Ocean freight outlook Q3 update

 

Red Ink

There's been some troubling news that I've been following regarding ocean carrier losses. A recent article noted that the carriers have already reported $1.4bn of losses for Q2, adding to the reported $1.2bn deficit for Q1. Just recently Zim, an Israeli ocean carrier, posted a $33m loss for Q2. Cosco shipping reported its first half profits fell 97.8 percent. Its looking like Ocean carriers are facing some rough seas this year (pun intended).

Driving Factors

What's causing all these losses you ask, well so did I! There's been an oversupply of vessels. Some of it can be attributed to poor planning that are being addressed, like in the Zim case. They are now consolidating routes and have signed an agreement with Maersk and MSC to consolidate container shipping services for the Asia-US East Coast tradelane. This will allow Zim to cut down six panamax ships when their charters expire.

Q3 Outlook

There are reports that prices are about to spike. Ships are increasingly being loaded full, some shipments are even being rolled over to a second or third sailing. The rates have been edging up, from Asia to North Europe rose 3.3% to $959 per teu and from Asia to US West Coast, a 1.9% rise to $1063 per teu, the east coast ports rose only slightly by 0.4% to $1664 per teu. Another recent report showed that peak rates are up for the West Coast 25%-40% more than typical and 20-30% for the East Coast. With rising rates, the ocean carrier future is reportedly looking better for Q3. The rates are not reported to have peaked yet, so prices are expected to continue to rise. With this in mind, now's a good time to lock in your current rates!

Beyond 2018

What's lurking in the horizon is a low-sulphur compliance rule that is about to become effective in 2020. Maersk for example has already complained that it will cost them more than $2bn a year. That will for sure be transferred to cargo rates. Other carriers have already invested heavily into scrubber technology. These costs will need to be recovered, especially with the carriers having a tough 1H for 2018.


References:
China's COSCO Shipping says first-half profit falls 98 pct, Brenda Goh, Reuters, 30-Aug-2018

Zim follows Q2 loss-making trend, joining box rivals in sea of red ink, Mike Wackett, theloadstar.co.uk, 23-Aug-2018

Full ships could lead to a more stable container shipping market, Mike Wackett, theloadstar.co.uk , 24-Aug-2018

Strongest Pacific season on record, Lars Jensen, LinkedIn Article, 27-Aug-2018

Impact of IMO 2020 low-sulphur fuel rule will be "close to a perfect storm", says Maersk, Mike Wackett, theloadstar.co.uk, 30-Aug-2018

Purchasing Strategy Considerations

 A solid supply chain strategy is essential for a successful and healthy business but equally important is a subset, the Purchasing Strategy. There's stacks of books written on the subject to go in depth. This article aim's to open up some consideration to purchasing strategies and avoid common pitfalls.

Vendor base consolidation

In the relatively recent P2P hype, one area that generally receives considerable attention is the consolidation and reduction of vendors. This is both hugely important for increasing purchasing power but also for reducing vendor management costs. Its also a perfect time to weed out some of the under-performing vendors and to elevate the company's supplier base. The consolidation should be done with a clear strategic eye on vendor qualities that the company considers most important. What should not be forgotten is the hidden costs of doing day-to-day business with the vendor, these "soft" measures such as: ease of invoicing, accuracy of documents such as packing lists and others can end up costing dearly if ignored.

Minimum order quantities

When making contracts with vendors, among the many items that are negotiated is the minimum order quantity. Usually the sourcing group is measured by achieved cost savings and as such are motivated to reduce costs. This may lead to agreeing to minimum order quantities that deliver better prices but also higher inventory holding costs. Therefore order quantities need to be calculated, analyzed and aligned with the supply chain strategy prior to signing on the dotted line. A good purchasing strategy will therefore include inventory turnover targets that will help formulate the direction of the sourcing agreements. In addition, flexibility can be added to the setup by allowing for quantity based price breaks.

Landed Cost vs Piece Price

Most procurement professionals understand the difference between the two but in many cases, the company accounting system is not configured to be able to provide item level landed cost numbers. For example, not only do you want to know the transportation costs but also inventory holding costs which can be significant in terms of tied up capital en-route from China for instance. This will mask the true cost of items and may lead to some very unhealthy practices. In these cases, its necessary to have a purchasing strategy that makes it easier, perhaps through using the appropriate Incoterms in the contract. The other option is to develop the accounting system to provide the level of details necessary to calculate part costs. Ultimately, your goal is to be able to make apples to apples purchasing decisions between different vendors and create value to your company by being cost effective through the whole supply chain.

In-Sourcing vs Out-Sourcing

These term's can have several meanings, within a company it can mean either using a vendor for a product or service or using the company's internal capabilities. On a political level it can also mean bringing the purchasing and/or manufacturing volume back to the home country. In the last decade, this movement has received more press, especially with rising transportation costs and long transportation lead times. BCG published a well known article on this topic in 2011.

Within the company, often the focus is on core competencies and out-sourcing the more repetitive processes that add little value to the product. A good purchasing strategy therefore addresses what are the core competencies and align with the business strategy. What should not be overlooked is a movement to utilize contract manufacturers for the final configuration. Perhaps the company core competencies are in a sub-level assemblies but find it difficult to scale up in the final configuration phase at which point an outsourcing partner may provide greater flexibility and responsiveness.

Lastly, not only should the component procurement be considered but also the whole procurement function. There's very successful setups where the day-to-day purchasing functions have been outsourced and the company has been able to focus on tactical and strategic procurement tasks. Even strategic procurement has been successfully outsourced. There are many possibilities that should be carefully weighed with the maturity of the organization.

Vendor Contracts, ERP system setups, Control

Modern ERP systems offer massive amounts of information to procurement professionals. But often the discussion turns to the quality of the provided data. Unless the company has only a handful of vendors and the products or services being offered are relatively simple, you will have possibilities for supply chain challenges. Ask your procurement personnel if they know the details of every vendor contract, such as non-conforming materials policy, on-time delivery penalties, invoicing discrepancy handling etc., more likely than not the details are cloudy at best. A good procurement strategy should include clarity and transparency and be easily accessible so that when the abnormal situation occurs, the main terms of the agreement can be checked and referenced.

Technology Requirements

Technology plays a key part in modern P2P systems. Old fax based ordering setups are quickly fading and being replaced with EDI connections that make ERP systems talk to each other. When selecting vendors, the purchasing strategy should include consideration to the technical capabilities of the vendor. Will they be able to accept your orders electronically and will they be able to respond in-kind with electronic invoices? Do their packing lists include barcode's, are the products labelled perhaps with RFID tags? The purchasing strategy should therefore include consideration for technology requirements that make lives easier not only at your company but also at the vendors side because ultimately, extra labor on their end, will result in overhead that will need to be paid for in sales pricing.

Vendor development

A vendor is ultimately a partner. Their success will facilitate your success and vice versa. There should therefore be a common mutually agreed need to employ collaborative continuous improvements. Perhaps your company is highly adept at quality inspections but the vendor does not have the same capabilities. In a good partnership, companies will help each other to become better. This knowledge sharing should be a frequent practice and part of company culture. Dedicated resources are generally needed to manage and improve processes and make it part of the company culture. Therefore, the purchasing strategy needs to answer the level of vendor development that will be provided and how that should be leveraged for cost improvements. Annual fixed cost reductions as part of the contract are fairly common but in the long term are only sustainable through continuous improvement activities.

Incoterms, more complicated than just FOB or EXW

Incoterms, why should you care?

I've been surprised several times by how little companies either care or understand the use of Incoterms. For example, I once had a vendor thoroughly upset that my company had refused payment of a vendor invoice for an order that was shipped DAP but never received at port of destination. The carrier deemed it lost in transit but the vendor was threatening to send the collectors after my company. In another case a company had a policy for DAP terms but didn't hold the sourcing group accountable so they were constantly allowing the vendors to ship with EXW, the ballooning freight spend was later flagged by the accountants.

In my experience there has been a lack of training/ownership for either the sales or purchasing group on Incoterm basics and obviously a lack of company wide strategy. Mistakes like these can end up being very costly. This article looks into a few more common terms and gives you, the reader, some ideas on what you should be using in your business.

What are Incoterms?

The International Chamber of Commerce publishes periodically internationally accepted trade term definitions that are then used worldwide in global and domestic sales contracts. Its a commonly agreed language that defines risk, carriage and cost. Incoterms don't specify where ownership or title transfer, that is between the buyer and seller to separately specify. There are currently 11 rules in the 2010 version, divided into four groups: C, D, E and F, with each three letter rule starting with one of the four group letters.

EXW - Ex Works

This is the simplest of the Incoterms, it requires for the buyer to load the vehicle at the location where the seller has made them available. If you are buying from overseas, make sure you make arrangements for the loading and pickup of your items! The risk in transportation, export and import clearance and the cost for both is the buyers responsibility.

CIF - Cost, Insurance and Freight (Sea and Inland waterway Transport)

The seller delivers the goods, cleared for export, on board the vessel. The seller pays the costs and freight to the named port of destination and the seller contracts insurance to cover for risk or damage during transit. However, the  risk for loss or damage is transferred once on-board the vessel and the seller is only required to obtain insurance for the minimum cover. Once at the port of destination, the buyer needs to pay any offloading chargers, import duties, and transport to the final destination.

FOB - Free On Board (Sea and Inland waterway Transport)

This is my absolute #1 favorite misunderstood and abused Incoterm. First, it is only for use for waterway transport, not ground freight. Second, it should only be used for bulk or non-containerized goods. The seller pays for the delivery of the goods on-board the vessel, this includes any Terminal Handling Charges, and at which point the risk for transport or loss and any further costs are the buyers responsibility. If you therefore lose a shipment, check where the loss occurred, it may end up being the sellers responsibility! For containerized goods, use FCA instead!

FCA - Free Carrier (Any transport method)

This is a basic rule for situations where the buyer arranges the main carriage. The seller delivers the goods to the named place of delivery, where the risk and costs transfer to the buyer. This could be a forwarder's warehouse, terminal or hub. If the named place is the sellers location, then the seller is responsible for loading the goods on the vehicle at which point the risk and responsibility for costs transfers. A buyer therefore should never use EXW for non-bulk goods due to this notable difference. Lastly, the seller is responsible for export clearance but not for insuring the goods for pre-carriage damage.

DAP - Delivered at Place (Any transport method)

This rule replaced the old DDU (Delivered Duty Unpaid) but shares many of the same responsibilities. The seller arranges and pays for delivery to named place but not the unloading from the vehicle. The buyer is responsible for import clearance and costs, including any terminal charges at the named place. The risk also transfers at the named place, damage incurred during unloading is therefore the buyers responsibility. Lastly, the seller is not obligated to insure the goods in transit.

DDP - Delivered Duty Paid (Any transport method)

The only rule that defines that the seller is responsible for the, carriage to, import clearance, import/export duties and other costs. For a buyer, it is the least bureaucratic but also allows for the seller to upcharge for the extra service. In some countries, this can also be extremely difficult for the seller since they may not have a presence in the country causing additional headache in the import clearance procedure.

There's several other Incoterms that may be more applicable to your business needs. The above six covers most bases and a solid understanding will offer you the most amount of control and liability that you are willing to bear. I highly recommend you incorporate Incoterms into a recurring training course for your sales, purchasing and accounting staff. After all, an accountant should not pay an invoice for something that your company may not be liable for!


References: 
KoganPage, Master the 11 Incoterms Rules, Gwynne Richards, 13-Jul-2016
inbound logistics, Using Incoterms to Simplify Global Sourcing, Simon Kaye, 31-Jan-2012
International Chamber of Commerce, Incoterms rules 2010

Supply Chain Strategy

Supply Chain Strategies

There's tons of books on operational, management and supply chain strategy. There's no point in trying to discuss in depth those in a blog post. But what I've spent some time looking into is what industries are typical for a particular strategy and then what type of metrics or KPI's should be used to measure your success. Using six generic supply chain strategy models we can begin to consider the focus areas.

Continuous-flow

This model is typically found at manufacturers of components for OEM's, short shelf life food products and some medical reagents businesses. In a continuous-flow model, the basic business premise is low demand variability, low supply/demand balancing costs and long product life cycle's. You could characterize this as a mature business, highly predictable demand where the customers display little change in their ordering behavior.

"make to stock "

What should the production setup then be? In this, you'd typically want to run a make-to-stock operation where you are replenishing predefined stock levels. You are offering high service levels, quick responsiveness and your customers the ability to hold low inventory levels. You need to focus on having strong relationships and extensive collaboration with customers to improve planning visibility. The main KPI's and metrics from a supply chain point of view should be inventory turnover, on-time delivery and short production cycle time with batches as small as possible.

Efficient (lowest cost)

Typically this model is used for commoditized products such as raw materials; sheet metal and
chemicals or gases. There's strong competition between providers and high customer mobility. A procurement decision is often based on best price. To stay competitive, you therefore must push on lowering your operating expenses. Your customer demand variation will be more volatile but product life cycle and supply/demand balancing costs are similar to the continuous-flow strategy.

"make to forecast with some make to order"

The production setup should be make-to-forecast with some room for random make to order's, aim therefore to reduce the number of production batch setups.The business needs to focus on reducing the number of low volume SKU's and plan on larger batch sizes for scale efficiencies. For seasonal variations you hold finished good's buffer stock to maintain high service levels. You'd measure on time delivery, which should be high along with low number of production setup changes, plant utilization should therefore be high. Focus on efficiency through continuous improvements resulting in lower costs. You will have high inventory but your aim is to have high perfect orders in your service.

Fast (speed to market)

These supply chain setups are usually found in trendy products such as fashion apparel. Customer's are interested in getting the latest popular item quickly. The product life cycle is short and demand is variable, depending on the popularity of the product. With quick turnarounds comes higher costs, therefore balancing your supply with demand is typically more expensive.

"make to forecast"

The production setup is therefore make-to-forecast with large batch sizes, perhaps only one batch per SKU. The production cycle must be as short as possible to reduce the time to market. Close collaboration with your vendors are needed to help with market visibility. Measure scrap rate and obsolescence, forecast accuracy and freight costs.

Flexible

These types of supply chains are most often found in companies that manufacture metalworking and machining components and spare parts for industrial customers.Customers often order unique products, therefore component variation is high. Perhaps engineering is complex and products have a high level of other added services. These types of customers are generally not price sensitive but
rather rely on good on time delivery and quality. Demand is therefore often highly unpredictable and product life cycle can be measured in decades. The cost of doing business will be high, transportation, holding costs, obsolescence etc.

"design to order"

The production setup is often design to order. Each product is unique and rarely duplicated. Batch sizes will therefore be specific to each project. Suppliers need to deliver components with as short lead times as possible, have excess capacity and perhaps through pooled resources and/or stocking agreements have a supply of raw materials at ready. Production cycle times should be short. Inventory levels typically tend to be low, although a high service level strategy for spare parts may prove challenging. Plant utilization should not be optimized to the point that there is no excess capacity. Measurable metrics should be free capacity internally and externally, service levels, obsolescence, inventory turnover and careful monitoring of bottlenecks.

Agile

This is similar to the flexible supply chain strategy with the notable difference that the product life cycle is usually shorter. Products are unique to project specifications per customer. These companies tend to be in the intermediary industries that produce parts for industrial customers. Products are typically metal machining services, special chemicals and custom electrical assemblies. Demand variation is high due to the uniqueness of the products, and like the other high responsiveness strategies the cost to balance supply with demand is also high.

"make to order with some make to stock"

Production setup is often make to order although some make to stock setups may also exist. Key is to have extra capacity always available for high demand peaks, it will have a negative impact on plant utilization but should not be a main focus. Suppliers must provide small batches on short notice. It is therefore necessary to have a pool of suppliers to leverage from when high demand situations exist. Raw materials should be pooled to offer best scale economies. Inventory should be processed to a common platform before differentiation. Metrics should capture production cycle time, supply chain costs, perfect order and demand forecast accuracy.

Custom-configured

Companies typically in the consumer good's industries employ custom-configured supply chain strategies. The idea is to produce the products to a late stage and then assembled or configured to the final product. Many auto manufacturers have this as their supply chain model, it offers flexibility but also scale efficiencies. Demand variation will be high with a short to medium product life c
ycle. Balancing the supply with demand carries high operating costs.

"configure/assemble to order"

The production setup is often configure or assemble to order. Buffer inventory should therefore be maintained prior to the point of final configuration. Finished goods should be kept low, the point is to configure to demand and sell. Batch sizes will be variable to the customers needs. The supply chain should have a depth and redundancy in its supplier base to both help with capacity and to offer shorter order cycles. Main measurable metrics should include raw and semi-finished goods vs finished goods inventory turnover and production utilization prior to assembly/configuration and main configuration, they should should be high and medium with extra capacity respectively.

Summary

There's several different supply chain models that each addresses a different set of circumstances. A company first needs to understand their value proposition and demand situation before making decisions on the correct supply chain model. Often though, the challenge is not so much the supply chain model to choose but the need to have some hybrid version of two or more models. What is important is to manage the business according to the chosen model and to employ effective control mechanisms that allow for visibility to the ongoing business cycle.

References: 
Supply Chain strategies: Which one hits the mark., Herman David Perez, CSCMP's Supply Chain Quarterly, Quarter 1, 2013
How Many Supply Chains Do You Need?, Dan Gilmore, SupplyChainDigest, 14-Oct-2011
Designing the Right Supply Chain, Richard Kauffeld, Curt Mueller and Adam Michaels,  Strategy+Business, Spring 2013, Issue 70, 1-Feb-2013

RFID implementation cost for warehousing

RFID technology briefly

The RFID (Radio Frequency ID) technology is not new. An early version was developed in 1973 with a passive radio transponder with memory. A reader or interrogator sent a signal to the tag which bounces the memory response. Since then, both the tag's and the readers have gotten more sophisticated and they have slowly permeated our everyday lives.

 "Its more common than you think!"

Today, these tags can be found everywhere. Your credit card may contain a tag, passports, automated toll booth systems, waste collection bins and keycards to name a few. The distance that tag’s can be read varies between 3 ft and roughly 24 feet. This is dependent upon the tag and the readers performance.

Uses and applications

Industrials have also caught into to the movement with railroad cars having RFID tags but often, they are not considered a direct replacement to barcodes. Barcodes still serve a purpose, especially when needing to be distributed electronically via email for example. RFID tag’s are generally considered to be better when used on bulk level and Universal Product Code (UPC) or EAN barcode’s on item level.

"Tag's are cheaper than they used to but still expensive"

Cost of Tag's

The cost of RFID’s has decreased which has enabled wider adoption. In 2001 an RFID tag cost roughly $1.15/ea. Today, the same tag can be bought for $0.20/ea. Some tag’s, depending on ordering volume can be had for much less. But even then, the cost is significantly higher than a barcode label at $0.01/ea which is why they should not be considered substitutes for each other. 

With such a difference, the application needs to therefore justify the cost difference. Often, its not practical to read a barcode for example on a pallet of boxed items of high value. For inventory tracking, it may make sense then to have RFID tag’s that are much less dependent upon tag placement.

"You need a special printer!"

Printer Considerations

The RFID printers have also come down in price. Today, they can be integrated with a regular barcode printer. The RFID tag is encoded at the same time as a barcode is printed on the label. This enables the best of both worlds. A quick survey of barcode printer costs yields that basic RFID printers can be bought for between $900-$1100.

"And there's no use in the system without a tag reader"

Software and Readers

The software to encode tag’s add’s some expense but can be considered a one-time expense, perhaps $700 per license. An RFID reader system, often built on an Android platform is slightly more expensive, starting around $2000 with everything included. But at these prices, its easy to see that the startup costs of a system are relatively low.

"Start with the end in mind"

Budgeting and Planning

With a budget of $5000 you can have an RFID system up and running in under a week. It does require some technical understanding of tag encoding and setting up the reader has its own challenges. But after that, the sky is the limit in how you utilize the system. For example, in a warehouse setting it can greatly improve your cycle count process.

Good advice would be to specify what you want to accomplish with the system, design your processes around that and then get to work on the technical implementation.

References:  Forecasting the Unit Cost of RFID Tags, Richard Moscatiello, March 27, 2003