The supply chain is no place for cowboy rhetoric
“The Fed no longer assumes that supply chain issues will unravel throughout the year,” Federal Reserve Chairman Jerome Powell said last week. Later he commented: “If we knew now that these supply locks, really, and the resulting inflation collided with, you know, robust demand – if we knew that was what was going to happen, then looking back, yes, it would have been appropriate to move earlier” raise the benchmark interest rate.
The issues surrounding the global supply chain are deeper and more complex than reflected in the political rhetoric of the Departments of Transport and Trade in the marketing of current programs. Fixing global supply chain issues would help inflation (now the highest in twenty years), but announced programs are not the answer. Programs are superficial and lack a good understanding of supply chain fundamentals.
Untangling political rhetoric
Let’s examine the problems with current political rhetoric. On March 15, 2022, the Ministry of Transport announced the work to optimize freight logistics – with the acronym FLOW – to accelerate supply chain delivery times and reduce costs. FLOW is an information sharing initiative between eighteen initial participants: private companies, warehouses, logistics companies and ports. The goal is to test a proof of concept of information exchange to reduce supply chain congestion by the end of summer 2022. Will it work? My prediction? The pilot may succeed in exchanging data but fail to achieve the goal of improving supply chain flows. The program shows a very rudimentary understanding of what is needed to solve a much deeper problem.
With the war in Ukraine, supply chain managers report that supply chain flows are more variable today than a year ago. Things are getting worse, not better. Global port congestion in Europe and North America is so severe that it has rendered 12.4% of global ocean-going vessel capacity unavailable. For reference, in the pre-pandemic era, only about 2% of the global total was trapped by delays at any given time. The eight major ocean carriers control more than 80% of the ocean freight market. In 2021, ocean freight carriers made more than $150 billion in profits, nine times more than the previous year. Clogged ports are a symptom of a systemic problem in the global supply chain. With congestion, prices will continue to rise, fueling inflation. The systems are paper-based and the many parties (port operators, drayage drivers, container pools, stevedores and marshalling yards) are not synchronized. What is needed is frameless unloading and port automation.
FLOW is hailed for complementing the $550 billion bipartisan Infrastructure Act (BIL). While the Infrastructure Act is touted as a program that will speed up flows in ports, highways and transport infrastructure, the rhetoric exaggerates realistic improvements. Only 3% of the bill will be used to improve port infrastructure, mainly dredging and redesigning the port for larger ships over 10 to 15 years. The bill will not fundamentally change port offloading to improve efficiency. Chassis issues and timing issues between port operators, drayage drivers, ocean carriers and stevedores remain. The bill will not automate unloading at Southern California ports, which receive 40% of Asian imports, which are the most problematic. The ocean arrival rate on the west coast of Asia and the United States is 170% higher than the same period in 2021. Prices for the east coast of Asia and the United States States are 200% higher than rates this week last year (Source Freightos).
Labor issues remain at the ports. Today, manufacturing companies are expected to prepare for a possible strike by West Coast dockworkers in July. COVID issues at Chinese ports add both uncertainty and variability.
What is missing?
Supply chain problems are fueling inflation. The issues are complex and multifaceted. The problem with supply chain programs over the last administration is the sole focus on logistics without a holistic appreciation that supply chain in the commercial world is sourcing, manufacturing, and logistics. While logistics is the dominant stream in wartime, supply chain is much more than just logistics in the private sector.
Which brings me to the question, “If the government was serious about boosting supply chain information flows, what steps should they take?” Here is my recommendation:
1) Carefully define terms at each step of the improvement journey. Invest in talent. In recent program launches, buzzwords abound: programs stall without clear definitions. For example, what does Made in America mean? Supply chains consist of four and five nodes with interconnected flows. These deliveries are not linear. Is Made in America defined by labor, sources of cash or materials consumed? While the goal is clear to focus public spending on regional and local supply chains, there is no standard of identity. Another example is the new carbon emissions legislation. What is the definition of carbon? How is it tracked? With 72% of global supply chain impact outside the four walls of the supply chain, how can companies better track and trace to improve carbon impact? Today, there is no clear standard or value network for following either of these programs. Audits will not be enough. We’re sending supply chain leaders on a goose chase in the face of unprecedented variability. Learning? Initiate programs with clear terms and standards of identity.
2) Implement authoritative credentials. Planned initiatives require a higher level of track and trace and the need for authoritative identifiers. Today, the supply chain is a black hole: there is no definitive identifier for a company, a manufacturing site or a distribution center. We have more information on scanning a candy bar in a checkout aisle than on global shipments. Without authoritative credentials, informed flows are not possible. The remedy is to enforce the use of ISO-8000 identifiers. These would be similar to EINs for taxation, but would require all organizations to update their business systems to record and manage flows based on unique identifiers into and out of facilities and through alternate modes/pathways. With clear definitions and authoritative identifiers, supply chain managers can focus on making real change. Today, due to the lack of clarity, businesses don’t know what to do next.
3) Mandate interoperability between existing parties. The FLOW program does not recognize that supply chain operating networks exist today for thousands of trading partners. The problem? They don’t interact. Without uniform data standards, interoperability is essential. (Integration is the passing of data while interoperability ensures that when data is passed, systems maintain referential integrity, semantic reconciliation, and context of data.) Just as DARPA was the catalyst for Internet, the government should build a network of networks through networks. Mandate that all existing network players—Ariba (SAP), CH Robinson, Descartes Systems Group, E2open, Fourkites, GHX, IBM
4) Implement port planning and visibility. Today, ports are scheduled without taking constraints into account. Implement port planning systems based on constraint-based logic at all ports. Synchronize the port: schedule the chassis and the upstream drayage by berth when a container is reserved. Automate flows and reduce reliance on manual, disconnected processes between multiple parties.
5) Educate. Implement network design training for all manufacturers and make it mandatory for government contracts. Help companies move beyond a superficial understanding of the supply chain based on transaction costs to design supply chain flows based on variability, risk and constraint. (Only 9% of manufacturers’ design flows and 93% of supply chain decisions are made on spreadsheets. Companies that make decisions on spreadsheets cannot manage constraints and guarantee a plan. achievable or on-time delivery.) The answer is to design buffers and rationalize nodes based on variability. To do this, design a supply chain leadership program requiring all government suppliers to design supply chain flows to better understand the impact on port, planetary and government infrastructure. To accelerate behavioral change, consider taxing inventory that sits, perhaps more than six months, in warehouses. The problem? Ports today often transport goods that are not only needed to sit in warehouses for months. Ports are congested and warehouses are usually full with bad inventories. On average, manufacturers have thirty-two days more stock today than in 2007.
Supply chain stakeholders deserve reliable, predictable, and accurate information about the movement of goods, but FLOW and BIL are not the answer to improving supply chain reliability.
Consumers need the supply chain to work better for them. The supply chain is too important to the economy and the general well-being of society to leave it to cowboys playing politics. We need less talk and a more informed focus on transforming supply chain fundamentals into value networks.