As I rolled holiday cookies in my hands, I watched TV. I seethed as the news stations celebrated supply chain success for the December holidays. As I watched, I shook my head. I am worried. Chinese Lunar New Year in the face of a new pandemic lays before us. I expect disruption.
Let me start this blog by asking, “Shouldn’t you be worried too?”
I do not believe in big government and I hate politics. So, I write this blog with this bias. Global shipping is national news with most stories covering the symptoms. I find little coverage on the root issues. My struggle is for comprehensive coverage to focus on a holistic remedy.
The health of the supply chain underpins our economy. When the supply chain is sick, all industries suffer. The current state of logistics is our malady. I believe that the remedy is far different than ambling down traditional paths. When I speak to the “experts” writing the current infrastructure plans–people that reach out because I write for Forbes–I am amazed to find the conversation dominated by politicians, lobbyists, lawyers, and labor unions. I find no agency or entity trying to find a holistic solution to global logistics. We are awash in a sea of self-interest.
Background on Ocean Transport
When the ball drops on Times Square to welcome in 2022, the employees at the Port of Long Beach will celebrate moving 9 M TEUs in imports: a 26% increase in year-over-year volume. Pandemic demand for goods, and the shifts from a service economy, drove the increase in southern California ports where 40% of ocean carriers unload for entry into the United States.
Trade continues to be imbalanced. Imports outnumber exports: empty containers increased 28% year-over-year to 360,092 TEUs. Returning containers is an ongoing issue resulting in some manufacturers investigating a return to break-bulk shipping (container free).
So what you might say? The volume of ocean shipments grew two-fold in the past decade. The price of an ocean shipment increased 9-10X from 2020-2021. Not only did the cost increase, but variability tripled.
Ocean carriers, struggling to make a profit for the past ten years, collectively will post 200 billion in profitability in 2021. The dramatic increase in cost is a major factor in inflation: driving the 11.5% jump in apparel costs and 5.5% increase in consumer products.
The supply chain can handle cost increases more easily than variability. As ports become more congested, lead time variability increases. Variability increased during the pandemic and there is no good system for visibility. Leaders are flying blind. Value networks do not interoperate and the business leader trying to track shipments must manually sync multiple data sources to get to answers. Enterprise control towers operate in islands without a dial-tone to drive interoperability with and within networks.
Figure 1. Volume of Seaborne Trade (Billions of Tons Loaded) Over the Past Two Decades
Figure 2. Freight Rates 2019-2021
Figure 3A. Port Back-up In LA Over Two Years
Reducing variability is not easy. In November at LA, there were 5,985 containers sitting for 9 to 12 days and 20,426 containers sitting at terminals for 13 or more days. In December, the movement increased with 18,995 imported containers with more than a nine-day dwell time. Today’s supply chains are not designed for this level of variability. Few planning systems update delivery based on actual dwell times; and despite the abundance of Internet of Things (IOT) data, there is no place to put streaming data signals into traditional planning systems. As a result, companies plug along planning based on historic lead times and freight rates which as you can imagine is doomed for failure.
Figure 3B. Variability in Dwell Time at LA Port
The larger the container, the greater the need for a larger port, and automation, to manage loading and unloading. Since 1990, the size of ships increased 3X, but the design of the west coast ports remained largely unchanged. This adds to variability.
Figure 4A. Increase in Size of Ocean Carriers
I also laugh when newscasters quip, “Just move west coast ships through the Panama Canal…” With new locks in 2016, the Panama Canal is able to handle vessels with an overall length of 366 m (1201 feet), 49 meters beam (increased by the Canal Authority effective 1 June 2018 to 51.25 meters, to accommodate ships with 20 rows of containers) and 15.2 meters draft, and cargo capacity up to 14,000 twenty-foot equivalent units (TEU); previously, it could only handle vessels up to about 5,000 TEU. Net/Net: The Panama Canal cannot handle the largest ships, and moving a vessel through the Panama canal increases the cost of a container by approximately $8,000. The banter on 24-hour news on moving ships from the west to east coast is laughable.
Figure 4B. Ocean Carrier Sizes Acceptable for Each Port
As the ships increased in size over the last decade, unloading complexity increased. The need for data synchronization increases with the growth of nodes, the increase of the number of parties handling the freight, and the use of multiple modes of transport. The California landlocked ports struggled with unloading the larger ships. In addition, the terminal operators changed policies for chassis ownership which complicated unloading.
When today’s big ocean containers come to port, the instantaneous requirement for chassis is 2,000 and 5,000. The chassis is required to put “wheels” under a container. Unloading containers from a ship takes two-to-three days. Prior to 2018, when an ocean carrier booked a shipment they had to provide a chassis. The interests of the parties, i.e. ocean container company, truck carrier, shipper, and labor unions, are divergent. Planning is not easy: there are seven sizes and shapes of chassis. Freight does not move without the right chassis and logistics requires forecasting and planning and interoperability between providers. (Which does not exist today.)
The three major asset leasing companies in southern California attempt to work together in a pool of pools, but there are issues. Chassis are not being returned: “street dwell time” is ten days up three-fold from 2018. Asset utilization of forty-foot containers chassis is over 90%. With the full warehouses on the west coast, many of the chassis are under containers being used as overflow warehouses outside of retail stores and distribution centers. Maintenance is problematic: 1700 (roughly 3%) of the chassis are inoperable requiring maintenance. Truck drivers report that maintenance issues are a constant nightmare. In addition, preference is given to dual loading at a location (drop off and pick-up) to maximize unloading efficiency making it difficult to perform a single drop-off (a return of an empty is very difficult). As a result, many containers and chassis are being dropped near the port becoming a nuisance for local townships.
Figure 5. Chassis Utilization in the Pool of Pools
So why should you care? The answer is variability. The supply chain leader’s number one responsibility is reliability. When it comes to visibility, the ports are largely black holes. Capabilities for supply chain visibility remained largely unchanged despite the promise of value networks and streaming data. The reason? The current models for the technology providers are self-serving. As a result, interoperability between and amongst networks is non-existent. (For example, Ariba does not interoperate with Elemica, GT Nexus does not interoperate with Nulogy, and E2open does not interoperate with 3PL networks. The integration with streaming data providers like Project 44 or Fourkites is low. Each technology provider operates in isolation. Manufacturers build “control towers” but there is no network dial tone between parties to enable prescriptive analytics and alerts.)
As we think about the future, data issues and opportunities abound. There is not a one-to-one relationship between a container and a purchase order. As a result, a purchase order can cover multiple containers; and a container can carry multiple purchase orders. The average purchase order changes 3-4X before shipment. Document and data synchronization (integration is insufficient)–is paramount; yet, there are no good answers for business leaders.
In addition, there are no authoritative identifiers for a container, a warehouse, or a shipper. Dockworkers currently use the printed numbers on the side of the “box”, or container using manual systems to pull containers at the dock. A container is typically moved manually at the dock 5-7X before being pulled for the long haul. Paper is prevalent: we are a long way from embracing a digital transformation vision.
Why I Am Worried
This month, China stopped sharing Automated Identification Signals (AIS) data when an ocean carrier is in Chinese waters. The Chinese government is also moving aggressively to bring Logink–A National Transport and Logistics Information Sharing Platform in China–to market. Logink, funded by the Ministry of Transport of the People’s Republic of China, is designed to provide visibility information.
Logistics costs in China are 16.6% of the countries’ GDP. Logink is designed to interoperate with 10 international ports. China is aggressive in port expansion with Beijing now having investments in more than 100 ports in 63 countries. My fear? While the US stumbles with private operators that are hesitant to provide interoperability, I believe that China will make ocean data less available outside of China’s interests and build a network of networks to streamline data sharing in China. Think about this statement as you view the Chinese influence on port infrastructure shown in Figure 6.
Figure 6. Chinese Influence on Ports
Don’t expect change. In the recently signed $ 621 Trillion infrastructure bill, there is only a planned investment of $17 Billion to inland waterways, ports, and ferries. For perspective, in contrast, there is a focus of $174 Billion investment in the electric vehicle market. Net/Net: The current infrastructure bill will not improve the port infrastructure to alleviate the global shipping issues.
What Should Be Done
I hope that I have helped to make you worried. If you are a shipper, take these actions:
- Design for Variability. Recognize that there is no short-term fix. Invest in network design capabilities and analyze the feasibility of the plan at least quarterly. Reduce complexity: rationalize the number of nodes, parties and shipments. Build a supply chain planning master data base to understand shifts in cycle times, conversion factors and lead times. Use outside data like chassis utilization, Covid infection rates, and lead time variability to develop your plans. Move your inputs of planning data from 80-90% based on enterprise data (current state) to at least 50% based on market sensing. Change your planning processes to sense and validate based on simulation.
- Move to Regional Supply Chain Designs. Analyze the network–with a focus on locations of second and third-tier suppliers and focus on minimization of cross-border shipping. Break your dependency on Excel Spreadsheets. The reason? Variability modeling is not possible in Excel models.
- Get Good at Inventory Management. Push past cursory analysis of safety stock and embrace the concepts of form and function of inventory. Design where inventory should be placed and in what form in the network. Actively manage cycle stock in manufacturing and shift the focus from asset efficiency to schedule adherence. Be smart in the management of intransit inventory.
- Be A Good Shipper. Work with other shippers to improve asset utilization: actively return containers and chassis. Now is the time to work cooperatively with your logistics providers. Don’t waste your time issuing the annual low-cost RFP for shipping lanes: this is a waste of time. Focus on reliability, local efficiency, safe conditions for drivers, and minimizing empty moves. Start the work now on implementing ISO-8000 standards for authoritative identification of company data and site locations.
- Actively Work with Industry Associations to Put Pressure on the United States Government for Remedy. Don’t be lulled to sleep. Push within your associations to lobby and drive change in port infrastructure. The current network of disconnected players–terminal operators, chassis pools, drayage services and 3PLs–is not the answer.
My advice for all of the lawyers, lobbyists, and labor unions forging the direction (I wish that I could see more knowledgeable supply chain professionals advising the current administration):
- Force China to Share Data. Push China hard for not providing AIS data. This is a major issue that we should not sidestep.
- Aggressively Build a Network of Networks and Force Players to Interoperate. Force all logistics and network players to provide a supply chain dial tone to improve shipping. This is not only a commerce initiative/imperative, but also essential to meet corporate social responsibility goals. (Why? Consider the emissions from all of those ships waiting to unload off the coast of LA.)
- Legislate Authoritative Identifiers. Aggressively support the release and compliance of company, location and container identifiers to improve track and trace visibility.
- Port Infrastructure Automation and Legislation. The current port governance is not sufficient. Buy out the current terminal operators and actively invest in port infrastructure. Chassis-free unloading and port scheduling should be at the top of the list.
- Push for a Southern California Port Modernization Act. Evaluate enlarging the southern CA ports or opening new ports. Recognize that unloading 40% of the imports for the United States through land locked ports is untenable.
Recently, I had the opportunity to record an overview of container shipping with Wire. I share this for you to review as you ponder the points above.
In 2021, we made ocean carriers rich resulting in inflation and increased variability. Most shippers reacted seeing this as a short-term phenomenon. My advice? It is not. Too few manufacturing companies redesigned supply chains to understand the impact of variability on lead times and costs. As a result, in the first decade of 2022, expect surprises in manufacturing and retail earnings.
Chinese New Year 2022 falls on Tuesday, February 1st, 2022, beginning the year of the Tiger. China’s public holiday will be from January 31 to February 6, 2022. Factory shutdowns are typically two weeks. Expect erratic behavior as China deals with the electrical outages and COVID lockdowns.
I will be baking cinnamon rolls for the New Year to give to the local neighbors. As I bake, I will be watching the news channels. As an old supply chain gal, I am seeking greater recognition of the real issues. I doubt that I will see them covered by the pundits.
In summary, I am worried and I ask, “Shouldn’t you be too?” As a supply chain community, we need to lock arms and drive for lasting change to ensure the reliability of the first mile.
As the ball drops on Times Square, I wish you happiness and health in 2022. Hang in there, we are all tired of dealing with the pandemic supply chain response. Let me know if I can help.