply chain wide visibility and digitization of customer support processes. Last week, the Business Performance Innovation Network, a peer-driven thought leadership and professional networking organization, released a study indicating that the global maritime shipping industry still needs better data sharing, and that most respondents cite improved supply chain visibility as a requirement.  This report indicates that:

industry resistance to change, coupled with the industry’s aging and inflexible IT systems, are key impediments to improving visibility and collaboration. Some 54 percent of respondents said the industry being “slow to change” was one the biggest roadblocks to improving collaboration, while 49 percent cited the cost and complexity of legacy systems.”

We view the above as an indication that while the logistics industry has performed in keeping a lid on support costs, customers and shippers are growing restless in the reluctance to change and invest among various stakeholders. This has implications for pending change.

The report authors point to four potential scenarios for logistics in the coming years;

Plain sailing”

“Choppy waters”

“Stemming the tide”

“Industry doldrums

By our lens, the latter three are all pertinent. Business-as-usual or plain sailing, from a customer and industry disruption perspective, does not appear to be a reality given the faster-pace of continuing multi-industry changes.

Once again, Supply Chain Matters applauds CSCMP and A.T. Kearney for their increasing efforts in making the Annual State of Logistics Report more meaningful in presenting a balance for both logistics industry and customer perspectives related to U.S. logistics.

Our takeaway for readers is once again, is similar.  A current high level of economic uncertainties coupled with ongoing logistics industry challenges imply that last year’s optimistic viewpoints may not necessarily apply to a rapidly changing global and U.S. logistics landscape.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


UPS Holiday Delivery Surcharge Announcement Will Lead to Industry Structural Shifts

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The small parcel transportation and delivery industry, under the lead of United Parcel Service (UPS), once again elected to add yet another business challenge to online retailers. Only this time, Supply Chain Matters anticipates structural shifts in online business practices likely to occur because of this move. UPS Natural Gas Van 300x177 UPS Holiday Delivery Surcharge Announcement Will Lead to Industry Structural Shifts

This week UPS announced a series of delivery surcharges timed to the busiest online fulfillment period in the United States, that being the period between the Black Friday shopping and Christmas holiday period of 2017. UPS plans to impose a 27-cent per package surcharge on all ground packages destined to U.S. residential addresses between the period of November 19 and December 2, a period that includes the Black Friday and Cyber Monday online and in-store shopping holidays. Likewise, surcharges will be imposed for the period that includes December 17 through December 23, the traditional last-minute holiday shopping surge period. For this period, the surcharge amounts to an extra 27-cents for each ground shipment, 81 cents for each next-day air, and 97 cents for two or three-day delivery. Again, these surcharges only apply to package deliveries to residential addresses, as opposed to business.

UPS further announced added dimensional package surcharges of an additional $24 to the existing surcharge of $70 for packages weighing more than 150 pounds or exceeding certain large package dimensions. Further included is a peak surcharge of $249 per package for “overmax” packages.

The motivation for the new UPS pricing actions is obvious, to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. More than likely, rival FedEx will also initiate similar pricing actions. The effect for online retailers is yet another assault on their business margins, already stressed by the increased cost factors for online fulfillment needs. While dominant online retailers such as Amazon and Wal-Mart have the financial and market power to buffer such increases with sheer market influence, that may not be the case for all other online retailers.

An obvious behavior continually reinforced by online consumers is their reluctance to pay for shipping, and thus Free Shipping remains the ultimate determinant for online shopping cart execution. We therefore anticipate that the effects of this week’s UPS pricing actions will be added motivations by many online retailers to either permanently change online buying behaviors or explore added parcel delivery alternatives. That most likely will include planning holiday related online merchandise promotions even earlier than Black Friday. Online retailers with brick and mortar presence will follow Wal-Mart’s lead in incenting online customers with free shipping or added discounts to pick-up online purchases at local retail outlets or receiving lockers. The U.S. Postal Service will likely see added package volumes during the busiest holiday periods, with the added risk that the service will not be equipped to handle such a surge or be able to recover added costs. Third-party logistics services firms, who are already marshaling resources and services to handle the need to support online purchases of larger-sized goods such as appliances, furniture and like will also benefit with increased holiday volumes, as well as opportunities to negotiate added services to online retailers. Like China, we could well observe the formation of independent parcel delivery entrepreneurs similar to an Uber or Lyft type of on-demand transportation, supported by advanced routing and dispatching technology.

In other words, if the intent of small parcel carriers was to somehow permanently change online buying trends, they will indeed get their wish.  However, as what occurred last year when Amazon demonstrated the prowess to implement its own parcel transportation and last-mile fulfillment capabilities, online retailers will have little choice but to explore other more cost-effective options to protect their margins. That will open the door to new industry disruptors.

From our Supply Chain Matters lens, the takeaway from this latest industry development is the continuing industry dynamics as to which business entity, or which supply chain or customer fulfillment partner stands to gain higher margins and profits from the ongoing explosion of online commerce. It involves the realities that consumers have become patterned to shop for the best online deals offering free or reduced shipping, regardless of time-period. Same or next day delivery is becoming part of this expectation.

At the same time, there is the reality that online fulfillment shifts the cost burdens from that of operating physical stores, where consumers take-home their purchased merchandise, to an online era that requires ever more expensive pick, pack, and parcel transportation costs. The forces related to financial gain ultimately lead to added structural changes and to new winners and losers in the weeks and months to come.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Ocean Container Transportation Trends Remain Dynamic

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Data emanating from the global ocean container transportation area again indicates important trend shifts that industry supply chain teams need to continue to monitor.

In our last transportation industry update published in mid-May, Supply Chain Matters observed that ocean container carriers now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to changed routings, nuances, and carrier network forces.  Maersk Con Ship 300x201 Ocean Container Transportation Trends Remain Dynamic

Since our last update, the revised three major ocean container carrier networks went into operational effect beginning in April, and service routings have now permeated across major global trade routes. Industry and business media have been homing in on both global volumes and specific U.S. West Coast and East Coast port data for May that is reflecting the impacts of the new carrier networks.

Data we have observed would indicate the overall container shipping volumes are up from a global basis. The benchmark Port of Singapore operating data reflects a 5 percent rise in first quarter container volumes, from the year earlier period. The demand for container transportation capacity has reportedly cut the percentage of idle ships to 3.5 percent in the first quarter, compared with double that amount in the fourth quarter of last year.

The Wall Street Journal and transportation industry media observe that the Ports of Los Angeles and Long Beach, which traditionally manage the largest volumes of container traffic, experienced a pullback in overall inbound container traffic in May. While the ports experienced volume increases of 26 percent in March and 12 percent surge in April, May was reported as a mere 2.5 percent increase.  In contrast, the two largest port operators on the East Coast reported import volume growth of 8.8 percent and 13.5 percent each in May.

The WSJ observes that the three consolidated networks are dispatching larger container vessels to the three major U.S. West Coast ports with fewer port calls. Cited is Drewry data indicating that megaship coverage on the Asia to U.S. West Coast routing has doubled since the beginning of the year. At the same time, the networks have scheduled similar larger vessels on the Asia to U.S. East Coast routing, via the Panama Canal, hence the building east coast volumes. Some of this shifting routing is obviously shipper motivated while some has to do with the new strategies being deployed by shipping lines.

The implication for industry supply chain teams is the existence of fewer sailings than prior scheduling, which implies less flexibility for shippers along with added exposure to inventory-in-transit. The larger megaships require added unloading and loading turnaround times, especially for ports that are not prepared for the larger megaships and their added logistics implications. That is going to present added challenges for time-sensitive transit of goods such as agricultural and food related products.

It is our Ferrari Research Group belief that the new network routing strategies are an effort by ocean carriers to capture more of the transportation cost dollars from shippers, avoiding the need for a U.S. surface trans-shipment. It further supports the strategic goal among carriers to expand into added third-party logistics services through broader control of container movements. Further, the industry as a whole is shifting away from shipping line and service differentiation towards network-centric scheduling and global leverage.

As we also noted in our prior commentary, freight rates continue to climb for shippers over previous very low rates dating back to 2015. One rate benchmark for May cited by the WSJ reflects a $1390 average TEU rate for Asia to the U.S. West Coast, and a $965 Asia to Europe rate for respective segments. This is despite a continued capacity imbalance where new megaships continue to enter service chasing single-digit capacity growth. The existing scrap rate for older, less efficient vessels lags the reality of global market demand.

With the scheduling under three global alliance networks now pooling capacity for over 90 percent of major global trade routes, influences for rate hikes have shifted toward a seller’s market.  That defies supply and demand logic, but then again, we are describing an industry that seems to defy logic. Most carriers are forecasting a return to profitability in the current year which implies the threat of continued rate hikes.

The takeaway for industry supply chain, logistics and transportation procurement teams remains one of diligence and constant market monitoring.  Business-as-usual assumptions related to ocean transport no longer hold credence with these dynamics occurring. If management of ocean transportation has been outsourced, make sure that your services provider is communicating an adequate stream of market strategy updates as well as plans to address such factors.

Insure that senior management as well as line-of-business teams understand that ocean container transportation trends are quickly changing with many market forces pulling in different directions. Added transportation cost savings, particularly in the upcoming and often far busier second-half of the year may not be a wise assumption. Service levels, flexibility and added inventory exposure are potential risk areas.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Exploding Demand for Warehouse Space- Thorough Analysis is Wise

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Some concerning news crossed our Supply Chain Matters news desk that compelled a blog commentary. That news is that warehouse space acquisition across the United States has reached its highest level in over 16 years.

This data comes from CBRE, one of the largest global commercial real estate services and investment firms. CBRE reports that almost half of the 167 million square feet of new U.S. warehouse space currently under construction, the equivalent of over 70 million square feet is already pre-committed to new tenants. The tenants are described as primarily E-commerce, third-party logistics and retail industry users, no doubt responding to exploding needs for online fulfillment capabilities.  Warehouse 300x200 Exploding Demand for Warehouse Space  Thorough Analysis is Wise

Further noted is that current ratio of space under construction that is pre-leased stands at 43 percent, which exceeds the 17-year average of 38 percent. Obviously, the ratio signifies a healthy momentum and zeal on the part of online logistics and customer fulfillment teams for warehouse and fulfillment space acquisition.

We are of the view that such space trending and building momentum should be viewed with a cautionary lens. Here is why.

As a long-time industry supply chain analyst, my view of warehouse space has been admittedly as a skeptic. Warehouses, particularly very large ones, are monuments and reflections of inefficient supply chain inventory and customer fulfillment management. However, the boom in online B2C and B2B fulfillment has added a newer dimension for warehouse space, namely a tradeoff of overall physical retail space for that of warehouse space. A further market influencer is no doubt Amazon, which continues to consume new warehouse and distribution space. Adding to the challenge for some brick-and-mortar retailers is the need to simultaneously support both traditional store inventory replenishment and growing online fulfillment needs.

For the most part, prior warehousing and distribution strategies were predicated on supporting physical store or distributor inventory replenishment needs. Warehouses were maximized for vertical height vs. square footage, reflecting maximum inventory storage in a concentrated dimension.  Replenishment orders, for the most part, called for pallet-loads of inventory and merchandise shipped to individual retail stores or wholesale distributors. Inventory could thus be stacked higher in warehouse racks, with automated material handling cranes and equipment providing the bulk of warehouse pick automation.

Online fulfillment centers support a different strategy, namely far higher numbers of individual online orders that feature single cartons or packages. Thus, today’s specialized online customer fulfillment centers are now highly automated examples of end-to-end inventory flow-through, where bulk inventory is received and stored in building flow-through configuration, and where pickers or robots, perform pick and pack needs, while highly automated conveyors flow individual shipments to the other end of the building for actual shipment to online customers.

Online fulfillment is a trade-off of required real-estate square footage with the assumption that the customer fulfillment center assumes the real-estate burden of physical stores or distributors. Thus, the need for fewer overall physical stores, but new investments in customer fulfillment logistics and lower-density warehousing that focusses more on order volume productivity. The one continually changing variable will always be assumptions for inventory needs.

Where this tradeoff is tricky is in the cost and footprint of overall physical space, as well as the cost of such space.  Real estate market supply and demand dynamics can often inflate real-estate and subsequent leasing costs, especially when retailers like Amazon and Wal-Mart are leading the charge. As we all know, today, the cost of capital continues to be rather low. What if that changes over time, particularly in the costs of large footprint warehouse space vs. that of traditional shopping mall or retail space. The other looming challenge is the increasing costs included in online fulfillment, including added inventory, transportation, and logistics costs.

Such trends are complex and the takeaway for supply chain and online customer coordination and fulfillment professionals is that major decisions on real estate cannot be made in isolation.  They are not the context of a supply chain functional decision alone. Rather, thorough, rigorous business-wide analysis and review as to longer-term strategic business implications is very important. By our lens, the firm’s CFO and the head of supply chain are key stakeholders as well as stewards for such decisions.

The last thing that retailers need or desire is to tradeoff cheaper fixed or variable physical store real-estate and store operating costs for even more expensive online fulfillment costs. Likewise, supporting traditional stores and online needs with different or redundant footprints is no longer efficient nor cost affordable. Compounding the strategy are decisions to entirely outsource online customer fulfillment to an experienced 3PL, but here again, logistics providers are subject to the same market supply and demand dynamics.

At face value, exploding demand for warehouse space is not surprising. Such dynamics are the elation of warehouse design, construction, automated systems and real-estate providers.

Thorough analysis of the cost and service tradeoffs for implementing a widescale online customer fulfillment model is a business-wide joint responsibility involving multiple stakeholder inputs.

 

Bob Ferrari


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