In this second part of a two-part Ferrari Research Group Advisory commentary, we continue to highlight the groundswell of increased concerns being placed on global and domestic transportation cost inflation, and how from our industry analyst lens, the cascading COVID-19 related supply chain disruptions and subsequent consequences will be an accelerant for the rethinking and realignment of industry supply chain sourcing strategies.
In our Part One Commentary, we provided context and more visible evidence that that ongoing global supply chain disruptions and associated cost increases are not sustainable and will be an added catalyst for the rethinking of existing supply network component sourcing, production and customer fullfilment strategies.
We further explore added indications in the areas of increased supply network resiliency and increased transportation and logistics costs and share our perspectives as to why both of these areas will undergo increased scrutiny.
As we approach the all-important final quarter of 2021, there is even more evidence that supply chain driven cost factors are becoming a broader C-Suite and boardroom concern.
Last week, CFO Magazine published a contributed article penned by Plante Moran partner Lou Longo which has titled The Great Logistics Crunch. This opinion commentary observes that over the past 30 years, the winning formula for U.S. manufacturing firms was to outsource as much production as possible among low-cost sources in Asia and ship the goods across the Pacific. He states that while the model had a good run, U.S. manufacturer’s luck has run out:
“Any manufacturing industry CFO who thinks they can go back to business as usual after this period of logistics sclerosis is misguided. On the contrary, the crisis is a wake-up call for companies to re-think old assumptions and take bold steps to reduce their supply chain risks and bolster their capacity to weather future shocks. These actions are particularly crucial now, given the rising risk that inflation will trigger a hike in U.S. interest rates, posing a double threat of higher input expenses and a jump in debt servicing costs”
Last week, Bloomberg Supply Lines highlighted a Deloitte survey of 96 CFOs among North American firms, most with over $1 billion in revenues which was conducted in August. Upwards of 44 percent of CFO’s responding to this survey indicated that supply disruptions have increased costs by 5 percent or more this year, while 32 percent indicated lost sales due to delays and shortages. Reportedly, more than two-thirds expect their supply sources to become more diversified over the next three years.
A recent KPMG 2021 CEO Outlook survey polling over 500 Asia Pacific chief executive sentiments reportedly indicated that 66 percent of the executives stating that their supply chains were under stress over the past 18 months and subsequently viewed supply chain risk as their top threat to business growth this year.
Threat of Increased Governmental Regulation
For the shipping industry as a whole, our prediction is that the transportation industry will experience more pronounced pushback from global governments and regulators as such cost increases are increasingly perceived as hindering economic and business recovery.
In early January, such pressures were being encountered across the Eurozone sector with both the European Freight Forwarders Association and European Shippers Council requesting governmental regulators to look into disruptions believed to have been caused by global ocean container carriers.
In the United States, recently filed legislation has been titled the Ocean Shipping Reform Act of 2021. This legislation seeks to address “longstanding, systemic supply chain and port disruption issues which have been further exacerbated by the COVID-19 pandemic.” The legislation was especially lobbied by U.S. agricultural and export companies which encountered instances where loaded containers contracted for U.S. export to other countries were not loaded onto container vessels because of higher carrier priorities in the need to reposition empty containers to other global ports. Shippers are also experiencing high demurrage and storage costs because of the overall disruptions in carrier shipping schedules.
A letter sent last week to the two House of Representatives members who sponsored this legislation voiced strong support for passage. The letter was signed by over 50 specific companies and over 90 various industry trade associations including the National Retail Federation (NRF), Consumer Brands Association and the American Association of Exporters and Importers, among others.
A paragraph specifically indicates:
“The legislation will also seek to update key provisions of the Ocean Shipping Reform Act, which has not been updated over two decades. The maritime transportation system has changed significantly during those decades. While some maritime system changes have been positive for the industry overall, we need to ensure that regulations remain applicable to today’s realities. With the creation of the carrier alliances, contraction of the number of carriers in the market, changes to chassis management and others, we believe the time is right for these important reforms.”
Overlaying this legislative effort is the observation that the ten top global ocean container carriers now control 85 percent of capacity and they do so by pooling capacity among three multi-carrier appliances allowing for added influence as to which global ports are served and the frequency of such services. That service model spills over to the movement and availability of shipping containers among global ports. A further optic is that the ocean container industry as a whole is financially benefitting from the ongoing supply chain disruption. By one estimate, the industry is on track to reap upwards of $100 billion in profits this year compared to $15 billion in 2020.
This legislation is already drawing the ire of global shipping, transportation and other stakeholder interests with comments of over regulation or doomed to fail. There is sure to be a considerable amount of discourse as to whether such added regulation is either unnecessary or counter to solving the needs for more agile and transparent transportation networks.
Transportation carriers and logistics services providers may additionally feel that conditions are such that continued lucrative financial benefits can be garnered from the current global supply chain disruptions as they extend into the coming year. All time high ocean container transport costs benefit from bidding wars for needed capacity and shippers and beneficial cargo owners to be forced into the spot market to accommodate shipping timing needs. All modes of transportation are impacted by cascading disruptions. Reports indicated that this week upwards of 70 ships remained anchored in the waters outside the U.S. West Coast ports of Los Angeles and Long Beach awaiting slots to be processed.
Carriers feel bolden either in cherry picking ideal customer contracts, leveraging the advantages of spot market capacity pricing or amassing funds to invest in added automation, new business models or more attractive stock dividend or buyback efforts.
Some carriers now aspire to grow their services into complete door-to-door transit visibility and third-party logistics services, adopting Digital Twin technology strategies to compete with existing tech company start-ups for needs for supply chain digital transformation.
However, the adage for never wasting a significant crisis comes with the added caution of being very careful of the market change forces that are being sewn across the globe. Supply chain logistics and transportation services stakeholders would be wise to be very careful as to where they thread and how they elect to drive public discourse in the current environment. Casting blame on improper planning on the part of shippers or one specific region such as the U.S. reinforces perceptions that carriers are seeking to benefit from disruption and are fueling the bulk of inflationary pressures among businesses and economies.
Needs for New Thinking and New Definition Remain
The pitfalls of global wide supply chain movements are far more painful in cost, service and now business impact dimensions. Indeed, businesses large and small are increasingly being compelled to provide new thinking and enhanced definition to supply chain sourcing strategies under different weighting criteria. That will include supply network resiliency and business risk mitigation in addition to cost.
In the specific area of online B2C retail and B2B commerce, added hikes in transportation and logistics costs add to the influence of Amazon and Alibaba and some other very large online platform providers in dominating online retail, solely because of logistics and last-mile services that turn out to be least costly.
The more visible and meaningful risks associated with the global warming our planet and calls for corporations to be more socially responsible add to catalyst for changed thinking related to industry supply network sourcing strategies.
Our sense is that the forces of change will indeed be more top of mind from many dimensions and the notions of globally extended supply chains and what they imply will undergo increased scrutiny over the next 2-3 years. While we have admittedly believed that such actions would have been underway before the pandemic, the post-pandemic response has laid bare a multitude of sharp rocks not only among industry supply chains, but also the services and conflicting stakeholder goals surrounding globally based supply chains.