Supply chain chaos, additional friction, labour shortages, delays, problems with border controls and the Northern Ireland Protocol. It has been six years since the UK voted to leave the EU. One thing that has become clear since is the woeful lack of preparation and planning by the Government. Listen to why this is so. Things have moved on and we have had disruptions due to the Global Pandemic and the War in Ukraine. The Global Supply Chain Volatility may well remain a permanent feature for the foreseeable future.
There is also an interesting story of how one Welshman, John Hughes built the Russian Iron and Steel Industry in Donetsk in Ukraine formerly known as Hughesovka.
Shanghai has been closed down for the best part of a month now. Listen to how this has and will continue to impact global supply chains this year. It is also taking its toll on China too.
Avian flu, the price of chicken feed, fertilizers and the crisis on the farm and in our food supply chains.
Microbeads in the cosmetic supply chain – do we really need them?
Redistributed Manufacturing is a term that describes a reconfiguration of supply chain resources to produce goods where and when they are needed often at speed and usually at small scale to meet the need. It is particularly applicable in health care. It offers a flexible manufacturing solution with a shorter supply chain changing the default geography of global supply chains by reducing time and distance. Disruptive digital technologies are transforming manufacturing supply chains bringing value enhancement capabilities. Professor Wendy Phillips at Bristol Business School, University of West England is a leading researcher in this field. You can hear what Professor Phillips had to say in conversation with me on the Chain Reaction Podcast.
Further Reading: Phillips, W., Roehrich, J. K., Kapletia, D., & Alexander, E. Global Value Chain Reconfiguration and COVID-19: Investigating the Case for More Resilient Redistributed Models of Production. California Management Review, 0(0), 00081256211068545. doi: 10.1177/00081256211068545
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Time is of the essence. It is about perspective. Time in supply chains is critical. The faster you can move goods from point of origin through to customers means you incur less cost, there is lower risk because you do not have to store goods longer than required. Goods in transit are always better than goods in storage. Warehouses are stuck in time. They are a place where goods travel at zero miles per hour.
Are you working on monochronic time? Put differently does everyone in your supply chain work to the same timescale? To be efficient everyone has to work to the same timescale. If your supply chain works on polychronic time you need to correct it. Time is of the essence. All goods have some type of time criticality. Of course not all goods are time critical in terms of perishability as food is but they all require management to deliver on time.
Political Time
Political time is often short. Governments are voted in to office for specific time periods usually 4 or 5 year terms of office. Decisions taken by government are not always in the interests of the population or indeed the state. Government’s are populated by people with different interests and priorities and they do not always act or behave in democratic ways even in a democracy. Factions emerge and sometimes they become dominant sometimes this can be good and other times not so. Governments in a democracy are supposed to represent the views of the people being governed. In a party system that is usually but not always limited to people who voted for the party in government. Time is of the essence. To get things done within their term of tenure governments have to act quickly. This often limits their time horizons on what to do, which means they will action what they can do within time. In this decision algorithm they will limit policy choices. Implementing only those they can within time, with maximum gain meaning they will have one eye on the impact this will have on attracting sufficient votes to stay in power for another term.
Just-In-Time
Just-in-Time is what it says something that arrives just-in-time and not too late. It is in the ‘nick of time’. For politicians it might be the introduction of a policy to correct some injustice or inequitable allocation and distribution of resources. It might be an action to prevent something from occurring which is harmful or undesirable. If it is just-in-time it may stand a chance of working when it is too late it does not.
In supply chains just-in-time (JiT) is a system to move goods from one point to another as they are required. An example might be a material planning requirement to get materials just when they are needed. This way inventory risks and the cost of holding stock just-in-case is minimized. It means that working capital requirements are significantly lowered. JiT supply lowers carbon footprints by reducing waste as well as time in production and distribution. Thus, increasing throughput in a shorter time. Just-in-time systems are efficient. You only produce what you need to. JiT supply systems can of course be disrupted in the same way that other supply chain systems are. When this happens they can appear less resilient than supply systems holding buffer inventories to mitigate risk but there is nothing stopping JiT system adjustments to mitigate some risk by holding a minimum risk level of inventories. This is the premium for resilient supply chains. This will work most effectively for non-perishable goods. After all there is a limited time to hold perishable goods in any supply system. The bland criticism in the press that JiT systems are to blame for supply chain problems is just not true. How well these JiT systems are managed is the issue. Any friction in the supply chain such as additional time delays at ports for any reason will impact JiT systems. If you know this is likely in your supply chain you can take steps to mitigate risks. JiT supply chains work most efficiently when friction is removed. Sometimes unforseen frictions occur causing disruptions e.g. volcano eruptions, floods, adverse weather conditions, cargo lost at sea or delays due to other causes that are not known in advance. In the case of goods disrupted at UK ports because of increased time taken with border checks and administration after leaving the EU (Brexit) then this is bad planning and preparation either on part of government or by businesses. Most examples I am aware of have been because government did not plan particularly well and was unclear about processes. Furthermore, processes were not only unclear but were not clearly communicated to those who were bound by them in time to prepare and act. It was a case of too little, too late.
Too Little, Too Late
Too little, too late, is a political malaise when governments either do too little or are too late to act. This type of malaise can occur when governments fail to recognise their responsibilities or decide that something is not their responsibility. Complacency or indecision is another reason for delays in taking action. It can affect business too. This malaise of too little, too late will be recognised by business leaders. In supply chains those that act fast are the one’s to succeed. Procrastination is not an option. ‘Procrastination is the thief of time’ meaning you will always be too late.
The list of supply issues in the UK grows ever longer: Labour shortages in food processing, shortage of butchers in abatoirs, shortage of C02 for stunning animals, putting fiz in drinks and in food packaging, fuel shortages because of a shortage of HGV drivers, Food shortages at supermarkets and retail stores because there is a shortage of 100,000 HGV drivers after many returned to their home EU countries after Brexit, Builders and other construction workers and materials, doctors and nurses, medicines, microchips, shipping and shipping containers, not enough farm labourers, flower pickers and crop pickers with daffodils left to rot, blueberries too, courgettes, lettuces, tomatoes and potatoes also left in the fields. The PM said he wants a high wage economy and we are going through a period of adjustment but this belies the facts. Many of the daffodil pickers for example earn £200 per day if they pick around 1600 bunches and many do, so that is already decent pay. Some sectors in which there are skill shortages are already by most standards highly paid such as doctors. Migrant workers have always travelled to pick crops so there is some fundamental misunderstanding by many, that people just sit and wait for the work to come to them, it doesn’t work like that. The impact of the pandemic is one issue but the elephant in the room is Brexit restrictions on the movement of labour and a failure to act quickly to issue work permits to allow skilled people to do the work when needed. Even when the UK government did act timely they were swallowed up in their own post Brexit red tape. Employment licenses were too slow to be enacted. There was said to be a shortage of 20,000 HGV drivers five years ago when the UK was in the EU. In China there is a reported shortage of HGV drivers – 20,000 – for a completely different reason – increasing demand for goods. In the UK prior to the pandemic this number of HGV drivers had swelled to around 60,000 a substantial number returning to their home countries prior to Brexit. After the UK left the EU on December 31st, 2020 it became impossible for many EU nationals to remain and a further 20,000 are said to have returned in the run up to that. Growing demand during the past few years accounts for the remainder.
At present the labour shortages in many supply chains have become critical. This despite the UK Government issuing 5,000 short term visas to attract HGV drivers – apparently only 27 people have applied so far. The time limits and restrictions on the visas were set too tightly to be of much use in encouraging people to apply. Also, in some quarters the loss of self-employed status for some contractors including HGV drivers (and IT professionals) has been blamed with HMRC pushing contractors to employed status through the IR35 rules. This moves those contractors to PAYE tax at source and an inability to claim expenses against income which some relied on. There are 5,500 visas available for food processing workers.
Supply Chain Disruptors
Time To Put Things Right
Who is responsible for putting things right? As with many things this answer is not straightforward. Government have a responsibilty to ensure that citizens have security. This security extends from personal safety through to other securities inter alia including, cyber, health, welfare, energy, food, financial and employment. So when it comes to managing the infrastructure to achieve such security the government has a clear responsibility. Government has a responsibility to take action, implement policies and put in place regulatory frameworks that ensure security in these matters. Governments are not responsible for disruptions due to matters beyond their control such as accidents or what insurance companies refer to as ‘Acts of God’. Labour shortages in an industry are caused by many factors including pay and conditions of work. It is up to government to ensure safe working conditions through legal protections and law enforcement. It is up to government to put in place arrangements that make it easy to employ people and minimise the impact of bureaucratic arrangements that impede employment opportunities. For example, if a government department is unable to issue driving licenses to HGV drivers in time then that is down to government to act. If a government is slow to carry out a responsibilty to test HGV drivers in order to license them through DVSA then that is down to government to take corrective action. Actioning work permits in a timely manner when necessary is a government responsibility. These are matters that firms have little control over but they can be badly impacted by too little, too late. Time is of the essence.
Time Enough
It was 2016 when the UK voted to leave the EU. More than five years have passed which you might think is a good length of time to plan and prepare effectively for a smooth exit to minimize the impact on businesses and people who have to adapt to different systems that affect their daily lives. Governments are responsible for conditions created by their actions or inaction. How come five years was not long enough? Well maybe because much of the available time to negotiate an exit deal was wasted and wasteful in negative rhetoric. Government did not really get on with it despite the rhetoric. The vote may have taken place but the fights were replayed in Parliament, in every newsbite, soundbite and political meeting. Without going into great detail not much was done in that period to secure a smooth exit to reduce risk and minimize the impact of all the necessary changes that would come into play after Brexit. The task was grossly underestimated and the detail was thin. Many of the claims and promises made to persuade people to vote to leave the European Union by the ‘Vote Leave Campaign Group’ melted away as positions on both sides of the vote became frozen, hardened in the passage of time. Not a great deal of thinking about what future arrangements between the UK and EU might look like was given mind space or indeed communicated to the nation who would have to pick up the pieces later. Signals of future disruptions were coming from industries who had benefited from frictionless trade with the UK’s biggest trading partner, the EU. Not enough time was set aside to deal with the detail of these real issues until it was too late to act and get a deal in the best interests of the UK. Despite all the rhetoric about ‘an oven ready deal’ the reality was different. The eleventh hour trade deal struck by the government in December 2020 with a few January tweaks did not give sufficient time to communicate with businesses about what they needed to do to prepare and plan by putting appropriate systems and procedures in place. Inevitably, the chaos emerged with hold ups at Dover and other ports and the fiasco to build a lorry park at Dover to store the delayed trucks waiting to move cargo to Europe. Many businesses incurred additional costs that they had not been able to budget for because of the failure to plan and prepare properly. Each transaction now had to contend with extra bureaucracy that added a minimum of £180 to a consignment. Some businesses rapidly began to seek out premises in the EU to move their operations outside the UK to lower their costs. There were ludicrous examples of small consignmnets perhaps worth only a few pounds having to pay a hundred pounds or more to export the low value item. Many smaller firms gave up. Others made big investments in facilities in the EU. Although initially this might cost substantially more by way of investment they were planning to reduce the cost of supply chain friction longer-term.
Covid Time
In the first quarter of 2020 it became clear that we were all entering a strange period threatened by a virus that had started in Wuhan, China, Covid 19. A virus that began to infect and kill people at scale. The whole world was caught short. Apparently back in 2016 the Government in the UK had simulated the impact of just such a threat to the environment and concluded the UK was not particularly well prepared to meet all the challenges. There were some damming reports about a lack of any follow-up regarding the simulation failures. How true this prophetic conclusion became as equipment shortages in the form of ventilators in Intensive Care Units (ICU) and Personal Protective Equipment (PPE) were all difficult to source and procure. There was also no antidote to the virus and epidemiologists, immunology experts and virology researchers started to cooperate to find one. This was done in double quick time. Within a year there were several vaccines including the Oxford Astra Zenica, Pfizer and Moderna vaccines. From March 2020 the UK Economy locked down under governmnet directives. The impact on businesses and people’s livelihoods were to some degree mitigated by government funding but not everyone was protected. As a vaccination programme was rolled out by the National Health Service (NHS) in the UK early in 2021 the worst of the pandemic began to ease and restrictions were slowly and painfully in many cases lifted. There were some false starts until pressure on the NHS were lowering. Non Covid Health Services during the pandemic had been badly impacted and many patient treatments were postponed. As with all bad news stories there were many other failures blamed on the pandemic to deflect attention away from the real cause of problems such as underinvestment in health and care services. Not enough was done quickly enough to protect the elderly in care homes and medical staff were at high risk on a daily basis because of a shortage of PPE. Time is always of the essence in these circumstances. Unfortunatley time had passed to invest in resources that might have achieved better outcomes in this pandemic. This week a joint report from the Commons Science and Technology and Health and Social Care Select Committees said government had “made big mistakes” in handling the pandemic. They cited ‘Group Think’ among ministers and scientific advisersers preventing lockdown sooner. Poor performance of Test and Trace and social care not prioritised. Maybe next time we can learn the lessons from this experience.
As people became ill with Covid 19 supply chains became disrupted. Ports in China were closed as outbreaks occurred sporadically and elsewhere in the world too. Factories had to close or reduce their output and materials were often late or difficult to procure due to Covid.
Businesses exist in a system that is subject to regulation by governments. Institutional arrangements determine how businesses behave and act within the system. It is not simply possible to trade freely with businesses either inside the system managed by a national government or to trade internationally without being subject to regulatory frameworks put in place by governments. Even trading groups such as the EU and NAFTA have regulation so called free trade areas. This regulation is a form of protectionism. Any free market is regulated. It is the degree of regulation that gives consideration to calling it free or not. Communist states were said to be planned economies which somehow suggests that market economies are not planned when in fact they are. Both types of economy are regulated and government control ranges from total to some point on a measuring scale that is less so. If markets were completely free a business would simply hire labour from anywhere at a price it was prepared to pay for that labour without any regulation or control from government. Taxation and public spending would not be necessary if markets were completely free. Clearly they are not free if the aim is to protect industry and to provide public goods because to do that we need government to generate taxes to fund the administrative structures, regulations and investment required. There is somehow a myth of time that once upon a time we had free markets without government regulation. In this polemic it is up to merchants to manage markets and for government to manage affairs of state and never the twain shall meet. The reality is very different there has been some degree of regulation in international trade since the emergence of nation states through quota restrictions and tariffs. All forms of economic activity – feudal, agrarian, industrial, service – were subject to regulation be it manorial, guild, community, state, national and international. The pre-industrial age relied much more on local arrangements than national and international regulation. The rise of nation states gave rise to international regulations. Regulations were designed to protect a nation state from other nation states; a means of security. In England it took the form of what came later to be described as ‘Mercantilism’. It is in these roots we find discussions of trade, health security, food security and security of other national interests. In 1563 the ‘Elizabethan Statute of Artificers’ ensured overseas trade was subject to State control. Today the World Trade Organization (WTO) administers the rules by which all nations trade with each other. This regulatory authority was set up by the Bretton Woods Agreement in 1944 setting out a General Agreement on Tariffs and Trade (GATT). Trading Blocs too like NAFTA and the EU have to abide by WTO rules.
Regulation of trade has given rise to wars between nation states. When Britain tried to impose taxes on the tea trade in Boston 1773 it caused the American Colonies to break away from British rule. It was said to be “Taxation without representation.” Quota restrictions and tariffs where there are imbalances seen as unjust by one party can escalate. Others have resulted in bitter trade wars between nation states such as the Smoot-Hawley Act 1930, The Chicken Tariff war in the 1960s, The US 1987 trade war with Japan related to cars, electronic goods and motorcycles, Canada-US lumber wars, the 1993 Banana Wars betwenn the US and Latin America and the current episode between the US imposing 19 per cent tariffs on China.
Time is Money
The one thing that most business people and governments would agree upon is that time is money. The faster business can produce outputs, supply goods to customers and get payment for their service means they will generate profits to invest. The shorter these cycles become the more money they accumulate. This is capitalism. Governments too know that time is money as they collect taxes within time periods to ensure they have sufficient funds to pay for public services and affairs of state. Given that time is money it is incumbent on government to act fast to solve problems that affect the business environment and the livelihoods of citizens. It is incumbent on businesses to act fast to solve their problems too. Agility, responsiveness and resilience is an investment required by government as well as businesses if we are to increase national income in a global economy and improve the wellbeing of citizens and maintain security. Put differently, businesses can only be as good as the systems and environments they operate in. Individul businesses cannot maintain the regulatory frameworks and the business environment in which they find themselves.
Out of Time…
Below you can play an audio transcript of this article TIME in the Tony Hines Blog
Ever Given – Supply Chain Disruption in the Suez Canal
Supply Chain Resilience and Risk
Post Brexit Supply Chains UK-EU
Value, Customers and Service
Complexity and Disruption
7 V’s Explained
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At the time of writing the MSC New York is just off the coast of China at Ningbo waiting to offload its’ cargo of containers.
Source: Vesselfinder
Miquel Serracanta Domenech asked me a question last week about my thoughts on the disruptions in global shipping following disruption at Yantian and other ports in China due to Covid 19. A supplementary question was what will the new normal look like? Many businesses are asking the question: Where is my box? This got me thinking more about the problems currently being experienced by many businesses who want to import or export their goods and the knock on effect it has on global supply chains. In this article I want to examine global sea trade carried by containers in a little more detail.
Is it a case of Plato’s cave when it comes to inflated prices being charged by shipping companies and multi-modal logistics firms? In Plato’s allegory the slaves were kept in check by the appearance of guarding soldiers behind them casting large shadows onto a wall of the cave that the slaves faced. They could not look around to see the world as it really was with normal sized people not giants under penalty of death. The world they could see was one of appearance. So it is with firms acting as a single supply monopoly or colluding as an oligopoly visibility is obscured from view for the customer and this facilitates price fixing for cartels. Increasing concentration with shipping owned and controlled by a relatively few large companies and the biggest multi-modal logistics companies handling a high percentage of cargo is it the case that the rapid rise in prices for containers is somehow being artificially inflated to recoup lost profits during the pandemic? If you work in shipping let me know what you think?
Things are desperate for some UK businesses attempting to book containers to move their imports and exports. Reports of price increases as much as five times higher than a year ago for containers between Chinese ports and the UK with average box prices up by 400 per cent. Similar price increases are being experienced in the EU and in the United States. The main reasons given by shippers and logistic firms is that there is a box shortage and yet there are now more boxes in the world than ever according to the statistics held by UNCTAD, World Shipping Council and the large shippers operating in these markets. So where are they? Where’s my box? Another reason given is that boxes are in the wrong places and the shippers have not been able to move as many empty boxes to the return ports as they would in normal times. Demand for boxes is also said to be higher than normal. While these reasons are plausible it is also clear that the profits earned by the largest players are increasing despite Covid 19. So is it the case that these large businesses dominating the global sea trade have seen an opportunity to clawback some profit by fixing higher prices through a quasi cartel?
In recent episodes of my Chain Reaction Podcast disruption and complexity have featured heavily. Disruption is number one in my list of trends to be managed to achieve supply chain advantage. Layered complexity is also in my top ten too. Today’s supply chain networks are complex and the type of system complexity is what I describe as layered. Since the Suez Canal hold up caused by the Evergiven container vessel stopped the flow of sea freight travelling through it in March the situation has worsened and now we have many ports in China stopping ships from entering or leaving because of an increase in Covid 19 in their sea terminals. According to Maersk this has increased delays by two days from 14 to 16 days. This is adding much time and layers of complexity to moving goods around the globe. Nearly one quarter of China’s exports pass through Guangdong and the port cities of Shenzhen and Guangzhou. Other ports in the province including Yantian, Shekou, Chiwan and Nansha, have stopped vessels from entering. Ninety five per cent of electronic goods out of China travel this route.
When shipping lines carry containers to a port of discharge where cargo is unloaded they request permission to enter and dock at an unloading berth where the containers are lifted off the ship. Usually they are loaded either directly onto waiting transport where they are either moved directly to their onward destination or to a storage facility. If cargo gets stuck at a port for longer than the permitted berth time it incurs charges known as demurrage. These fees are expensive. They are an incentive to get things moving. Excessive delays can incur costs greater than the value of the container. Containers are often provided by shippers and they expect them to be returned to use as soon as possible after discharging cargo. Customers return them to the allocated port where they are picked up and put back in use The shipper may have to move them to a pickup port.
Detention Charge: The customer picks up the container from the shipper and loads the cargo in the box wherever they have the goods stored. The container is then delivered to the embarcation port. There is a time allowance for doing this part of the operation. If the customer keeps the container longer than that time they incur a detention charge. If customers exceed the free day allowances that shippers give they have to pay detention charges until they are returned to use. Ten years ago it was rare to have detention charges. Nowadays such charges can be $100 per day so you can soon run up a large bill.
Demurrage Charge: Once the container is inside the port again there is a time allowance for any loading or unloading. If this is exceeded then demurrage charges apply.
How much global trade travels by sea?
About 80 per cent of Global Trade by volume and 70 per cent by value travels by sea freight and 60 per cent travels from Asia with one-third of maritime trade travelling through the Straits of Malacca and through the South China Sea (Source: United Nations Conference on Trade and Development UNCTAD). Trade passing through the South China Sea is valued at $3.71 trillion. Europe and the US are heavily reliant on these trade routes. Sea freight is one of the biggest disrupters when it goes wrong the impact is high and the interconnected supply networks feel the full effect with many businesses and consumers detrimentally affected. Fifty Two per cent of DWT is under control of just five nations; Greece 18%, China 11%, Japan 11%, Singapore 7% and Hong Kong China 5%. Sixteen per cent of all merchant ships are registered in Panama. The beneficial ownership will of course be located elsewhere.
Even prior to the recent disruption some signals were already emerging from the noise. I recently mentioned the sharp increase in the cost of hiring 20 and 40ft sea containers had risen with 40ft boxes rising from around $4,000 to $10-12,000 moving freight from China to the US. Moving goods in a 40ft container from Shanghai to Rotterdam is costing in the region of $10,000-11,000 up by 350-400 per cent on prices last year. This will feed into business costs and consumer prices in the months ahead. Price inflation is likely to increase as the shortage of boxes intensifies. Most of the world’s sea containers are manufactured in… you’ve guessed it…China. Many boxes are tied up in the supply chain as they remain at ports, on ships and elsewhere because it is taking much longer to complete shipments than it did prior to the pandemic. This extra time is adding to the pressure on the existing container stocks. Three in four containers returning from Los Angeles to China do so empty. Maersk estimate it costs them $1 billion to ship and reposition empty containers annually. Most shippers want their empty containers in Asia for the next pick up. There is also a mismatch of increased demand to shrinking supply for transport.
Facts About the Boxes
It is estimated that there are 93,161 maritime vessels (Various Sources), 5,222 of these are container ships. The capacity of container boxes in use is estimated at 38.5 million dead weight tonnage (DWT), This is the weight of everything on board a vessel including cargo, people, water, ballast, fuel, food and crew. Around 1,400 containers are lost at sea annually on average. Sometimes but not often a whole ship sinks which pushes averages upwards. In a normal year up to 6 million containers are manufactured usually in China where they make 97 per cent of all containers. There are two standard boxes known as the 20ft and 40 ft container with a height of 8’6″ (High Cubes are 9’6″). While the 40ft box is exactly that the 20ft box is 19’10”. In addition there are 6 million High Cubes which are 9’6″. These containers make about 200 million trips p.a. equivalent to 811 million Twenty Foot Equivalent Units (TEU) carrying $4 Trillion in container cargo value. They travel to 150 ports in over 80 countries.
There is no complete register of containers but best estimates suggest that there are:-
23 million shipping ‘in service’ containers or 38.5 million TEU ( of these about 67% are 40ft and 33% 20ft)
14 million not in-service shipping containers or 23.3 million TEU
6 million new shipping containers or 10 Million TEU added annually
Total 43 million Shipping Containers or around 72 Million TEU
So if there are 23 million containers in use, 14 million not in service and 6 million new boxes added each year it appears that there are close to double the number of boxes available than are currently in use. This suggests that the efficiency level in container utilization is exceptionally low compared to other parts of the supply chain. So where is my box? There have obviously been disruptions die to Covid 19 but is this sector doing enough to remedy the situation? In normal times pre-pandemic demand was obviously more predictable and less volatile than it is today. Inefficiency is disguised when you can operate at lower volumes. So it maybe that there has been no urgency to improve customer service until now.
Reverse Logistics
Reverse logistics is the big issue to be tackled in shipping. It doesn’t make sense to move empty containers on large ships half way round the globe in large quantities. Maersk alone moves 4 million boxes empty to get them to where they are needed. Maersk has 16 per cent of the market in shipping containers. Improvements were made in road haulage transport when attention was paid to backhauling rather than returning empty so perhaps this is one area that needs attention if bottlenecks are to be avoided to make the supply chain more resilient. One suggestion has been for shippers to co-operate by sharing containers so that the empty box is reused at the destination port by other shippers to improve efficiencies. It cannot be that difficult in the digital age to set up a digital register of containers so that shippers have visibility to allocate, reuse and return boxes to ports of origin or somewhere else where it is needed.
So what does the new normal look like?
Well it looks disrupted. Supply chains and networks are going to need to employ agile and flexible solutions to the continuous disruptions likely to break-out without much notice. Contingency planning is the name of the new normal. Each and every supply network needs to audit and assess the vulnerabilities and risks in order to plan for those ‘what if’ moments that are likely to be more frequent. Shipping has to be a high priority to address for many. However, if you were to look beyond this immediate shipping crisis to the root-cause analysis it would suggest that Western businesses have become too reliant on China and Asia to satisfy their every need and it is the imbalance of global trade that is a major risk. A new normal might begin to examine what it takes to rebalance trade.
Layered complexity means that this has to be tackled by governments creating incentives to encourage investment in production hubs, service centres and transport infrastructure. In the United Kingdom these are areas that have for too long been put on the back burner. In the US the Biden Administration is committed to making supply chains more resilient and this requires significant investment. It would be good for UK policy makers to do something similar. If government needs some encouragement to think this through then it might be worth pointing out that Factory costs in China have risen by more than 9 per cent in the past year which is higher than in the previous decade. They are likely to continue on this trajectory in the short to medium term as they struggle to contain cost. Consumer price inflation in the US,UK and Europe is also on the rise. While international trade brings many benefits it has to be balanced. Balance is needed for stability, risk reduction, reduced environmental impact and to secure employment. It is also necessary to build strategic capabilities. While China has been building its strategic capabilities much of the developed world has been sleep walking into a turbulent future. Downsizing, offshoring and outsourcing may all sound attractive when faced with immediate threats or in search of immediate returns on profit and performance measures. They were relatively easy ways for global companies and their accountants to push cost overseas while at the same time lowering them. It is not the way we should build the future. We need to build back better. It is time to reskill, relearn and reinvest for a better future. This is not a simple argument to re-shore or near-shore although there may be benefits in doing so in some cases. This is an argument about rebalancing the economy. A manifesto for making it resilient and fit for purpose.
So what are pressing problems? When it comes to business we often think that we have many pressing problems. In truth there will be just a few. These are the problems that will disrupt the business if they are not addressed. In the strategy literature they refer to such problems as those that are critical. Identifying such problems is not always easy. Often this is because managers spend more time doing than thinking. It is essential that tiime is set aside for thinking.
Some time ago now I spent a day in London speaking with the then UK CEO of Diesel the clothing retailer and I asked him how he spent his week. At the time I recall being surprised by the answer. I was expecting him to tell me what most other CEO’s were telling me at the time about how important they were to the success of the business and without their drive and foresight what a disaster it could be along with the many managerial concepts and insights that they had brought to enlighten the business. In the case of Diesel almost none of this was in the answer I received. The most striking parts of the discussion focused on the many store visits made by the CEO incognito to understand the business and the competition. The focus on the failures and mistakes and what they had done to identify causes and rectify what they considered to be those threatening future business was paramount. He regarded days spent in HQ as wasted days apart from the necessary team meetings and activities designed to develop his team. It was important to be active gathering data from observations about his business and talking to others about theirs. He also read a lot of business books alongside many about design. He spent a lot of time thinking about how to improve the business and had a good grasp of the end to end supply chain. When I came away from that meeting I began to think more about what I had learned from this interview.
One of the first things I did was to read more about failure and what can be learned from it. Many business and strategy books focus on success. The narrative is often a smooth passage from a sleepy start to an unfolding growth pattern by employing technical solutions, management techniques and a few four box matrices but this is far from the truth on the ground. It is one of those lightbulb moments when your experience is different from what you are reading.
Learning from Mistakes
There are books that cast light on the darkness and one of those was something I regarded as a strange book at the time I read it called ‘The Goal’ I think I picked up originally because I thought it was about football with its striking cover design. This book was an important find as it articulated in a short novel a story about a plant manager saving the business. As it unfolded it was clear that identification of the problem was the first step in a process to remove constraints. This and a later book by the same author Eliyahu Goldratt introduced me to something called ‘The Theory of Constraints’. It struck a chord with me as I had become familiar with the idea of constraints from my studies of Linear Programming Methods optimizing an objective. The basic concept is that ‘a chain is no stronger than its weakest link’. Throughput, operational expenses and inventory are key areas of focus that need to be managed in supply chains. If you search for weaknesses you will be able to identify the one or few that may be critical. Ongoing improvements can only be realised by identifying limiting factors and removing them. Constraints are anything that stop the system from achieving the goal. The key messages from the Theory of Constraints are as relevant as ever. You may adapt and apply the theory to many different contexts.
Reflexive Managers
We know that reflexive managers learn from their mistakes. In developing processes and practices with the aim of improving performance we learn to adapt and respond flexibly to the circumstances we are faced with. Resilience is a term that we use to talk about effective responses to bounce back from events that disrupt performance. We can draw analogies from sport where high performance levels are expected by those teams and individuals that win prizes. To know what it is like to win, maintain fitness and skill levels that enable us to compete we have to practice regularly. We learn how to improve performance through reading and observing stories about other athletes who have achieved success. Often within these stories there are moments of doubt, tales of endurance, commitment, mistakes and resiliance. So it is in business too. If we want to improve a situation we need to know reasons why we may not be meeting our expectations or underperforming. We need to focus on the constraints that might be holding us back but we also need to focus on specific failures to understand why they happened. It is necessary to understand mistakes so we can learn from them. Reflexive managers create learning organizations. Learning organizations are resilient. Learning from failure is expected in resilient organizations. Failing to learn is unacceptable.
Peter Senge talked about the fifth discipline in his book of the same title. In it Senge describes the five disciplines as: personal mastery, mental models, shared vision, team learning and systems thinking . The fifth discipline systems thinking creates pathways to the future. Focusing on critical issues by being open in discussions about the organization and open to receiving ideas about how to get to the future by involving everyone in the conversation is a means of unveiling the biggest issues and discovering solutions to the pressing problem(s) . Senge, identifies one of the key bottlenecks as the mental models that lock people into positions blinding them to the realities of the current conditions and situations they face. This resonates with Kurt Lewin’s approach to change management as a process. First you have to unlock the entrenched positions that prevent progress, once transition is reached the process begins all over because people are creatures of habit so they refreeze the new mental model. Lewin argued that this transformation was a continuous process.
Solving Pressing Problems
Before we can solve any problem we have to identify it. Sometimes this is straightforward as in the case of a particular supply issue. These types of problem come to us rather than we go in search of them. The impact is immediate. The magnitude can be calculated. The solution is usually straightforward such as change supplier. Other problems might be latent. Latent problems are often more complex in nature. Latent problems need to be identified in other ways. There are a number of tools and techniques that can be employed effectively to do this such as: DMAIC which is an acronymn for Define, Measure, Analyze, Implement and Control or SREDIM which is another acronymn Select the problem, Record events (Observed, Experienced, Identified), Examine and evaluate the problem, Develop possible solutions and after evaluation choose one to Implement, and Maintain by monitoring the solution and making adjustments as necessary. Other root cause analysis tools include the Ishikawa or Fishbone Diagram to identify causes, along with simple questioning techniques such as the Five Why’s so named because the cause is usually identified inside the fifth why. This was developed and applied as part of the Toyota Manufacturing System and is widely used in Kaizen to eliminate waste (Mura = uneveness, Muri = overburden, Muda = waste) and to improve efficiency in Lean Manufacturing Systems and in Six Sigma to achieve zero defects. The Five Why’s are used in conjunction with the Ishikawa diagram to establish cause and effect.
Problem solving tools and techniques are useful to help structure the problem and search for possible solutions but they are not a substititute for systems thinking, strategic thinking and practical wisdom which comes from experience and practice. Technical solutions while necessary are often not sufficient to solve pressing problems which are layered and complex. For example, a technical problem might be identified that a particular piece of software needs a patch to make it work. However, if we take a systems view it might be the case that different software is required to handle all the operations we now have to manage. Furtnermore, we may require investment in new software systems and new hardware to ensure that the new system will work. Going beyond the narrow sub-system and examining the interconnectivities may require further investment in infrastructure and training to achieve the goal we have set for the organization. So what we might have thought of as a technical solution quick fix is more of a pressing problem to change the system to meet future needs of the organization. Put differently, we have grasped at a technical solution to fix an immediate problem but failed to grasp the magnitude of the latent pressing problem which is to build future capabilities to transform the business.
Conclusions
The pressing problem is one that will disrupt your business. The problem that is, or will prevent you from achieving your goal. Often the problem is in clear view. Sometimes the pressing problem is hidden from view. The latter type the latent problem may require investigation of other issues before it becomes visible. As they say in the best crime novels it is hidden in plain sight which makes it difficult to see. It is the paradox of some latent problems. This is why it is necessary to be vigilant and involve people in the organization in the conversation. Supply chain visibility is essential to uncovering any hidden problems. Solving the pressing problem is the difference between achieving the goal or missing the target.
When you get the invitation to the ‘C’ Suite it is something you worked for, you may feel worthy and you hope you will now be rewarded for your business experience, organizational and leadership skills developed during your career. Those things may have qualified you and opened the door to the office of CEO but your future success will rest on results not the attributes that others have acknowledged in appointing you. However, it is worth reflecting and acknowledging all may not always be as you had imagined. There will be times when you wish you had protective clothing similar to the photograph to protect you from the outside world which can be a hostile environment. It may not just be the outside of course sometimes threats come from within your own organization. So what are the responsibilities that accompany the invitation into the ‘C’ Suite strategy room?
Leadership is defined by results not attributes.
Peter Drucker
CEO’s Responsibilities
The Chief Executive heads up the ‘C’ Suite. The ‘C’ Suite is comprised of the Board of Directors responsible for running the company. The CEO leads and the directors direct. The Board are paid to manage the business on behalf of shareholders and they balance the needs of other stakeholders including employees, customers, suppliers and wider public interests. The organization’s culture determines how this works in practice. For example, is it top down or collaborative but no mistake the CEO has the ultimate responsibility for the company meeting its objectives. Responsibilities come in the form of leading the organization and all that means. There is no hiding place. Every decision will be scrutinised, analysed and criticised, it goes with the territory.
Leadership is the capacity to translate vision into reality.
Warren Bennis
The CEO is responsible for leading, developing and executing organizational strategy and achieving the goals set. Organizational effectiveness, efficiency, profitability and return on investment are three concerns for those occupying the ‘C’ Suite. As Warren Bennis put it “leadership is the capacity to translate vision into reality”. It is a skill developed through experience.
Between 70-90 per cent of a company’s assets are tied up in the supply chain. If you work in or are responsible for your organization’s supply chain it is likely to represent much of the Balance Sheet value. Fixed Assets can include warehousing, production, handling equipment, plant and machinery including delivery vehicles, cranes, fork-lift trucks, ships and in some cases aircraft. Inventories on many company balance sheets represent somewhere between thirty and fifty per cent of the value. When you add it all up you will see why the supply chain contains a lot of the value and it all needs to be managed to achieve the company’s strategic and operational objectives. Supply chain pro’s come in all shapes, sizes, from different backgrounds with a range of skillsets. Having the ability to communicate effectively in written and spoken word along with numeracy and analytic skills will establish a good foundation for the future. Today roles carried out in the supply chain provide an excellent training ground to learn about business. Forget the MBA as a stepping stone to a leadership career learning on the job may be more valuable especially if it is in the supply chain. If you know about sourcing, procurement, production operations, warehousing, distribution and customers then you have acquired a range of transferrable skills that might take you all the way to the ‘C’ Suite and even to CEO.
You may think about acquiring formal qualifications on the job as part of your continuous professional development while you get paid. Staying in touch and keeping abreast of competitors demands a commitment to continuing professional development (CPD). CPD can take many forms and it is not just the formal qualification, short and long course routes that matter. Learning from others inside and externally, keeping up with trends and as any sporting professional will tell you there is no substitute for real game time by which I mean experience.
Experience is not what happens to you; it is what you do with what happens to you.
Aldous Huxley
Supply chains are a source of value, cost and differentiation. When Michael Porter first wrote about competitive advantage I doubt he was thinking necessarily about supply chains although he did introduce the term value chain to the world in 1985. The term ‘supply chain’ was only coined in 1980 and did not come into wider use until much later. Nevertheless, supply chains are the central focus for many businesses wanting to achieve competive advantage. It is easy to see why it covers every stage from sourcing through to delivering the goods and services to customers. Supply chains are the central spine of most organization operations embedded in wider networks creating value for supply chain partners and customers. I once read that if you wanted to move to senior roles as a supply chain professional you needed to talk the language of finance – ROI, Profit Margins, Asset utilization and less so about fill rates, returns, backhauling, work-in-progress, fullfilment, stock-outs, back-orders, purchasing and sourcing. The truth of it is like most things in life somewhere in between. Isn’t it about time that the the ‘C’ Suite occupants were able to speak supply chain? Understanding the organization’s supply chain offers the capability to understand the business and potential sources of competitive advantage. Well the good news is that some do!
Many people on the Board of retail businesses, FMCG and manufacturing companies have spent some time working in the supply chains of businesses where they cut their teeth. The skills are transferrable and could take you on a journey to the ‘C’ Suite and even to CEO. There are a number of notable CEO’s with previous when it comes to supply chains including Tim Cook at Apple, Alan George Lafley at Proctor and Gamble, Tom Hayes at Ocean Spray Cranberries Inc. and Mary T. Bara at General Motors. This experience has proved invaluable when they step up into leadership roles. It has a number of benefits that include respect from the workforce knowing that you are one of them cut from the same cloth, know and understand the detail of what makes the business tick, and the skills you learned performing supply chain roles not only informs what you do but also helps identify capabilities and competencies that the organization requires. Flexibility and agility are not just supply chain concepts they are necessary to think, plan and guide an organization to a future position. Experience of teamwork and development roles on the way up will prove necessary at the top to move the business forward. Supply chain pro’s have a lot to offer when it comes to being the CEO.
TONY HINES BLOG 