Friday, 23 April 2010

Has Volcanic Ash Lessons For Logistics?

Warehouses put money to sleep, pithily remarked one Toyota vice president, but idled assembly lines can cost far more. This is now the prospect that faces car production plants worldwide as air-freighted key electronic component supplies dry up, caused by the Icelandic volcanic ash cloud which grounded all flights to much of Europe for five days.

Some 40 years ago such a world-disrupting event would not have raised a logistics eyebrow because all factories had some buffer stock that would tide them over for weeks or more and/or relied on locally-sourced parts. But in today's globalised markets, typified by dependence on complex worldwide supply chains geared to Just-in-Time (JIT) deliveries, that is no longer an option but the Icelandic event does, at least, spur a rethink of JIT techniques. But what, if any, changes should be made to stretched supply chains, particularly with respect to JIT?

Doubtless, expansion in global trade, partly underpinned by JIT, has done wonders to reduce world poverty. The most globalised countries, like Chile, China, Thailand and Bangladesh, to which much Western manufacturing has been outsourced, have grown the fastest and benefited the most. This helped cut world extreme poverty, defined as less than $1 a day, from 28% to 21% between 1990 and 2001, while infant mortality rates between 1980 and 2002 fell and life expectancy rose in low and middle-income countries. If only for that reason, JIT and globalisation are here to stay but vulnerability to disruption much be reduced.

Airfreight may only account for a tiny fraction of freight by weight --about 0.5% for the UK, but in value terms it is 25% and for Ireland 30%. Most UK car makers use suppliers near their factories and mainly road and sea for most deliveries, but high value electronic components come by air from far-flung places where production costs are much lower.

A case could be made for manufacturers to stock higher levels of these small electronic components at point of assembly and use more road/sea deliveries. While this would add to logistics costs it would be far cheaper than idling whole plants for the want of tiny components or, worse still, losing overseas markets to unaffected, opportunistic suppliers. As explained by the Irish Exporters Association's chief executive, John Whelan, "the big thing is to hold onto your customer base. Asian suppliers will try to grab US customers of European exporters and US suppliers will do the same in Asia."

The Icelandic event may be a rare occurrence and so prompt many to deride any calls for higher stock levels of air-freighted items. However, JIT-orientated manufacturers are exposed to a legion of disruptive supply risks and just one, tiny, isolated incident can be highly damaging. One of the most unlikely examples was the collapse of a container crane at Southampton Container Terminal in 2006. It disrupted parts supply to Honda's Swindon car plant so much that the whole plant was closed temporarily.

There are, of course, techniques for efficient disaster recovery, anticipatory measures and production philosophies that could sidestep or ameliorate supply chain disruption. Useful guidance on this can be found in Yossi Sheffi's book, The Resilient Enterprise.* As the book explains, insurance companies have well-developed models of the likelihood of earthquakes, floods, hurricanes and tornadoes for America and other countries. Volcanic eruptions are usually preceded by tremors but these signs are often dismissed or ignored by managers. Supply chain managers need not become Earth scientists but they could do better by reacting faster to top up critical item supplies by air before it is too late.

In time, the global supply chain environment could be expected to change for the better in terms of JIT risks. More global corporations see the value of locating their manufacturing and supplier base close to their main markets. Not only does this reduce supply chain risks it also enhances quality control and faster response times to customers' changing demand patterns. It seems customers require products faster than supply chains can respond. The growing prosperity of Third World countries like China will also erode their cost advantage, while transport costs will also rise.

On top of all this is the joker in the pack -- environmental concerns. Although the jury may still be out over the causes of global warming, the vociferous environmental lobby should not be underestimated. New legislation through tax disincentives, et al, would discourage far flung global supply chains. As to whether that would economically harm industrialising countries, and so pose political risks, only time will tell.
*The MIT Press, Cambridge, Massachussetts, 2005

Sunday, 11 April 2010

Will Noro virus scupper cruise market revival?

After two years of declining fortunes typified by slashed prices, cruise lines see better times ahead with rising bookings and prices but will the smallest of organisms, the Noro virus, scupper the nascent revival?

The cruise lines badly timed their expansion plans when laying down orders for new ships several years ago, which came on stream just when global credit markets imploded. The situation, however, could have been very much worse if it were not for the growing British love affair with cruises. The Passenger Shipping Association, for example, shows that more than 1.5 million people took a cruise last year, up 4% on 2008 and nearly 50% since 2005.

It is not hard to see why such growth occurred when recession hit other travel markets badly. Cruising is one of the most pleasant ways to spend a relaxing holiday, offering many new sites and entertainment more competitively priced than most land-based holidays. But what land based holidays do not normally have is the Noro virus, which sadly has reached epidemic levels on many cruise ships.

This vomiting virus has the power to cripple the cruise industry and even, on occasions, endanger the running of the ships if sufficient crew members go down with the bug at the same time. On more than one occasion cruises have been cut short for just such safety reasons. The reason for the concern is that many passengers struck down by the virus have said they would not cruise again. This is an understandable reaction because the bug can ruin a cruise. Although the vomiting only lasts for 1-2 days, passengers are normally ordered to remain in their cabins for another 3 days until they have been given the all clear by the ships' doctors. Being mewed up in a small cabin for 5 days is like serving a costly prison sentence.

So far it seems that the media and cruise lines have tended to blame infected passengers for bringing the virus on board. This may be so on some occasions but there is far more to it than that. According to the US Food and Drug Administration, person to person transmission of the Noro virus has been well documented but the virus is transmitted by the fecal-oral route by contaminated water and food. Water, says the FDA, is one of the most likely causes of the virus and that must include water stored on cruise ships. This raises concerns about where potable water is taken on board and why, it seems, there is never a mention of whether the water was tested and what the results of those tests were.

Food supplies can also sicken passengers. The FDA reports that shellfish and salad ingredients are foods most often implicated in Noro virus. This suggests that increased cleaning everywhere on infected ships and frequent hand washing with spirit lotions will have little effect. This writer's own experiences bear that out. On taking a 24-day cruise last November on board Fred Olsen's Balmoral, I had been warned that there might be departure delays caused by sanitizing the ship owing to a serious outbreak on the preceding cruise. Such cleaning, however, did not stop the almost immediate outbreak of the virus on my cruise which lasted almost the whole voyage. The Celebrity's Mercury cruise ship may be another case in point. On two of its most recent cruises alone around 600 passengers fell ill but does that seriously suggest 600 people simply failed to wash their hands?

Cruise lines must clearly do more than sanitizing if they do not wish to see their fortunes impaired by class law suits and a waning interest in cruise ships turned plague ships. One travel law specialist, Irwin Mitchell, already has over 80 angry customers of Fred Olsen Cruise Lines following 5 separate outbreaks over the last few months on Boudicca.

The Centre for Diseases Control reports numerous outbreaks of Noro virus on cruise ships operated by Celebrity Cruises, Cunard, Holland-Amerika Lines and Royal Caribbean. If left unchecked there will be an avalanche of claims against the lines. Now is not the time to imperil the recently launched, costly cruise ships like P&O's Azura and Royal Caribbean's Oasis of the Seas (225,000 tonnes) simply because health and safety issues remain sloppy or inadequate.

This writer has viewed many cruise ships in ports and all failed to have all their rat baffles (guards) in place. Such baffles may no longer be a legal requirement, except where there is a serious rat infestation or plague but their lack of use is symptomatic of the sloppy procedures undermining passenger health and safety.

Saturday, 3 April 2010

MoD's stock mismanagement threatens security

In what must be one of the most damning indictments of a Government department's financial ineptitude the Defence Select Committee has excoriated the UK's Ministry of Defence (MoD) for its accounting failures. In its annual report on the MoD's accounts, published on February 24, the Defence Select Committee comments: "Failures in the administration of service personnel and sensitive equipment are unacceptable" This has led the National Audit Office to qualify the department's resource accounts for the third consecutive year. Usually one year's qualified accounts would be enough to presage a commercial company's obsequies.

Such an embarrassment could not have come at a worst time for a government battered by economic forces and preparing what seems to be deep cuts in this year's Defence Review. Given the three armed services' worries over cuts that could reduce their commitments, such monumental logistics and accounting failures, worth many millions of pounds, must feel like a stab in the back from their own governing department. But if the MoD does not clean out its own Augean stables then the Defence Committee, chaired by the Rt Hon James Arbuthnot, MP believes that the MoD's accounting failures have the potential to threaten its own long-term capability.

The MoD has long been a lumbering, bureaucratic moloch, devouring huge taxpayers' funds, and stock control has rarely been its forte in modern times. Apart from worries over specialist pay of £268 million and lack of evidence to show that the errors in accommodation and food charges of £83m had not been made good, a key worry of the Defence Committee was the inability of the MoD to account for certain items of expensive and sensitive equipment.

The National Audit Office has carried out a selective audit of the army's relatively new £1.3 billion BOWMAN tactical communications system, which provides secure, integrated radio intercom and internet services. Only 89% of these assets could be accounted for by the end of the year owing to problems of accounting for radios in use on the battlefield. James Arbuthnot said that the MoD could not at a given time account for radios worth £155 million, giving rise to serious security implications. "Having an effective audit trail is the only way to ensure that all equipment is accounted for," he added.

Veracity and transparency, however, are two traits woefully lacking at the MoD, the COD Donnington warehouse fire in 1983 being a huge example. Until then, at £174 million, the uninsured fire loss was the costliest in the country's history. On various occasions the MoD had been explicitly warned that the building was not fire safe but the MoD ruled out fire improvements on cost grounds, callously opting instead for the "calculated risk" approach. The consequences of that decision are now being felt decades later with the recent death of a 31-year old woman from mesothelioma, caused by asbestos ash falling on thousands of houses over 15 square miles. The asbestos content was originally denied by the Army and the Controller and Auditor General, the Public Accounts Committee and the Select Committee on Defence all made scant comment on the fire.

The fire's cause was never proven but the investigators thought that the likely cause was workers using lighters and cigarettes to sever plastic wrapping. Another, darker, mooted cause was arson, because the Falklands War allegedly occasioned a comprehensive stock audit which, it was claimed, would have exposed serious stock losses and so tracks had to be covered by a fire. The sprinkler system failed to work and it is very rare for sprinkler heads to fail. Nearly half of all warehouse fires are maliciously caused.

Astoundingly, five years later, a second fire hit the stores after £31 million had been spent on building 10, autonomous, high bay automated stores designed to limit fire damage spread, destroying most of store B1. Arson was not ruled out but the cause was never determined for certain. Ironically, on another occasion, the sprinkler system accidentally flooded out an entire high bay store. Still, at least the store separation principle was sound and probably saved £800 million worth of stock.

The Defence Select Committee recommends that the National Audit Office should continue to monitor closely the MoD's management of stock, perhaps giving consideration to undertaking a broader analysis of this problem at some future date. But given the broken assurances made last year by the Secretary of State for Defence and the Permanent Under Secretary to provide sufficient audit evidence to support their accounts perhaps a start should be made to encourage these two functionaries to fall on their swords now.