Global Logistics—January 2016
China reached its highest level of air pollution on record in December 2015. The smog in Beijing was so bad that the government issued a series of red alerts (the highest alert on a four-tier scale) spanning days. The alerts forced more than 2,000 factories to reduce or shut down operations, restricted vehicle traffic, and closed many schools and businesses. The pollution in Beijing registered more than 50 times acceptable levels, according to the World Health Organization, and the situation in Shanghai isn’t much better. Some studies suggest that more than 1.4 million deaths in China each year can be traced to air pollution.
With clouds of toxic smog regularly engulfing more than 30 major cities in the country, the timing of a green supply chain list couldn’t be better. The Corporate Information Transparency Index (CITI), a project of the National Resources Defense Council and Beijing’s Institute of Public & Environmental Affairs, examines the environmental responsibility of 167 major brands’ supply chains.
Apple leads the list of China’s greenest supply chains, followed by fashion brands Adidas, H&M, Levi’s, and Marks & Spencer (see sidebar, left). It is no surprise that western multinational corporations with a history of green operations top the list. These companies should be commended for operating sustainably in an area where they could easily not do so.
Because the government isn’t known for enforcing environmental standards, many Chinese companies ignore costly environmental measures in favor of increased profits. To reduce pollution and encourage these entities to operate more sustainably, China’s Ministry of Environmental Protection and other agencies governing energy, water, and resources must not only implement, but also enforce policies to support environmental protection, according to the CITI report.
The report recommends that corporations interested in maintaining a green supply chain focus their initiatives in areas that would have the most environmental impact, use third-party evaluators to benchmark suppliers’ environmental performance, and avoid shutting down environmental programs after the pilot phase.
Considering the health effects of pollution and smog, and the red alerts that disrupt daily lives, Chinese consumers are more tuned in to environmental issues. It is up to the Chinese government and companies operating in the country to promote a sustainable mindset in every way possible, which might drive consumers to push back at companies that hurt the environment.
Earthquakes. Port shutdowns. Tsunamis. Factory fires. Terrorist attacks. Equipment malfunctions. Any of these events can unexpectedly disrupt a supply chain at any moment, and most shippers are completely unprepared for it, according to the Business Continuity Institute’s Supply Chain Resilience Report, supported by Zurich Insurance Group. Seven out of 10 global shippers don’t have the supply chain visibility necessary to predict or even respond effectively to a disruption.
Although 74 percent of respondents say they experienced a supply chain disruption in 2014, there are enough unreported incidents that the percentage is most likely higher, the survey notes.
Incidents go unreported due to lack of visibility. Only 28 percent of enterprises surveyed have the capability to report a disruption across their entire supply chain, 37 percent can only report within specific areas of the operation, and 35 percent don’t bother reporting supply chain incidents at all. The biggest reason for this lack of capability is an old and persistent problem: Departments operate in their own silos, which limits the ability to report. Until corporate management gets involved and knocks down walls between different areas, the changes necessary to create more visibility likely won’t happen.
When companies that are able to track disruptions are asked where they occurred, 50 percent name a Tier 1 supplier, 28 percent name a Tier 2 supplier, and 8 percent name a Tier 3 or other supplier as the cause. A surprising 31 percent say they don’t analyze disruptions, so they have no idea of the source of their disruption.
Even if shippers don’t know where the disruptions occurred, many are at least able to identify the disruption. The three most common supply chain disruptions are communication failures, cyber attacks, and severe weather. Respondents report the most common consequences of these interruptions are reduced productivity, customer complaints, cost increases, lost revenue, and decreased service.
Consequences of Supply Chain Disruption
Survey findings reveal the most common consequences of disruption.
Source: Business Continuity Institute’s Supply Chain Resilience Report, Zurich Insurance Group
While the initial results may appear disheartening, the survey does reveal a positive trend. Companies claiming that their C-suite has a strong commitment to supply chain resiliency rose to 33 percent, up from 29 percent in the previous year. An enterprise where top management gives special attention to this area is 43 percent more likely to invest in supply chain end-to-end visibility.
As such, supply chain managers must do all they can to make sure that the C-suite is engaged in efforts to build up a resilient supply chain. Getting the top dogs on board is the best way to make sure your organization is prepared for a disruption when it happens, and has the ability to react appropriately and immediately.
China is seeking to establish a new naval logistics center in Djibouti, a country located in the Horn of Africa, as a base for anti-piracy patrols. Because China has never had foreign military bases, the move is causing nervous chatter among other global powers.
Officials say China will use the base as a leave and refueling station for the ships it sends to protect cargo routes off the coast of Somalia. China has deployed 60 such vessels on 21 separate occasions since 2008.
The center would also aid Chinese military support to the United Nations in Sudan, Mali, and other areas.
The logistics center “will play a positive role for the Chinese armed forces to effectively fulfill its international obligations and maintain international and regional peace and stability,” says Wu Qian, a Chinese Defense Ministry spokesman. The facilities could also provide logistics support for humanitarian aid missions in the region, he adds.
Djibouti is also the headquarters for the U.S. Joint Task Force-Horn of Africa, and home to a sizeable contingent of French military forces.
The United States and Mexico signed an agreement expected to significantly increase trade and travel between the two countries. The new plan allows airlines on both sides of the border unrestricted access between destinations, and more control over their own prices.
“The new agreement will benefit U.S. and Mexican airlines, travelers, businesses, airports, and localities by allowing increased market access for passenger and cargo airlines to fly between any city in Mexico and any city in the United States,” says a joint statement released by U.S. Secretary of State John Kerry and U.S. Secretary of Transportation Anthony Foxx. “Cargo carriers will now have expanded opportunities to provide service to new destinations that were not available under the current, more restrictive agreement.”
The new deal has particular implications for the supply chain. The agreement is expected to benefit the manufacturing sectors of both nations by more easily allowing manufacturers to connect with suppliers, which should drive economic growth for partners on both sides of the border. The new rules are expected to take effect once the deal passes Mexico’s internal ratification procedures.
Most companies know their Tier 1 suppliers pretty well. But how well do they know those suppliers’ suppliers? As the global shrimp supply chain is finding out, a lack of end-to-end visibility can be incredibly harmful to an enterprise’s reputation.
Consider Thailand’s Charoen Pokphand (CP) Foods, a company that supplies shrimp products to many of the world’s largest grocery retailers, including Walmart, Carrefour, Costco, Tesco, Aldi, and Morrisons.
The supply chain works like this: Off the coast of Thailand, third-party fishing boats catch thousands of fish that nobody wants to eat. The boats sell those fish to factories, where they are ground down into fishmeal, and then sold to companies like CP Foods, which uses the fishmeal to feed the shrimp in its shrimp farms, and proceeds to sell those shrimp all around the world. This seems like a pretty straightforward supply chain, right?
The problem is, human rights violations are a regular practice for major suppliers of the fish used to create the fishmeal, reveals a six-month-long investigation by international news outlet The Guardian.
“On Thai fishing boats, some men remain at sea for several years, are paid very little or irregularly, work as much as 18 to 20 hours per day seven days a week, or are threatened and physically beaten,” says the U.S. State Department’s 2015 Trafficking in Persons Report, which rates 188 nations on how well they combat and prevent human trafficking. “Some victims of trafficking in the fishing sector were unable to return home due to isolated workplaces, unpaid wages, and the lack of legitimate identity documents or safe means to travel back to their home country.”
The report lists Thailand as a Tier 3 country for human trafficking, second from the bottom in the four-tier rating system. By comparison, North Korea and Iran are also Tier 3 countries.
“Thailand is committed to combating human trafficking,” said Vijavat Isarabhakdi, Thailand’s ambassador to the United States, in a statement to the press. “We know a lot more needs to be done but we also have made very significant progress to address the problem.”
Thailand’s shrimping industry exports more than 550,000 tons of shrimp each year—10 percent of which is exported by CP Foods, according to The Guardian. The Thai government estimates that 300,000 laborers work on the fishing boats; 90 percent are migrants susceptible to being fooled, cheated, and eventually trafficked.
“We’re not here to defend what is going on,” said Bob Miller, CP Foods’ UK managing director, during an interview with The Guardian. “We know there are issues with regard to the material that comes in, but to what extent that is, we just don’t have visibility.”
With an economic recovery in progress, many carriers and transportation industry stakeholders are benefitting from consumer confidence spikes across the globe, and the increased spending that has more goods moving from place to place. Ground carriers can always count on long haul and last-mile business, while new super-sized container vessels ensure affordable capacity over the water. But for the air cargo industry, cashing in isn’t always as simple.
Even though capacity continues to expand, air cargo carriers in many regions suffer from slow growth or even contraction, according to numbers released by the International Air Transport Association. This has led air cargo executives to search for more ways to cut costs without sacrificing growth.
Operational efficiency and capacity utilization are among the top challenges that air cargo carriers are trying to address, according to Accenture’s 2015 Air Cargo Survey, and they need the tools that can help them improve in these areas.
The challenges are especially tough for mid-size and large carriers that have a lot of capacity to fill. Among the air carrier respondents to the survey, 71 percent say they would consider purchasing a Software-as-a-Service (SaaS) solution to help address efficiency and capacity concerns.
“For many air cargo carriers, limited visibility into capacity utilization can result in serious revenue leakage through a number of causes,” says Ganesh Vaideeswaran, managing director, Accenture Freight and Logistics Software. “These include unnecessarily shipping low-yielding freight on in-demand routes to underutilized allocations, and being unable to respond to shipment disruption.”
Most air cargo executives responding to the survey agree that they need to work on three areas:
- Capacity. Having unused capacity causes carriers to hemorrhage money because they are paying to store or maintain unused equipment. Nearly 70 percent of carriers struggling to cut costs are looking for ways to optimize capacity through automation and software solutions.
- Pricing. Only 14 percent of Accenture’s survey respondents say they are capable of maintaining steady and competitive rates; many carriers don’t have the technology tools to guarantee consistent pricing. Other problems, such as shippers who provide incomplete shipment data, and lack of control over sales operations, also affect pricing.
- Visibility. Only 54 percent of air cargo executive respondents say they have full end-to-end visibility through every stage of the shipment.
Bottom line: air cargo carriers need technology solutions that can manage these areas, and others, to streamline processes and plug up areas where revenue is leaking. Considering that air cargo transports 35 percent, or $6.8 trillion of the world’s goods each year, spending some money now to plug those holes will net definite long-term advantages in terms of growth and profitability.
Top Operational Problems Facing Air Cargo Carriers Today
More than half the cargo executives surveyed say operational efficiency and capacity utilization are among the top operational problems that they are now trying to address, with capacity utilization representing a particular challenge for medium/large carriers.
Source: Accenture 2015 Air Cargo Survey
Companies continue to reshore and nearshore manufacturing to the United States, but that doesn’t mean manufacturing in Asian countries is in decline—though there are signs of a geographic shift. In response to rising wages in China, some global manufacturers have begun to shift production to nearby countries, including Bangladesh, Thailand, Korea, and Vietnam.
“A number of manufacturing companies are moving into and out of China; some of the more labor-intensive, lower-skill manufacturers are moving to Thailand and Vietnam,” says Morris Cohen, professor of the manufacturing and logistics, operations, and information and decisions management department at the University of Pennsylvania’s Wharton School. “However, higher-skilled aerospace and automotive manufacturers are moving to China. Both moves are decided, in large part, because of labor costs and market access.”
Cohen’s Global Supply Chain Benchmark Study: An Analysis of Sourcing and Re-structuring Decisions finds that while China is still the most attractive region for sourcing production, it is also among the top countries experiencing volume decreases.
“Companies leaving China do so for total cost reasons,” he adds. “Nearby countries emerge as low-cost destinations to serve Asian markets for high-labor, low-skill manufacturing plants. With the move, manufacturers maintain the advantage of market access and low-cost labor. The market of the future is Asia, India, and China, where the middle class will buy cars, televisions, and computers as well as medical services.”
Some examples of this growth include Samsung Electronics Co., which opened a $2-billion manufacturing plant for handsets in Vietnam, and Paramit Corporation’s construction of a new facility in Penang, Malaysia, to build medical devices and life sciences instruments.
A new pilot program clears much of the red tape for companies bringing cargo in through the Port of Mombasa in Kenya. The port can now clear incoming cargo seven days in advance.
“The program will support the political commitment in the region to integration, where we have so far achieved a reduction in transit time and reduced cost of transport and importing through Mombasa,” says John Njiraini, commissioner general of the Kenya Revenue Authority (KRA).
The new program was created to increase efficiency at the port, and to support integration of the East Africa Community initiative, which aims to reduce cost and transit times for freight, and promote trade in the region.
“When you log the documents in advance, you have the time to process them, profile them, and be ready when the vessel comes,” says Julius Musyoki, the KRA’s commissioner of customs. “You just load your cargo and move out.”
Manufacturers should benefit the most from the program because they can clear their raw materials in advance, and haul them off immediately once they arrive at the port. Even if cargo isn’t picked up right away, the program awards domestic cargo four free storage days, and transit cargo nine free days.
The port also began reviewing bids for a new cargo scanner system, which should further improve processing times. And once cargo leaves the port area, KRA has implemented a tracking system between Kenya, Rwanda, and Uganda to curb cargo theft. It has also cleared checkpoints and roadblocks to reduce highway transit times to those destinations.
Many governments around the world provide subsidies to exporters of agricultural products, but the World Trade Organization (WTO) recently ruled that those subsidies make it hard for poor farmers in developing nations to compete on a global scale. The new rule aims to even the playing field.
An export subsidy constitutes any loan, direct payment, or tax relief for farmers exporting their crops into the global market. The WTO tackled the issue once before in 2005, when it vowed to end all agricultural export subsidies by 2013. But it failed to follow through.
“WTO members—especially developing countries—have consistently demanded action on this issue due to the enormous distorting potential of these subsidies for domestic production and trade,” says Roberto Azevedo, director general of the WTO, in a statement to the press. “This decision tackles the issue once and for all.”
Developed countries must cease providing subsidies immediately, while developing countries have until 2018 to halt subsidies. Farmers in areas such as New Zealand, where agricultural subsidies make up about 1 percent of revenue, are cheering the decision. Meanwhile, agricultural exporters in Switzerland, where subsidies represent 58 percent of revenue, are likely less enthusiastic.
China’s Greenest Supply Chains
Companies are measured on public engagement and responsiveness, compliance and corrective actions, extended green supply chain practices, data disclosure and transparency, and responsible recycling.
- Marks & Spencer