Logistics Series – Blog 6 – Marine Fuel Regulations? Brexit? Coronavirus? The Global Economy and Supply Chain Keeps Taking Hits

Logistics Series – Blog 6 – Marine Fuel Regulations? Brexit? Coronavirus? The Global Economy and Supply Chain Keeps Taking Hits

Back in June of 2019, we posted a blog title “Global Economy Vs Transportation Industry” and it
focused on how a variety of global and domestic events can truly test how prepared one’s supply chain is when faced with new sets of obstacles and hurdles. From recessions to driver shortages and from tariffs to the holiday season, some changes or disruptions to the global economy are very predictable while others are quite sudden and highly impactful.

Previously, I have stated, “Shippers must also be prepared for the unexpected shift in supply chain patterns. There could be an influx of a particular product entering the system or there could be cases where the opposite is true. Something as simple as bad weather can cause common spring and summer goods to be sitting on the shelves instead of in the back of a truck.” I then went even further and stated “When extreme weather conditions threaten the US, there are several short and long term planning options to consider. Shippers can move freight out of a region early if something like a hurricane is imminent. In other cases, like an earthquake, time is not something a company has so moving freight ahead of time is not possible. Companies can have a list of back up suppliers and vendors so if critical items needed for production cannot be shipped from a particular region, a backup is in place from a totally different region.”

Those comments focused around severe and extreme weather events. There was no mention of a global pandemic. Or a change in regulations on marine fuel. Or what would happen if England decided to leave the European Union. All of which have happened within the first two and half month of 2020.

With all that said, all of these major body-blows to the global economy and supply chain relate in a way that is very important when trying to develop and maintain a well-run logistics network with limited disruptions and optimal pricing. Timing is critical.

Even the most prepared shipper with the most well-thought-out network with dialed in pricing models can’t be prepared for everything that has happened so far in 2020. I completely agree in measures companies take to help mitigate potential disruptions or price hikes. Some of those measures include diversifying your supplier base, becoming a shipper of choice (Logistics Series – Blog 5 – The Art of Becoming a ‘Shipper of Choice’), and using planning models to become predictable and reliable in your process.

Price increases are part of the game. We would all like to be able to reduce cost year over year but the key to doing so is knowing when to strike (run a RFP) or when to accept a negotiated, fair, market appropriate increase. Often the most important goal to a shipper is to limit the disruptions to the supply chain. Understanding when to take a hard stance and expertly negotiate cost decreases or possibly even switch vendors for even greater savings is very dependent on the state of the industry and the global supply chain. It is possible, that doing nothing, could be the best option.

One final piece to this blog, here are a few bullet points on the three main supply chain pains of 2020:

IMO 2020 – Marine Fuel Regulations:
  • IMO banned ships from using furls with a sulfur content greater than 0.5%
    • Previously was 3.5%
  • Regulation aimed at improving human health by reducing air pollution
  • New regulation causes shipping lines to incur additional costs
    • Some carriers have already invested as much as $2 billion/year in this area
  • Ocean shipping is predicted to see price increases throughout 2020 to offset the increased cost of fuel
  • Due to IMO 2020, cost of marine fuel doubled
    • 1/3/2019 3.5% heavy fuel oil (HFO) was $363/ton
    • 1/3/2020 VLSFO was $724/ton
  • The changes in fuel prices and the implementation of surcharges means shippers may require a different approach to their annual contract negotiations
  • Short term effects will be time, partial trade contraction
  • Long term effects will be structural changes with adjustments in logistics and value-added chains therefore the location of productions and partial reorientation of trade flows is more than certain
    • Also long term: allocation of resources, reallocation of production, and resulting impact on economic growth Reduced trade
  • Almost half of UK's exports distributed to countries within EU
  • After Brexit this number will decrease and over time will hurt UK's GDP
  • Reduced trade across Europe's mainland leads to a decline in demand for road haulage (regardless if rate of export remains unchanged)
  • Stricter border control
    • Increase in barriers at borders for administration of trade in both directions
    • Decreases efficiency
    • Goods transported slower
Coronavirus (Chinese Exports):
  • Wuhan which is a manufacturing hub is on lock-down
  • Industries impacted by shutdown
    • High-tech industry
  • Foxconn is a critical manufacturer in high tech supply chains
  • Other active contract manufacturers for high tech products are located in regions with similar restrictions as Wuhan
  • Hard to easily transfer/start up high tech production facility due to its high costs therefore causing the options in the short term to be significantly reduced
  • Wuhan heavily supports/impacts automotive industry
  • Robert Bosch GmbH (one of the largest auto parts makers in the world) closed 2 of its plants near Wuhan
  • Hyundai in Korea announced they ran out of Chinese parts for their just in time inventory process
  • US and European car manufacturers estimate they are 3-4 away from running out of their Chinese supplies
  • Due to China being the largest exporter of intermediate products, its closures are severely disrupting global supply chains
  • Even if secondary suppliers were to be utilized, the surge in demand will overwhelm them
  • Many supply chains are vulnerable because supply chains within supply chains and even their supply chains rely on each other for parts and raw materials
  • Hyundai had to suspend operating at a manufacturing plant in Korea due to its inability to receive parts from China
    • Hyundai is one of the first to announce its interruption in manufacturing
  • Probably won't be the last though
  • Airlines and air cargo were first on a restricted holiday schedule but now are suspended
  • Many factories and logistics warehouses are on extended leave, not just in Wuhan but in other large Chinese cities
  • For the factories that are not being forced to shut down, people are scared to go back to work
  • Some companies are trying to source parts to stock up on inventory but this will cause various shortages therefore increasing premium pricing strategies and part hoarding
  • Should products be exported from China, there would be extensive screening for the virus at seaports, airports, and other China border crossing thus causing severe delays
Coronavirus (US Imports):
  • In just 4 weeks, the concern went from the Chinese Export market into the US to a mass manufacturing stoppage where the goods unable to come into the importing country is becoming less and less critical
  • This will get worse before it gets better
  • Stay Safe Everyone
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Joebles Chicago

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