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“The Fed is no longer assuming supply-chain problems will heal through the year,” chair of the Federal Reserve, Jerome Powell, said last week. Later he commented, “If we knew now that these supply blockages, really, and the inflation resulting from them in collision with, you know, robust demand – if we knew that that was what was going to happen, then in hindsight, yes, it would have been appropriate to move earlier” in raising the benchmark interest rate.
The issues with the global supply chain are deeper and more complex than what is reflected in the political rhetoric from the Departments of Transportation and Commerce in the marketing of current programs. Solving the global supply chain issues would help inflation (now the highest in twenty years), but the touted programs are not the answer. The programs are superficial lacking a good understanding of supply chain fundamentals.
Unraveling The Political Rhetoric
Let’s examine the issues with the current political rhetoric. On March 15, 2022, the Department of Transportation announced the Freight Logistics Optimization Works— with the acronym of FLOW— to speed up supply chain delivery times and reduce costs. FLOW is an information-sharing initiative between eighteen initial participants: private businesses, warehousing, logistics companies, and ports. The goal is to test a proof-of-concept of information exchange to ease supply chain congestion by the end of summer 2022. Will it work? My forecast? The pilot may successfully exchange data but not achieve the goal of improving supply chain flows. The program shows a very rudimentary understanding of what is needed to solve a much deeper problem.
With the war in Ukraine, Supply chain leaders report that supply chain flows today are more variable than a year ago. Things are getting worse, not better. So dire is global port congestion in Europe and North America that it has rendered 12.4 percent of global ocean vessel capacity unavailable. For reference, in the pre-pandemic era, only about two percent of the worldwide total was trapped by delays at any given point in time. The top eight ocean carriers control more than 80% of the ocean freight market. In 2021, ocean-freight carriers made over $150B in profits, up nine times from the prior year. Clogged ports are a symptom of a systemic problem with the global supply chain. With congestion, prices will continue to rise fueling inflation. The systems are paper-based, and the many parties (port operators, drayage drivers, container pools, longshoremen and rail yards) are not synchronized. What is needed is chassis-free unloading and port automation.
FLOW is hailed to complement the 550B$ Bipartisan Infrastructure Law (BIL). While the Infrastructure Law is marketed as a program that will speed the flows in ports, highways, and transportation infrastructure, the rhetoric overstates realistic improvements. Only 3% of the bill will improve port infrastructure—primarily dredging and port redesign for larger ships over 10-15 years. The bill will not fundamentally change port unloading to enhance efficiency. Chassis issues and synchronization problems between port operators, drayage drivers, ocean carriers, and longshoremen remain. The bill will not automate unloading at southern California ports—receiving 40% of the Asian inbound— which are the most problematic. The rate of Asia-US West coast ocean inbound is 170% higher than at the same time in 2021. Asia-US East Coast prices are 200% higher than rates for this week last year (Source Freightos).
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Labor issues remain at the ports. Today, manufacturing companies should prepare for a potential West Coast dockworker strike in July. The COVID issues in the Chinese ports add to both uncertainty and variability.
What Is Missing?
Supply chain issues fuel inflation. The issues are complex and multi-faceted. The problem with the supply chain programs over the last administration is the sole focus on logistics without a holistic appreciation that the supply chain in the commercial world is procurement, manufacturing, and logistics. While logistics is the dominant flow in wartime, the supply chain is much more than just logistics in the private sector.
Which leads me to the question, “If the government was serious about driving supply chain information flows, what steps should they take?” Here is my recommendation:
1) Carefully Define Terms on Each Step of the Journey For Improvement. Invest in talent. In the launch of recent programs buzzwords abound: programs stall without clear definitions. For example, what does Made in America mean? Supply chains are four and five nodes with interconnected flows. These shipments are not linear. Is Made in America defined by labor input, cash-flow sources, or materials consumed? While the goal is clear to focus government spending on regional and local supply chains, there is no standard of identity. The new carbon emission legislation is another example. What is the definition of carbon? How is it tracked? With 72% of the global impact of the supply chain outside of the four walls of the supply chain, how can companies best track and trace to improve carbon impact? Today, there is no clear standard or value network for tracking either of these programs. Audits will not be sufficient. We are sending supply chain leaders on a goose chase in the face of unprecedented variability. The learning? Initiate programs with clear terms and standards of identity.
2) Implement Authoritative Identifiers. The planned initiatives require a higher level of track and trace and the need for authoritative identifiers. Today, the supply chain is a black hole: there is no definitive identifier for a company, a manufacturing site, or a distribution center. We have more information on the scan of a bar of candy across a checkout aisle than we do on global shipments. Without authoritative identifiers, informed flows are not possible. The remedy is to mandate the use of ISO-8000 identifiers. These would be similar to EINs for taxation but would require all organizations to update their enterprise systems to record and manage flows based on unique identifiers in and out of facilities and through supping modes/lanes. With clear definitions and authoritative identifiers, supply chain leaders can focus to deliver real change. Today, due to the lack of clarity, companies are not sure what to do next.
3) Mandate Interoperability Between Existing Parties. The FLOW program fails to acknowledge that Supply Chain Operating Networks exist today for thousands of trading partners. The problem? They do not interoperate. Without uniform data standards, interoperability is essential. (Integration is the passage of data while interoperability ensures what when data is passed that the systems maintain referential integrity, semantic reconciliation, and data context.) Just as DARPA was the catalyst for the internet, the government should build a network of networks across existing networks. Mandate that all existing network players—Ariba (SAP), CH Robinson, Descartes Systems Group, E2open, Fourkites, GHX, IBM IBM , Maersk TradeLens, Nulogy, OpenText, Project44, TrueCommerce, and Transporeon— to share data in well-defined canonicals and adopt authoritative identifiers. Build interoperability by starting with orders, shipments, receiving, carbon emission, price management, and inventory availability sharing. Automate ocean, rail and air flows into the existing networks don’t recreate the wheel.
4) Implement Port Scheduling and Visibility. Today, ports are scheduled without recognizing constraints. Implement port scheduling systems based on constraint-based logic at all ports. Synchronize the port: schedule the chassis and the inbound drayage by berth when a container is booked. Automate the flows and reduce the dependency on manual and disconnected processes between the multiple parties.
5) Educate. Implement network design training for all manufacturers—mandate it for government contracts. Help companies move past a superficial understanding of the supply chain based on transactional costs to design supply chain flows based on variability, risk, and constraints. (Only 9% of manufacturers design flows and 93% of supply chain decisions are made on spreadsheets. Companies making decisions on spreadsheets cannot manage constraints, and ensure a feasible plan or delivery on schedule.) The answer is to design buffers and and rationalize nodes based on variability. To do this, design a supply chain leadership program requiring all government suppliers to design supply chain flows to better understand port, planet, and government infrastructure impact. To accelerate a change in behavior consider taxing inventory that sits—perhaps for more than six months— in warehouses. The issue? Today’s ports often move goods that are not needed only to sit in warehouses for months. The ports are congested, and the warehouses are full usually with the wrong inventories. On average, manufacturers are carrying thirty-two more days of inventory today than in 2007.
Supply chain stakeholders deserve reliable, predictable, and accurate information about goods movement, but FLOW and the BIL are not the answer to improve supply chain reliability.
Consumers need the supply chain to work better for them. The supply chain is too important to the economy and general welfare of society to leave it to cowboys playing politics. We need less talk and a more informed focus on building supply chain fundamentals into value networks.