In my last post I discussed the issues surrounding labor negotiations at the US West Coast ports.  This potential work stoppage at critical California ports could not come at a worse time.  Suppose, for example, that a work stoppage occurred August 1^st.   

Record Energy Prices 

What are the alternative means of importing goods from Asia to the US?  Re-routing goods to East Coast of Gulf State ports is one option.  Shipping goods via air freight is another option.  However, record high energy prices make these options more expensive than ever.  $150/barrel oil has led to skyrocketing increases in jet fuel and gasoline.  Higher energy prices have not only affected air and ground transportation.   Oil prices have increased the costs of marine freight as well.  The diagram below illustrates the dramatic cost increases for shipping a 40 foot container from Shanghai to the US at various oil prices.

As a result, no matter what contingency plans are followed, importers will pay an unusually high premium to divert shipments around the work stoppage.

Olympics 

The clock in Tiananmen Square is counting down the minutes remaining to the opening of the 2008 Olympics in Beijing on August 8th.  The Olympics present a critical milestone in China’s development.  Government officials want to ensure that while country is showcased to the world during the Olympic Games that outsiders will gain a favorable opinion of China’s progress in recent years.  Among the government’s largest concerns is pollution.  There have been several unconfirmed reports of government actions to curb pollution.  Examples include closing factories, halting construction and limiting automobile use.   For more information see the post on Bryan Larkin’s blog  or the recent articles from AMR Research  or Business Week (An Olympic Loss for Industry).   

The Olympic disruption to transportation and manufacturing is significant in that it could interrupt the flow of exports to the US for several weeks.

Back To School 

Challenged by a recessionary economy throughout the duration of 2008, US retailers are hoping to stage a comeback in the second largest sales period of the year – back to school season.  Overcoming recessionary pressures in consumer spending will not be easy.  US retail sales for June increased by only 0.1%.  Much of the gains are attributed to rising gasoline prices which are included in the sales figures.  Consumers are demonstrating a reluctance to spend even though the US Federal Government has injected over $90B in liquidity into consumer’s bank accounts through its tax stimulus programs this spring. 

The Perfect Storm? 

So back to the original question at the beginning of the post - what would happen if a port strike occurred on August 1^st?  High volume imports of apparel, footwear, electronics, toys, furniture and other consumer products would come to a halt as steamships anchored idly off the California coast.  This comes at a period in which the US is already anticipating decreased flow of exports from China.  Government actions to temporarily reduce Chinese manufacturing and transportation capacity to offset pollution will be occurring throughout July.   Alternative transportation methods such as shipping cargo via air freight and re-routing to East Coast ports with subsequent ground transportation are possibilities, but may be prohibitively expensive due to rising oil prices.  

The combined effect could be a perfect storm of logistical challenges that result in an unprecedented volume of out-of-stocks during the mid-August to late August peak shopping season.  Let’s hope the longshoreman and port operators can reach a consensus on the critical issues soon.  Otherwise a depressed retail sector may be stealing headlines from the automotive and banking industries come September…

Bank failures, record oil prices, potential automotive bankruptcies…what next?  How about a major port strike in the West Coast of the United States?  Believe it or not, a strike could happen at any minute now.  The dockworkers who manage the California, Oregon and Washington state ports have been operating without a contract for two weeks as of today.  A series of six months of negotiations between management and unions to resolve terms about working conditions, benefits and compensation failed to culminate on July 1^st when the contract expired.  Since then dockworkers have been continuing to perform their daily responsibilities with a few exceptions.  In the past few days, workers have begun to take coordinated breaks designed to disrupt productivity.  The result has been a 10-15% productivity decrease in port operations, but this is just the beginning…

What are the impacts? 

Imagine if the negotiations reach a stalemate resulting in a temporary work stoppage!  What would be the impacts of a port strike to US retailers such as Wal-Mart, Home Depot, Target, Lowes, Best Buy and JC Penney who are critically dependent upon Asian imports to fill their shelves?

West Coast ports are the critical entry point for inbound ocean containers arriving from China, India, Malaysia, Vietnam and other Asian exporters.  Together the 29 ports in the states of California, Oregon and Washington represent $1.3 Trillion in annual domestic business impacts.  $1.3 Trillion is roughly equivalent to the Gross Domestic Product of the entire country of Canada or Mexico. 

Dockworkers failed to reach a consensus with management during the last round of contract negotiations in 2002.  As a result there was a 10-day shutdown of critical West Coast ports that cost the US economy over $1 Billion per day.   Since 2002, port volume has increased by over 45%, raising the stakes of a potential shutdown even higher.

Who are the players? 

• Pacific Maritime Association – effectively acts as the management entity for the 71 different companies who operate the ports.  Owners include cargo carriers, terminal operators and stevedores.   What is a stevedore?  A stevedore is a company who manages the process of loading and unloading container ships.  Stevedores typically own the equipment used to manage the freight and manage the longshoreman who facilitate the process.
• International Longshoreman and Warehouse Union (ILWU) – is an AFL-CIO organization that is one of two major labor unions in the US for dockworkers.  The other is International Longshoreman’s Association which represents the East Coast, Gulf States and Great Lakes ports.  The ILWU represents over 40,000 members in over 60 unions from Oregon, Washington, California, Alaska and Hawaii.

What are the issues? 

• Compensation and Benefits – Health care benefits and salaries are listed amongst the key issues by the union.  However, statistics provided by Pacific Maritime about dock worker compensation might lead one to side with management.  The average full time employee earns $136,000.  Union members with the title of “Clerk” receive $145,000 and Foreman gross over $200,000.  Members enjoy a benefits package that costs over $50,000 per employee including full health insurance with no deductibles.
• Safety – Compensation and benefits are better understood if you consider the dangerous environment that dock workers operate in.  Over 17 employees have died in the past six years since the contract was renewed.  Many workers claim that pressure from port operators to improve productivity leads longshoreman to take shortcuts that compromise safety.
• Environment – The port facilities are filled with transportation and loading equipment that collectively generates a significant amount of pollution.  A longshoreman’s work is performed amongst trucks, ships, locomotives, tug boats, tankers, barges, yard hostlers, cranes and forklifts.  Pollution not only affects the dock workers during business hours, but it affects friends and family throughout the West Coast region who are subjected to smog and poor air quality.

What can importers do to avoid being impacted by a potential strike?  One strategy is called “port diversification”, which I introduced in a post earlier this year.  Instead of all Asian routing shipments through the US West Coast Ports of Long Beach and Los Angeles, retailers are being to explore alternative options such as:

• Routing of shipments from India through the Suez Canal and into US East Coast hubs such as Baltimore, Savannah or Charleston.
• Routing of shipments south of the US to Mexico.  Intermodal links enable transfers of containers to rail cars for travel to the Midwestern US states of Texas, Oklahoma and Kansas.

But even with re-routing, a port strike would have a massive impact on the US economy adding further turmoil to an already financially disastrous year…

Last weekend we had some friends over to visit our house and rather than cooking we decided to place an order for pizza delivery from Dominos.  Ordering a pizza today is amazingly convenient.  We didn’t even have to pick up the phone.  Instead we placed the pizza delivery order online using the Dominos web site and a credit card.  The fact that you can order a pizza online should probably come as little surprise in today’s increasingly Internet-centric world.  What did surprise me, however, was the new Domino’s Pizza Tracker site that provides you a step-by-step update on the status of your order.  Using the phone number that you used to place the order you can login to a graphical interface that monitors the progress of your delivery.  The web site also displays the street address of your delivery, the complete contents of your purchase and the exact time of your order.   The tracker shows five different steps throughout the food preparation and delivery process:

1. Order placement
2. Food preparation
3. Baking
4. Boxing and packaging
5. Delivery en route

My tracker even told me the name of the driver who was coming to our house!  All that was missing was a link the to the driver’s MySpace page so you could learn more about he or she before they arrived….

Dominos launched this new tracker service on January 30^th.   I am not sure exactly how it works, but the system somehow ties the local operations systems in each store to the B2C web site on a real time basis. One thing I will bet on is that it doesn’t use RFID.

The tracker site is one of the more customer friendly web experiences that I have seen in recent years.  In fact, there is even a survey that consumers can fill out after the delivery to comment on their experience.  So as I ate my pizza I started thinking about the idea of providing customers real time visibility into the status of their orders.  And I began to relate this to some of the customer visits I have conducted recently with multi-national corporations in the automotive, high tech and retail industries.  One thing that I am consistently surprised by is how little visibility many of the largest companies have to inventory moving through their supply chains.  Most of the order management portals large manufacturers provide their customers don’t come anywhere close to the supply chain visibility that Dominos offers its consumers.  So I ask you - if the average Dominos franchise with an employee base of 10 and annual revenues of $580K can notify me of the exact time that a pizza is boxed and taken out the door for delivery, why can’t a multi-billion dollar manufacturer of airplane parts be able to tell their customers when a $50M shipment of goods has arrived at a port and cleared US customs?

The good news is that many manufacturing leaders seem to be recognizing the challenges associated with lack of supply chain visibility.  At GXS, we have seen a recent surge in interest amongst large manufacturers seeking to provide their key distributors and customers with better visibility to outbound shipments.  The highest concentration of demand seems to be with industrial goods manufacturers who are seeking better quality data on ocean freight traversing long distance trans-Pacific routes.   Consumer products companies are slightly ahead of their peers in the automotive, high tech, aerospace and industrial machinery sectors when it comes to supply chain visibility.  In the industrial sector, it is not uncommon to find that neither buyer nor supplier has visibility to the location and status of shipments of goods once they leave the manufacturing plant.  Interestingly, this situation applies even to high value goods including consumer electronics such as high definition plasma televisions, kitchen appliances such as refrigerators and computing equipment such as robotic tape backup libraries.  Not only are these expensive goods targets for theft and counterfeiting, but many of them can be easily damaged without proper handling.  Due to the value of the goods, suppliers often purchase cargo insurance to protect against these types of threats.  Also due to the value of the goods, many suppliers seek out third party financing for their inventory in transit.  The financing frees up working capital that would otherwise be tied up in long distance supply chains. 

So the point here is that we have multi-million dollar shipments of industrial goods insured and financed by third parties and no one other than the transportation provider holding the actual inventory seems to know the location at any point in time.  Should industrial manufacturers hire pizza delivery persons to help them?  That is probably unnecessary.  But they should consider investing further in transportation management applications, particularly in logistics visibility suites that offer customers insights into the status of inbound freight.  I have written a few recent posts about the value of transportation management suites and some of the new software-as-a-service deployment models which are emerging that outline these concepts in further detail…

• Is Your TMS Application Costing You an Arm and a Leg? 
• SaaS – A Less Crude Approach to TMS

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

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.