subscribe: Posts | Comments | Email

Overstocks of U.S. Retail Inventories Spell Challenges for the Remainder of the Year


After many prominent retailers have formally reported their financial results for the first quarter, business and industry media have been quick to note that for the most part, U.S. retailers are facing a glut of existing unsold inventory.  The exception is certain online retailers such as Amazon who have managed to post continued sales gains and leverage the existing popularity of online shopping especially in categories such as apparel. However, retailers with a large physical retail store presence and who suffered significant revenue declines in Q1 are expected to deeply discount and promote the sales of excess inventories over the coming weeks.

While this is certainly some good news for avid shoppers, this quandary will have implications for the remainder of the year. A published report from Reuters quotes a retail industry equity analyst at Edward Jones as indicating that retailers are now in the process of cutting back inventory purchases for both the third, and the all-important fourth quarter of this year.

The stated risk is that without very comprehensive and purposeful inventory planning and supplier management, retailers run the risk of jeopardizing revenues and profits in the crucial holiday buying quarter that comes towards the end of this year.  Those retailers who have invested in more advanced inventory optimization and management applications that integrate with item-level point-of-sale sales data may well get the benefit of successfully navigating through some difficult upcoming quarters.

The other obvious implication will be on global ocean container transportation, which continues to slog through its own crisis of too many ships chasing declining shipping volumes. With many traditional retailers cutting back on second-half inventory purchases, shipping volumes may well decline even further. That will bring added revenue and profitability pressures to some existing ocean container shipping, port operations and inter-modal railroad lines.

The current environment of global economic uncertainty and rapidly shifting shopper buying preferences continues, and retail focused supply chains, as always, are in the cross-hairs of scrutiny and required performance. Retail supply chains and their associated sales and operations planning teams will continue to learn lessons in responsive merchandising and more proactive inventory management while continuing to discover the increased costs of online fulfillment.

To No Surprise- Another Ocean Container Shipping Lines Alliance Announced


At the beginning of this month, Supply Chain Matters advised our readers to pay particular attention to the ongoing sober signs of global transportation structural changes. For the ocean container shipping segment, it was inevitable that a new multi-carrier alliance would emerge, and indeed it has.

Late last week came the announcement that Germany based Hapag-Lloyd AG intends to join five other Asian carriers to create a vessel-sharing alliance to be termed “The Alliance.” According to the announcement, this new alliance will control 18 percent of the world’s container shipping fleet with more than 620 vessels and a combined capacity of 3.5 million TEUs. Since there are reportedly merger talks between Hapag-Lloyd and United Arab Shipping are in the works, there may be additional capacity added to The Alliance.

Members have agreed to a five-year term scheduled to start operations in April 2017 subject to necessary maritime agency regulatory approvals.

Since three Asian based carriers currently belong to the existing G6 alliance, and three others belong to the CKHYE alliance, all will cease these alliances next year. Further, Hyundai Merchant Marine Co., now part of the G6 Alliance, in a separate statement indicated that once its business is normalized, it will initiate necessary processes to join The Alliance before September.

Just about a month ago, China’s Cosco Group, Hong Kong’s Orient Overseas Container Line (OOCL); Taipei based Evergreen Marine and France’s CMA CGM agreed to form the Ocean Alliance, representing nearly 350 vessels across various global routes, and by CMA CGM estimates, could account for 26 percent market share in Asia-Europe routings.

These new alliances are being put forward to rival the market dominance of Maersk Line and Mediterranean Shipping Co., (MSC) which formed the 2M Alliance in 2014 that reportedly now controls roughly 34 percent of the Asia to Europe trade route.

It would be understandable if readers are confused at this point as to which carriers will eventually be associated with which asset pooling alliances. What is of more concern is the amount of global shipping capacity that could be eventually pooled and aligned to global shipping routes. Is it no wonder that reports are circulating that some global maritime regulatory agencies are becoming a bit concerned as to any imbalances in pricing power.

Parcel Shipping Dynamics are Moving Far More Quickly- Stay Informed and Seek Added Intelligence


For the past 6 months, Supply Chain Matters has advised our readers that structural disruption is underway regarding online and B2B small parcel transportation and logistics, and supply chain and procurement teams, particularly those residing in retail or in small to medium sized businesses need to be prepared for the implications.

Succinct signs of these forces became visible prior to the 2015 holiday fulfillment quarter, as the major parcel carriers FedEx and UPS significantly raised rates and surcharges despite historically low fuel costs, to reap additional revenues and profitability. In an October commentary we reflected on whether the duopoly would together inch closer toward upsetting the “golden goose” of their current growth strategies, that being their ongoing participation in the boom in online B2B/B2C fulfillment. In a January commentary, we called attention to higher shipping charges impacting smaller online as well as B2B businesses.

In just a few short months, events are moving more quickly and the signs have become much more obvious.

This week, adding more arrogance, both FedEx and UPS simultaneously issued announcements indicating that effective June 1st, additional handling surcharges of $10.50 would apply to packages with dimensional measures greater than 48 inches but equal to or less than 108 inches along the longest side. The previous measure to trigger the dimensional surcharge was greater than 60 inches but equal to or less than 108 inches. Both carriers attributed the surcharge increases to increased handling and larger package volume costs.

Such larger-sized packages would generally be routed to LTL (less than truckload) carriers, and indeed, such carriers have experienced a marked increase in online B2C fulfillment package volumes. But alas, as The Wall Street Journal recently reported, such carriers are not really prepared for the impact for sending tractor-trailer rigs within multiple urban and residential neighborhoods to deliver single packages. Operational costs are increasing with driver times eaten up by longer delivery time needs as well as the need for more specialized delivery vehicles. These carriers will have little choice but to increase rates to accommodate added online orders and the fallout will impact general business transport needs.

We along with business media have noted that one of the biggest beneficiaries of the FedEx and UPS rates increases was the United States Postal Service (USPS) as more online fulfillment and B2B package needs are routed through the postal system. The USPS just reported that its revenues rose once again, rising 4.7 percent in the March ending quarter thanks to stronger shipping volume and prior rate increases.  Overall volumes rose 1.4 percent fueled by a reported 11 percent increase in first quarter package volumes, which is usually a slower period of retail activity. However, the USPS has its own good news, not so good news challenges.  Increasingly becoming the parcel carrier of choice has driven up operational expenses by 7.4 percent. While controllable income rose to $576 million from $313 million a year earlier, overall the USPS reported a loss of just over $2 billion when long-term pension liabilities are factored-in.

The reality, by our lens, is that the USPS is currently not equipped with the same inherent efficiencies and owned transportation assets as either FedEx or UPS. In fact, the service contracts with FedEx for air transport needs. The implication is that continued volume increases will drive-up more USPS operating expenses without additional rate increases or added investments in more efficient transportation assets.

We then turn our attention to the largest online retailers.

Amazon’s strategy for directly controlling more transportation assets continued to unfold with the announced of a second major announcement relative to leasing dedicated air-freight capacity. The online retailer will partner with Atlas Air Worldwide to lease 20 Boeing 767 freighters, an addition to the 20 air freighters leased from ATSG in March. Reports further speculate that Amazon is shopping for its own airport facilities in certain geographies.  With an air fleet of upwards of 40 planes, coupled to multiple customer fulfillment and logistics pre-sorting facilities, and a fleet of leased tractor-trailer units, the unfolding strategy is one of Amazon controlling its own logistics and transportation capabilities for Amazon Prime and Fulfilled By Amazon fulfillment needs.

The Wall Street Journal recently reported that Wal-Mart is about to open four additional online customer fulfillment centers, in addition to four existing centers, each spanning a size of than one million square feet housing upwards of 30,000-50,000 items. Today the WSJ amplified that Wal-Mart has begun a new Shipping Pass service, where members get free two-day shipping for $49 per year. The publication cites informed sources as indicating that in February, the retailer invited a number of regional parcel delivery companies to an Atlanta conference to outline a vision for contracting a network of regional delivery firms to support its new shipping service. Wal-Mart is reportedly wooing carriers with promises of predictable shipping volumes and strategic partnerships, and the implication, according to the WSJ report, is a shift away from FedEx which currently handles the bulk of the retailer’s current parcel delivery needs.

Events are indeed moving quickly, and the implications need to be closely monitored. Those shippers locked into longer-term contracts may or may not be impacted whereas shippers who rely on current parcel transportation rate market dynamics are bound to be impacted if they do not pay close attention to the implications of these events. While the large parcel carriers continue to play out a power game of rate increases, alternative options maybe short-lived as market dynamics and opportunistic moves by remaining carriers and by Amazon and Wal-Mart continue to unfold.

Best to seek out technology providers who can provide market intelligence and transportation market knowledge as to which carriers and which modes will provide best short and longer-term cost options.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.

Supply Chain Matters Impressions of QAD Explore 2016- Part One


This week, this Editor attended and spoke at QAD Explore 2016, the annual customer conference for ERP technology provider QAD. Candidly, this was my first experience attending this conference and I was impressed from a number of perspectives. This posting is one of subsequent commentaries that will explore such impressions and insights.

From an ERP technology support perspective, QAD is primarily serving tier one and other mid-market manufacturers and services providers as well as divisions or lines-of-business needs of major global manufacturers. Regarding the latter, one positive impression were the names and affiliations of certain corporate attendees present and interactive at this conference, corporate names often associated with a very large global German based ERP provider.

Since 2012, QAD has been investing a hefty R&D budget directed at a major revamp of the firm’s ERP applications and technology deployment strategy. The effort is termed “Connected Enterprise” and it includes emphasis on enabling what this technology provider terms a more effective organization with more connected business processes. The emphasis is on providing more standardized solutions, a more flexible platform, suite-wide analytics with product enhancements supporting program/project management, manufacturing automation and customer engagement needs. Anther major emphasis is directed in enhancing the user experience and in providing both Cloud ERP and Cloud EDI deployment options. During the conference, executives announced that 30 percent of QAD’s existing customers are now utilizing the Cloud platform.

Regarding Cloud, since March of last year, the ERP technology provider has embarked on what it terms as its “Channel Islands” development strategy, a series of twice annual releases further enhancing Cloud ERP. The effort began with the Santa Cruz Release in March of 2015. Other releases are “Channel Island” planned for 2017 and “Santa Rosa”, planned for 2018. Each release, the result of joint-development efforts with existing customers among different industry sectors, addresses added Cloud based functionality needs.

What impressed this analyst was the flexibility of options that QAD is providing its customers. Instead of a forced march approach compelling customers to move to the Cloud, QAD has fostered options to both maintain existing behind-the-firewall applications and supplementally deploy Cloud based applications within an overall cohesive systems architecture framework. Cloud modules are provided in process areas termed Customer, Manufacturing, Supply Chain and Finance. Overall, QAD’s emphasis is in helping its customers overcome any major disruptions related to advanced technology deployment via a strategy of continuous, manageable extensions and/or release upgrades.  That is quite refreshing from an ERP provider.

A final impression relates to two prior acquisitions that QAD made related to supply chain support needs which are now incorporated both as add-ons to QAD’s ERP support capabilities and as separate operating divisions.

In June of 2012, QAD acquired European based supply chain planning technology provider DynaSys S.A., a specialized planning vendor catering to specific mid-market industry players within France and Europe. Since that time, the supply chain planning capabilities of DynaSys have been incorporated in what is termed Demand and Supply Chain Planning (DynaSys Cloud DSCP) within QAD.  As noted, also as an operating division of QAD with an independent branding, DynaSys provides supply chain planning support for non-QAD customers, including those with other ERP backbone systems. This has fostered experience that supports the demand and supply chain planning needs of broader industry verticals and integration experience with other ERP and legacy systems.

Another operating division is Precision, a Cloud based transportation management and international trade compliance technology provider that operates in a similar manner. QAD and non-QAD customers can adopt Precision’s trade management support capabilities.

I had the opportunity to conduct introductory briefings with executives from both of these operating divisions, and candidly, was very impressed with technology and support efforts undertaken by both. So much so that I will be conducting more in-depth briefings upon which highlights and insights will be shared in a later Supply Chain Matters posting.

In a subsequent postings related to QAD Explore, we will share more impressions and insights related to QAD customers and their needs, as well as discuss the session that this author served as a guest panelist. Our panel session addressed the ongoing challenges and root causes of skill and training gaps related to today’s manufacturing and supply chain industry environments.

Stay tuned.

Bob Ferrari

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


Sober Signs of Global Transportation Structural Change


For some time, Supply Chain Matters has brought attention to the building overcapacity situation that is occurring across global focused transportation sectors. This includes ocean container shipping as well as airfreight. As carriers continue to report on Q1 earnings performance, the scope and degree of the capacity problem becomes more evident.  Container_Term

A.P. Muller-Maersk, the parent of industry leading Maersk Line reported Q1 financial results this week. Overall the diversified shipping line reported an 86 reduction in net profitability although the firm was able to deliver some profit.

For the Maersk Line ocean container shipping segment, earnings were $32 million vs. $710 million in the year earlier period. Volumes were reported up 7 percent. With the China Containerized Freight Index declining 30 percent in Q1, Maersk’s volume increase strongly implies that the line is taking market share from other lines. Thus, shipping alliances among dominant lines are having an impact on other smaller industry players.

Overall, Maersk noted a 26 percent decline in freight rates during Q1. That was beneficial for shippers, not so great for the shipping industry and the mounting pressures for further consolidation. The Wall Street Journal described shipping industry executives as describing the most bruising three months since the 2008 financial crisis. Current freight rates are barely covering fuel and other operating costs. There are ongoing reports of financial issues with the two major shipping lines in South Korea and other financial related challenges for lines based in Japan.

Turning to the air freight segment, Deutsche Lufthansa reported a significant decline in revenues related to the carrier’s air freight segment. Cargo yields were down 15 percent year-over-year in Q1, and citing “sizable overcapacity in the market.”

We as well as supply chain media have brought attention to Amazon’s ongoing efforts to lease and operate the online retailer’s own air transport fleet. The opportunity to add to that resource base on a broader global basis may now be more opportune since some air freight carriers may need to shed assets more quickly than anticipated.

Supply Chain Matters continues with our counsel to transportation, logistics and related procurement services professionals. While the rate picture continues to look very advantageous in the short-term, overall industry dynamics will obviously have to undergo continued structural changes in the months to come. For carriers, it is about preserving profitability and the ability to cover operating costs, regardless of the impact on shippers. The real test comes later this year when Asia to Europe and the U.S. shipping volumes once again ramp-up to support the holiday period.

While logistics and transportation costs are trending favorable, insure that senior management is aware that structural industry change is foreseeable, and that will have future impact on global sourcing and transport lead-time and service costs in the long-term. Current advantageous global transportation rates should not be presumed to be sustaining. Global trade and declined global production levels particularly from China are fueling continued shakeout and where the end state lands may be anyone’s guess right now.

And then, consider what industry disruptors like Amazon can do to leverage an industry challenge to an individual opportunity.

Thus, logistics, transportation , procurement and third party logistics firms need to stay current with industry intelligence, ongoing developments, along with their implications.


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


« Previous Entries