Supply Chain Matters has published two commentaries dating back to December, regarding reports of merger talks between two high profile ocean container shipping lines, German based Hapag-Lloyd and Chile based CSAV. These talks had the potential to create the fourth largest global container shipping line by such a consolidation. In our late-January posting we cited a Wall Street Journal report indicating that a Memorandum of Understanding had been reached and that the merger deal was expected to be signed in February.
Today, various global media outlets are reporting that this merger deal is signed, and the terms are essentially unchanged from the Memorandum of Understanding reached in January. The deal calls for Hapag-Lloyd to control 34 percent of the merged entity after two added capital infusions totaling approximately $1 billion. According to a published Reuters report, this business combination is not completely a done deal because it is subject to approval by the City of Hamburg’s Senate and has stipulation that if more than 5 percent of CSAV shareholders exercise withdrawal rights by April 20, the deal will be annulled. According to a separate report published by the Wall Street Journal, the combined entity will have a transport capacity of one million TEU’s and 200 ships.
Business media and Supply Chain Matters have both noted that this merger is a direct result of the announced formation of the P3 Network involving the top three global ocean container carriers, which has already gained U.S. maritime regulatory approval and awaits similar approval from both China and European Union regulators.
We have also featured research and commentary noting that this ongoing consolidation of global ocean container networks has an impact on various industry supply chains. Succinct evidence on the financial impact to shippers was noted in a posting featured by The Loadstar, reporting that global premium beverages provider Diageo revealed that container shipping line unreliability has cost that firm upwards of €3 million in extra inventory costs so far this year. According to this blog posting, a Diageo customer services and logistics executive noted during an industry conference presentation that current reliability of eastbound Europe to Asia container services is so poor that the beverage provider has had to increase safety stock inventories by 34 percent to maintain customer service level needs.
Supply Chain Matters remains of the belief that there are many other industry supply chain service and industry costs being precipitated by the current conditions of excess capacity and need for shipping line profitability.
Today’s announcement concerning the formation of a consolidated fourth network carrier will more than likely lead to additional industry announcements in the weeks and months to come. Meanwhile, industry supply chains depending on cost control initiatives achieved through increased ocean container inter-modal methods will continue to be disappointed by the ongoing economic fallout from such strategies.
Supply Chain Matters had the opportunity to recently attend the 2014 Crossroads Conference hosted by the Massachusetts Institute of Technology (MIT) Center for Transportation and Logistics (CTL). Crossroads is an event that began 10 years ago, and each year we look forward to attending and hearing about leading-edge trends and developments in MIT supply chain focused research and across industry supply chains.
Each year, the agenda shifts in focus and the 2014 conference featured talks on advanced and emerging research occurring among select MIT faculty members. The conference was kicked-off with a presentation from MIT Professor Suzanne Berger, principal author of the book, Making in America, From Innovation to Market. Professor Berger summarized the multi-year research conducted by the MIT Task Force on Production and Innovation. Supply Chain Matters has previously posted our summary of last year’s event that reported on the findings from the MIT PIE Task Force. None the less, the messages continue to have meaning. MIT researchers studied and interviewed over 250 manufacturing start-up firms located in the United States, Germany and China. The principle takeaways summarized by Professor Berger were:
- Industries do require close ties and integration among R&D, product design and manufacturing. The MIT researches identified a meaningful pattern of successful firms that demonstrated specialized expertise in physical manufacturing bundled with specific customer-focused services.
- Of the 250 manufacturing start-ups that were analyzed, most were able to gain funding for initial product design and concept in the first 3 years of the start-up. None were able to scale-up to full volume production in the United States because of the large dollar and process expertise investments required to scale. Industrial ecosystems that were once provided by industrial giants have moved outside of the United States, primarily in Germany and China. While 85 percent of advanced process and material research had roots in an academic institution such as MIT, most migrated to other global areas and according to the researchers and the U.S. continues to lose out on commercialization expertise. Professor Berger joked with the audience that the book could have be renamed to be “Home Alone”.
- U.S. companies have huge pressures from Wall Street for shedding overall assets and focusing on short-term vs. longer-term focused results.
- On the positive side, researchers cited existing U.S. public and private consortiums and partnerships as having a rather positive influence in providing needed expertise and infrastructure to sustain innovative manufacturers.
A rather sobering presentation, Is Cyber Security the Next Risk, was delivered by Dr. Abel Sanchez, Executive Director of the MIT Geospatial Data Center. Sobering is probably an understatement because Dr. Sanchez provided mind-blowing examples of how easy it has become for unscrupulous parties to hack corporate systems today. We are not going to cite the specific statistics in our commentary from concern that such data would become more visible. Suffice to state that the often cited statistic that 50 billion connected devices will exist by 2020 has to be factored against much stronger information security techniques. Dr. Sanchez noted that an internal experiment was conducted within MIT when a single laptop with no security controls, was connected to the internal network for a 24 hour period. A visualization representation of the specific attacks that occurred from all parts of the globe on that single laptop in just that 24 hour period was sobering. Dr. Sanchez’s observation was that for the most part, corporations are not allocating sufficient attention or resources to address information security. Sanchez further pointed to the recent massive credit card security breach that occurred across Target retail stores as a potential benchmark for ascertaining corporate, government and personal security responsibilities.
Other highlights of the 2014 Crossroads event included a presentation from Professor Julie Shah of the MIT Interactive Robots Group depicting factories of the near-future, where robots and humans will work together interactively on flexible work sequencing and scheduling of assembly tasks. The next-generation of robots will be responsive to high-level guidance from humans, and Prof. Shah outlined how assembly work can be coordinated among multiple robots in the not too distant future in applications such as aerospace, automotive or consumer electronics assembly manufacturing. MIT Self-Assembly Lab Director Skylar Tibbits provided insights into 4D Printing application concepts, where the emphasis shifts from the printer to essentially programmable, super high density or molecular “smart” materials which form desired shapes based on individual material properties. In his overview, Tibbits described the notion of materials that can assemble or repair themselves in application areas such as aeronautics, medical devices, pharmaceuticals and other area in the coming 5-10 years.
As always, Crossroads was a thought provoking conference focused on the future concepts of supply chain technology and processes.
Inditex, the parent company of fashion retailer Zara continues to invest in that retailer’s fast fashion capabilities.
The Wall Street Journal recently reported (paid subscription) on a $209 million investment in a new logistics hub, the tenth distribution center within Spain, which will be capable of distributing approximately 500,000 garments per day to over 6000 retail stores located within 87 countries. A further investment of $680 million has been directed for a logistics upgrade for various distribution centers including the Cabanillas, Spain hub.
Inditex continues to invest heavily in Zara’s competitive differentiator, namely the ability to quickly be able to turn any new fashion trend into finished garments in a matter of a few weeks. These latest investments on agile distribution hubs provide an added boost to back-end execution and store stocking needs. Zara is further in the process of changing its retail strategy, investing in larger retail footprints while closing smaller footprint stores and these new investments in faster logistics have been planned to aid in this strategy change.
In January of 2013, Supply Chain Matters reiterated our observations that that companies whose senior management team has a solid grounding and understanding in principles of operations and supply chain management can often have their supply chain serve as a competitive differentiator for business outcomes. The two founding business principles of Zara are:
- Give customers what they want
- Get goods to customers faster than anyone else
Few global specialty retailers have been able to match Zara’s success. Even as the Eurozone countries endured a long period of severe economic recession, Zara managed to maintain its admirable record of consistent revenue growth and sustained profitability. A leadership culture that fundamentally understands that supply chain agility, responsive logistics and valued people do matter in sustaining a competitive industry advantage.
In October of 2013 Supply Chain Matters introduced our readers to the first signs of advances in item-tracking technology that being a stand-alone sensor in printed electronics. We called attention to Norwegian based Thinfilm Electronics ASA which announced that it had successfully demonstrated a fully functional stand-alone, Smart Sensor label built from printed and organic electronics with low power. We further noted that the announcement pointed to the ability to track and monitor temperature and environment for logistical needs in pharmaceutical supply chains as well as the ability of retailers to have insight on both the temperature, shelf-life and food safety of perishable products.
We have now received word of two other strategic partnership announcements involving Thinfilm’ s product development plans. One announcement outlines a partnership with Temptime, a significant provider of cold-chain related, time-temperature indicators to the healthcare and pharmaceutical industry. Currently, Temptime claims to produce the only temperature sensor for item-level vaccine monitoring that is approved by the World Health Organization (WHO) and the United Nations Children’s Fund (UNICEF). According to the announcement, both companies will collaborate to develop indicators featuring electronic technology that will alert people through digital display if medical or pharmaceutical products have been exposed to potentially damaging temperatures. Terms of this deal include a development-related investment from Temptime and commercial pre-orders for samples that can be shared with customers. While the press release notes that the timing is still to be determined, we believe that samples may well be developed in months.
Another announcement calls for a distribution agreement with PakSense, Inc. in the development of intelligent sensing products specifically designed to monitor perishable goods. PakSense currently provides numerous major food retailers and suppliers with solutions to help monitor the condition of perishable goods. Terms of this agreement authorize PakSense to distribute Thinfilm Smart Labels™ to food suppliers and retailers of produce, meat and seafood in North and South America. In addition, PakSense has submitted pre-orders for the labels, which are targeted for delivery to lead customers in early 2015. The Thinfilm printed electronic labels will indicate if certain temperature ranges have been exceeded, allowing added visibility into temperature variations that may exist within a shipment and will complement PakSense time and temperature monitors. Further indicated is that the ultra-low cost associated with the printed electronics process will now make it possible for PakSense customers to use multiple Thinfilm labels in a shipment at the “item” and “pallet” level. In addition to ThinFilm technology, key components of these smart labels will be provided by several other partners including PST and Acreo.
One of our predictions for 2014 was that the “Internet of Things” will accelerate in momentum, particularly in applications related to broader supply chain visibility. Smart, item-level labels that alert to environmental and other real-time conditions certainly falls under this category and the above announcements point to some exciting potentials in the not too distant future.
In our recent Supply Chain Matters update on Q1 commodity price trending, we noted that the severe winter conditions that have occurred across the U.S. and Canada, coupled with operational disruptions in the placement and logistics of tank and bulk commodity railcars have led to reported disruptions in supply contracts of inbound bulk commodities. Commodity producers have had to shift to more expensive trucking options to accommodate food production line scheduling.
The government of Canada is now taking more extreme action against its national rail carriers with proposed legislation that would allow bulk commodity producers to switch between Canadian National Railway (CN) and Canadian Pacific Railway (CP) for flexibilities in getting commodity products to designated supply chain customers.
According to reports, Canada’s current conservative government is getting much more concerned about shipment bottlenecks, especially when it concerns commodity shipments to existing and newer export markets, including the United States. According to a report published by the Wall Street Journal, 150 grain elevators would have access to both rail lines under the proposed legislation. Currently only 14 grain elevators have such access. For its part, the CEO of CN is quoted as indicated that this legislation will have little impact when considering the extreme winter weather conditions seen this year across North America.
No doubt, the debates concerning government vs. private industry solutions to logistics bottlenecks will continue. In the end, it’s always a demand and supply imbalance problem that needs a solution.
The termed P3 Alliance which calls for an alliance among the top three largest ocean container companies to pool shipping assets across major routes gained arrival last week from the U.S. Maritime Commission. As noted in our previous commentaries, this alliance pools the shipping resources of
Maersk Line, CMA-CGM, and Mediterranean Shipping across what is estimated to be up to 40 percent of total cargo moved in containers from Asia to Europe, as well as other major trans-Atlantic and trans-Pacific ocean routes. This proposed alliance network still needs the approval of European and Chinese regulators in order to consummate their network.
As noted in our ongoing commentaries regarding the proposed P3 Network, smaller shipping lines, cargo forwarders and maritime fuel suppliers all objected to this arrangement for fear of a significant competitive advantage among the top three carriers.
In its reporting the gaining U.S. maritime approval, the Wall Street Journal quotes the chairmen of the Asian Shippers Forum as indicating that: “The P3 is very close to being a monopoly” and that: “Such a concentration is untenable.” The publication further quotes the CEO of SeaIntel Maritime Analysis as indicating that this alliance could be a game changer in the shipping industry, and be the forerunner of a wave of industry consolidation.
Prediction 8 of our 2014 Predictions for Global Supply Chains, called for turmoil in ocean transport to intensify well into next year as the fallout of approval of the P3 Network, or other proposed alliances play out. It appears that after reaching the critical U.S. approval, the broader industry is now fearing the realities of the implications of a significant competitive advantage.