Global Logistics—January 2014
Nearly seven out of 10 business leaders believe supplier risk analysis will become more complex as they expand into new global markets, according to the Economist Intelligence Unit report Strategies for Managing Customer and Supplier Risks, sponsored by Dun & Bradstreet.
Adverse events associated with suppliers are becoming more frequent and severe, say 75 percent of the 395 respondents.
"Supplier risks are becoming more challenging because the supply chain is getting more complex," say half of those surveyed, while 36 percent agree that an increase in outsourcing essential functions is creating challenges in managing supplier risk.
More than half of those questioned say they collaborate with suppliers to improve performance in identifying and assessing risks. Fifty-three percent add that they use personal judgment.
When asked what strategies organizations rely on to control supplier risks, 38 percent say they closely monitor relationships with high-risk suppliers, 37 percent use contract language that controls risk, 35 percent limit the scope or scale of business with high-risk suppliers, and 30 percent maintain a blacklist of unacceptable suppliers.
Companies that successfully manage risk use a variety of tools to handle specific threats, the study finds.
"Many organizations represented in the survey are on the verge of implementing more advanced analytics," the report states. "The majority say they are now using some analytical tools to navigate through risk data, and they recognize the need for more sophisticated tools to obtain actionable or predictive analytics."
Sixty percent of executives say they want to extract greater business value from risk data, but are uncertain about how advanced analytics can help.
The report also encourages companies to measure risk management, as only about half of respondents say their company tracks the outcomes of their mitigation efforts. About 85 percent of those who track outcomes are successful, compared with 51 percent of those that do not.
The U.S. Department of Defense’s (DoD) drawdown of U.S. forces and materiel in Afghanistan has hit a costly hitch. Hundreds of shipments routed overland from the war zone via Pakistan have been delayed because of local protests against the CIA’s drone program. Unless a peaceful resolution can be reached, the DoD faces the possibility of having to airlift equipment out of the region at an additional cost of $1 billion.
Pakistani officials have promised to take immediate action and quell the disruptions, but continuing security risks could force the issue. Flying military equipment out of Afghanistan to a port will cost five to seven times as much as it does to truck it through Pakistan. About 100 trucks are stacked up at the border, and hundreds more are loaded and stalled in compounds, waiting to leave Afghanistan.
The shipments consist largely of military equipment that is no longer needed now that the Afghan war is ending. Sending cargo through the normal Pakistan routes will cost about $5 billion through the end of 2014, according to the DoD. Flying heavy equipment, including armored vehicles, out of Afghanistan to ports in the Middle East, where it would be loaded onto ships, would cost about $6 billion.
A northern supply route, which runs through Uzbekistan and north to Russia, was used for about seven months in 2012 when Pakistan shut down the southern passages after U.S. airstrikes accidentally killed 24 Pakistani soldiers at two border posts. That northern route, however, was used primarily to bring shipments into Afghanistan, and is much longer, more costly, and often requires cargo to be transferred from trucks to rail.
While a widely documented "regulatory war on trucking" continues to build in the United States, Asia is dealing with its own last-mile logistics challenges.
In China, high road tariffs and unregulated penalties are having an impact, accounting for one-third of total logistics costs—which approached 18 percent of gross domestic product in 2013, according to the China Federation of Logistics and Purchasing.
Approximately 95 percent of the mainland’s highways, and 61 percent of its first-tier roads, require tolls. Trucks are also subject to other restrictions and penalties—for example, they can’t use highways after midnight. Such a ban has left trucking companies with no other option than to break the law in order to guarantee timely delivery.
Exacerbating the problem, China’s fractured transportation and logistics sector—which features more than 10,000 operators—is unable to take advantage of economies of scale and other collaborative opportunities. Trucking companies don’t have enough network density to optimize moves, loads, and asset utilization. So capacity is wasted, leading to undue costs. Continuing e-commerce growth and last-mile delivery demands will only magnify these failures.
Elsewhere in Asia, Philippine truckers are facing similar restrictions that impede productivity. A modified truck ban in Manila from Dec. 13 to 20—which prevented overnight and early morning deliveries into the city because of holiday traffic—irked local trucking companies.
Restricting operators from roads will delay the delivery of goods to businesses and consumers, says the Confederation of Truckers Association of the Philippines. The ban, which impacted between 5,000 and 6,000 trucks, penalized 85 drivers during the first day of enforcement.
Amid optimism surrounding Africa’s rising economic star, piracy remains a concern for shippers transporting freight in and around the continent. From the Gulf of Aden to West Africa to the infamous Barbary Coast, hijackings have become an all-too-frequent occurrence—and a reminder of the corruptive influences hindering economic growth throughout Africa.
The tide may be shifting, however, according to a recent report by Control Risks, a London-based global risk and strategic consulting company. Maritime piracy by Somali gangs has reached a six-year low. The number of incidents between January and October 2013 was down 90 percent compared to the same period one year earlier.
A few key factors support this reduction: Adherence to best management practices by crews and vessel operators, a significant naval presence offshore, and the continued use of armed security onboard vessels. "Additional onshore factors, such as the development of local security forces, have also played a part," according to the report.
Still, concerns are emerging elsewhere on the continent. West Africa has experienced a recent surge in piracy—and contrary to the Somali trade, bandits are after freight, rather than ransoms. A recent Reuters report documents that incidents off Nigeria’s coast have spiked by one-third as vessels navigating the Gulf of Guinea, a major commodities route, come under siege.
The ongoing piracy problem is a sobering counterpoint to the positive economic vibe that has been building in parts of Africa. Government agencies that rely heavily on commercial maritime taxes are seeing revenues disappear as shippers seek more secure locations. The effect on trade is marked—as is the impact on socio-economic well-being.
The close of 2013 did not finalize a long-discussed free trade pact that would stretch from the Americas to Asia. Talks in Singapore between the United States and 11 other countries—including the host nation, Japan, Mexico, Chile, and Australia, among others—broke down before any agreement could be consummated.
The U.S.-led Trans-Pacific Partnership (TPP) is a major part of President Obama’s foreign policy shift toward Asia. But consensus thus far has been hindered by disagreements regarding agricultural market access, environmental protections, and intellectual property concerns.
Progress was delayed when President Obama’s Asia trip was postponed earlier in 2013 due to the U.S. government shutdown. The administration has already announced a rescheduled visit in April 2014.
The outlook, however, remains optimistic as the trade pact is expected to be finalized early in 2014. Negotiators are looking at reducing tariffs on goods and services, ensuring foreign companies operating in these markets share a level playing field with state-owned ones, and that patents are protected against counterfeiting. The bloc includes developing countries with large state-owned industries such as Vietnam and Malaysia, as well as wealthier nations including the United States and Japan.
There is some concern that the cost of medicine may rise in countries such as Vietnam because U.S. pharmaceutical companies are looking for longer periods of patent protection, slowing the release of generic versions.
If completed, the TPP would encompass approximately one-third of world trade and 800 million people. And there’s already chatter that other countries, notably China, have expressed interest in joining the partnership as well.
Any deal will have to be ratified by the U.S. Congress, where Democratic lawmakers, in particular, are calling for tough provisions on environmental and labor standards, and against currency manipulation. To simplify the process, the Obama administration wants to pass legislation that gives it authority to negotiate trade deals that Congress can accept or reject, but cannot change.
U.S. fossil fuel exports are a hot topic in trade news. This graph shows the exponential growth of U.S. natural gas and crude oil exports since 2007. Liquid natural gas and crude oil exports made an especially huge jump in January through October 2013.
Source: Zepol Corporation
London-based grocer Tesco is making a play to build its business in Southeast Asia by acquiring a minority stake in Lazada, an online retailer owned by German venture capital incubator Rocket Internet. The company sells non-food products including electronic goods, books, clothing, toys, and home goods. It maintains operations in Indonesia, Thailand, Vietnam, Malaysia, and the Philippines.
Tesco, which aims to strengthen its e-commerce capabilities while reining in spending on store expansion, has invested "tens of millions of pounds in the online marketplace," according to Robin Terrell, the company’s multichannel director.
"We can do a number of things from a customer and product perspective, whether it’s sourcing or supply chain management," Terrell explains, suggesting the possibility of cross-selling products—notably food—to a population of 600 million.
Lazada’s business plan is ambitious; it wants to be Asia’s answer to Amazon. Not to be outdone, Tesco intends to dominate the new multi-channel era—selling a range of goods from food to apparel, and banking products from its supermarkets and online, in lieu of cutting food prices to win market share as rivals such as Walmart’s Asda have done.
Tesco already provides online shopping in most of its nine non-domestic markets, including Thailand and Malaysia. But greater competition is forcing it to differentiate by offering e-commerce capabilities in developing markets.
To that end, Lazada offers an eBay-like marketplace where third-party retailers can sell their services, which provides Tesco the chance to offer products in markets where it doesn’t have stores or its own website.
The expectation and execution gap in Southeast Asia is still huge, which presents opportunities for new players such as Lazada and Tesco. E-commerce commands only a fraction of total retail sales. Apart from the geographical challenges of delivering to rural areas, credit card use in Southeast Asia is still relatively uncommon. Lazada serves the entire market with cash-on-delivery service.
Elsewhere, the grocer is also expanding into India, which is notable given the country’s austere regulations on foreign investment. In fact, Tesco is the first global food retailer to receive approval since the Indian government decided to open up the supermarket sector last year. Tesco will launch a chain of supermarkets as part of a 50-50 partnership with India’s Tata Group.
Leave it to China to steal the Panama Canal’s centennial thunder. Rumors of a partnership with the Nicaraguan government, and plans for a competing canal connecting its Pacific and Atlantic coasts, are picking up steam.
Reports suggest the Sandinista government will give Chinese telecom tycoon Wang Jing concessions to create a canal three times the length of Panama’s existing gateway. The deal would include stakes in proposed port operations, an airport, railroad, and other infrastructure developments. The price tag of the canal alone is estimated at close to $50 billion.
Under the terms of the deal, Nicaragua would receive $10 million every year for 10 years, as well as a gradually larger portion of canal ownership over the course of one century. After 100 years, Nicaragua would gain ownership of the canal. The payments would only occur, however, if the canal actually gets built.
China’s Nicaraguan adventure is the latest example of its aggressive offshore infrastructure investment strategy—a lesson likely gleaned from its own dependence on Japanese ventures in the early 20th century.
China is paying the favor forward where it sees opportunities for even greater returns. Plans for a $10-billion port in Tanzania, and now a Nicaraguan Canal, would provide greater access to raw material sources, as well as control of global trade. Whether these ambitious proposals gain traction remains to be seen. As China proved with the Three Gorges Dam hydroelectric dam project, there are few limitations to what it can do.
The dam incurred its share of environmental criticism—and the canal is likely to trigger even more, especially outside Asia’s friendly confines. There’s also speculation about whether there’s even a viable business case for another canal in such close proximity to Panama. Some observers note that a Nicaraguan canal would need to produce $1 billion in annual revenue to break even. That means siphoning half of the Panama Canal’s existing freight traffic.
Regardless, Nicaraguan President Daniel Ortega has given his imprimatur to Wang Jing’s canal development company. In December 2013, Chinese workers arrived to conduct viability studies. Biologists from the National University and an English environmental consultancy joined them, according to the International Business Times.
Bluster or not, China gained everyone’s attention. Maybe that’s what the canal project is really all about.