Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Iran and International Trade Expansion

EU | By •

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.

The US West Coast Port Debacle: Porter’s Five Forces at Work

Global Trade | By •

On Friday, the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU) announced a tentative agreement on a new five-year contract covering workers at all 29 West Coast ports. This announcement comes after months of labor negotiations and West Coast port congestion that has caused widespread shipment delays felt across the nation and across industries.

Courtesy of Michael Kelley http://www.mpkelley.com/
Courtesy of Michael Kelley http://www.mpkelley.com/

My colleague Chris and I have included ongoing updates on the gridlock in our Friday news posts. This past Friday I referenced a Gizmodo article that included some truly remarkable photos of the congestion at the Ports of LA and Long Beach. This got me thinking about the longer-term prospects for the stakeholders of the West Coast ports.  I have a personal interest in economics and business strategy; so I almost automatically look at the dynamics of these situations from the perspective of Porter’s Five Competitive Forces.

Michael Porter - The Five Forces That Shape Industry Strategy
Michael Porter – The Five Forces That Shape Industry Strategy

Existing Competition Among Ports
I consider the West Coast ports to be one entity in this situation, since the ILWU is established along the entire coast. Therefore, other ports outside of ILWU territory can be considered alternatives, or “competitors.” I found it interesting that the ILWU chose to disaffiliate itself from the AFL-CIO (since the International Longshoremen’s Association is affiliated) back in 2013, as I always thought that “strength in numbers” was a key tenet to collective bargaining. Anyway, it is clear from the press and from statistics that a notable amount of shipments are being diverted away from the West Coast ports to more reliable alternatives such as Gulf and East Coast ports. (In fact, The Panama Canal has been another beneficiary of these ship diversions because the ships coming through have a greater number of loaded containers, generating greater fees for the canal operators.) There is evidence that discretionary West Coast cargo has been getting diverted for some time. A PMA annual report states that East Coast and Gulf ports have gained market share at the expense of the West Coast. And they point to reliability concerns after the 2002 coast-wide port shutdown as the likely cause. With the Panama Canal expansion, the Gulf and East Coast ports will become an increasingly viable alternative for the West Coast going forward.

The diversion of shipments to alternative ports is driven by the importers’ desire to receive the goods in a timely manner and on a reliable basis. Diversion causes an increase in shipping distance and cost. But at this time diversion is providing time and reliability advantages. Importers are likely to continue to shy away from the West Coast until they obtain sufficient confidence in the reliability of the ports.

Threat of Substitutes to Labor
Aside from the reduction in work caused by diverted shipments, the ports are becoming increasingly automated due to general modernization, capacity constraints, and the increased use of containers that lend themselves to standardized processes. In 2013, when the ILWU disassociated with the AFL-CIO, the Seattle Times referenced  a letter from the ILWU president stating that they faced the “challenge of the ports soon being run by robotics and computer-operated machinery over the next five to ten years.” This is likely to be true, as the ports need to stay competitive and increase throughput. But I also think that while some jobs will be replaced by automation, others will be created to support the new technology and processes in use.

Technology is currently being deployed across the West Coast ports. The recent TracPac container terminal at the Port of LA is the West Coast’s first to be completed terminal automation project, according to PMA. It is a $510 million upgrade that is composed of 10 projects and includes the construction of an automated intermodal container transfer facility and equips each terminal with on-dock rail. West Coast terminals are reportedly also considering the deployment of additional automation including automated guided vehicles and automated stacking cranes. An example of the use of AGVs in terminals is APM Terminals new facility in Rotterdam that will use battery-driven lift AGVs for container transport within the yard and eight STS cranes that will be controlled remotely.

So the shipping lines are being pressured by volumes and economies of scale; the West Coast port operators are being pressured by the alternatives being created by the Panama Canal and alternative ports; and the ILWU is being pressured by the port operators. It sounds to me like competitive forces are alive and well on the Pacific.

Why Russia’s Agricultural Import Ban is more Supply Chain than Economics

Regulations | By •

In July the US, the European Union (EU), and select other countries instituted a number of trade and financial sanctions against Russia for its involvement in the separatist movement in neighboring Ukraine. The EU banned the export of military technology and certain technology used for oil and gas exploration and production in deep water, the Artic, and shale projects. In retaliation to these and other sanctions, Russia announced an import ban on food and agricultural products that the New York Times reported would include all beef, pork, fish, fruit, vegetables and dairy products from the US, EU, Norway, Canada, and Australia.

Supply Chain Modeling Output Example Courtesy of LLamasoft (Click on Image to Expand)
Supply Chain Modeling Output Example
Courtesy of LLamasoft
(Click on Image to Expand)

I have read a number of articles analyzing and forecasting the likely economic effects from these trade sanctions. For example, the Russian supermarket X5 Retail Group is expecting slight price increases from the trade ban. And there are signs that the adversarial environment is taking its toll on the economic sentiment in Germany, as the ZEW indicator decreased to a 20 month low. Many of the economic concerns are amplified by the already unstable growth profile of the European economies, as these sanctions may be just enough to send the economies out of growth mode and into recession. However, it appears to me that much of the economic concerns surround the possibility of additional sanctions in the future. I also find the Russian ban on agricultural imports to be timely, given that it is harvest season in the temperate latitudes of the Northern hemisphere where Russia is located, and the country’s domestic produce can likely support its own needs for the next few months.  Tim Worstall, the author of a Forbes.com article made the following comment that resonated with me (emphasis mine):

“The ban on imports of EU food into Russia doesn’t mean that the food will simply rot. Instead it means that there will be a shake up of trade patterns but largely the same amount of food will still be produced and also eaten, just specific types and production from specific areas will be consumed by different people.”

This statement largely captures why I believe that at least the Russian agricultural sanctions are primarily a supply chain disruption rather than an economic disruption. There are and will be economic damages to individual and groups of businesses. I don’t mean to downplay the economic harm. However, I do believe that businesses will adjust to the trade sanctions and this will be done primarily through supply chain adaptions. As Tim Worstall stated, in the medium term, food is “fungible,” meaning it is interchangeable. If Germany can’t sell its beef to Russia, but it can sell its Beef to Middle Eastern countries, and Middle Eastern countries can sell their beef to Russia, then Middle Eastern countries can export their beef to Russia and import from Germany. This specific example may occur to a limited degree, but I am using it to illustrate the point that supply chain networks will adjust, some trade lanes will become more congested, while others will become less utilized. I see this situation as a large, government induced supply chain disruption.

This situation really offers opportunity for supply chain network designers, logistics providers, and carriers to apply their skills to adapt to the new global trade constraints and match supply with demand. Robust supply chain scenario analysis can allow organizations to determine financially feasible opportunities to match their goods with buyers. Transportation providers can adjust their routes to meet shifting demand.  There will likely be short term disruptions, but global supply chains will adapt, and astute logistics providers will see the opportunity to capture what is offered by newly created opportunities. And on a micro-level, in the short term, companies with fast and flexible supply chains will even be able to minimize the short-term disruptions.

Can You Rely on Freight Forwarders for Trade Compliance?

Global Trade | By •

Can you rely on freight forwarders for trade compliance?

To answer that question ARC interviewed trade professionals from 12 shipping companies. All of them agreed that you cannot put your fate into the hands of freight forwarders when it comes to compliance. If goods are misclassified, or if shipments go to restricted parties, the shipper is considered the Importer of Record, not the freight forwarder. And it is the Importer of Record that pays the fines and penalties imposed by a governmental authority. The exception is some Latin American countries where there is joint liability between the shipper and the forwarder. For egregious offenders, those penalties can run into the millions of dollars, as was the case for one of the companies we interviewed.

A director of trade compliance at a High Tech company provided the best explanation of why companies need to retain control. He believed that compliance is not high on the list of what forwarders care about, even though they say it is. The forwarders his company works with care about what percent of goods get delivered in a particular time window, because their pay is linked to that metric. He has seen many shipment declarations that he knew contained multiple products with different classifications, but the forwarder declared just one.

How do shippers that work with freight forwarders retain control? In a posting last month, I wrote about how Leggett & Platt’s GTM solution completely automates the information flowing between suppliers, freight forwarders, customs authorities and various internal departments. All the data elements necessary for an Importer Security Filings (ISFs) automatically propagate into the document without the need for rekeying. The solution is so automated that the company has all the information it needs to do self-filings if it wants. Leggett & Platt, however, still prefers to have freight forwarders as a layer between itself and customs. The forwarders provide a second set of eyes for compliance, and if there is a mistake, they provide local representation with foreign customs agencies. John Wainwright, the Vice President of Customs Compliance at Leggett & Platt, thinks the ability for freight forwarders to provide these services makes them worth the money.

But how do shippers without a GTM system control the process? Hu Huang, Director of International Logistics & Customs Compliance at Kichler Lighting, told me she sends their freight forwarder a CD that lists all their items and HTS codes on a quarterly basis. Therefore, any mistakes made at filing are likely due to Kichler, not its partner. Kichler also sends purchase orders to its forwarder via EDI and those POs have unit prices on them. The forwarder verifies the code, quantity, and shipping windows. Thus, Kichler’s partner serves as an important check in the process.

Another company used a process similar to Kichler’s, except it used a portal. Internal folks classify the products and brokers can access this data by entering SKU data into the compliance database on a portal. The system provides the trade classification for the broker. If a product has not been classified, the brokers can contact the company’s trade people and get a classification. Every few months, the company pulls data out of the broker system and checks trade classification and country of origin data. It puts this data in a pivot table and audits the work. The analysis shows that the partner’s work is 99.7 percent accurate. If there are any problems, the company contacts customs and submits a revision. (Customs compliance ownership belongs to the shipper —  i.e.,  the Importer of the Record. This is a responsibility issue, not an automation or system issue. In any event, Customs only looks for the Importer of Record, not the freight forwarder.)

Some of the shippers interviewed believed they could use freight forwarders to help classify goods and still retain a large degree of control. One shipper retained an internal trade staff, yet used two forwarders to augment their staff. They worked with only the largest and most reputable of brokers; they audited a sample of their broker’s classifications, depending on the product category, either every two weeks or monthly; they engaged in extensive co-training exercises when the forwarders were hired; and they continue to bring the two trade staffs together to examine processes and issues on an annual basis. They described this as a two way street where the company and the forwarders learn from each other. In certain areas, the shipper has become better at compliance by interacting with its partners.

In short, the answer to “Can you rely on freight forwarders for trade compliance?” is no, but the methods used by shippers to retain control are very different.

Leggett & Platt’s Approach to Global Trade Management

Global Trade Management Solutions | By •

A report from American Shipper shows that trade policy is driven largely by either the supply chain or compliance group. I assumed when I read this that the supply chain folks mentioned would be mostly logistics personnel. However, I had a conversation with John Wainwright, Vice President of Customs Compliance at Leggett & Platt, a company that makes a variety of components used in various industrial and consumer finished products. At Leggett & Platt, trade compliance reports up through procurement, and John makes a compelling case for why this makes sense.

Leggett & Platt bought a Global Trade Management (GTM) system 10 years ago from a software vendor now known as Amber Road. The solution was implemented at the same time as an ERP solution from PeopleSoft (now Oracle). The GTM solution and the ERP were tightly integrated to support an end-to-end international procurement process. The company designed the procure-to-pay process first, then bought and implemented the two systems simultaneously. The end-to-end process for both domestic and international procurement is the same, although customs processes generated by the GTM are, of course, not necessary for domestic procurement.

Leggett & Platt’s process includes developing supplier relationships and managing those suppliers on an ongoing basis. This procure-to-pay process includes: placing purchase orders (POs) with suppliers, having the supplier strictly limited to working within the existing process, and having any substantial changes outside the boundaries of the original PO be implemented only with changes to the actual PO on the procurement side (e.g., “you asked for 1000, we can only make 950 by that due date”). The PO-centric environment internally creates the commercial invoice, as well as various other customs documents. Then the various documents, reports and alerts flow from the system to the appropriate supply chain parties (suppliers, customs brokers, LSPs, the company’s procurement and supply chain planning departments, customs authorities, etc.) as needed at the correct point in time.

This process is designed to dramatically improve data integrity across the extended international supply chain. Data in one document automatically populates other documents without having to be rekeyed. Suppliers access their data through a secure portal. The supplier needs to add relatively little data to the PO screen they are using — the Stock Keeping Unit and terms of purchase are already auto-populated. The supplier just adds that it will ship this number of items on this particular date.

Legget & Platt International Supply Chain Solution
Legget & Platt International Supply Chain Solution

Leggett & Platt’s International Supply Chain Solution
This technology and process creates the essential data elements – importer security filings and routing instructions – that in turn need to be passed on to other key players in the supply chain. This also means that the company has all the information it needs to do self-filings. However, Leggett & Platt still prefers to use customs brokers as an additional compliance resource for its interactions with customs. In the company’s view, freight forwarders/customs brokers provide a second set of eyes for compliance, and if there is a mistake, they provide valuable local representation with foreign customs agencies. The company believes a forwarder’s ability to provide such services make them worth the money, even though compliance control is ultimately Leggett & Platt’s responsibility.

So what were the benefits for Leggett & Platt? Because there is no supplier paperwork –- everything is filled online through a secure portal — the whole process of invoicing and issuing payments is much cleaner and faster, and it is supported by many times fewer people. And, of course, with more accurate data comes Days Payables Outstanding (DPO) reductions. The portal generates the pack list, so the warehouse receiving process is much more accurate.

Further, as the government came out with new regulations for importer security filings (ISFs) and conflict minerals, the company found it easy to comply. For ISF, the only thing Leggett & Platt needed to do was get a correct bill of lading in a timely fashion. For ongoing conflict minerals needs, it already has much of the required data available for its suppliers in place.

Leggett & Platt’s solution has made it a better partner to its suppliers. The company has almost completely eliminated expensive Letters of Credit among suppliers. Letters of Credit are driven by fear of late payments or the need for financing. Because invoicing disputes virtually disappear, suppliers don’t need to worry about late payments. For suppliers that need financing, the visibility provided by this solution makes them a better banking risk and enables Leggett & Platt to help them work with some of its financial partners.

John tells me it is impossible to put an exact payback number on all this. But it is a better and cleaner procurement process, and there is big money in doing procurement better.

In conclusion, the American Shipper article argued that “best practice” would be to have trade compliance reside in the compliance department. Leggett & Platt’s experience shows that there is a very strong argument for having it report up through procurement.

This Week in Logistics News (April 29 – May 3, 2013)

Global Trade Management Solutions | By •

It’s the beginning of May and the Red Sox have the best record in baseball. I know it’s a long season, but after a disappointing two years, I can’t help but feel good about this team. If they remain competitive the rest of the season, I think the team will prove something that is also true in the workplace: a few rotten apples can spoil the bunch, so it’s sometimes necessary to remove them from the team, no matter how talented they are, if you want to reach your true potential.

In other news…

Descartes opened up its wallet and made another acquisition, this time KSD Software Norway AS, a Scandinavia-based provider of electronic customs filing solutions for the European Union. Descartes paid approximately $33 million for KSD, which currently generates about $10 million in annual recurring revenues. Here is an excerpt from the press release:

KSD brings more than 1,300 customers to Descartes’ Global Logistic Network, with the majority of these companies based in Scandinavia. KSD provides its customers with customs declaration, security filing, transportation management and freight forwarding technology solutions.

I’m a big proponent of network-based solutions, especially for global trade management processes. As I wrote a few years ago in “Beyond Software: The Role of Content and Connectivity in Global Trade Management,” connectivity is perhaps the most underrated aspect of global trade management, but its importance cannot be overstated. Simply put, global trade processes do not occur in a vacuum. A cross-border shipment typically involves the exchange of information with about 25 external parties, including customs agencies, freight forwarders, brokers, banks, regulatory agencies, transportation providers, and suppliers. Establishing and maintaining connectivity with a dynamic set of trading partners, as well as keeping up with customs modernization efforts around the world, is a challenging task that few companies would call a core competency — which is why I believe network-based solution providers are a good option for many companies.

In 3PL news, Con-way reported net income of $14.0 million for Q1 2013, compared to $25.6 million for the same period last year. Net revenue for Menlo Worldwide Logistics increased 0.9 percent in the quarter, while Con-way Freight reported a 0.4 percent decline in revenue and Con-way Truckload reported flat growth compared to Q1 2012. Here are some comments from Douglas W. Stotlar, Con-way’s president and CEO:

“On a consolidated basis, our first quarter 2013 results were below our expectations and therefore were disappointing. However, the first quarter also provided further validation that our efforts to expand margins are gaining traction and moving in the right direction.”

 

“Adverse weather and fewer working days affected load count and efficiency [at Con-way Truckload]. The rate environment remains stable and we look for Con-way Truckload to benefit from low driver turnover and consistent operational execution.”

In technology news, CargoSphere introduced Floodgate Quote Refresh, “a freight rate quoting enhancement that allows logistics service providers (LSP) to quickly and efficiently refresh quotes with timely and accurate freight rate updates.” According to the press release:

Day in and day out, freight forwarders and NVOCCs (non-vessel operating common carriers) prepare origin/destination freight rate quotes for their customers. They are burdened with the task of tracking and managing complex, non-stop freight rate changes and carrier amendments for an enormous range of global trade lanes. Quotes must reflect accurate, up-to-date pricing including scheduled rate hikes, surcharges and fees. Managing this rate complexity with manual processes is simply too time-consuming and inefficient. Floodgate Quote Refresh eases this burdensome task by automating the update process. Customers open the floodgates on their quotes and let the new rates rush right in for a faster, more efficient operation.

According to the Bureau of Transportation Statistics, “the value of goods moving between the U.S. and its NAFTA partners by all modes of transportation decreased by 1.0 percent from February 2012 …Goods moving by truck, pipeline, and air each declined, while rail and vessel transportation both increased from the same month last year…From February 2012 to February 2013, the value of freight carried by truck fell by 2.5 percent while the value of freight carried by rail increased 0.8 percent.

I haven’t looked at the data closely, but is this another sign that shippers are moving more freight from trucks to rail?

In other freight news, freight volumes declined in April according to the Cass Freight Index Report. Here is an excerpt:

North American shipment volume and overall freight expenditures both slumped in April, following strong showings in March. The drops are not unexpected given the slowing state of the economy overall. It follows the pattern we have become accustomed to in the last several years − a strong surge raising expectations followed by an erosion of the gains. This month’s declines are significant because once again both the number of shipments and dollars spent have fallen below same month 2012 levels, and the number of shipments is even lower than the April 2011 level [emphasis mine]. This is indicative of the slow growth experienced since 2010 that has created a very narrow bounding range for each measure, with a small difference between the lows and the highs.

As I’ve said before, there are so many mixed signals out there, I have no idea what’s going on with the economy — which is why, to use a bunch of buzzwords, companies need to have timely and accurate visibility to demand and supply signals to enable agile and responsive supply chains.

Finally, sometimes it takes a disaster to drive companies to collaborate better. According to an article in the Wall Street Journal, “Wal-Mart Stores Inc., Gap Inc., and Hennes & Mauritz AB met with about 30 Western retailers, labor groups and nongovernmental organizations to work on a plan to prevent industrial disasters like last week’s deadly building collapse in Bangladesh.The discussions included creating a clearinghouse of factory-inspection results, so companies can see where other retailers stopped production over safety concerns, participants said. The group plans to publish the results of the talks in May.”

Time’s up. Have a happy weekend!

Song of the Week: “Fake Plastic Trees” by Radiohead

Note: Descartes and Con-way are Logistics Viewpoints sponsors.

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