Taking control of the supply chain

This is a good, easy to follow and understand article on one company’s solution to its supply chain problems in China and how they resolved it:

The most dramatic improvement that’s resulted from all of these changes has been in transit time. Today, shipments from China consistently arrive at TESSCO’s distribution center in one week, instead of taking a month or longer.

But other, less quantifiable benefits are just as important. For instance, TESSCO has been able to exponentially increase shipment volume without experiencing growth pains. The predictability of the twice-weekly flow allows Shockey to better schedule labor at TESSCO’s distribution center. And the increased shipment visibility that is available through BAX’s website allows for exception-based management. Finally, all of the costs associated with the door-to-door shipments are presented to the importer on a single bill, greatly simplifying and reducing paperwork.

The factories gain, too. They no longer have to concern themselves with delivering TESSCO’s orders to the consolidation points. They also benefit from receiving smaller orders with greater frequency, and they can plan on growing their businesses to meet the shipper’s rapidly expanding needs. Intersource, which acts as TESSCO’s eyes and ears in China, is now helping the company expand its sourcing there.

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While TESSCO is justifiably proud of taking control of its import traffic and turning a costly, inefficient situation into a great success, one of its most satisfying achievements has little to do with ROI and customer satisfaction. Recently the company was recognized by its home state of Maryland as an important job creator. “We’ve taken an import model—sourcing from China, no less—and used it to create economic opportunity for the state,” says Shockey. That’s a big win by anybody’s standards.

While I think this a good article that educates companies on how to implement discipline and changes in their supply chains, particularly from China, there are a couple of other points I gleaned from the article:

1) The company made the decision to source directly from manufacturers in China, rather than from third parties, without considering carefully the different logistics involved and the effect on their supply chain. Not too surprisingly, they were unprepared for the multitude of problems and delays that came up. This is a theme that has been cropping up lately as companies continue to follow the crowds to China. No one is saying don’t source from China – only that you should plan carefully and consider every aspect before making such a major decision.

2) What is wrong with BAX? From reading the article it sounds like BAX Global really dropped the ball and I was very surprised that the company in question decided to stick with them. I have to ask “where was their head at?” when their client started experiencing all these problems.

A proactive logistics provider would have looked at the problems and delays they were experiencing, analyzed what was going wrong, and not only alerted their client but provided them with possible solutions to improve the situation BEFORE the client had to take drastic action on their own. At the very least they could have raised the alarm with the client in the beginning, letting them know that their current supply chain model simply wasn’t working and offer to sit down with them and their team to work out a solution. Whether they took you up on the offer or not would be up to them, but at least you discovered and notified the problem promptly and the fact that you did that as well as offer your assistance and advice would be remembered when they decided to change things. I mean, BAX nearly lost the whole business because the client was forced to look at different options from a number of different companies. As a logistics provider you never want to be put into the situation where a client is looking at different options involving different companies because their current supply chain model – of which YOU are a part of – is broken.

For me this is simple common sense. I don’t know how many times I have gone to a customer with problems in their current supply chain model and assisted them or at least advised them in finding solutions and changing the way we moved their cargo. The minute the client starts having difficulties or we start having problems dealing with their shipments, we ask the question “why?” and try to find out why their shipments have become such headaches or why they keep having problems. We don’t know BAX’s side of the story, but it sounds like they did nothing. The customer had to do all the heavy lifting, sitting down with its various division heads to figure out a solution.

Even when they decided to switch to airfreight and kept the business with BAX, they still had problems, with their freight getting split up on numerous flights and transiting via a number of airports. The article states that the company had “…only tasked BAX with freight forwarding and not with managing its entire inbound supply chain, so the forwarder had limited control over the situation.” Complete nonsense. It is true that once handed off to the airline the freight forwarder has limited control over how the airline routes and handles the cargo, but any freight forwarder worth a dime has control over which airlines they use and how the cargo is tendered to the airline. BAX could have tendered the cargo as secured pallets or even better as built ULDs (Unit Load Devices, i.e. airline containers) to avoid the cargo being split up amongst different flights. BAX also could have arranged more direct service via a primary carrier and ensured they had allocated space on the flight to ensure that cargo moved as booked and did not get delayed or transited via other airports. The airline has a vested interest in keeping the freight forwarder happy by ensuring the forwarders demands and wishes are met, not that they are ever perfect, but a large company such as BAX with heavy airfreight volumes should have been able to use their leverage with a major carrier to ensure these problems never occurred. Once again, the client made the necessary changes to their supply chain model, not BAX, at least that’s the impression from reading this article.

3) Changing the selling terms to EXW-ExWorks gave both BAX and the company in question more control over their supply chain and was probably a smart move, but again I have to say that a professional logistics service provider should have been able to provide the necessary recommendations and changes to services to make the previous sales terms work. Regardless, when negotiating sales terms companies should educate themselves on not only the costs and risks involved but also the level of control they will have over the transportation of their product. This should be done before embarking on a major venture or making any major changes to their procurement methods.

Bottom line, companies should consider carefully the effects their decisions will have on their supply chains and, ultimately, their profit. Too many companies these days do not incorporate supply chain strategy into their thinking when making major decisions such as where to source product or components from. One needs to look beyond raw cost of goods and take a good hard look at the changes to their supply chain. By planning carefully, companies can avoid painful changes and corrections that might need be made later.

Incoterms: CFR – Cost and Freight

CFR

CFR “Cost and Freight” is a less recognizable, but actually commonly used incoterm, it is basically a variation of its more recognizable big brother CIF. This is another incoterm that officially is not supposed to be used for air shipments, but I have seen its usage in both air and ocean shipments. Officially CFR is only to be used for ocean or inland waterway transport.

SPECIAL NOTE: You may see a number of variations of CFR used in documentation. For example, the term CFR was previously denoted as “C&F” and is still commonly used in this way. Also, the proper way to denote this incoterm is the usage of “CIF – Cost and Freight (named port of destination)” which leads many to confuse CFR with CIF, which is another incoterm very similar to CFR except that insurance is included. Still others will denote cost and freight as “CFR – Cost and Freight (named port of destination)”. “C&F” is still very commonly used, but don’t be surprised to see variations of “CIF……” or “CFR…..” used as well.

In CFR, the seller/exporter arranges for the goods to be delivered to the named port of destination. The seller’s risks end the moment the goods have been delivered onto the vessel at the port of departure, yet the seller is responsible for all costs until the goods have been unloaded at the named port of destination. In this case, the named port of destination is domestic to the buyer, meaning that the named port must be a port in the buyer’s country. For example, if I was exporting cherries to Thailand and the port of destination was Laem Chabang, I would sell it based on “CIF Cost and Freight Laem Chabang, Thailand”.

Under CFR terms, the seller’s risks end the moment the goods are delivered onto the vessel at the named port at origin, but the seller is responsible for all costs up to the named port of destination :
Seller’s Responsibilities:
1) Produces the goods and commercial documents as required by the sales contract.
2) Arranges for export clearance and all export formalities.
3) Arranges and pays for all costs for the transportation of the goods up to the named port of destination.
4) Assumes all risk to the goods (loss or damage) only up to the point they have been delivered onto the vessel at the port of departure, place, and time stipulated in the sales contract. SPECIAL NOTE: While the seller has NO obligation under CFR to insure the goods and may not be legally responsible for the goods once they are placed on the vessel at the port of departure, he may have a vested interest in the goods during the voyage. It may be a wise decision to purchase additional insurance coverage in the case of a loss.
5) Seller must advise the buyer of the location and time that goods have been delivered onto the named vessel.
6) Seller has to provide the buyer with transport documents that will allow the buyer to take possession of the goods at the named port of destination.
Buyer’s Responsibilities:
1) Buyer must pay for the goods as per the sale contract
2) Buyer must obtain all commercial documentation, licenses, and authorizations required for import and arrange for import clearance and formalities at own risk and cost.
3) Buyer takes delivery of the goods after they have been delivered by the seller to the named port of destination.
4) Buyer must assume all risks for the goods from the time the goods have been delivered onto the vessel to delivery into the buyer’s warehouse or other specified location.
5) Buyer pays for all costs of transportation, import customs formalities and duty fees, and all other formalities and charges related to the transportation of the shipment from the time the goods have been delivered to the named port of destination. Buyer should take note that the seller is under no obligation to insure the goods during transit and is responsible for all costs relating to loss or damage of goods or non-delivery from the time the goods have been delivered onto the vessel. It would be wise for the buyer to purchase cargo insurance that covers the goods from the time they are loaded onto the vessel at the port of departure until they arrive into the buyer’s possession.
6) Buyer would accept the seller’s transport documents provided they conform with the sales contract and will allow the buyer to take possession of the goods after arrival at the named port of destination.

This interpretation is provided as a guide only.

Incoterms are published by the International Chamber of Commerce and are available on their website and official publication “Incoterms 2000″. For a complete and official overview please refer to the ICC’s publication.

“Deep-sea rates, meanwhile, have been on a downward slide”

This is one of the basic points brought up in this Logistics Management article in that shippers can rest easy when it comes to ocean freight costs while all other transportation costs are rising because of over-capacity in the market; although the author does mention that rising terminal and other related costs are taking their toll on carriers as well as shippers.

The author starts by referencing the oft-quoted assumption that capacity has exceeded demand.

…the global supply of container ships has exceeded demand since last year.
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In the trans-Pacific, most analysts say, the growth rate for containerized imports this year and next will be well below that seen in 2005. And when demand for inbound capacity slacks off, rates are sure to fall.

We did a post on container shortages and a quote from an article in the May 8, 2006 edition of the Journal of Commerce that pretty much debunked this theory.

While the Journal of Commerce article was quick to point out that much of the added capacity had yet to come online and that analysts they spoke to also expected rates to fall, demand already rose a much higher than expected 13% in the first quarter of 2006 and ships were still running full, leading Chris Bourne, executive director of the European Liner Affairs Association to comment “Every Tom, Dick, and Harry came out with their forecast, and they got it wrong, and it damages us”. Shippers were indeed able to secure better rates this year, but so far ships have pretty much been running full, despite the prediction that capacity would exceed demand, hurting the carriers’ bottom lines.

Perhaps analysts are still correct in assuming that as extra capacity continues to come online that it will exceed demand, but they could be wrong again. Just last month TSA members announced that they were planning on raising peak season surcharges due to the growth in Asia-U.S. cargo that “exceeded even the most optimistic forecasts”. As the price of oil continues to rise, bunker adjustments (BAF – fuel surcharges) will occur.

The Logistics Management article quotes the number of new ships coming online, accurately explaining that many of these new ships may replace older ones, but then proceeds to explain that the net capacity will increase as a number of mega post-Panamax 8,000+ TEU vessels come online:

Even if most of those ships replace aging vessels, there will be a net capacity increase because many of the newbuildings will be much larger than the ones they replace. About 150 of the ships on order will have capacities of 8,000 TEUs (20-foot equivalent units) or more, Page notes. Few ports will be able to handle those giants, and those that can are likely to experience serious strains on their operational efficiency.

As we have mentioned time and time again, simply increasing capacity will not necessarily reduce cost. The few ports that can handle these larger vessels are already stretched in terms of their ability to handle larger ships and larger volumes of cargo, despite their preaching to the contrary. But don’t take my word for it. From this very article:

But it’s difficult, if not impossible, for them to control some of their biggest expenses. According to Vincent DelPrete, a vice president of sales for OOCL, rail, trucking, and terminal operations account for 40 percent of his company’s costs in North America. From 2004 to 2005, fuel costs rose 18 percent and terminal operating costs rose 14 percent. And just like shippers, ocean carriers are paying much more for truck and rail services, he said at a recent industry conference.

It remains to be seen how long the carriers will continue listening to the analysts and media expectations when it comes to pricing. On the one hand we are told that all this wonderful excess capacity will easily outstrip demand (it hasn’t so far), that future demand for this year and next will be well below 2005 levels, and that a good portion of this excess capacity will be in mega vessels with 8,000+ TEU capacities. On the other hand we know that ships for the most part have been running full this year, demand far exceeded everyone’s expectations, fuel costs are rising, terminal and other related costs are taking up ever larger portions of carriers’ budgets, and these 8,000+ TEU vessels which are supposed to bring so much efficiency to the arena will only be able to call on certain ports which are already over-burdened and congested which will only add to their problems. Capacity is just one small piece of the giant pricing puzzle – you put all the other pieces in place and things don’t look quite so rosy for the future.

Logistics Costs : A grim picture

The latest report on logistics costs from this month’s issue of Logistics Management paints a grim picture of the many challenges facing the U.S. logistics industry:

In fact, estimated logistics costs in 2005 totaled a whopping $1.183 trillion, an increase of $156 billion over 2004 and the largest year-on-year change in the 17-year history of the report. Shippers are feeling pressure from two directions.

One factor is the steady climb in interest rates, which has pushed up inventory-carrying costs. But the biggest cost driver has been rising transportation expenses, which reached $744 billion in 2005, up from $636 billion in 2004. Soaring fuel prices, a driver shortage, and diminished competition have all come together to raise rates across all modes, and for trucking in particular.

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In 2001, logistics costs fell to 9.5 percent and reached a low of 8.6 percent in 2003. That decline was due in part to historically low interest rates that resulted from the Federal Reserve Board’s attempts to stimulate the economy out of a recession.

A weak economy signals less demand for transportation services. Now that the U.S. economy is booming, demand is exploding. The days of cheap money appear to be behind us: The Federal Reserve Board has begun ratcheting up interest rates in an effort to hold back inflation caused by higher energy costs. These higher borrowing costs have been especially troublesome because they coincide with a recent trend toward building up inventory.

All emphasis ours.

One of the reasons for the recent trend in building up inventory is the realization that just-in-time / lean inventory systems are exceedingly susceptible to deviations and problems in the ever larger global supply chain. As companies have rushed to source components and products from lower cost countries, usually in China, supply chains have become incredibly long and complex. In addition, the rapid rise of international trade and influx of imports is taxing the country’s infrastructure:

The nation’s harbors in particular are in dire straits. Wilson points out that an estimated 800 oceangoing ships make more than 22,000 calls at the nation’s 145 ports each year. Even if those ports could manage to handle the growth in container loadings and discharges, they still would suffer from congested truck and rail access to their docks. The situation will only get worse, she predicts, as ocean carriers deploy larger vessels carrying many thousands of containers. The new ships’ size, moreover, will force ports to widen their navigation channels and deepen shallow harbors.

Congestion also plagues the nation’s highways, and that situation, too, is expected to worsen in the years ahead. The Federal Highway Administration predicts that the volume of freight traffic on U.S. roads will increase 70 percent by 2020. Just to maintain the current highway infrastructure, the agency has said, the United States will have to spend nearly $76 billion annually through 2020.

To avoid potentially disastrous bottlenecks and solve the congestion problem, Wilson contends, the country must adopt a “total system” approach that looks at the connections between all modes. “Investment decisions should be made to maximize the benefits of improvements that will reduce the bottlenecks and the freight exchange points throughout the system in the next three years,” she argues.

The issue of cargo security poses another problem that could drive up logistics costs. In 2005, more than 11 million containers were imported into the United States. By 2007, an estimated 13 million containers will be entering the country annually. Any disruption to this container flow would have immediate and wide-ranging economic implications, Wilson notes.

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Problems caused by the nation’s aging infrastructure and the need to improve cargo security will only add to the growing pressure on logistics costs. Add to that inevitably higher interest rates, rising fuel prices, and escalating wages, and there’s no question that logistics costs as a percentage of GDP are headed up—and over—the 10 percent mark. “It’s not a matter of if anymore,” Wilson says about crossing that threshold, “but a matter of when.”

I strongly recommend reading the entire article here. It touches on a number of issues that continually come up in this blog : the effect of increasingly large vessels on container pricing and port infrastructure, how congestion and infrastructure problems both in the U.S. and abroad effect pricing and the future of logistics, and why companies shouldn’t blindly move production or sourcing overseas – sometimes it’s best to stay close to home. While it’s mostly gloom and doom, companies with a focused attention to their supply chains with careful analysis and planning of every facet should be able to weather the storm.

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