LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

GLOBAL SUPPLY CHAIN PERFORMANCE EROSION - Impact from Actions of a Major Logistics Partner

Global supply chains have become more complex, with many parties involved in a transaction, increased challenges, and an evolving landscape of shippers and practices. Complexity and challenges occur in many types and many levels. Distance, time, performance, currencies, numerous participants, risks, and culture are a few of them. Supply chains are not monolithic. There are really supply chains within supply chains - and these are compounded with the global positioning and organizations of the many players. There are many parties involved with a single international shipment. Topics such as supply chain process, visibility, alignment, and collaboration have taken on greater importance.

CONTAINER SHIPPING EVOLUTION

Hidden among all these are events that impact supply chain operations. They are often silent changes and are caused by one of the most important logistics players in international trade - container lines. The shipping landscape has been changing and continues to change.

Look at the past thirty-plus years. Then the major trade lane was the transatlantic. Then the transpacific took off and grew dramatically, surpassing the transatlantic. Now there is really global trade with three major trade lanes - Asia-North America, Asia-Europe and intra-Asia, with intra-Asia being the largest. Also, in this time:

As trade has grown into a global business, ocean transport has grown in importance. Container shipping is an important factor in trade expansion. Ocean carriers moved actively in many lanes, especially the major ones. Ships began to get bigger to meet business growth. Early container ships were 1,000 containers or so in size. These container ships used are now called and used as feeders because they are now considered small.

Starting with Hapag-Lloyd's "Frankfurt Express" vessel of 3,000 containers, ships have grown dramatically, as measured in twenty-foot equivalents (TEUs). New vessels now coming in that are 18,000 containers large. These vessels are called mega-ships. The largest ships are generally targeted for use in the Asia-Europe trade. There is even talk of a 22,000 TEU vessel.

A MEGA-SHIP IS LONGER THAN A NIMITZ-CLASS NUCLEAR AIRCRAFT CARRIER

(400 meters versus 333 meters)

The size of ships and the number of ships now operating and being built are points of discussion now whether the total supply/capacity of container ships exceeds demand.

Correspondingly, main ports have changed as trade has expanded. China dominates now with its role in all three of the major trade lanes.

Ports are ranked based on the total number of TEUs handled in a year.

This can be seen in the top U.S. ports and top Europe ports:

Some of the North American and European ports listed are active in trade lanes other than involving Asia as an origin or destination. Various ports are used primarily for transshipment. As trade as changed and ships have grown, port authorities are deciding whether to invest significant monies in dredging, cranes, container stowage, terminals, and underlying infrastructure to keep up with the vessel growth and to handle these ships. Given the capital cost of ships, handling means that a port must be able to quickly berth, unload, load, and get the ship sailing again—as part of the asset utilization and turnaround time that these ships were require. It is possible that fewer ports throughout the world will be able to accommodate mega-vessels.

IMPACT ON SUPPLY CHAINS

Maritime container shifts and growth were driven by business changes, primarily with manufacturers and retailers. These corporations did basically domestic sourcing, manufacturing / assembly, and selling. There were some export sales, primarily between Europe and the United States. Companies evolved by sourcing and manufacturing in Asia. The effort transitioned from countries such as Japan, Singapore, Hong Kong, and Taiwan to where China is now the dominate origin for world trade.

Retailers have grown from local buying into global importing and even having buying office overseas for supplier evaluation, quality control, shipment inspection, and other needs. Parts, components, and subassemblies for manufacturing can now come from many countries. Other firms have expanded from domestic and being exporters to become multinational corporations (MNCs) with sourcing, manufacturing, and selling worldwide.

These businesses, these shippers, are directing international, even global supply chains. Ocean shipping is important. It moves products to where they are needed and provides an in-transit supply of goods to sustain sales and production requirements.

The ways in which carriers operate - and how they revise operations--have affected their customers' supply chains. While some shippers only care about the rate they pay and give little attention to what is happening with carriers, serious companies who practice leading-edge supply chain management know differently. They understand that what carriers do can sometimes adversely affect their supply chains and their businesses.

Performance reliability is important for international supply chain effectiveness. Usually quarterly, companies, using tools such as sales and operations planning, create weekly buckets of production / build plans and logistics plans. These build and logistics plans can be very dynamic and critical because they involve high volume, seasonality items or new products. Those plans reflect underlying lead times from suppliers to factories and from factories to distribution centers. Key factors in the lead times are prompt, dependable transit times.

When container lines change schedules, vessel planning, alliances, slow ship speeds, or other actions, then there is a corresponding change to the transit times implicit in logistics plans and build plans. And there are uncertainties with mega-ships. How will they be filled if supply exceeds demand and what carriers will do to ameliorate the under-utilized capacity - and will it affect transit time?

Also, what will be the time factor with the new ships and getting into terminals, unloading them, loading empty containers and full containers, and getting back on the water? Add this terminal uncertainty over each stop that the ship makes? If fewer ports opt-in to handle the ships, what does that do costs and to the time from the port to distribution centers or to end-use customers? All these build up scenarios of questionable schedule time consistency.

As larger ships enter into the major trade lanes, container lines will move ships now used in these lanes into secondary trades. How will ports in those trades handle vessels that are bigger than they are used to handle? Will they choose to invest in terminal upgrades? What does this cascading effect of large ships and terminal investments do to global trade and to a smooth flow of supply chains between and among countries?

Will carrier operational changes create the uncertainties every year, even every quarter? How does the supply chain organization deal with such schedule vagaries to effectively meet build and delivery plans and to manage a large, complex supply chain?

The effects of the carrier actions are about more than transport; they are about supply chains. All these actions impact every business, and especially retailers. Supply chains require dependable service for best results. Service irregularities and resultant creep can require companies to go into fire-fighting mode in order to try to compensate for problematic service. Significant expediting may be used and is a sign of process breakdown. It creates de facto chaos. Products may be flown to keep production lines going or to meet sales needs. Multinationals, with their global scope, can be particularly concerned with all these events.

Uncertainty creates a type of supply chain risk, beginning with customer service, and is the driver for carrying extra, unnecessary inventory to buffer that unknown. Consistent product availability is important. To deal with varying transit times, more inventories - more safety stock - will be added throughout the entire production and finished supply chains. Additional working capital is tied up in raw materials, work-in-process, and finished goods. This is investment that could be used elsewhere. Such added inventories are an anathema to supply chain management and to lean logistics. The net result is there is now a third group of inventories in the supply chain.

Another disruptive issue caused to carriers' customers by service inconsistency is inventory yield maximization risk. This effect, as with the other performance problems, ripples across the entire supply chain. With multi-channel sales, the disruption can be significant.

Inventory yield management maximization is an underlying factor for company profitability. Yield management is often associated with the airline and hotel industries where companies attempt to maximize revenue from a fixed supply or capacity, seats on a flight or rooms in a hotel. It recognizes that there is a window of opportunity for the highest price or revenue-creating ability of the item.

Ocean carriers practice a form of yield management. For example, on the transpacific eastbound trade, they try to balance the timing and value from the service contract signing period through peak season when space may be at a premium regardless of pricing and into slack season where price reductions are given to freight forwarders to fill ships.

Yield management, which ties to shelf-space profitability for retailers, is applicable in supply chain management when inventory is viewed as the supply whose yield is to be made the most of. Having the right inventory and having it positioned at the right time is difficult and challenging. Insufficient inventory means lost sales opportunities, both immediate and longer-term by customers. Too much inventory means price markdowns to sell it-and reduced profits. Firms working on thin margins especially feel such pain.

Many items, as retailers know, enjoy a short shelf life relative to demand to the price customers are willing to pay. Firms that are in dynamic, volatile businesses, such as fashion, and ones dealing with strong seasonality, such as retailers with Christmas, know the impact of short product life cycles. Not having products for those potential peak times creates problems.

Inventories and their sales have windows for maximum yields. Missing those openings can have significant impact on revenue and profits. Sales promotions, discounts and price cuts are then more strongly used to draw customers. Such pricing decisions reduce margins. Fire sales to dispose of items do not help margins. Carrying unsold inventory, no matter how low the interest rate may be, is capital that is tied up and cannot be used for other needs.

All this, in turn, factors into effectively managing product portfolio complexity and assortment optimization. These are important to multinational corporations, to manufacturers, and to retailers, for both brand and private label items. Supply chain cost and performance have underlying role to portfolios, to product assortment, and to profit results, all of which can extend even to the individual item level. Reliability is vital to supply chain results, both financial and operating.

Achieving yield management value requires the need for inventory velocity with its focus on supplying product and not on placing it at customers or in stores. It puts the focus where it belongs, at the beginning of the supply chain where product originates. Firms can better turn inventory from purchase orders into cash. Inventory that is not available on store shelves and floors loses value. The inventory goes stale and misses the sales and profit window of opportunity. The only solution then left is price reduction. The challenges of global supply chains with their length and complexity are significant enough with having the right inventory available. Carrier service irregularities can significantly compound the problems of obtaining highest yield.

WHAT TO DO

All ocean container customers are affected by what carriers do. Multinationals, with global facilities and suppliers in multiple trade lanes, have felt the effect even more with the various operating changes by container lines. Feeding production facilities, distribution pipelines, and customer distribution centers; managing product flows; maintaining costs; being responsive and agile; and providing leading omnichannel customer service are affected by the service creep. Lack of schedule continuity creates performance degradation and creep on supply chains. And that is the key point. It is about supply chains and not about ocean shipping as a logistics action.

Companies need to take corrective actions. How do they recover from the ocean transport inconsistency, and how do they achieve consistency? Since transportation is often a key to speed of inventory, then its inconsistency requires different approaches for remedies.

A starting point is to evaluate carriers by consistency of service. The expanded Panama Canal will help some companies in the U.S. But these actions do not really address the bigger issue of the need to regain logistics performance control that has been lost over the years and to remove the waste of the additional time and inventories. Carriers, as with many businesses, are going to continue to operate primarily with what is best for them.

There are tactical or operations efforts that can be done. The emphasis for the planned actions is not about moving containers. It is about the flow of products in the containers. These include increasing the use of practices such as transloading and crossdocking at ports to reduce time and handling and to better position inventories where they are needed. In addition, there is crossdocking at distribution centers to more quickly place products at stores or at customers' warehouses.

Supply chain execution technology is an excellent tool to manage overall operations. It is targeted for international, can be integrated, and has exception management and event management to manage and provide visibility to global supply chains from purchase order placement through to container delivery. It helps to coordinate the entire supply chain.

Tactical adjustments, while needed, are not enough to compensate for what has happened and is happening. The effect is not limited to one origin-destination or, even, to one trade lane. Corporations are dealing with multi-echelon inventory systems and with essentially an industry-wide problem with ocean carriers. It is worldwide in scope and affects the global supply chain.

This is about more than eliminating a problem-causing carrier. Manufacturers and retailers should take a strategic view to correct the performance erosion from inconsistent carrier service and to have a world-class supply chain program that supports corporate strategy, direction, growth and profitability. This can include strong, active support of customer portfolios or other executive focus.

Three, interconnected strategic actions that companies can take are:

1) Perform holistic performance analysis. The need is to optimize the total supply chain. Core components to the assessment model are -

The analysis should confirm that the supply chain is aligned with the corporate strategy. It is not just parts of it, not just about certain lanes, not about certain carriers. Parsing the supply chain to optimize pieces can really sub-optimize the global supply chain. Gaps, redundancies, and improperly integrated areas will be overlooked with reviewing sections of the chain.

Start from the customers' warehouses or from the company's stores and build back the supply chain. Supply chains are about pull; that is why the initial point is the customer or store. Assess what is done, how, when, and why? Continue building back through critical suppliers and through their supply chains. Identify where performances are below standards or expectations and where they exceed. Determine the reasons, both internal and external, for these results. Improve the supply chain process. Then establish what logistics service providers, including ocean carriers, best fit into the new business model.

2) Implement lean supply chain. Take the holistic review to another level. Supply chain managers understand how lean logistics and supply chain management are similar with the emphasis on pull, not push, and on removing the wastes of time and inventory.

The lean logistics needed is about the four walls of the distribution centers and factories - and more. With its length, number of parties, and complexity, the international supply chain is the important and needs the work to reduce time.

There are many suppliers and many logistics service providers in a supply chain. Some of these are visible; some are less visible. Many suppliers or logistics service firms do not practice lean. Taking lean outside the four walls of the company into other firms brings global complexity into the challenge of implementing and becoming lean.

The challenge of lean is compounded when it comes to international. Many parties and trade partners are involved which challenges the abilities to remove waste from a supply chain that extends thousands of miles. For example, with an international transaction there are -

*Different groups within the company buying the product who have a role in the movement of information and product

*Different groups within the company selling the product who have a role in the movement of information and product

*Different outside organizations, including:

Add in the interchange of information between and among these various parties. The challenge is that each of these parties has a different role and responsibility. Each is working on the internal efficiency of their operation and not on the efficient movement, with no waste, for a shipment. Value stream mapping is a very good tool to use with the supply chain.

Another important part of lean supply chain success is supplier performance. Suppliers, include container lines and other logistics service providers. Analysis of supplier reliability - and its implied impact as to time, inventory, and risk - can highlight key suppliers and their role in effective supply chain functionality.

Identify suppliers as to importance as measured in importance-volume or profit margin, long lead-time, how critical, stringent specifications and how strong or weak each. Note, not all products from an important supplier are critical. Adapt the Krajlic Matrix the for this -

3) Segment the supply chain. Supply chain execution deals with many variables. People and groups, both inside and outside the company, have their particular issues and requirements, some of which may conflict with supply chain plans and operations. These demands create noise that can interfere with performance. As a strategic tool, to dampen the noise, and to keep focus, especially given the strategic activity, supply chain segmentation is a very good action.

Segmenting is not unbundling the existing supply chain structure. It is using the supply chain in a targeted way to best support company strategy and to maximize return. Segmentation is focused, multi-tier supply chain management.

The result is emphasizing important factors that CEOs, COOs and CFOs care about, such as higher profits and reduced working capital. Supply chain executive can target select product categories, or high-value customer or market sectors, or other criterion. An example of segmentation analysis is -

This focus complements and fine tunes the efforts of the holistic assessment and lean logistics strategies. Time reduction and time dependability are targeted to the segments that have significant corporate importance.

Segmentation enables companies to identify, focus and prioritize key sectors and to tier, align, and, if needed, build supply chain resources and capabilities to successfully serve the sectored customers, cross-channels or markets. Instead of applying a standardized supply chain service across all segments, it provides clarity of purpose and enables the company to match the supply chain service with each segment's requirements. This tiering creates a greater profit, realistic competitive advantage. It improves supply chain cost, capital and performance.

CONCLUSION

Container lines have played a vital role in the growth of global trade. They have been a strong logistics service provider for companies as worldwide sourcing, manufacturing, and sales have expanded. Yet, as these carriers enjoy significant growth, they have made and are making operational changes that lack dependability and can negatively affect the supply chains of their customers. In some ways, ocean carriers and multinationals are diverging in what they are doing when the focus is placed on supply chain performance. Large shippers need to take tactical actions to counter the impact of some carrier actions. More importantly, companies should develop and implement strategic moves to improve the functioning and results with their global supply chains.