Navigate Clear of Supply Chain Disruptions

Port Labor Negotiations

When dealing with maritime supply chains it is anyone’s guess how port labor negotiations will pan out or affect inbound and outbound traffic. A prime example of this was the U.S. West Coast port negotiations amongst the Pacific Maritime Association and the International Longshoremen and Warehouse Union.  Imperative to evaluate your supply chain on a constant basis and introduce contingency plans to avoid potential trouble that negotiations such as these might cause. 

As the dock employees and employers prepared for an intricate contract negotiation we need to be aware of the disruption to their supply chain and to the effect on the U.S. economy.  The concern is well-founded.  In prior negotiations the Pacific Maritime Association brought in new technology such as scanners, sensors and bar-coding system to make cargo flow more efficient. But at the same time these improvements eliminated 10 percent of longshoremen positions.  Passionate talks resulted in a 10 ten lockout and only intervention by President Bush settled the lockout. 

While all this occurred in 2002,  a few years later, 2008 to be exact, saw another dispute cause major  interruption.  The Pacific Maritime Association (PMA) charged the International Longshoremen & Warehouse Union with deliberately creating work stoppages at all West Coast ports. The International Longshoremen & Warehouse Union (ILWU) counter charged that individual members were merely exercising their rights to protest the war in Iraq.  Ultimately, the sides compromised agreeing to wage rates and to have automated cargo handling systems.  

Once again in 2014 uncertainty reared its ugly head.  The primary issues for both the ILWU and PMA were healthcare c costs, pensions, etc. Compared to past port disruptions based upon automation and wages these discussions were very time consuming.   

These negotiations resulted in unpredictable work stoppages, increased costs, capacity challenges, transit time delays and lack of supply chain stability.

Not only did each of these three incidents cost the U.S. economy about $1 billion dollars per day but the resulting six months to recover deeply affected retailers, importers, manufacturers and  agricultural exporters.  While companies can track negotiations over time they cannot gain any certainty about the process until contracts have been signed. 

The best way of protecting your business is to assess the impact of potential disruptions on the current state of the supply chain.  Afterwards, create response plans to minimize the landed costs and delivery times.  Be proactive and appraise potential disruptions before they occur is critical and will make a response plan.

There are three phases to this appraisal that need to be followed:

1-      Assess the impact of disruption.  Port disruptions will cause companies to deviate from their existing supply chain strategies.  For example, cost-driven companies may be forced to reroute through different ocean routes which have longer transit times.  This will lead to lack of product availability and lost sales. 

2-      Explore options.  Form contingency plans for the affected product flows. 

a-      Develop alternative sources of supply.  Suppliers closer to distribution centers will avoid material movement via transportation.

b-      Build onshore inventory. Increase safety stock of materials normally routed through ports.

c-       Plan for alternate routes. Map out and assess the viability of these routes.

d-      Evaluate airfreight strategy.   Examine the impact of changing modals from ocean to air by comparing costs, transit time and service.

3-      Prioritize the response options.  The building of onshore inventory and finding alternate routes require long term planning and execution perspectives.  These options should be considered along with three factors: severity, occurrence and detection (SOD).

a-      Severity of impact. A contract negotiation could differ from no impact, a slowdown or a complete work stoppage.  The severity depends on the duration of each scenario.

b-      Occurrence. Use a rating system of 1 to 10. More frequent occurrences will pull the scale toward a ten (most severe and occurrences).

c-       Detection. This is most difficult factor. How can one pre-judge the severity and occurrences of a work disruption? The option here is to build relationships with neutral logistical service providers. 

To minimize the impact of port disruptions firms should monitor developments of the negotiations from both parties, use response planning options throughout the disruptions and find impartial logistic providers for transportation capacity, alternate routes and space for additional inventory. 

The sooner planning is initiated for any and all impending disruptions; your supply chain will be able to withstand the disorder.

CASH into INVENTORY or INVENTORY into CASH?!

A manufacturer may turnover inventory 3.6 times, a retailer can have 4.1 turns and a wholesaler or distributor can show turns of 4.4.  What these companies, albeit, in different types of industries, have in common? TOO MUCH Inventory!  Where they may carry it – raw materials, work-in-process or in finished goods – is not necessarily the point.  The point is they have too much money tied up in inventory.

From an accounting outlook, inventory is an asset – a buffer against uncertainty.  The complete cycle time of inventory, when needed, when received, sold and sales payment is received is vital to a company’s success. The longer the cycle time, the larger the amount of inventory will be carried against that uncertainty.

Inventory turns are important.  While the turns mentioned in the opening paragraph look good on the surface it is important to understand that turns should be compared to rate of days paid.  In other words, when the company receives payment for the goods. The above firms are getting paid every 90 days. Would you like to get paid only every 90 days?  This leads to a large capital investment of inventory earning nothing at a large carrying interest rate.  Why do many companies still operate in this manner and accept this kind of performance?

In addition to the capital or carrying issue, excess inventory influences service and operations. Unnecessary freight costs were incurred to bring products into facility.  Other costs like manpower hours, warehouse put-away and larger warehouse space than is needed are increased.  A cycle count program, which is based on Pareto’s Law and ABC analysis, will continually count these items to the company’s detriment.  

A business does not automatically or deliberately decide to have too much inventory on-hand as part of their forecasting plan.  The reasons for excess inventory are many but some of the more common ones are the following:

1     Loss of sales fear: this is the fear of not having an item to sell as opposed to not being able to sell the item.  This is where companies will put in a hedge factor into their inventories.

2      Price deals:  Many companies purchase due to “great” price deals. Buy in excess of what is needed or will deplete in a reasonable time frame due to a price they could not pass up. Is it still a good deal when it sits in your inventory forever?

3      Write-offs: Firms are hesitant to write off the inventory and take a hit to their profit and loss for the year.  

4      Metrics to measure: there are no metrics or key performance indicators implemented to measure and manage inventory – inventory turns, days in inventory, inventory aging and inventory velocity and no “ABC” analysis.

5      Supplier performance: suppliers are not managed even the ones who fail to ship on time or less than a pre-arranged percentage of the purchase orders. Extra time and extra inventory are built into the system to compensate for delivery issues. 

These are only a few of the reasons for excess inventory. Inventory buildup is not the result of one cause but many create the overabundance of inventory.  These causes reflect the lack of priority, processes and control of the inventory.

Excess inventory is not an acceptable situation and needs to be eliminated as quickly as possible. There are some options to carry this out:

1     Strategy and process: develop a process and procedures to manage inventory. Sustainability for this must come from the C-level management, otherwise a frustrating endeavor.  Included in this, is the development of performance metrics for inventory (some mentioned above), implement lean to add value-added processes, study the entire supply chain from inbound to outbound and make inventory part of the company direction as it pertains to customers, sales and profits.

2      Distribution network: determine the optimal number of DC’s for today’s business. 

3      Supplier performance: ensure it is a key part of the inventory management and sourcing strategy.   There is more to vendor selection than just low prices.

4     Effect of global sourcing:  long transit times across the oceans affect the inventories – in costs – that companies carry. 

 Increasing inventory turns and controlling lead or cycle time is vital to a firm’s profitability and long term growth.  However, reducing inventory and preventing excess inventory does not happen overnight.  It took a while to realize the inventory overage, so it will take a fair amount of time to correct.  This action will require focus and diligence.