October 18, 2016
There are two distinct notions that encompass supply chain visibility:
1. Visibility of products (raw through finished products)
2. Visibility of the financial supply chain in terms of money flow and risk
The Impact of Supply Chain Disruption
Disruption can have a major impact on all parties across your supply chain. It can negatively impact the supply of materials from manufacturing plants through to your customers, as well as alter the flow of money.
Unfortunately, the cause of the disruption often goes unexposed until the repercussions actually occur. By then it may be too late to account for the changes that should have happened to prevent the disruption. This can lead to major financial problems, such as a devastating loss of revenue.
In this blog we will discuss some of these recent events and their impact on supply chains. This is not about supply chain technology disruption.
Major Supply Chain Disruption Events
The most recent event, and one that has likely affected every major shipper worldwide, is the Hanjin bankruptcy. Hanjin is the world’s 5th largest ocean carrier or shipping line.
For the past 4 or 5 years, shipping lines have driven down rates on all trade lanes due to depressed global growth. With burgeoning capacity occurring on ships, rates have been reduced by up to 3 times on some trade routes.
To offset this need to maximize capacity of shipping containers per vessel, shipping alliances were created to transport cargo strategically. However, the problem still remained. Because there were too many vessels running at capacity, they had to start reducing the number of routes.
With the industry already so depressed, something was bound to give. Maersk, along with all the other major shipping lines, have reported losses in recent quarters. Maersk, having significant exposure to both shipping and energy, decided to split in an effort to slow down the losses.
As we have seen it was Hanjin that would falter first. The challenge confronting Hanjin was its debt ratios. Although Hanjin had seen reasonable growth, its revenue per TEU was eroding. It was seeing growth in TEU volumes but not in revenue. This, coupled with rising debt ratios, was the final straw for the company.
However, since they are funded by the state owned Korea Development Bank, Hanjin is still floating. Both the Korean Development Bank and Korean Air Lines are looking to offer a small line of credit to help unload containers. The challenge is that with more 600 Billion won in unpaid debts, this may not even begin to make a dent in what is required to begin the unloading process.
Hanjin’s Disruption Effects Across the Supply Chain
The disruption from Hanjin’s bankruptcy has been significant for many major retailers. Just ask Ashley Furniture. The financial impact on them has been more than $1 million and is likely still growing. With more than 200 containers stranded, this story resonates with many shippers and is a wakeup call for those responsible for managing their supply chain.
Again, it is not just shippers that have been negatively affected by Hanjin’s bankruptcy. NVOCC, Schenker, is now in court trying to recover 46 containers that are sitting on vessels. Having paid the full ocean freight, Hanjin is asking for up to $1m in addition to these payments. Further exasperating Hanjin’s customers, and increasing tensions, are containers that are not incurring demurrage charges but are sitting at sea with the cargo unable to be collected.
Beyond just the movement of goods, there is now a greater need for shippers, as well as manufacturers and retailers, to understand the financial risks associated with the partners and operators within their supply chains.
Natural Disasters Disrupting the Supply Chain
You may remember the Japan Tsunami of 2011, another major disruption to global supply chains.
Japan is the world’s third-largest economy, and a vital supplier of parts and equipment for major industries such as computers, electronics and automobiles. Disruption such as this had a profound effect on supply chains. General Motors, at the time, had to close plants in the U.S. due to a lack of parts sourced from Japan. The cost to General Motors was estimated to be in the millions.
At the time Japanese plants were shut down for days as a result of rolling blackouts and considerable disruption to the transportation systems.
In 2014, the Bardarbunga volcano in Iceland erupted over the course of weeks. The impact in Iceland itself was negligible, however the impact to the continent of Europe was unfathomable. Thousands of flights were halted in and out over a period of 4 weeks. People were stranded and air commerce stopped. The end result was billions of dollars in lost revenue.
These are extreme examples of supply chain disruptions, however, we are now seeing more and more of these disruptions occurring. They can happen because of natural forces, but they can also happen due to company mergers, acquisitions or bankruptcies.
Supply Chain Disruption in the Future
The supply chain world, in relative terms, has transformed fairly quickly over the last few decades. Globalization, industry 4.0, the Internet and technological advancement have been the driving forces in manufacturing. The transportation industry has been a little slower to evolve.
Manufacturers manage a complex network of plants, providers, suppliers and buyers that enable them to remain flexible, operate efficiently and meet customer demands. In an effort to maintain this, manufacturers are looking for real-time visibility across their complex network or supply chain.
It is new technology like integration platforms, 5G and the cloud that will deliver unprecedented capability, scale and affordability. These technologies along with sensors, tags and smart labels will enable real time tracking of all goods, worldwide. Robots, algorithms and analytics will communicate and make smart decisions based on data insights.
The world is changing quickly. Robots, and we humans, must adapt quickly to deal with these destructive supply chain disruptions.
Related: Managing the Risks of Multinational Supply Chains