Earlier this week American Airlines cancelled approximately half of its scheduled flights due to concerns over a potential wiring issue in MD-80 passenger jets.  Over 1000 flights were cancelled on Wednesday and nearly 500 were grounded on Tuesday.  It has been a tough year for the airlines.  Not only are jet fuel prices rising rapidly which is driving carriers such as Aloha and ATA out of business, but operations disruptions are dealing further blows to the bottom line.  A few weeks ago I was in London during the week that Heathrow Airport’s long anticipated Terminal #5 was scheduled to open.  As you have no doubt heard a series of operations failures handicapped the new terminal and its major tenant, British Airways, for much of its opening week.  Fortunately, I have not been directly impacted by any of the operations disruptions or flight cancellations as my travel patterns tend to steer me towards flying United, Delta or US Air.  But even those of us who haven’t been stranded at an airport yet, may be impacted more than we realize.

Airline Disruptions Upset Travelers, but also Slow Supply Chains 

Many of you know may know that American is the largest passenger airline in the world.  But you may not know that American is also one of the largest air freight carriers in the world providing a range of transportation services to shippers.  American’s Cargo operations has the capacity to move 100 million lbs of cargo weekly including everything from small parcel packages to heavyweight bulk pieces up to 300 lbs.  Thousands of businesses rely on commercial airline cargo services to provide expedited delivery of freight to locations worldwide. Freight forwarders are some of the largest customers of airline cargo operations.  Forwarders will purchase capacity from commercial airliners on behalf of their end customers to route international cargo between origin and destination.  So the point is that when an airline cancels flights, it not only has to inconvenience the passengers, but it also must reroute time-critical cargo shipments.   Even though the wide body aircraft such as Boeing 777 and Airbus 340 which carry much of the international cargo were not affected by the FAA inspection mandates, the smaller connector flights which route the cargo to its final destination were affected.  Many businesses depend upon air freight transportation as a critical conduit for their supply chains.  As a result, cancellations and disruptions to air travel impact the bottom line of the airlines as well as the profitability of their business customers.

Growing Transportation Challenges in the Supply Chain 

It seems that transportation challenges are becoming more and more significant issues for supply chain managers in 2008.  Not only must you factor in weather and traffic, but there are an increasing range of political and economic factors that must be considered.  The environment is an increasingly sensitive topic as more corporations are seeking to become carbon neutral.  Transportation processes are receiving a high degree of focus in these corporate social responsibility initiatives.  In January, I wrote about several transportation related issues discussed at the National Retail Federation Show.  These included the growing problem of port congestion and potential labor strikes in the Western US hubs of Long Beach and Los Angeles.   Recently, however there seem to be two new transportation related challenges disrupting supply chains: 1) airline operations disruptions and 2) the falling US dollar.  Having discussed the former, let’s now explore the latter.

The Falling US Dollar 

What does the US dollar have to do with transportation processes and the supply chain?

There was an interesting article in Thursday’s Wall Street Journal about how manufacturers in rural regions of the Midwestern United States are encountering challenges exporting their products.  You might not be surprised to see such a headline.  For the past twenty years we have been inundated with stories of how offshore manufacturers using low cost labor are making US products uncompetitive in the world market.  However, Thursday’s Wall Street Journal story (Container Shortages put US Export Boom in a Box)  had a very different theme.  As the value of the dollar has fallen against the major currencies, prices of US manufactured goods are becoming more competitive in international markets.  As a result, US exports are beginning to grow at a pace not seen in decades.  The problem is that the US has fine-tuned its transportation infrastructure to support the highly imbalanced import flows experienced over the past few decades.  With supply chain trends beginning an unfamiliar reversal, the transportation infrastructure is struggling to keep pace.  One unexpected challenge is the shortage of shipping containers – the big, metal boxes that are used to house goods as they travel on rail cars and steamships en route to their destination.   The Journal stated:

“…Finding enough of the big metal boxes used to be a cinch, because the nation’s massive hunger for imports meant they were constantly arriving and stacking up from Long Beach, California to Long Island, NY.  Shipping companies typically scoured the country for anyone willing to fill outgoing boxes…” 

But most of these cargo containers are used to move consumer goods that are unloaded at retailer distribution centers near major metropolitan areas.  US exports tend to be agricultural products and industrial equipment produced in the rural sections of the country.  The head of container research at Drewry Shipping Consultants was quoted stating:

“There are some places, particularly in the Midwest, where there’s a complete lack of containers.” 

As a result, exporters are struggling to fully capitalize on the growing market opportunity.  There have been lost orders and shipment delays.  After all, what does a manufacturer do if they cannot find enough container boxes to ship their products to overseas destinations?  Well a more expensive, perhaps easier alternative is air freight.  That is unless it is flying BA through Heathrow or American on an MD-80 or whoever the next target of FAA inspections is….

Best Practices for Managing Supply Chain Disruptions 

So what should retailers and manufacturers do to avoid supply chain disruptions from unpredictable transportation challenges?

Risk mitigation strategies such as diversifying the transportation vendors, port facilities and trade routes utilized in your supply chain will provide some level of resiliency against unforeseen congestion and bottlenecks.  A more expensive option is to buffer additional inventories at strategic points in the supply chain.  But the truth is that no amount of planning or hedging can provide 100% avoidance of transportation related disruptions.  As a result, supply chain managers should place as much emphasis on preventative measures as they do on their ability to quickly to react to disruptions when they occur.  When an air freight shutdown or a container box shortage arises, transportation managers should be able to quickly adapt their supply chain models to route around the bottlenecks.   A key factor that will influence the agility and responsiveness to supply chain challenges is the level of information you have about your transportation processes.  Suppose you shipped an order to a customer in Western Europe earlier this week.  The goods were to be shipped air freight for arrival on Friday afternoon.  Will your shipment be impacted by the problems at Heathrow or at major American hubs?  If you don’t have good visibility to your logistics processes then you may not know who your freight forwarder contracted with for the trans-Atlantic route.

Transportation Management Applications 

The best way to take control of your logistics operations is with a Transportation Management System (TMS).  These applications can provide a centralized, enterprise-wide view of all logistics activities.  With rising fuel prices and the looming economic recession, I suspect more and more companies will be evaluating TMS deployments.  for the second half of this year.  Fortunately, a number of new software-as-a-service models are emerging that can help companies to accelerate the ROI and benefits of their TMS applications.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Last week I had the privilege of delivering a presentation at the CFO Rising conference in Orlando, Florida on the topic of Supply Chain Finance.  I was fortunate to be presenting jointly with Neal Harm who is the Chief Administrative Officer of BB&T’s Commercial Finance group.  BB&T was a key exhibitor at the show, promoting their new integrated financial supply chain product - Supply Chain 360 (http://www.bbt.com/bbt/business/products/supplychainsolutions/supplychain360.html).  Working with the BB&T team on their product launch activities has been a rewarding experience for me as I have found their Commercial Finance team to have some of the most visionary thinking in the industry.  We were fortunate to draw a crowd of over 40 CFOs and senior level finance executives, who were all very actively interested in this hot topic.

Why such a crowd?  Because, supply chain finance promises to enable radical new efficiencies for managing working capital in the value chain.  Supply Chain Finance is a multi-faceted concept.  Some of these concepts can be leveraged today while others are more visionary at this point.  Without question the most widely embraced aspect of supply chain finance today is the idea of post-export supplier financing.   The term is intimidating to those not familiar with trade finance, but the principles are actually quite simple and familiar to anyone who has used a credit card. 

Comparison to the Credit Card 

We are all familiar with how a credit card model works, but I will recap a few of the more relevant points that help to illustrate the analogy to supplier finance.  Let’s suppose that you are a sports fan that has decided to invest in a high definition plasma television to enhance your viewing experience.  Perhaps, if you are in the US you may wish to buy a new HDTV in time for this month’s NCAA basketball tournament.  So after evaluating the various brands and product options you make a visit to your favorite consumer electronics retailer to purchase the TV.  The easiest way to purchase a high value item such as a TV is probably not to carry cash, but instead to use a credit card.  Using a credit card, you can purchase the HDTV on credit, taking possession immediately without having to present any cash to the merchant (electronics retailer).  The merchant assumes little risk as the bank who issued you the credit card guarantees payment in all but a few scenarios.  And the merchant is paid quickly.   Within just a few days of uploading their point-of-sale transactions to their bank, the merchant is reimbursed for the value of your purchase.  However, you (the consumer) do not have to remit any payment for at least 30 days when your next monthly statement arrives.  At this point you can decide to pay the balance in for your monthly purchases (including the TV) full or defer payment until later.  Or you might pay only a percentage, financing the remainder of the balance. 

The credit card model has become the most popular means of retail payment due the benefits it offers to both consumers and merchants.  Consumers can purchase goods and services on credit, deferring payment until a later date that enables them to optimize their cash flows.   The merchant offers a simple, hassle-free approach for consumers to make payment, but also benefits from the relatively fast inward cash flows that the credit card system offers.  Both the issuing bank and the merchant’s bank also benefit by charging a processing fee to the merchant for facilitating the settlement process.  The issuing bank that provides the consumer the credit card also enjoys significant upside, in that, the consumer may elect to defer payment of the balance.  The issuing bank then enjoys an additional income stream as interest accrues on the consumer’s balance.

Supply Chain Finance – A Credit Card for International Trade 

Supply Chain Finance operates under similar principles as the credit card model except that the transaction is business-to-business rather than business-to-consumer.  Suppose, for example, a large UK-based department store is purchasing a line of apparel products from a third party contract manufacturer in Vietnam.  After reviewing samples and finalizing on a sales forecast, the retailer places a bulk order for the clothing with the manufacturer.  The manufacturer acquires the fabric materials, performs the sewing process and then ships the product to the retailer’s distribution center outside of London.   Concurrently, an invoice is sent from the manufacturer to the retailer’s accounts payable department.   The retailer performs a series of validations and matches on the invoice to ensure consistency with the quantities, colors and sizes specified on the original purchase order.  The invoice is then approved to pay.  In a traditional buyer-supplier relationship, the retailer may withhold payment of the invoice until its maturity which could be another 30 or 60 days after receipt of the goods.  Why?  Because, most buyers prefer to hold onto their cash as long as possible so that they can put it to use in other ways.  However, in the supply chain finance model, a different sequence of events occurs – very similar to the consumer credit card example described earlier. 

In the supply chain finance model the retailer will instead notify the bank of their intention to pay the supplier at term.  The bank will then approach the supplier asking if they would like to be paid immediately.  Most suppliers, especially smaller ones in emerging markets such as Vietnam, are cash constrained.  As a result, the early payment option is appealing to them.  Upon confirmation from the supplier, the bank immediately transfers the appropriate funds to the supplier’s account.  The supplier has now collected its revenues from the products it manufactured.  And the bank has assumed responsibility for collecting the payment from the retailer.  30 or 60 days pass until the date the original invoice is due is reached.  Now the bank will collect the appropriate funds from the retailer.  At this point, the retailer may elect to settle the transaction in full with the bank.  Or they may request to extend the payable to a future date based upon their cash flow situation. 

Let us compare the retailer B2B example to the earlier B2C HDTV purchase example.  In both scenarios, the suppliers (the apparel manufacturer and the electronics retailer) are compensated shortly after delivery of the goods.  In both scenarios, the buyer (the department store chain and the sports enthusiast consumer) has the option to settle their transaction balance within the original purchase terms or to extend terms with an interest-based financing approach.  In both scenarios, the banking system provides short term financing to bridge the time-span between when the buyer takes possession of the goods and the buyer makes payment.  The most important concept is the value created to all three parties in the transaction.  The timing of the supplier’s inbound cash flow is accelerated.  The timing of the buyer’s outbound cash flow is maintained or extended.  The financial institution generates income from the processing and financing of the transaction.

Given the analogy above, you might ask why the credit card companies are not participating in the supply chain finance market today.  The answer is that they plan to.  Facilitating B2B payment transactions and short term financing arrangements are a natural extension of the value proposition and capabilities credit card processing networks offer today.  Of course, the funding sources for the short term financing will be the actual banks.  There is an interesting study in contrasts when one compares the situation in the banking sector to the major credit card brands.  MasterCard and Discover have both enjoyed tremendous success with their IPOs.  The Visa public offering scheduled for this week promises to be one of the largest in history.  By contrast, the banks are struggling to keep afloat as the credit crisis continues to worsen.  With the collapse of Bear Stearns over the weekend and the recent turmoil in the financial markets, one might question whether adequate liquidity and credit facilities will exist to support supply chain finance…

Steve Keifer 

© Copyright 2007 GXS, Inc.  All Rights Reserved.

It’s Sunday morning at the annual National Retail Federation Big Show in New York City and there is a mix of excitement, intensity and competitiveness is in the air…. 

Some of you may wonder what I was doing at a tradeshow on Sunday.  Well, I don’t usually spend my Sundays going to tradeshows.  However, I felt compelled to get to the NRF show for its opening day.   Unfortunately, it always seems to me like the best sessions at NRF are held on Sunday – especially in the morning.  However, one good thing about this year’s show is that it is one week earlier.  Normally, the show is held on the week of the Martin Luther King holiday, which means that to attend the conference you may have to forgo not only a Sunday, but a holiday Monday as well.  However there are a number of benefits to being at NRF on Sunday morning.  In my opinion it is really the best time to be there - not just because there are great speakers and content, but because of the atmosphere.   

The first session I attended was a presentation by Dr. Ira Kalish of Deloitte’s research group.  Every year at the NRF show, STORES Magazine and Deloitte release their annual “Global Powers of Retailing” report.  This is one of two retail industry studies that I look forward to each year.   The other is AT Kearney’s Global Retail Development Index - http://www.atkearney.com/shared_res/pdf/GRDI_2007.pdf.   I often carry a hard copy of the Deloitte study with me in my briefcase because it proves to be a useful reference throughout the year.   This year’s version does not appear to be online yet, but the 2007 report is posted at www.deloitte.com/dtt/cda/doc/content/Global%20Powers%20of%20Retailing_07(3).pdf if you are interested.    

I will share a few of the results from the 2008 study.  The top 10 global retailers were listed as:

1. Wal-Mart
2. Carrefour
3. Home Depot
4. Tesco
5. Metro
6. Kroger
7. Target
8. Costco
9. Sears Holdings
10. Schwarz 

A few other interesting insights from the 2008 study: 

• US Leadership – 37% of the Top 250 global retailers were based in the US.  45.5% of sales from the Top 250 were from the US market.  Most of the US leaders are non-grocery retailers and most only sell in the US.  Apparel is particularly strong with the US claiming the top 5 global chains worldwide.
• Emerging Markets - Chinese retailers are growing quickly with 6 retailers in the Top 250 and 3 of the Top 10 fastest growing chains (GOME, Suning Appliance and AS Watson).  There are no Indian retailers in the Top 250.  However, Russia and Eastern Europe are well represented.  In fact, Russia’s electronics retailer Euroset Group is the world’s fastest growing chain as measured by 2001-2006 sales.
• Sector Analysis – Hardlines, which as defined by Deloitte includes consumer electronics, office supplies and toy retailers, was the most globalized sector with leaders such as IKEA (37 countries), PPR (45 countries) and Toys “R” Us (35 countries) represented on several continents.   Hardlines enjoyed 14.5% CAGR from 2001 to 2006 – largely driven by the housing bubble in markets such as the US and UK. 

These are a few of the highlights from the study, but they don’t do justice to the outstanding presentation delivered by Dr. Kalish.  He provided what I think is the most succinct and easy-to-understand explanation of the root causes of the global credit crunch and its relationship to the US trade deficit and mortgage crisis that I have heard from anyone.  He then went on to reveal some fascinating insights about the retail market in 2007 and some intriguing predictions about what we can expect in the years to come.  While, Dr. Kalish’s presentation was without question the best session I attended all day, I could not help being somewhat distracted by my peers in the audience.   One of the most interesting aspects of the Sunday morning sessions at NRF is the attendee demographics and behaviors you observe.  On Sunday most of the attendees are not actually from the US, but instead from overseas.  There is a particularly large contingent from Europe and Latin America.  The Asian and the Middle Eastern countries are also represented, but with significantly fewer attendees.  These attendees are all hard-core retail types.   Many of them have traveled more than 3,000 miles to hear from the leading US strategists on innovations in consumer marketing, real estate and store design.   Although it is a Sunday most of this group is dressed in business attire.  And many are carrying digital cameras which they use to take snapshots of important slides presented during the conference.  By the way, these are not the disposable cameras you buy from a street merchant in Times Square or even the standard consumer digital cameras you use to take pictures of your family.  These are high end digital SLRs, which reflects both the passion and intensity of the audience.

Another excellent session I attended was titled “How America Shops” by a firm called WSL Strategic Retail.  I had not heard for WSL (www.wslstrategicretail.com) prior to this show, but I was very impressed by the presentation given by Wendy Liebmann, their Founder and Chief Shopper.  This session was attended by another capacity crowd eager to learn from WSL’s findings about consumer preferences and shopping behaviors. The theme of the presentation was “It’s Anarchy,” referring to the erratic buying behaviors exhibited by US consumers.  However, the theme proved to also be excellent foreshadowing for the end of the session.  WSL had produced about 100 color copies of the presentation handouts.  However, the room must have had at least 400 attendees.  As the session broke there was a mad rush by the crowd of to get a hard copy of the presentation.  People were literally pushing, shoving and kicking each other to make their way to the table to grab a copy.  It reminded me of being stuck in a mosh pit.  It is hard to believe that one would observe this type of behavior on a Sunday morning at a retail tradeshow, but as I stated above – these folks are hard core.  I did manage to get a copy of the handout, which I am considering auctioning on eBay…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Part 1 

Last week GXS announced that it was selected by BB&T to power the financial institution’s new “Integrated Supply Chain Finance” solution.  And since then our phone has been ringing off the hook with calls from other banks, analysts and partners interested in learning more about this topic of Supply Chain Finance.  This is a fascinating area and one that I have been studying for about 24 months now, so I thought I would offer my perspective on the topic.

Supply Chain Finance is part of a broader trend in the market, which involves the convergence of the physical and financial supply chains.  There is much more to be shared on this topic than I can offer in just one post so let’s start with the topic of supply chain finance as it relates to international trade.  

History 

Historically, many of the international trade transactions between large buyers (based in the US or Europe) and small suppliers in emerging markets (China, India, Southeast Asia, Latin America) have been conducted using a letter of credit.  When a dispute arises in trade between two parties located in different countries with different legal systems, resolution can be timely, complex and expensive.

This is where a letter of credit can provide significant value by simplifying international trade terms and providing risk mitigation against default by the buyer.  The letter of credit offers a guarantee to the supplier that they will be paid for goods delivered to a buyer if they meet all of the terms and conditions outlined in the purchasing agreement.  The guarantee is made from the buyer’s bank to the supplier’s bank, both of whom facilitate the transaction on behalf of the buyer and supplier.  The commitment in a letter of credit is very strong.  In fact, with most letters of credit the buyer’s bank will make payment even if the buyer goes bankrupt or is for some other reason unable (or unwilling) to pay. 

While letters of credit provide strong risk mitigation for the seller, they are viewed by many buyers as costly, slow and inefficient.  As a result, many large US and European buyers are moving their international sourcing relationships away from letter of credit towards “open account” terms.  With open account there are no bank guarantees.  Payment terms are negotiated directly between buyer and supplier.  Critical to such an arrangement is the assumption of trust between both parties. 

Cash Rules! 

In addition to changing to open account, buyers are also extending their payment terms with international suppliers.  Buyers want to hold onto cash as long as possible.  As a result, they would prefer to defer payment to suppliers for 60 to 90 days so they can put their cash to use in other ways.  Other uses of cash might include 1) short term investments to generate interest income or 2) cash outlays for capital projects requiring immediate funding.  On the other hand, suppliers want to be paid as quickly as possible for the goods and services they provide to their customers. 

Suppliers must purchase raw materials and to pay their labor force to manufacture the products.  In international trade, the time between when a purchase order is first issued and payment is received may be 120-150 days.  Extended payment cycles with customers force suppliers to seek out financing from third parties to keep their business operating.  These competing priorities of buyers and suppliers are a growing source of tension in the supply chain.

Source of the Tension 

Some of you may be wondering, why is this tension around payment terms a new phenomenon?  International trade scenarios such as the example above have been common for decades.  This is true.  But, the migration towards open account and the extension of payment terms have combined to exacerbate the working capital challenges of exporting suppliers.  Why?  Because, historically, exporters in emerging markets had the security of a letter of credit, which could be used as the basis for a working capital loan to fund their manufacturing activities.  A letter of credit backed by a major financial institution (and buyer) in the US or Western Europe was viewed very favorably (less risky) by banks in emerging markets.  As a result, exporters in these countries could receive a cash advance against the value of the purchase order from their local bank.  The cash could be applied to purchasing, payroll or other operational activity until the payment from the buyer was received.

In an open account world, the supplier in the emerging market only has a purchase order.  A PO is relatively easy to counterfeit.  And even legitimate POs lack any firm payment guarantee from the buyer.  As a result, open account transactions are viewed as having a higher risk by banks in the exporter’s home country.  Financing is therefore more difficult to obtain.  When financing is available to a supplier, it is often for substantially less than the full purchase order value.  Even more problematic is that financing is offered with relatively high, credit card level interest rates.

A Lose-Lose Situation 

Few buyers have considered the full implications of the new terms of trade they are negotiating with suppliers.  Extending Days Payable Outstanding (DPO) and reducing banking fees may seem like a winning proposition to the buyer.  However, the overall cost and risk introduced into the supply chain may offset the other benefits.  By having to borrow money at a higher interest rate to fund manufacturing operations, the supplier’s cost structure has now effectively increased.  These higher costs will undoubtedly be passed onto the buyer in the form of higher prices.  Furthermore, suppliers who are not able to obtain timely financing, may be at risk of financial insolvency.  Others may be forced to cut costs resulting in unexpected manufacturing delays or lower quality products. 

Dr. Hau Lee of Stanford University has recently introduced a new theory that I think is very insightful articulation of today’s international supply chains.  He stated:  “Instead of company to company competition, we are now in an era of supply chain to supply chain competition.”  If companies are going to compete on the strength of their supply chains, buyers must find a more supplier-friendly approach to international trade. 

So what is the solution? 

An innovative new concept called Supply Chain Finance, which is a topic I will explain further in an upcoming post.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.