Archive for Global Trade

At this point, experts are not saying that China has slipped into recession. But recessions are defined in the rear-view mirror, after they have already occurred. Further clouding the issue is the fact that leading economists have long questioned how accurate China’s GDP data really is. Companies would be well advised to start doing contingency planning assuming that China is in recession.

Further, companies need to also ask not just how a Chinese recession impacts their China business, but whether a Chinese recession, or even just a substantial slow down, will tip the world’s economy into recession. Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management says that a continuation of China’s slowdown in the next years will likely drag global economic growth below two percent, a threshold he defines as a world recession. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010.

Recessions

One of the worst things a company can do when the world is tipping into a recession is to react too slowly. The key process for matching supply to demand is the sales & operations planning (S&OP) process. But if companies are using order history to forecast demand, they will be stuck with too much inventory. Demand driven companies, companies that have visibility to demand at the point of sale (POS), can sense downturns in demand much, much quicker. But accessing POS data is difficult in the US, only a few very large retailers provide this data. Accessing it in China will be all but impossible for many companies.

Companies that can spin their S&OP process more quickly will be better positioned to deal with a downturn. Many companies, do S&OP on a monthly basis. Increasing numbers of companies are beginning to do this process on a weekly basis. A few companies, actually match supply to demand in leading product segments on a daily basis.

Daily S&OP is beyond what many companies can do. But at an inflection point like this, some sort of daily planning is imperative. After the last global recession, I talked to one company that had implemented daily inventory planning meetings. In December 2008, it told all of its suppliers to stop all shipments for four weeks until it had a chance to recalibrate its demand plan. The company also moved quickly to resize the company by laying off workers, slowing production, and shutting some factories. As a result of these actions and its new supply chain applications, the company was able to come within five percent of its financial plan every quarter, even during the worst of the downturn. The company’s stock price, like many others, tumbled with the recession. But following the recession, the company’s fiscal discipline led to much stronger stock performance that its peers.

The next generation of S&OP is called integrated business planning. It is focused more tightly than traditional S&OP on how particular demand/supply balancing decisions impact revenues, profits, and cash flows. But during a recession, “Cash is King.” The cash conversion metric becomes an increasingly important KPI for the global supply chain team. To be successful, a Cash is King Initiative needs to drive performance not only in the global supply chain organization but also across the sales and finance teams. This end-to-end effort helps to insure that Inventory turns, Days Sales Outstanding, and Days Payables Outstanding targets are met with a goal of driving down the cash conversion cycle.

But in a recession, you have to be careful about this kind of initiative’s impact on key suppliers. If you slow down how fast you pay them, their financial integrity may be impacted. In a recession, companies have more to worry about than just demand. They also need to carefully monitor the financial health of their suppliers. One fairly simple tool companies use is a two by two matrix where on the vertical axis, a company places suppliers in boxes based on total product revenues linked to specific supplier components, the degree to which key components are single sourced, and the geopolitical and environmental risks associated with where a supplier operates. On the horizontal axis, the company assesses the financial robustness of its partners. If suppliers are placed in the top right hand corner of the matrix (high supply risk/high financial risk), procurement executives should require these suppliers to develop and present business continuity plans. And like with demand, companies should be monitoring these companies’ financials more frequently.

In conclusion, companies with flexible, responsive supply chains will weather a global recession better. These companies will be posed to buy distressed assets at bargain basement prices, grab market share when the recession ends, and outperform their competition in financial markets.

Categories : Global Trade
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The Pacific Rim trade deal, formally known as the Trans Pacific Partnership (TPP), obtained a great deal of media coverage in June as Congress debated legislation aimed at providing the President with “fast-track” approval authority. The intensity surrounding debates and opinions led me to believe that this proposed multi-lateral trade agreement would soon come to fruition. Not even close.

Source: Office of the US Trade Representative

Source: Office of the US Trade Representative

Examining the Details?
Logistics is inexorably linked to international trade. At ARC, we conduct research on logistics processes and technologies that directly support international supply chains. Some of the technologies include global trade management (GTM) systems, transportation management systems (TMS), and supply chain planning and network design tools. Due to the potential impact of this trade deal on these markets, I decided to dig deeper into the details to obtain insight into the imminent changes slated to occur. The scope and structure of the agreement are available on The Office of the US Trade Representative for those interested in viewing the agreement framework. However, obtaining specific details on the proposals is proving to be more difficult. Although details are not yet available, there are some features worth noting.

Reduction of Trade Barriers and Development of International Supply Chains
The TPP participating countries are working to eliminate many of the tariffs placed on each other’s exports. This will serve as an important step toward increased integration of multi-national supply chains through the reduction in government imposed competitive barriers. Examples of current tariffs outlined on USTR.gov include a 27 percent Vietnamese tariff on US made auto parts, a 40 percent tariff on poultry entering Malaysia, and tariffs from a number of countries on US made textiles.  The removal of government duties such as these is likely to make customs management less complex for companies and will also shift the competitive landscape toward those with comparative advantages and increase international trade volumes. The increase in global trade is likely to increase international sourcing, extend production lead times, and increase demand for supply chain visibility solutions that provide insight into upstream supply chain events and status changes.

Rules of Origin
The elimination of tariffs between TPP countries opens the opportunity for non-participating countries to use TPP countries as a transshipment intermediary, or a “pass through” to avoid tariffs and duties. To assure compliance, the TPP countries are looking to develop a common set of rules of origin to determine whether or not a given product or item originates within the TPP region, and therefore qualifies for preferential treatment.  It is questionable how quickly these rules will be developed, as the WTO harmonization program was originally expected to be completed in 1998, but is still ongoing due to unforeseen complexities.  However, specific rules such as the yarn forward rule of origin is being proposed to assure that only properly sourced items will receive the preferential duty treatment. The complexity of the rules of origin and ongoing updates to the agreement will assure that item classification software will remain a critical application for those companies that produce complex products and engage in substantial international trade activities.

Intellectual Property Rights
The World Economic Forum publishes an annual global competitiveness report leveraging its Global Competitiveness Index (GCI). The Index categorizes the most advances economies to be those driven by innovation. It should therefore be no surprise that the US is seeking strong intellectual property rights and protections to be included in the TPP. Patent, copyright, and trademark infringements are major concerns for companies that invest heavily in research and development. Increased protections will help alleviate theft and counterfeiting concerns and encourage additional investment in product innovation. Pharmaceutical IP provisions are specifically mentioned as an area of focus for the US. Also noted is US-Japan bilateral negotiations on motor vehicle trade, IP rights, and phased out US tariffs on Japanese automotive products.

Conclusion
The Trans Pacific Partnership is still a deal in the making. It is a complex, multi-lateral negotiation that is likely to hit a number of speed bumps going forward. Reduction of trade barriers, standardization of processes, and international supply chain integration are all key tenets of the proposed agreement. NAFTA trade flows increased from $290 billion in 1993 to over $1.1 trillion in 2012 (about 7 percent CAGR by my calculation). If NAFTA trade flows are an accurate barometer, then the TPP shows promise to propel pacific trade forward at a rapid pace.

Categories : Global Trade, Logistics Trends
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SHamiltonA shortage of drivers in the trucking industry is creating some painful dilemmas for transportation buyers and logistics managers. With the average age of a truck driver now in the late fifties and a dwindling interest in the trucking career path among young workers, it’s getting harder — and more expensive — to find drivers to carry long-haul loads. Truck drivers are required to spend long hours away from home without the company of co-workers. And trucking can be a grueling, sometimes dangerous job. As a result, the number of truckers is decreasing and, consequently, costs for their services are rising. Some loads are even being left to linger on docks while companies wait for truckers to become available.

But there’s good news for those looking to offset this shortage and increased cost. You have an attractive, time-tested alternative to consider: intermodal shipping. Intermodal shipping allows you to transport your freight in an intermodal container (sometimes called an ISO container) or vehicle using multiple modes of transportation, including railways, barges and trucks.

Here we look at the advantages of intermodal freight transport and what you’ll need to do to make the switch.

1. Services Are Easier to Attain
Intermodal opens up other avenues of transportation that are more readily available so trucking services can be kept to a minimum. While trucking is still part of the intermodal system, it’s easier to find a truck driver to do a short day run versus one who will provide long-haul services.

2. It’s Less Expensive
Utilizing intermodal transportation is also significantly cheaper than relying exclusively on long-haul trucking. The bulk of the miles for an intermodal shipment will be logged on a train, which is far less expensive than over the road trucking.

3. It’s Better for the Environment
Intermodal is also more environmentally friendly than long-haul trucking because large numbers of freight containers are moved together using the most efficient modes of transportation.

While intermodal transit time can take a little longer than long-haul trucking, a third-party logistics provider can help you plan ahead and build the extra time into your schedule. And if you’re accustomed to shipping delays caused by waiting for long-haul trucking services to become available, you may find that intermodal is actually faster than your current shipping solution.

If your company faces the challenge of changing the mindsets of production/logistics staff and convincing them to plan for different transit times, an intermodal provider can help. A 3PL can walk them through the process, address any hurdles they may face and customize an intermodal plan for their unique shipping needs.

In short, if the distance between your plant and the consignee is greater than 700 miles, you should inquire about intermodal shipping. At CLX Logistics, all of our intermodal customers are saving money versus shipping over the road.

 

Stephen Hamilton Jr. is the managing director of ChemLogix Global (a division of CLX Logistics), which encompasses CLX Logistics’ intermodal and international service offerings. He began his tenure with CLX Logistics in 2001 as the manager of the company’s liquid bulk intermodal business.

Last week negotiators from the P5+1 (or EU+3) and Iran developed a preliminary agreement on Iran’s nuclear program. This opened the door for Iranian sanction relief and presents the question, “How will Iran’s international trade change, and what partners will benefit?”

The World Bank lists Iran’s 2013 GDP at $369 billion, making it the third largest economy in the region, behind Saudi Arabia and Turkey. Iran’s largest export is petroleum, representing about 80 percent of product exports, and China, India, and Turkey are the largest purchasers of Iran’s goods. (As a note, the US Census shows that the US exported $182 of goods in 2014, and imported $0). Expanding Iran’s options to sell its petroleum internationally could have dramatic effects on the global oil market and substantial effects on that for natural gas as well.

Oil Transportation
Market participants expect a lag time between the sanction lift and oil market effects. In fact, a 5 percent increase in the price of oil just two days ago (April 6) was partially attributed to the expectation of longer than expected time-to-market for Iran’s oil. However, there appears to be plenty of Iranian oil just waiting to be shipped. Estimates range from 7 to 35 million barrels of Iranian oil that is currently sitting either onshore or in supertankers waiting to be shipped. At the same time, Iran appears intent on opening up its ports to international shipping firms. The head of Iran’s Ports and Maritime Organization stated, “Serious talks are underway with shipping companies from across the world, including Europe, on a weekly basis.” In addition, Shipping Company of India is revisiting its recently dissolved joint venture with Islamic Republic of Iran Shipping Lines. The reestablishment of this joint venture is especially substantive due to India’s status as the second largest importer of Iranian oil, after China.

TAP TANAP SCP Schah Denis from Wikimedia

TAP TANAP SCP Schah Denis from Wikimedia

Gas Transportation
In 2008, after a brief disruption of Russian natural gas supplied through Ukraine, the European Commission (EC) launched a strategy to increase the diversity of its natural gas supply sources.  As part of this strategy, the EC proposed the Southern Gas Corridor. This proposal was subsequently envisoned as a pipeline from Azerbaijan through Turkey, named the Trans Anatolian Natural Gas Pipeline (TANAP). Iranian gas supplies were considered a potential extension to the project.

This past September, Reuters quoted A European Commission source that stated, “Iran is far towards the top of our priorities for mid-term measures that will help reduce our reliance on Russian gas supplies.” The article further stated that impediments included the sanctions and a lack of infrastructure. Investors consider a pipeline through Turkey to be a practical option. Turkey views itself as a potential “energy hub of the region” connecting the energy supplies to its east with the demand to its west. The Turkish President is scheduled to make a visit to Tehran next week where he is reportedly expected to express interest in an expansion of Iran-Turkey trade from the current $14 billion.

The potential removal of international sanctions on Iran offers much in the way of opportunities for trade partners, especially India, Turkey, and China, as well as fuel sources for Europe. It also offers promise for international ocean carriers and gas pipeline infrastructure design and construction firms. The time horizon for these opportunities ranges from near-term for the effect on global oil prices, to mid/long-term for gas pipeline infrastructure completion.

ARC Advisory Group (Logisticsviewpoints.com) periodically publishes a study on the global trade management (GTM) systems market. Trade compliance, international transportation execution, and trade visibility represent the core functionality offered by these software solutions. The trade compliance functionality often includes up-to-date trade content that assures users comply with the constantly evolving international trade regulatory environment. ARC is currently developing this study. Please don’t hesitate to contact us for additional information.

Categories : EU, Global Trade, Petroleum Industry
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ecommerceDuring the second half of 2014, Clint Reiser and I worked on an extensive survey examining the omni-channel commerce landscape. One of the key findings from that research was on the growth of e-commerce. According to our research, the lion’s share of revenue is still driven by the store. Brick and mortar locations accounted for approximately 67% of all revenue for our survey respondents. However, when looking at revenue growth, our research tells us a different story. Over the last five years, survey respondents indicated revenue growth of 6% from the brick and mortar channel compared to 47% for e-commerce. Looking ahead, respondents forecasted flat growth for their brick and mortar channel compared to 40% growth for e-commerce. This is a pretty dramatic shift in the retail landscape. It shows that the convergence of channels will be more important as omni-channel operations continue to evolve. It also poses a significant problem for retailers: how to deal with the last mile.

Fedex_ups_uspsLast mile delivery is the final leg of the supply chain. It is the moment the customer finally receives their order. And it is generally the most expensive, least efficient, and most problematic part of the overall delivery process. In the US, last mile deliveries have their own unique set of challenges. Mostly they come down to cost issues, and a retailer’s desire to control the final moment of the brand interaction. There are a few main categories for last mile deliveries. First, is parcel delivery. UPS, FedEx, and the Postal Service are the three main players in this area. These companies are delivering thousands and thousands of packages daily from retailers around the globe to customers front doors and offices. The shipping rates have gone up recently, and these companies provide very little control over the last mile for retailers.

Amazon FreshAn alternative to typical parcel deliveries is in use by Amazon. To control the last mile, and to utilize its massive distribution centers, Amazon has rolled out its own private fleet of trucks to make deliveries. For Amazon, it creates more flexibility in delivery timeframes and reduces overall shipping costs (as Amazon is no longer paying UPS, FedEx, or the Postal Service for deliveries). This is not the first time Amazon has looked for creative ways to complete deliveries. As recently noted in Logistics Viewpoints, Amazon is one of a few companies testing drones for deliveries. The company has also experimented with bike messengers in New York City for small deliveries as well as delivery lockers for customers to pick up items at their convenience.

Another alternative to using the big parcel companies that has taken off is the use of crowdsourced delivery services. Deliv, for example, is a crowd sourced delivery option that stretches across multiple retail segments. This company uses a smartphone app to alert pre-qualified drivers of a pending delivery. The driver picks up the merchandise from the retailer and delivers it to the customer. Instacart is another example of crowdsourced delivery. Based in San Francisco, this company connects personal shoppers with customers to deliver local groceries. Both of these companies are proving that the crowdsourced model is growing. And all of these models show that while they may be expensive, they are doing a good job of satisfying the customer during the last mile.

last mile indiaBut outside of the US, it is another story. The growth of the e-commerce economy is great for retailers, and allows more people to shop for the goods they want, but it poses significant challenges to the last mile. The world’s two most populated countries, which bring an awful lot of buying power, face significant challenges. In India, for example, Morgan Stanley estimates that Indian online sales will hit $100 billion a year by 2020, up from $3 billion in 2013. The difficult part is figuring out the infrastructure to make home deliveries viable. Trucks have a difficult time navigating the crowded streets and the postal service is notoriously slow. One new option in India is the use of couriers to deliver goods purchased from Flipkart, Snapdeal, and Amazon India. But, in order to actually deliver these products, couriers are turning to smaller modes of transportation. In many places, delivery trucks are simply too big to navigate. Instead, couriers are using motorcycles and scooters to carry giant backpacks filled with 100 pounds+ of merchandise. These drivers navigate narrow streets, potholes, and erratic drivers to deliver everything from soda to laser printers. Most people agree that without the use of couriers to deliver these goods, the e-commerce market as a whole would grind to a halt in India.

china last mileChina faces its own set of challenges. The e-commerce market is growing exponentially in China and vast improvements have been made to establish more operations centers across the country. These improvements have made it possible for residents in rural China to shop online and receive orders in a timely fashion. But the last mile still remains an issue. One of the biggest roadblocks for Chinese retailers is the government policy banning freight vehicles and gas-fueled and electric tricycles in downtown areas. This poses a number of problems. First, delivery people can be detained, have their vehicles seized, and receive fines for violating regulations due to the pressure of making a delivery timeframe. Secondly, to combat the costs of tickets and seized vehicles, many companies are simply driving up their delivery costs. These costs can certainly be burdensome to the customer, but at the same time, they are necessary if they wish to receive their package. And third, if the last mile problem is not solved, and vehicles are seized or delivery personnel are detained, the packages may never be delivered. According to the operator of one such delivery service, “if the last mile problem is not solved, up to 1 million packages awaiting delivery could be stockpiled in cities around the country.” This shows just how serious the last mile problem, and the associated challenges are in China.

In conclusion, the global e-commerce market is growing. In fact, according to eMarketer, global B2C e-commerce will reach $2.3 trillion by 2017. This explosive growth brings about new opportunities, new customers, and new challenges. One of the biggest challenges will be controlling the last mile. Logistics infrastructure, economic and political regulations, and competition have proven to be roadblocks for many companies. But as the market grows, the solutions will too.