The top supply-chain issues keeping U.S. executives awake

Just getting back from South Korea has made me realize how amazing it is that we live in a world sustained by global trade. The stark difference between North and South Korea prompts a lot of reflection about the benefits of global trade. America’s longest-serving Secretary of State, Cordell Hull, reportedly said, “If goods cannot cross borders, armies will.” But business faces its own struggles in its own trenches trying to make goods cross borders, whether these are company, state or international borders. Here is a list of 10 challenges businesses face today in trying to make trade work better.
• New lease-accounting rules. Changes in accounting rules (earliest, 2013) will make it more expensive to lease capital assets. Leases will show up on balance sheets as assets or liabilities, which will make balance sheets grow. This will affect leverage and capital ratios. Many managers may ask, “So what?” But they shouldn’t: logistics and supply chain management tends to have higher leased assets than most industries (“nonasset based”), so this change has the potential to alter the market structure.
• Credit availability. The financial meltdown and mortgage crisis may be over, but credit is still tighter and more difficult to obtain. Pending inflation has firms scrambling for credit now before it becomes too expensive
• Tepid consumer demand. The economy is slowly coming back but not as fast as expected. Unemployment reached record levels in recent times, with Rhode Island still at 10.9 percent in July and 8.3 percent nationally (4.8 percent is “full employment”). The ISM index for manufacturing has contracted for the past two months, reflecting a slowing in demand; the non-manufacturing index has grown for the past 38 months, but its growth also has slowed in the past two months.
• Site selection. Businesses will need to reassess what your network looks like and assess system utilization. As transportation and other costs increase, more warehouse locations are called for. Businesses that don’t stay ahead of real estate and other aspects of site selection will pay the consequences in reduced customer service. • Growing sustainability movement. America is starting to discover “green” supply chains. Whether measured by carbon footprints, gallons of fuel, or congestion, more cargo will shift away from truck. Eighty percent of the U.S. population lives within 200 miles of a coast, which will cause a shift to more ship/rail intermodal movement.
• Security. Most people live the consequences of increased post-9/11 security every time they travel, but other supply chains are facing similar cost pressures for security screening, especially for food, pharmacy and electronics supply chains, all of which face mandatory quality inspections and certifications of origin to guard against socially undesirable inputs such as “blood minerals” or poor labor practices. Additionally, piracy around the world and container theft within the United States have increased in both violence and frequency. Some ships are hiring Special Forces veterans for travel through problem areas.
• Business interruption risk. The tsunami and earthquake in Japan demonstrated the “butterfly effect” in modern complex supply chains. Eyiafiallajokull (Iceland) and Puyehue (Chile) demonstrate how volcanoes can affect wide geographic areas, and this year’s droughts may have an even greater impact on the world’s food supply chains. Modern supply-chain practices such as JIT and consolidated supply bases increase vulnerability to disruptions.
• Budgets. Uncertainty increases complexity and difficulty to effectively budget. Uncertainty differs from risk because risk is quantified (often as a probability), whereas uncertainty embodies the fact that we are operating at the limits of human knowledge and rationality. • Transportation capacity. Our transportation system is still in the process of adapting to the massive shifts in global trade patterns. In 1995, no major liner called at a mainland China port; now, every liner does. “Slow steaming” demonstrates carriers’ efforts to reduce operating costs while increasing capacity utilization during the downturn. By 2015, highway congestion will cost $133 billion and 2.5 billion gallons in wasted fuel. Congestion also acts as a brake on job creation. Compounding the congestion problem is ATA data indicating that large fleet driver turnover has risen from a historical 80 percent to 90 percent this year. With a projected shortage of 111,000 by 2014 due to low recruitment and increased regulation, trucking capacity will become increasingly scarce.
• Volatile energy and transportation costs. Although high energy and transportation costs cause hardship, at least when they are predictable, they can be planned for. Southwest Airlines garnered headlines a few years ago when it made a $3.5 billion deal for fuel just before the cost of crude climbed, but it turned out to be a one-time stroke of luck as fuel markets have become highly unpredictable. For example, the monthly change to diesel fuel price per gallon before the downturn was near 2 percent, but in the past five years it has nearly doubled to 4 percent – meaning that price swings both up and down have doubled in size. •


Ted Farris is a professor in the department of marketing and logistics of the College of Business at the University of North Texas. Michael Gravier is an assistant professor of marketing at the College of Business at Bryant University. Mr. Gravier will deliver a speech on the above topic during lunch at Bryant’s Supply Chain Management Summit, scheduled for Aug. 23.

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