Thursday, October 9, 2008

Supply chain war stories from the front line

An interesting e-mail from a Sloan alum, Reggie S. on shocks rippling through the supply chain. He gave me permission to post it, and it's pretty valuable for those of who read this blog and are thinking about any type of business plan or strategy that requires manufacturing and logistics. Interestingly, when I talked to Claude Robert, CEO of Montreal's Robert Transport, he saw many of the trends that Reggie points out as presently affecting the way companies do business.

Here's the e-mail from Reggie:

"I just wanted to share some information with those of us involved in the supply chain/ops side of things that may be helpful. We have just been discussing supply chain issues in the company and with others in the industry and we have noticed a few problematic trends, not specific to my employer but for the logistics industry as a whole.

*Companies experiencing disruption from supplier bankruptcy are becoming increasingly common. I had to struggle through this earlier this year (hint: not fun). Make sure you know that your company has all of its assets accounted for on paper and agreed by both parties. Also, have appropriate proof of payment and ownership. Finally, make sure an alternate source is identified. We got out of it OK. Arguing with bankruptcy lawyers about why not to auction your stuff is about fun as arguing with divorce lawyers about why they should not take your assets (though I have never been divorced, thankfully). Suppliers are also increasingly asking for more lenient payment terms or advance payment since their short-term credit facilities, commercial paper or bank lending, are drying up.

*Bringing things in from East Asia is getting ridiculously expensive. First, a container from China has gone from something like $3k to $8k over the last year and a half or so and second ships are starting to slow down to save fuel and sometimes even “skip” ports they don’t feel they have enough to drop off/pick up economically. Also, the end of the Chinese VAT tax rebate means exporters are usually paying about 8% to ship stuff out. The RMB appreciation is another pressure. Adding up freight cost, inventory holding cost, safety stock needs, VAT tax, & broker fees among other things have made some classes of products even out much of the cost between US and China sources. Some of our supplier machine shops are reporting large orders coming back from China to be done domestically.

*In ground logistics in the US, the industry is getting worried about a potential capacity shortage for truck shipping. 6-9% of all US truckload carriers have gone out of business since the start of the year and reportedly at least 1,000 overall have bit the dust this year including a few big ones like Jevic and Alvan Motor Freight. In 1Q 2008 reportedly 45,000 trucks left the market. Despite being gouged by fuel surcharges, people are openly saying the industry is going to shake out to the point where there will be a shortage instead of surplus in truck capacity which of course means higher prices for everything (again) and maybe bigger problems in distribution overall.

*As an indicator of things to come, container freight growth between East Asia and North America is pretty much flat and not expected to increase, if not decrease, in the near future. The biggest freight lanes with growth have been East Asia<->Europe and East Asia<->Middle East (not including oil).

No comments: