The Ever Changing Automotive Supply Chain

Supply Chain

The global automotive industry is undergoing big changes. Emerging markets, customer preferences and technology are all playing a huge role in this transformation and its effects will result in redesigning of supply chains. As the automobile industry transforms, competition will increase and from unlikely businesses such as Google and Apple along with niche automobile manufacturers such as Tesla and startup company, Faraday Future. It is likely as competition increases, consolidation and joint ventures will follow as the Detroit 3 – GM, Ford and Fiat Chrysler, seek to maintain their leading roles within the industry.

 

Emerging Markets

According to the International Organization of Motor Vehicle Manufacturers (OICA), worldwide motor vehicle production increased 1.1% from 2014 to 2015 with the biggest year-over-year percentage gains reported in Africa, up 16.1%. In fact, J.D. Power & Associates note that automobile manufacturers typically build facilities in or near markets where they sell vehicles and as a means to increase efficiency, lower costs and customize offerings to local preferences. As such, J.D. Power observed that a shift occurred around 2010 in which emerging markets led by China, India, Brazil and East Europe accounted for slightly more than half of the vehicles sold worldwide. This trend has continued as middle class levels expand allowing for more consumer consumption and demand.

 

Customer Preferences

Brand loyalty has little meaning for many of today’s customers. Instead, social responsibility and a ‘green environment’ are increasing in importance as well as safety and lifestyle changes. According to a recent Deloitte survey, the Gen Y demographic group are more willing not to own an automobile if amenities and services are within walking distance. In addition, if this group does purchase automobiles, a majority indicated a preference for those automobiles with alternative engines – and yes; Gen Y’s are willing to pay for alternative engines.

 

Technology

Perhaps one of the fastest changes occurring within the automotive industry is the implementation of technology. According to AlixPartners, over the past decade, there has been a shift from traditional, hardware-centric in-vehicle infotainment and communication systems to software based connectivity solutions. The Connected Car Forum expects that by 2025 every new car will be connected in multiple ways including embedded, tethered or smartphone integration.

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The Pain of Demurrage Costs

The Pain of Demurrage Costs.

At Crescent Air Freight we spend a lot of time focusing on the hidden costs of logistics. We get clients and prospects to see what bad logistics can cost them far beyond the freight invoice by examining the impact on cash flow, profitability and brand equity. The concept is simple: poor logistics decisions (usually based on price alone) can result in delayed deliveries which can cause delayed payments, lost sales, and lack of product availability in overseas markets. However, there’s also a very real cash cost that comes with improper logistics planning and it’s known as demurrage.

demurrage costs

Demurrage, also known as detention, is a cost resulting from extended use of equipment, warehouse space, or other transportation resources. Basically, it’s a penalty charged for using someone else’s equipment or space. For example, railcars accrue demurrage if they are not unloaded in a timely manner; Vessels accrue demurrage if they are forced to wait at a port beyond a standard free time allotted by the port authority; Truckers charge detention when vehicles or drivers are made to wait for cargo pick up or discharge.

The problem that arises is when a demurrage or detention scenario arises, cargo owners often find their goods being held at ransom. Demurrage or detention charges are almost always expensive and your goods cannot be released until those charges are paid. Even worse, since such charges accrue on a daily basis, there’s very little room for negotiation and the final cost can change based on the time of receipt of payment!

NEW INCOterms CTAUnlike standard INCOTERMS which sets protocols for “who pays what”, the unfortunate reality is that demurrage costs are basically paid by the party who wants their goods so badly, they’ll even pay a penalty just to get them. Honestly, this can be avoided…it doesn’t have to happen. The solution to the problem, almost always lies in being prepared ahead of time and planning for eventualities. Matters like vessel detention or railcar detention tend not to be very relevant to the supply chains of our customers. However, port detention of export or import containers, airport storage of air freight shipments, and carrier demurrage charges for ocean freight containers gated out beyond “free time” are all examples of demurrage that occur on a daily basis. Obviously, this imposes heavy costs on cargo owners and can be avoided with better logistics planning.

Solutions to the demurrage/detention problem begin with the proper planning of a shipment and all the formalities associated with the arrival or departure of those goods. For example, we once had a client who wanted their export cargo out of their warehouse and into a container 7 days prior to the cut off date for a vessel headed to Australia. The problem was that the steamship line only allowed the container to be pulled out for loading purposes 5 days prior to the vessel cut off. Our client was unaware of the fact that they would have to pay a penalty for being 2 days too early. The solution was rather simple: we researched the details of the fees, calculated the cost of the extra storage and asked the client if they were willing to pay for it. Guess what happened? The client said “no”! They were very appreciative of us taking the time to research the cost associated with their plan and helping them to understand their true costs. However, had we not done this, it would have resulted in a few hundred dollars of charges that their trucker would have to pay upon returning the container. That’s right, the trucker would have been on the hook, and that’s one of the tricky parts of demurrage costs – it doesn’t just affect the cargo owner, but can also create headaches for their vendors or customers.

At other times, the problems can be caused by documentation mistakes in customs paperwork resulting in cargo being held at the port of destination. In such an instance, the delay might be caused by the exporter or importer of record, and it is the local customs authority that raises the objection, but the storage expense accrues at the airline terminal and often has to be advanced by the customs broker or trucker collecting the cargo at time of release. We once saw a client lose tons of a perishable food product in Turkey this way just because their logistics service provider at the time neglected to get documentation approved in advance of the shipment. That one step alone would have prevented thousands of dollars in unnecessary freight charges plus the confiscation of product.

Sometimes, the shipper can choose to take the cost of demurrage or detention as a cost of doing business. It can be strategic at times, although still a cost. Remember the client who tried to ship too early? Well, some months later they actually asked us to pull a container ahead of the free time allotted by the vessel operator just so they could have their product shipped out before the end of the quarter. In this scenario, it was actually beneficial for them to pay for detention rather than to have the good be in inventory at the start of a new month.

And, every once in a while, we get to see a cool scenario unfold where the shipper gets the last laugh. For example, at various times during the ISAF war effort in Afghanistan, ocean freight containers were delayed at the border crossing between Afghanistan and Pakistan. At certain times of heightened tensions, the delays stretched into weeks and demurrage applied to the shipping containers to the tune of thousands of dollars. The liners demanded these charges of truckers when the unloaded containers were brought back to the port and shippers, including many U.S. companies, were forced to pay penalties that were vastly more expensive than the cost of freight or even the merchandise itself. However, with some crafty logistics support on their side, some shippers simply decided to buy their own containers and ship them full of goods. The cost of buying a “shipper owned container” is higher than the cost of using one owned by the liner, but shipper owned containers are not liable to “in & out” demurrage costs. In effect the shipper’s were treating the containers as disposable and not bothered if they came back at all. This actually was the most cost effective solution to countering exorbitant detention costs that shippers were forced to pay.

These are just a few examples of how logistics costs can have a devastating impact on order profitability. However, the good news is that many of these problems can be avoided if your logistics service provider takes the time to understand your business, specific product requirements, and your import/export goals.

 

 

 

 

What is the greater cost: Stockpiling Inventory or Missed Sales?

What is the greater cost: Stockpiling Inventory or Missed Sales?stockpiling inventory warehouse

Logistics professionals are on the front lines of the fight to maintain market presence and minimize costs of product supply. One of the main issues faced is whether or not to stockpile inventory in an overseas destination or risk losing sales due to lack of inventory in that market.

Most large organizations have implemented good demand planning practices which enable them to plan production and shipping schedules. A client of ours, who is a global leader in the tobacco business, had such an efficient schedule in place for their business in Turkey that they were able establish a precise order flow one year in advance. Their demand planning was so effective that they almost never required air freight service for this market and could tell months in advance exactly how much product was to be shipped in any given week of the year.

On the other end of the spectrum, another client of ours who is a global leader in the foods business had a simple mistake in their demand planning process force them to de-list product from the market in Singapore for an entire month until they could send over the product needed to meet demand by ocean.

So you want to stockpile?

Here are some factors to be considered when deciding whether or not to stockpile inventory:

  • Failure to have inventory in market leads to obvious decreases in sales, cash flow and profitability.
  • Storage of inventory, especially overseas, is often expensive and eats directly into profit margins.
  • Inventory shortages often have to be met by expedited modes of transport and often specifically by air freight which is generally expensive and adversely impacts profit margins.
  • Excess product can be subject to damage, theft, obsolescence or other misuse which can result in direct and substantial losses in terms of write offs, discounted selling prices or additional processing costs.

So what to do?

The primary determinant of whether or not to incur increased transport or storage costs is profit margin. Coming back to the example of our client in the tobacco business, even though they enjoyed tremendous operational efficiency in their exports to Turkey, this client often relied on air freight to meet demand in the Far East. They also used air freight for new brand or product introductions and generally developed a market by using air freight first and then gradually shifting logistics to ocean freight. Very often the excess air freighted product was warehoused overseas in markets such as Japan and Hong Kong. Their tolerance for such expense came from the substantial profit margins they enjoyed. Equally important was their branding. The client believed that the cost of not having product in the market was not only high in terms of lost sales, but also in terms of damage it would do their brand in overseas markets.

But what if we don’t have the profit margins to support such costs? Let’s re-visit the example of our client in the foods business. Despite having a very good demand planning system in place as well as the resources that came with being one of the world’s largest corporations, this client ran into a problem that could happen to anyone: human error. Apparently, one of their demand planners in Singapore simply forgot to enter her orders before leaving for vacation. As a result production never got the orders and nothing was scheduled to ship by ocean. By the time the problem was detected the client had no other option but to use air freight to meet the demand of 30 tons of their merchandise in the local market. We assisted the client by providing a combination of cost effective air freight, and even created a schedule to stagger the shipments in such a way as to spread the cost out over several weeks just to minimize the cash flow impact they were about to feel. After careful review of the numbers, however, the client decided that their profit margins simply did not justify them incurring the cost of air freight. For 30 days they had no goods to sell in Singapore. From a profit and loss standpoint the choice was clear and that was the client’s main deciding factor. We presume that the loss far exceeded benefits that they may have realized in terms of brand equity and market share.

In both instances, what we have learned is that there are direct, indirect, obvious and discreet costs involved in managing international business. One of the best things a logistics professional can do is to learn what matters to their organization not only in terms of delivery but also in terms of profitability, cash flow, market-share and brand equity.

Logistics professionals need to consider the following when deciding whether or not to stockpile inventory:

  • Cost of domestic/overseas warehousing of excess inventory.
  • Cost of insurance of stored excess stored inventory.
  • Cost of air freight for excess inventory versus cost of ocean freight & storage of excess inventory.
  • Impact on company profitability and cash flow from absence of product in market.
  • Importance of product availability to the corporate brand.

So when you are in a position where you need to decide whether or not to stockpile, don’t hesitate to reach out to us and talk with one of our Logistics Professionals to make sure you understand all of the associated costs which will allow you to make the best, most informed, cost effective decision for your company.

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What Big Data & Little Data Mean To You in the Freight & Logistics Process

What Big Data & Little Data Mean To You in the Freight & Logistics Process:Big Data in Logistics

Possibly the most important business technology issue of the moment is known as “Big Data”, and its ability to transform an organization by allowing employees at all levels of the organization to make better decisions. Simply defined, Big Data is the compilation of such a large set of data points that cannot be defined or analyzed using existing “low tech” tools. For shippers this essentially means that an Excel spreadsheet of shipments in process just isn’t enough anymore to determine how well your logistics process is moving. In a recent paper written by a large logistics consulting firm, it is stated that the sustained success of Internet powerhouses such as Amazon, Google, Facebook, and eBay provides evidence of a fourth production factor in today’s hyper-connected world. Besides resources, labor, and capital, there’s no doubt that the information feeding Big Data and the use of such data has become an essential element of competitive differentiation.

In our July 24, 2014 blog post we addressed the importance of supply chain metrics, and this is precisely what lies at the heart of Big Data. Metrics are established based on past data generated from transactions or shipments and from this data companies can determine how well their supply chain or logistics process is performing. For example, a simple metric like “On Time Delivery” is calculated by measuring the time it takes an order to depart a shipper’s facility and arrive at the customer’s location. The decision about whether the performance is good is based on previous shipments in most cases.

While Big Data is thought to be a senior management issue, the fact is that the data points being studied at the highest levels of an organization originate from the day-to-day operations of the business. Let’s take a look at an example of how Big Data collection begins in the daily workflow of logistics personnel and how they can use it to improve their performance and hence their business.

Wasted Space – a client of ours, one of the country’s largest foods business, had state of the art distribution centers around the country. They needed such infrastructure to support their massive supermarket and big box store retail business. As a result, their international operations were something of an afterthought. Shipping personnel were simply taking cases of product, shrink wrapping them onto a skid and declaring them ready for export.

As we mentioned in our post on dimensional weight, shippers need to be aware not only of the weight of their product but also the dimensions of the cargo being tendered for air transport. As a result, the shipper was tendering cargo of 45 – 100 kgs on skids that had a volume weight of 275 kgs, effectively doubling or tripling the shipment charges.

By doing a simple analysis of the disparity between gross weight and volume weight (Big Data points) we were able to explain to the shipper that the cost of over-packing their material into cardboard boxes was well worth the time and savings in shipping charges. Within a matter of weeks the customer began to realize a reduction of air freight costs in excess of 50%. The Big Data analysis here entailed nothing more than looking at the discrepancy in weights and coming up with an alternative. Logistics managers can perform this sort of analysis in collaboration with their freight forwarders any day and without high level/hi tech solutions being deployed.

There is no doubt that Big Data gets very sophisticated and has the power to really revolutionize a supply chain. It can increase effectiveness exponentially, however, the fact remains that the data often originates at the warehouse level and can be a part of the daily process of logistics professionals at all levels of the organization.

Clearly the time is at hand to tap the potential of Big Data to improve operational efficiency and customer experience, and create useful new business models. It is time for a shift of mindset, a clear strategy and application of the right data analysis techniques. Those companies that do early will enjoy a disproportionate advantage over their competitors.

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“Nearshoring” Opportunities on the Rise

“Nearshoring” Opportunities on the Rise

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While there can be no denying that China has established itself as the world’s “manufacturing floor” over the past two decades, there are many reasons to suggest that U.S. companies are starting to see benefits from bringing their production back to North America. Factors such as labor productivity, transportation costs and energy prices are playing a significant role in eroding the benefits companies have enjoyed in sourcing from China. Also, as U.S. firms are becoming increasingly concerned about protecting their intellectual property, “nearshoring”—or bringing production closer to the point of use—becomes attractive as the risk of having important intellectual capital stolen is decreased. Having the capability to manufacture close to where ones customers are located can also increase customer responsiveness and decrease turnaround times, making the supply chain more predictable.

The United States is in the midst of narrowing its gap with China in overall manufacturing costs. Some have estimated that by as soon as 2015 the US could be in a cost parity situation with Chinese manufacturers. Many individual states now offer significant incentives such as state income tax rebates which reduce the aggregate cost of production thereby offsetting the lower wage benefits that come from China based manufacturing. As a recent example, the state of Nevada awarded electric automobile manufacturer Tesla a package of $1.25 billion in tax incentives to build a battery manufacturing facility in their state. Tesla will be able to operate in the state essentially tax free for the next 10 years. This is notable not only for the size of the package, but for the nature of the commodity.

China is a leading source of battery supply to the world, however the case for manufacturing in the United States is compelling. U.S. labor productivity remains substantially higher than that of many countries. In the case of China, a recent study by Boston Consulting Group suggests that adjustments for labor productivity make Chinese wages only 30% cheaper than U.S. wages. As wages are generally estimated to be 20%-30% of product cost, it becomes apparent then that U.S. manufactured goods are roughly 15% more expensive than Chinese made product and that is before accounting for transportation and logistics costs. Hence, true cost advantages to manufacturing in China may only be 10% or less.

Energy prices in the United States have contributed to the drop in production costs thanks to the countrys’ boom in natural gas and oil production. As a result, the energy costs of a U.S. based factory are amongst the lowest of any industrially developed country in the world.

In recent years, Mexico has also established itself as a source of cost effective production, especially for the North American market. Eighty percent of the cars built in Mexico are exported to other countries, about two-thirds of them to the United States. “I can export duty free to North America, South America, Europe and Japan,” says Volkswagen of Mexico Vice President of Corporate Affairs Thomas Karig.

“There’s not another country in the world where you can do that.” Over the past decade Mexico’s wage gap with China has almost completely vanished. As a result, manufacturers, particularly in the automotive sector, have been investing heavily in building manufacturing capacity in Mexico. The country’s proximity to the vital U.S. market also allows it to benefit from lower transportation costs.

While most of the variables that go into deciding whether to “offshore” or “nearshore” production are influenced by macroeconomic issues, logistics service providers can play a significant role in advising clients on the benefits of selecting a particular country for manufacturing. Insights into transportation costs, logistics infrastructure in foreign countries, import duties in the United States, the existence of free trade agreements, and other such matters are part of a logistics provider’s daily process and can be instrumental to U.S. companies in determining the value of a country as a market for sourcing or overseas sales.

Of course, challenges remain. Companies would have to rebuild their supply chains and identify people with the right skills to handle increasingly sophisticated automated operations. Also, U. S. tax policy makes firms reluctant to repatriate profits earned elsewhere, making it more difficult to find the resources to invest in manufacturing operations.

With all these things considered, manufacturing has a chance to stage a comeback in the U.S. and as with all things, getting in on the ground floor is an exciting prospect for the import/export industry.

 

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Hurricane Katrina Stopped Gulf Fish Deliveries: Could Your Business Survive Such a Disaster?

Hurricane Katrina Stopped Gulf Fish Deliveries: Could Your Business Survive Such a Disaster?Hurricane Katrina and it's impact on Supply Chains at the time

Many of us responsible for the smooth functioning of our company’s supply chain view
risks mostly as they relate to shipments in progress. However, the risks to our supply chains and logistics functions can take many forms. Many are beyond our control such as interruptions created by weather, natural disasters, political unrest and labor problems.

Others risks, however, are more directly related to the business cycle, and though less frequent, they too are significant. These include unexpected increases in demand, economic crisis or business failure of one or more market participants or suppliers.

How to Plan for Supply Chain Risk

Planning during or just before an interruption occurs is often a futile exercise. Effective planning takes place before interruptions occur, and is a specific and analytical process that creates protocols which prepare your company for all types of disruptions.

Include the Best People in The Planning Process

When exploring risks to the supply chain, and the appropriate responses, make sure to include your most relevant personnel in the process. This means involving not only senior executives but also capable operational staff as well. Senior management has a strategic overview but may not have operational insights that are relevant to the daily operations of the business. Those responsible for day-to-day operations have their finger on your company’s pulse and are the stakeholders within your organization most directly impacted by work disruptions. Consider warehouse managers, customer service managers, manufacturing shift leaders and the like as their views help bridge the chasm between theoretical planning for disasters and the real tasks the company faces in working around the problems that disasters create.

Assess Risk & Prepare a Process

Preparation is the key to withstanding the pressures imposed by a supply chain disruption. The first step in being prepared is to establish a periodic review process that examines a company’s supply chain in depth and identifies potential weaknesses and threats. Think of this as a SWOT analysis for your supply chain.

Key items to consider include assessment of raw materials and inputs that are needed for production, identification of key suppliers and vendors and – from a logistics perspective – ports/airports of origin and destination.

The importance of a specific, analytical and detailed overview is critical at this stage of your planning. Here is an example of why –

In normal times sales and profitability data show that a customer in Japan places large, high yielding but sporadic orders for your product. This type of customer draws the attention of personnel at various levels of the organization and is likely to have high priority even in a supply chain disruption review process. However, easily overlooked in the planning process is a smaller, perhaps less profitable but frequent customer in Hong Kong. In the event of a supply chain disruption it would be prudent to have plans to continue support for the smaller customer from Hong Kong. While the Japanese customer is of greater value in normal times, it is the smaller customer in Hong Kong who relies on your product on a regular basis, and also one who orders (and hence pays) with greater frequency. Being prepared to continue supplying such a customer will likely avoid hidden costs of disruptions such as decreased cash flow while also ensuring an enduring relationship with a regular customer.

Develop Alternative Service Providers

On time delivery is critical to those you supply and worth the premium your company pays for direct delivery services. Nevertheless, there is a need for developing relationships with 2nd and 3rd tier service providers who can offer alternative transit choices.

Assume that your company receives an important raw material from an overseas supplier. The cargo is normally imported by ocean through the port of Long Beach, California. However, due to an earthquake traffic to the port has been disrupted. An advance plan for this scenario would include an ocean rate contract that includes service to the ports of Oakland and Tacoma. Typically the same vessel calls on all three ports and for very little price difference, hence most steamship lines will often readily add these ports to a service contract. Furthermore, adding these destination ports into your contracts with a steamship line during normal conditions can save your company from the additional costs likely to be imposed by negotiating during an emergency when demand at nearby ports is likely to surge. Use of alternate ports may increase the cost of domestic transport to your factories and distribution centers; however, keeping your brand on the shelf and in the consumer’s eye is well worth it.

Collaborate With Your Freight Forwarders and Other Third Party Logistic Providers

If you do not include these groups in your planning process you are increasing the risk of your plan’s failure. While your plan may call for a freight forwarder to warehouse extra finished goods inventory in advance of a supplier’s strike, failure to include them in the planning process, and failure to update them on the likelihood of the strike will most likely cause the plan to fail as the freight forwarder would be in a reactive position without a complementary plan in place to support your company’s emergency plan.

One good solution is to form a crisis management task force that includes all the stakeholders in the supply chain. Since disruptions sometimes develop a life of their own, activate the task force members directly involved in any situation and keep others informed. If disruptions spread, other members join without the need for playing catchup.

Involving business partners in your planning works well. Under certain circumstances logistics service providers can allow for shared access to raw material and inventory systems providing all stakeholders with simultaneous updates on the flow of goods and materials.

This process is gaining popularity in the supply chain industry and is often called the “control tower” approach to managing the supply chain. Cloud computing has allowed smaller service providers the same abilities that were once the domain solely of global service providers and hence allows even small logistics providers to play a vital and leading role in a large supply chain.

Large Company Advantage

Companies having several layers of suppliers and transporters and sub-contractors are fortunate. They can work with them to develop advanced predictive models that may even have statistical foundations. The statistical models serve the same function as flight simulators for pilots and show how a number of events impact the supply chain and company operations and how well decisions from the crisis management team work to lessen or eliminate incident impact.

The task of preparing the supply chain for disruption is doable and critical to your company’s success. It is important to keep in mind that while you are far from a port that is earthquake prone, for example, your suppliers may use it to get products to you. Carefully analyze every step of your supply chain, identify weaknesses and ways to overcome them. Check your emergency plans annually and partner in this effort with your logistics vendors.