We continue with our series of Supply Chain Matters postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard theses predictions as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As a reminder, our self-scoring process is based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.
In our Part One posting, we revisited 2014 Predictions One and Two related to economic forces to expect in 2014.
In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
In our Part Three posting, we rated Prediction Five, our specific call out of extraordinary supply chain challenges among three specific industries.
In the Part Four posting of this series, we revisited Predictions Six and Seven.
In this Part Five posting, we conclude with a look at the final three predictions declared for this year.
2014 Prediction Eight: Industry Re-Structuring of Global Transportation Surface and Air Networks Increase Momentum as Carriers Adjust to Realities
Our prediction in this area was predicated on a continued uncertain global economy, along with the after-effects of severe recession in the Eurozone motivating industry supply chains to rely on more economical and cost effective surface transportation modes. However, multiple years of excess shipping capacity across global ocean container fleets continue to be exacerbated by the ongoing delivery of massive new mega-ships designed to carry far more containers at a lower overall cost. The result was a relative no-brainer prediction- namely that industry consolidation was inevitable.
In March of 2014, industry watchdog Fitch Ratings once again declared that consolidation in the container shipping segment via alliances or mergers was likely to accelerate due to persistent overcapacity and freight rates pressures. The CEO of industry leader Maersk Lines also predicted that excess ocean container capacity would extend through 2016.
As a consequence, number of industry alliance or consolation announcements permeated 2014. There was an attempt among the top three global ocean container carriers to form the P3 Network which was thwarted in the end by Chinese maritime regulators. That was followed in July with the announcement of the 2M Alliance as industry leader A.P. Moller-Maersk announced a ten year vessel sharing cooperation agreement with Mediterranean Shipping Company (MSC) for designated Asia-Europe, Transatlantic and Transpacific routings. In August, global maritime regulators gave the go-ahead to the merger German based Hapag-Lloyd and Chile based CSAV which was expected to create the fourth-largest global shipping company in terms of capacity. In September, the Ocean Three Sharing Alliance was announced as French container shipping group CMA CGM entered into a service alliance with China Shipping Container Lines (CSCL) and United Arab Shipping (UASC).
As 2014 came to a close, a perfect storm crisis crippled U.S. west coast ports as the compounding issues of ongoing labor contract negotiations, larger ocean container vessels requiring more time to unload and load, an overall shortage of container transport carriages and labor disputes among trucking companies and independent drivers all intersected to form a bottleneck for crucial holiday fulfillment supply plans.
In June, the 25rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals (CSCMP) reported cost of the U.S. business logistics rose by another $31 billion in 2013. The report further confirmed that both U.S. trucking and rail networks were running at near 100 percent capacity, leading to spot shortages of specialized trucks and/or railcars. The boom of rail car shipments of crude oil from the North Dakota Bakken region fueled such shortages along with more incidents of railcar accidents and explosions. The last months of 2014 featured the first overture of a major railway, Canadian Pacific, calling for network consolidation within North America rail networks.
More use of surface transportation motivated international air freight carriers to further cutback on overall capacity in an effort to uphold rate structures and profitability goals.
The sum total of this 2014 prediction is that industry supply chains experienced longer transit times, increased costs and further heartburn as to the overall reliability of transit times. Industry consolidation and constrained logistics networks thus far has been for the benefit of asset owners or carriers vs. shippers.
2014 Prediction Nine: Internet of Things Picks Up Considerable Momentum
The Internet of Things (IoT) provides a new era of interconnected and intelligent physical devices and/or machines that will revolutionize supply chain processes related to production, transportation, logistics and service management. Our 2014 prediction was that IoT interest and development efforts would expand globally and would feature more announcements from well noted global based players in manufacturing, services and technology circles. That turned out to be exactly the case, and as we approach the end of 2014, IoT has become the buzz of industry and global supply chain news.
In consumer dimensions, Google kicked off the year by announcing its acquisition of home monitoring provider Nest Labs for $3.2 billion. Automobile manufacturers continued with strategic efforts focused on connected automobiles, while General Electric became the leadership icon for connected industrial equipment. The industrial conglomerate recently disclosed that it has already garnered over $1 billion in revenues related to its connected industrial products and services.
Increased market momentum naturally fueled vendor interest in positioning or jockeying interoperability standards. That led Supply Chain Matters to speculate whether the market was positioning for a replay of the RFID standards mess. In March, AT&T, Cisco, GE, IBM, and Intel officially formed the Industrial Internet Consortium (IIC) to accelerate work on areas such as interoperability standards for IoT in industrial markets. In July, a handful of tech heavyweights, namely Intel, Broadcom, Dell and Samsung Electronics unveiled a new non-profit termed Open Interconnect Consortium (OIC) with a mission to come-up with certification standards for devices operating in IoT environments. That announcement came after a December 2013 announcement from nonprofit Linux Foundation in conjunction with names such as Microsoft, Panasonic, Qualcomm and others that calls for the AllSeen Alliance to come up with a similar goal.
Technology vendor moves included product lifecycle management (PLM) and service lifecycle management (SLM) technology provider PTC initiating two strategic acquisitions to position the company to be able to leverage IoT platforms. In December as we published our prediction, PTC announced its $112 million acquisition of ThingWorx, a provider of platform that allows firms to build and run applications that leverage machine to machine information exchange. In July the provider announced the acquisition of Axeda, an IoT cloud-based technology provider offering technology that connects machines and sensors to the cloud, for a reported $170 million in cash. SAP recently announced a series of supply chain, service management and manufacturing applications enhancements that can leverage IoT platforms, along with an intent to develop applications support in this area over the next two years.
In 2014, strategy consulting firm McKinsey included the IoT as one of the ten truly disruptive technologies for the next decade that will be adding several tens of trillions of dollars to the global economy by 2025. Increased momentum and interest in IoT and its potential business benefits was a prediction that indeed played out throughout 2014.
2014 Prediction Ten: Continued Technology Investments in Cloud Computing, Predictive Analytics and Select Supply Chain Services.
Our assumption for 2014 was that a more optimistic global economy would motivate industry supply chain and line-of-business teams to increase levels of investment in specific areas of supply chain business process needs. Areas we highlighted were enhanced sensing of product and geographic demand , deeper lower-tier visibility to supply risk areas, more emphasis on leveraging B2B network platforms and added investments in more predictive or prescriptive supply chain intelligence capabilities. We further predicted that the attraction of cloud-based applications technology would continue to gain market adoption, primarily due to the needs for quicker time-to-value.
Our monitoring of both technology vendor and end-user communities throughout 2014 indicated for us that this prediction area generally played out with a couple of exceptions. Buying activity focused on cloud-based options for supply chain related business processes is indeed on the increase, validated at double-digit growth rates among various by many of the quantitative market research firms.
In the area of enhanced sensing of product demand, in 2014 we discerned a movement on the part of a select number of supply chain planning vendors to enhance their connectivity and support of demand sensing processes. In March, SCP vendor ToolsGroup announced the application of “machine learning” applied to product demand forecasting. In the case of Steelwedge, it was manifested by release of initial supply chain and S&OP focused “apps” released on the Salesforce.com platform.
Increased interest in leveraging B2B business networks for broader end-to-end visibility captured the interest of many industry supply chains and we observed vendors in this area branching out beyond their core vertical industries. SAP communicated a strategy focused on “Integrated Business Planning Network” eventually leveraging elements of the AribaB2B platform with elements of supply chain planning, execution and S&OP support. The year 2014 brought added emphasis for including new product introduction (NPI) and PLM focused information within B2B networks and motivated E2open to acquire Serus Corporation, a provider of network-enabled NPI information.
Supply chain focused cloud technology also captured renewed interest from the venture capital community. In February Elementum, which describes itself as the first mobile platform for end-to-end supply chain management, formally announced its market launch after securing $44 million in Series B funding from Lightspeed Ventures. In late May we called reader attention to a CB Insights blog posting titled: Software Eats the Supply Chain which provided succinct quantification of the renewed interest and that further indicated that over the prior four quarters, investors poured $359M into 63 deals in the logistics & supply chain software industry segment. Early stage investments in mobility, same-day delivery and cloud based end-to-end platform investments were of the most interest. Oracle made added strides toward availability of its public cloud version of supply chain applications support.
On the services side, more industry supply chains opted to outsource supply chain logistics and fulfillment processes to external third part logistics (3PL), transportation or BPO services firms. The increased pressures for cost reduction coupled with needs to serve Omni-channel market and fulfillment segments motivated these moves. However, firms may well discover in the coming months the hidden costs of such moves. As noted in our scorecard related to Prediction Eight above, the costs related to business logistics and 3PL services continues to rise with little relief in sight.
This concludes our series of looking back on 2014 to assess how our Supply Chain Matters Predictions fared. We trust our readers were able to gain benefits from following our series. Again, feel free to share your own observations regarding the key supply chain, procurement and B2B developments in 2014.
As we move toward the latter stages of December, we will shift our attention to what to expect in 2015.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
The World Health Organization (WHO) has declared the ongoing outbreak of the deadly Ebola virus in West Africa to be a Public Health Emergency of International Concern (PHEIC) and humanitarian organizations such as Doctors Without Borders continue to work on the front lines to control the outbreak. The consequences of further international spread of the virus coupled with fears of wider-scale contagion have created a call for coordinated global public health actions to stop and reverse the outbreak.
Other concerns should be the short or longer impacts to industry and global supply chains if the current outbreak cannot be adequately controlled. Within close proximity to the current effected region within West Africa is the country of Cote d’Ivoire, which is a major supply source for cocoa. Countries within the West Africa coastal and interior regions also produce supplies of palm oil, iron ore and other commodity materials.
Beyond local sourcing are the broader implications to global transportation and logistics networks if the current outbreak spreads to other countries and spawns additional travel and cross-border restrictions. In short, industry supply chain and sales and operations planning teams definitely need to monitor the current Ebola outbreak and have some form of scenario and backup plans identified.
This posting serves to alert our Supply Chain Matters readers who subscribe to Accenture Academy training and webinars that this author will overview the current Ebola crisis from an industry and infrastructure supply chain perspective and provide expert perspective on the areas to watch along with considerations for building risk contingency scenarios. Accenture Academy is launching a new series termed Trend Talks, which are more compact and two-way interactive webinars that address and provide collective discussion on important, rapidly developing trends among industry supply chains.
I am pleased and looking forward to delivering this inaugural Trend Talk webinar addressing this timely and rather concerning global topic. The session is scheduled for Wednesday, December 10th at 10am Eastern time with participation available only to Accenture Academy members. Readers can utilize this Accenture Academy web link for login and registration.
In last week’s Update Three commentary regarding the current crisis involving the near paralysis among the U.S. West Coast ports of Los Angeles and Long Beach, Supply Chain Matters highlighted that conditions on the ground were not showing any signs of improvement. As this week draws to a close, the situation appears to be deteriorating even more, and now involves clear impacts and continued disruption for both U.S. exports as well as imports.
Last week, the National Retail Federation (NRF) published an editorial with the statement: “The sudden change in tone is alarming and suggests that a shutdown of the ports — either from a walkout by labor or a lockout by management — is imminent.” The NRF has since been joined by other industry associations including the National Association of Manufacturers (NAM) the U.S. Chamber of Commerce, and 60 other organizations representing agricultural growers.
Agricultural exports such as apples, forest products, potatoes and other crops are now jeopardized. Growers indicate that Far East buyers are now cancelling orders and moving to alternative sources of supply. According to a report from industry trade group, Agriculture Transportation Coalition, the consequences of the current port congestion are being felt throughout the United States. The railroads are unable to bring agriculture products from the Midwest and the South to West Coast ports because of the port congestion crisis. In addition, ocean carriers continue to attempt to pass on their increased costs by imposing draconian congestion surcharge fees on U.S. exporters and importers.
A published report in American Shipper (registered sign-up or paid subscription) now indicates that formal labor negotiations among the lead negotiators of the international longshoreman’s union and the Pacific Maritime Association (PMA) are currently in recess and not expected to resume until December 2. The publication characterizes this development as: “bad news for importers and exporters hoping for a quick agreement and rapid restoration of normal operations at West Coast ports.”
A new wrinkle concerning labor work stoppages expanded earlier in the week as independent truck drivers contracted by trucking firms serving both ports initiated multi-day job actions seeking fair wages and better working conditions. These job actions expanded to five trucking firms serving the port complex as of Monday. Truck drivers, mostly hired as independent contractors, have had longstanding grievances with local trucking firms and now the Teamsters labor union has taken the current port crisis as an opportunity to leverage driver demands to be recognized as full-time employees.
We again echo our Supply Chain Matters advice that industry supply chains impacted by the current west coast port disruption should be in full response management mode and seeking alternative options for both imports and exports from these ports. The situation is such that there appears to be little indication of improvement and further indications of shutdown, lock-out or government imposed mediation. Response time to save holiday revenue budgets is in critical stages, too late to save the Black Friday-Cyber Monday holiday weekend, and essential to save customer December and January holiday fulfillment commitments.
We may well observe that the winners and losers of the 2014 holiday buying surge were those individual industry supply chain teams that demonstrated the most resiliency and responsiveness to the west coast port debacle.
We are a mere two weeks before the Black Friday holiday shopping kick-off, and a mere six weeks before the actual Christmas holiday and the severe congestion that is crippling U.S. west coast ports essentially remains the same.
In last week’s Supply Chain Matters commentary we described what many are calling the “perfect storm” of supply chain disruption. Another week later, the crisis is cascading across industry and transportation channels, affecting both imports as well as time-sensitive exports. An NBC News broadcast in the U.S. notes that as of yesterday, 13 ships are anchored off the coast waiting to be unloaded and describes container shipping at “full stop”. While that may be a bit of journalistic sensationalism, it is descriptive.
The on-the-ground realities seem little changed from last week’s situation.
Public finger-pointing among the ILWU labor union and the Pacific Maritime Association (PMA) has become a public spectacle vs. any perceived constructive progress. Union officials continue to point to chronic shortages of truck chassis, the impact of having to unload far larger container ships and rail bottlenecks. Meanwhile, at least one container shipping line, U.S. Lines, is placing a Port Congestion Surcharge, effective November 17, amounting to $800 for a twenty-foot container and $1000 for a 40-foot container. That is sure to add additional heartburn for retailers and manufacturers alike.
A published report from the Journal of Commerce reports that air freight forwarders with operations in the Asia Pacific region are observing space shortages with shipping costs rising dramatically. That should not be a complete surprise considering that Apple and other consumer electronics providers had previously locked-up air freight capacity to overcome their own production backlogs.
The National Retail Federation (NRF) continues to lobby for the personal intervention of President Obama but that effort, even if it did occur, is unlikely to relieve the current congestion any time soon.
As we stated last week, regardless of the finger-pointing, the situation is indeed the perfect storm scenario that many had feared and industry supply chains need to deal with the current realities. Noted in this week’s Wal-Mart commentary, retailers have already kicked-off holiday promotional merchandising and are de-emphasizing the singular Black Friday shopping event in favor of a steady stream of promotions extending through the end of November and probably well into December.
Last year, UPS, and to some extent FedEx, were thrown under the proverbial bus by retailers for non-performance at the most critical time period. In 2014, the creditability of west coast ports and indeed the surface shipping industry is inching closer to being the Grinch’s of Christmas.
This week, AP Moller-Maersk, parent of global leading ocean container shipping line Maersk reported rather positive Q3 financial results. For the third quarter, the shipping concern reported an overall net earnings increase of 25 percent on flat revenues. However, Maersk did take the opportunity to once again warn its investors of a continuing slowdown in global trade.
Financial highlights for the Maersk Line unit included revenues of $7.1B and profits of $554M. Return on invested capital was 13.5 percent compared with 10.9 percent a year earlier. Volumes increased by 3.7 percent, average rate increased by 0.9 percent while unit costs decreased by 0.9 percent. Fuel costs decreased 2.4 percent from the year earlier period.
According to reporting from the Financial Times (paid subscription or free metered view), aggressive cost cutting and lower use of fuel has made Maersk Line the most profitable in the industry. The publication notes that current operating margin of 10.5 percent is considerably higher than the average of industry rivals. Once more, Maersk boosted its operating margin over two percentage points in one quarter, and has the opportunity to continue boost future margins through the announced 10 year 2M vessel sharing alliance with rival Mediterranean Shipping Company (MSC).
Maersk CEO is again quoted as indicating that in essence, the glory days of rapid industry growth in containerized trade is over. Operators must now assume lower single-digit volume growth.
In the midst of continued industry-wide overcapacity and little industry volume growth, Maersk continues to demonstrate that it will aggressively compete for additional business and market-share. In September, Maersk Line announced a renewed ship acquisition program. It announced plans to invest upwards of $3B per year, for the next five years to acquire the equivalent of 30 new 14,000 TEU capacity vessels. That is despite its recent investments and delivery of new Triple-E vessels capable of handling upwards of 18,000 TEU’s. The new acquisition of more technologically advanced and more fuel efficient vessels further provide the opportunity to scrap older, less efficient vessels.
Included in our Supply Chain Matters Predictions for Global Supply Chains for the current year, we forecasted continued industry consolidation in surface transportation. Maersk’s continued financial performance and aggressive competitive stance adds further kindling for the industry’s lower-tied players to make additional moves or be left behind.
Supply Chain Matters will be scorecarding each our 2013 Predictions in the not too distant future.
Global retailer Wal-Mart indicates that it will abandon its prior emphasis on the singular one-day Black Friday buying holiday and will instead spread promotional incentives over an extended five day period beginning in the last week of November. By our lens, this is good news for consumers but not so for certain retail competitors.
Wal-Mart’s efforts at spreading out online and in-store buyer incentives allows shoppers greater flexibility to shop for bargains and avoid the craziness and frenzy of Black Friday mobs in stores and online. The retailer’s employees hopefully get some brief time to celebrate the Thanksgiving Holiday with family and friends. Reports indicate that Wal-Mart will extend promotions thru the entire Black Friday weekend, with an additional flurry of bargains on Cyber Monday. The retailer further indicates that it will be matching online prices from its website as well as in its physical stores.
Other retailers including Amazon have scheduled their holiday promotions to begin earlier in November as well. Already, our inbox contains promotional emails for holiday bargains. What thing is certain, the largest online retailers including Wal-Mart and Amazon will be playing even more hardball in holiday promotions.
All of these efforts can hopefully avoid what occurred in 2013, consumers waiting to the very last days and hours prior to the Christmas holiday to make their purchases only to discover the weakest link, the last-mile of delivery from parcel shipping companies. Both FedEx and UPS have been urging retailers to spread out their promotions and avoid multiple delivery network surges. However, UPS anticipates that its peak day will be December 22. 6 days later than what the package delivery firm planned for in 2013. UPS is planning to process 585 million packages in the month of December.
An added dimension this year is the U.S. Postal Service and its efforts to be a more mainstream player in last-minute last mile parcel delivery. A final dimension in 2014 will be how Amazon and Google’s efforts in piloting their own pilot delivery networks fare in supporting or mitigating surge fulfillment periods.
The not so good news concerns retailers who are still scrambling to get inbound inventories moved through highly congested and near dysfunctional U.S. West Coast ports. With competitive promotional programs about to kick-off, some retailers will have to fess-up to not having inventory to satisfy consumer holiday needs, or be notified by suppliers that inventory is delayed.
This is all a game of competitive positioning and the stakes are high. Some business and social media outlets, knowing what may be forthcoming, are advising consumers to wait to the very last-minute before initiating holiday gift purchases. The premise is that certain retailers might be more motivated to offer more attractive bargains once they assess their inventory situation.
Another certainly is that retail and B2C focused S&OP forums and their supporting supply chains can expect a steady stream of intense activity, and perhaps more surprises now and through the end of December. It will not be pretty and the winners will be those that can plan and anticipate consumer actions and those that can best respond to changing events.
Keep your web browser pointed to Supply Chain Matters for continuing updates and insights regarding the 2014 holiday surge.