Today, we are nearing the end of the fourth quarter of corporate reporting. Self-reported projections of the ocean carriers forecast that the industry is posting over $200B in profits. Let me repeat this, “$200 Billion in profits.”
This massive positive windfall is double the profit made by carriers over the past 20 years combined. Yes, a single year offsets twenty years of poor margins for a struggling industry. Maersk, the world’s largest container shipping company, reported its best quarter in 117 years, posting a $5.9B profit for Q3 on $16.6B in sales.
None of this windfall will line the pockets of the truck drivers, fix the chassis issues, or streamline port operations. The top fifteen ocean carriers are owned by non-US international conglomerates dominated by Chinese, Danish, French, Korean, and Middle East interests.
In parallel, inflation, currently at 6%, is climbing. Retail shelves are increasingly empty. Ships continue to hold in the west coast harbors of LA and Long Beach, and the west coast warehouses are full. Inventories in the chemical industry are at record lows: a forerunner of bad days ahead. (The health of all sectors is dependent on the chemical industry.) Hazardous freight is the most likely to get “rolled” at the dock. (Sitting waiting for a confirmed booking.) While we will recover quickly in retail (moving from painful shortages to a glut of inventory), the chemical industry–sitting four and five layers back in the supply chain–takes longer to recover. My take? The value chain supporting all industries is sick, requiring a leadership step-change.
Time For Action
For business leaders, the chickens are coming to roost. On the one hand, we should celebrate the fact that the aggregate industry moved 38% more freight in 2021 when compared to 2019. On the other hand, we must take responsibility for supply chain leaders failing to deliver a resilient supply chain equal to the COVID-19 challenges.
“If chickens are coming home to roost, someone is suffering the unpleasant consequences of their bad actions in the past.”https://www.englishclub.com/ref/esl/Idioms/Buildings/chickens_come_home_to_roost_394.php
My friend Trevor says, “Lora, you need to realize that this is a business problem. Supply chain leaders have little say in the business.” My retort to Trevor is, “Isn’t supply chain about business? Over the last decade, supply chains have become more functional and less effective. The gaps between business leaders grew. Especially grievous are the gaps between finance and operations, manufacturing and procurement, and the operations and commercial teams. We are to blame.”
The failure abounds and will become worse. I wince as I push my cart down my Lowe’s aisle. Approximately 15% of my local store shelves are empty. Much of the inventory on the ships at sea will miss the essential seasonal windows.
What can we learn? While many are scratching their heads and pointing fingers at the compounding of issues, I hope that business leaders take a hard look at the current state and accept their part in the failure.
- The Order Is A Poor Indicator of Demand. Traditional supply chain practices model demand based on historic order patterns. In this world of demand volatility, processes need to shift to be outside-in to use market data. Effectiveness in Sales and Operations planned declined over the last decade as organizations attempted to tightly integrate the budget to the demand plan and constrain operations based on the financial plan. Never in the history of supply chain has the financial budget been so out of sync with the market as in 2021.
- We Assumed that Transportation Would Always Be Available And That We Just Needed to Negotiate Price. In the supply chain, truck drivers are treated as second class citizens. Paid only when the wheels are turning, the asset-intensive carrier base struggled with wait times and warehouse inefficiences. Lane RFPs focused on cost reduction, but few asked if they had a feasible plan. Without any penalties for failure for first-pass tender acceptance, carriers and shippers have played a shell game on price. Over the past decade payments to transportation carriers from shippers increased from net 30 to net 60 moving to net 90 in 2019. When transportation became a bottleneck and a constraint, there was no way for the average shipper to model the impact. Most continued running planning models assuming average leadtimes without variation.
- Cost and Waste Can Be Pushed Backwards in the Value Chain Without Consequences. Today’s investment in value networks is small. Within organizations there is no buying center to invest in building value chain architectures. EDI is slow, expensive and single-directional. The implementation of control towers lack a dial tone giving business leaders a false sense of security.
- The Efficient Supply Chain Is Effective. Companies do not have one supply chain. Based on the analysis of rythmns and cycles of supply chain variability and constraints, most have five-to-six. Each requires design and fine tuning. However, only 9% of companies actively design their supply chains. The strategy department in most shipper organizations sits in finance while the network design technology expertise is usually a much lower level in operations. The use of spreadsheets in corporate strategy misses the complex non-linearity and variability of supply chain decisions. As a result, most organizations chased lower cost of variable costs without embracing the needs for buffers, variability and constraints. The focus of planning is volume not value, and leaders struggle to change and embrace bi-directional orchestration to capture the price/volume trade-offs between source, make, deliver and plan.
- ERP Investments in the End-to-End Supply Chain Are Sufficient. When I speak to a supply chain leader, they happily retort the brilliance of their end-to-end strategy. However, when I roll-up my sleeves and get into their strategy, I find that most are investing in transactional efficiency. Over the last decade, ERP technology leaders consolidated and reaped the benefits of maintenance revenues as the gap grew in solutions offered versus the industry need state. Today, only one in two business leaders feel that they are successful in deploying analytics. I find that most supply chain leaders struggle to be heard against the mandates of IT standardization and financial dictates to build the most efficient, low cost supply chain.
What Should We Do
Align the organization against solving the gaps. Call all business leaders together and map the supply chain from the customer’s customer to the supplier’s supplier and ask for an honest discussion of the current gaps. Challenge the current state. Ask the group to consider:
- Invest in Market Sensing. Realize the latency and distortion of the current demand planning programs and build outside-in processes. Use data scientists and many start-up cloud-based solutions to write to current systems of record (companies like 1010 Data, Aera Technology, Alloy, Enterra Solutions, o9, Tailwinds, UCBOS, or Zebra Technologies (previously Antuit.ai)) as an overlay to current processes. If you are a current client of E2Open, JDA, Logility, Kinaxis or OMP ask for an overhaul of existing processes to build outside-in capabilities. Use market indicator functionality with conventional APS solutions to drive exception management. Align on the role of the budget and forecast and get clear on the role of each in this world of variability.
- Build Value Network Capabilities. Stop fooling yourself that investments in enterprise solutions build value networks. Reach out to Supply Chain Operating Network providers like Elemica, GT Nexus (a part of the INFOR suite), Nulogy, and OpenText to begin the journey of building a supply chain bi-directional dial tone. Align internally with the EDI work groups to transition historic EDI to newer technology capabilities. (The looming retirement of the EDI baby boomers is a major risk to the supply chain.)
- Build Strong Supply Chain Sourcing Development Practices. Only 29% of companies have active supplier development groups. Now is the time to strengthen supply chain relationships with suppliers. Hold yourself accountable for sharing clean and accurate data with minimal latency. Take your foot off the pedal for continued investments in efficient procurement–now is not the time for voice automation, software robots and RFP automation.
- Design Your Value Chains. Introduce the financial strategy teams to the capabilities in network design tools and build a supply chain planning master data base (conversion rates, lead times and cycle times), to actively design the supply chain based on actuals. Redesign supply chain flows monthly and quarterly across make, source and deliver based on market intelligence.
- Redefine Metric Systems and Clearly Define Supply Chain Effectiveness In These Volatile Times. This is unprecedented time. Avoid the discussions on traditional risk management approaches. Instead, align the organization on balanced scorecard of customer service, margin, growth, inventory turns and Return on Invested Capital. Replace functional reward systems with an aligned system for all business leaders. Make supply chain flows the heart of your business systems.
In short, who is responsible for the record profits of the ocean carriers and supply chain failures? My take? The chickens have come home to roost. We are all guilty.