Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions.
Part Two in this series summarized Prediction One related on what to expect in the global economy and Prediction Two, what to expect in procurement costs.
Part Three summarized Predictions Three, continued momentum associated with the resurgence in U.S. and North America production, and Prediction Four, talent recruitment and retention as a continued challenge.
Part Four addressed some unique industry specific supply chain challenges in 2014.
Part Five predicted increased implications regarding current supply chain social responsibility strategies and practices.
Part Six explored the implications of increased supply chain risk on global sourcing strategies in 2014.
In this posting, we dive into Prediction 8 related to expected global transportation developments and shifts, along with Prediction 9, increased momentum in the “Internet of Things”.
Prediction 8: Industry Re-structuring of Global Transportation Surface and Air Networks Increases Momentum in 2014 as Carriers Adjust to Realities
In 2013, global ocean container lines, air freight and surface transportation carriers experienced the presence of shippers that continue to elect, because of budget reasons, more economical and less priority prone transportation options. The reasons were obvious for shippers. A continued uncertain global economy, along with the effects of severe recession in the Eurozone motivated shippers to rely on more economical and cost effective transportation modes. In surface transportation, a rather volatile environment of actual vs. stated tariff rates had some shippers opting for spot market tendering to take advantage of less costly rates than those contracted. Improved planning of supply needs coupled with broader inventory visibility across the global supply chain provided more confidence among shippers to opt for regularly scheduled surface transportation.
Shifting patterns for product sourcing and increased momentum for near-shoring of production and distribution is further contributing to the trend. Supply Chain Matters featured a number of commentaries regarding global transportation industry structural shifts, rate trends, and what we viewed as a failure of the industry to deal with blatant realities of quickly changing global sourcing and trade patterns and too much capacity chasing lower transport volumes
Global transportation and logistics giants FedEx and UPS incurred a series of consecutive quarters where capacity allocated for priority air movement was significantly underutilized because of the shipping trends noted above. Each of these carriers in turn, have taken proactive measures throughout 2013 to re-structure or re-align excess capacity dedicated to priority movements and at the same time, initiated efforts to compensate for lost revenues and potential profits with either rate increases or further expense reductions. Both carriers have announced rate increases ranging from 3.9 to 4.9 percent for ground and air shipments in 2014.
In ocean container segment, the picture is far more complex and troubling. According to the United Nations Conference on Trade and Development Review of Maritime Transportation 2013, growth in 20-foot equivalent units (TEU’s) slowed significantly in 2012 with a volume increase of 3.2 percent. This was down from 7.1 percent from 2011, and 13.1 percent in 2010. Final volume numbers for 2013 may slightly exceed 2012. Multiple years of excess shipping capacity is now exacerbated by the ongoing delivery of massive new mega-ships designed to carry far more containers at a lower overall cost. As an example, over the next two and one-half years, industry lead Maersk alone has plans to introduce into global service 20 new mega-ships, capable of transporting up to 18,000 containers with up to 35 percent less consumption of fuel.
A troubling global economy and certain cutbacks in global trade have not help. The problem has been compounded by carrier optimism that global shipping movements would eventually return to growth. An overall reluctance to maintain excess capacity has led to hemorrhaging balance sheets for shipping lines with multiple unsuccessful and some successful attempts to increase shipping rates to compensate for lost revenues and excess fixed debt and operating costs. In the latter part of 2012, the industry anticipated 4 to 5 percent volume growth only to discover that demand turned a negative 2 percent.
In January of 2013, the CEO of industry leading Maersk revealed in an interview with the Financial Times that the carrier was losing $8m-$9m daily. By October of 2013, the CEO of Maersk indicated in an interview with business network CNBC that “the worst is over for the global shipping industry but so are the glory days.” That was clarified to a statement that most goods that can be shipped by ocean container are already being shipped with little silver bullets of shipping on the horizon. We viewed that declaration as an industry milestone.
As we pen this prediction, the top three ocean container lines have a proposal before multiple global regulators to pool capacity and global scheduling under the termed P3 Network. Another industry consortium, the termed G6 Alliance announced plans to expand their cooperation in certain global routes. Each of these initiatives require regulatory approval and there is lots of speculation as to whether governmental agencies will sign-off on such actions involving the management control of hundreds of vessels across key global trade routes. On December 5th,news broke that sixth ranked carrier Hapag and 20th ranked CSAV were engaged in merger discussions, If both lines were to merge, the combined entity would rank fourth globally. In would as well motivate other potential player moves.
For all of these reasons, industry supply chain should anticipate increased momentum in the re-structuring of global transportation capacity and networks. What is unclear is the eventual impact on transportation rates or schedule performance, either from a positive or not so positive perspective. An optimistic scenario is that container lines and air freight carriers are successful in re-structuring networks to maximize efficiency, service, newer fuel-efficient equipment and lower overall operating costs, to benefit of shipping rates. Another scenario, particularly for the ocean container segment is more accelerated consolidation and fallout of marginal carriers. Efforts to expand consortium influence on control and management of capacity and rates will not be well received by regulators and influential shippers.
The bottom line prediction is that procurement and shipping leaders should expect continued global transportation developments during 2014 and close relationships and contracting arrangements with trusted carriers will be important during this period. However, there may continue to be cost affordable transportation options by venturing into the spot market.
Prediction Nine: Internet of Things Picks-up Considerable Momentum
In April 2012, The Economist magazine declared the coming of what it termed as “The Third Industrial Revolution”, a new era from the second industrial revolution that began in the 20th Century with the advent of assembly line manufacturing in the United States. This new era is enabled by the increasing digitization or individualization of manufacturing processes. Cited were continued breakthroughs in 3D printing, individualized or additive manufacturing techniques, faster and more sophisticated engineering and manufacturing simulation and the increased benefits derived from the “Internet of Things” or machine-to-machine (M2M) technologies. And, it is not just a revolution in manufacturing, but in how services related to manufactured products will be delivered.
The Internet of Things provides a new era of interconnected and intelligent physical devices and/or machines that will revolutionize supply chain processes related to production, transportation, logistics and service management. IDC recently predicted 30 billion autonomously connected endpoints and $8.9 trillion in revenue by 2020. It will profoundly impact both product and service focused supply chains in months and years to come and we predict more increased momentum in 2014.
Automotive and truck OEM’s continue to design and deploy smarter on-board technologies affixed to Internet connectivity in motor and commercial transit vehicles facilitating far more responsive and efficient methods to track operational status, route vehicles, or revise routing on a real-time basis.
In 2013, General Electric made a major product design and deployment commitment to what it termed as the Industrial Internet. The conglomerate characterizes industrial internet as a combination of sensor, software, analytics, data visualization and other technology tools integrated into complex machines such as turbines, locomotives, aircraft engines and other equipment. Industrial Internet is further described as providing contextually relevant information in a near real-time basis that can monitor, control or modify actual conditions of industrial assets. Readers might recall current GE television commercials that provide visuals of aircraft engines communicating to maintenance teams current operating performance parameters and alerting to when maintenance will be required to avoid downtime. In its initial announcement, GE announced partnerships with a variety of other information technology and services firms including Amazon Web Services, AT&T, Cisco, Intel, Pivotal, among others and reinforced the emergence of new and previous unheard of vendor ecosystems that bring together manufacturing OEM, technology and service firms collaborating on enablement and delivery of more innovative products and services enabled by Internet real-time connectivity and more powerful analytical tools.
M2M facilitates needs to synchronize manufacturing devices and/or networks to the pace of market demand and further enable mass customization of products. It further accelerates asset intensive manufacturer’s needs to enable broader product platform-as-a-service services that help customers to avoid large up-front investments in capital equipment in favor of forms of “pay by the hour” leasing and service agreements over multiple time horizons. It helps manufacturers to build annuity type revenue and profitability opportunities.
We believe that M2M and smarter machine investment and development efforts will expand beyond just the United States but to other geographic regions and will feature more announcements from well noted global based players in both manufacturing, services and technology circles. Following typical investment and development cycles, efforts will continue toward most promising business cases for M2M, and we believe that will center squarely on the capital equipment intensive services management segment. We expect other developments to come in the logistics and transportation services segment.
Expect other announcements from global players such as Siemens which will lead to additional partnerships as influential industry players, both classic manufacturing and tech-focused, jump on to building market momentum. We agree with current industry participants that security remains an important obstacle to broader deployment and it will be important for 2014 development efforts to focus on stronger network and data related security measures. A further open question is whether more organizations are ready to leverage M2M networks for product innovation, or have the resources and where-with-all to do so. For the time being, GE has a huge leg-up in this area.
This concludes Part Seven of our Supply Chain Matters 2014 Predictions series.
Keep your browser focused on Supply Chain Matters as in an upcoming posting, we conclude this series with our final predictions related to information technology in 2014.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
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