Saturday, 24 December 2011

How logistics can help save the world

If it is true that global warming is the greatest threat facing humanity and that mankind's activity is the sole or major cause, an issue far from proven, then can logistics play a key role in averting catastrophe? Once called materials handling, storage and distribution, logistics is a vast, complex subject exposed to many changeable forces but one theme is clear: the subject has huge potential to cut carbon emissions. In this report we shall look briefly at the impact transport has on environmental issues and what can be done to lessen that impact meaningfully.

Whichever mode of transport is used it carries a pollution tag. Transport may typically cost only 5-6% of total product sales but that does not include the immeasurable social/environmental cost. Shipping, currently not covered by environmental strictures, by one measure is the worst polluter of all transport modes. It's claimed that one very large cargo ship, for example, spews out as much toxins in a year as 50 million cars. Insurance statistics show that people living on shores by busy shipping lanes can expect to live up to 30 months less than inland dwellers owing to air-borne particulates. But there are ways to reduce that impact which will also cut shipping costs.

Ships have two big advantages over other transport modes. They offer the maximum cargo load as a percentage of gross weight and the best cargo density in terms of lbs/ft3. Currently there is also the added financial incentive of cheap freight rates because of the excessive shipping glut caused by new ship builds entering the market. But that boon for cargo consignors is transient, though it may take some years to clear the glut, while in the meantime one may expect to see more spectacular shipping line failures, putting yet more strain on troubled banks.

More importantly in the long run, shipping lines can reduce carbon emissions per ton/mile shipped by building larger vessels, which is happening now with container ships in particular. But there are other materials handling techniques in shipping which could benefit the environment but which remain largely ignored despite being around for at least 40 years and one is the use of slip sheets instead of wooden pallets. Made mainly from plastic, slip sheets cost less than one tenth the cost of timber pallets and take up only a tiny fraction of the space. While it's true that container shipping lines charge by the container, consignors could stuff significantly more goods in palletless containers and so cut the carbon cost per tonne mile shipped. It would also cut the burning of unwanted timber pallets at the cargo destination points. The only extra, marginal cost of adopting slip sheets is the forklift attachments for push-pull platens and, perhaps, pallet inverters.

There is another palletless method particularly applicable to bagged products, which does not involve special forklift attachments. This method uses stretch and shrink wrap to unitise bagged loads which are stacked in a particular pattern to leave two fork voids at the load base.

Shipping technology is also changing by combining new and old technologies. Belfast-based B9 Shipping, for example, are building 3,000 dwt windjammers that also burn methane gas made from municipal waste. Fully automated sail handling will account for 60-70% of motive power while Rolls Royce spark ignition engines will supplement sail power in light or heavy winds to ensure delivery times are met. There are about 10,000 ships of this size plying short sea routes so this proves demand for such vessel sizes. The company, however, is also drawing up plans for 5,000 tonners.

Back on Terra firma, there is much that can still be done to cut transport emissions by reducing miles run per tonne. Three approaches are catching on, even though they have been around for decades. The rise of pallet exchange networks in Britain 20 years ago has done much to improve logistics efficiency and cut emissions and is a concept now being rolled out across Europe. Such networks are based on the hub and spoke principle in which just one, centrally-located hub allows network member hauliers to deliver all their loads for onward sorting and loading to their second and final leg of the journey. Decanted lorries then load up for the return journey. Before the networks, lorries would typically run empty on the return journey. It is a triple win scenario in which the hauliers benefit from this more efficient pallet handling technique, the consignors profit from lower charges on small 1-6 pallet loads and the environment suffers less pollution per load mile. Around 10 million pallet loads now pass through UK pallet exchange networks each year.

A second approach to cutting journey miles is the use of double deck lorries, now being avidly taken on board by big UK retailers, in particular. Such lorries are 40% more productive than single deckers. This principle is also finding favour in the passenger traffic world. In America, for example, the Megabus operation can move a full complement of passengers from Washington to New York at a fuel burn rate of only 2 pints per passenger. Compare that oil burn to each passenger using his own car instead.

Large, fully automated distribution centres can also play a key role in cutting miles travelled. To give but one example, Coca Cola Enterprises in the UK is planning to invest £30 million in a new automated national warehouse at Wakefield which will double storage capacity, allowing it to deliver more products directly to customers rather than via external warehouses. The company hopes to cut 500,000 road miles a year by delivering directly to customers rather than storing product at external warehouses. It would also drastically cut forklift fuel burn at these warehouses.

There is nothing new in using one national distribution centre (NDC) for direct deliveries to customers but care needs to be taken over warehouse capacity and throughput restraints. In the past, large food retailers were embarrassed by taking this approach because too many lorries turned up at the NDC at the same time, causing bottlenecks and chaotic delays. They then had to go back to intermediate warehouses to control the flow of goods to the NDC more intelligently. Warehouse automation, however, has the power to eliminate intermediate layers of warehousing.

While on the subject of warehouses, they are heavy users of energy in ways that are wasteful. According to the United Kingdom Warehousing Association's report, Save Energy, Cut Costs, the UK warehouse sector could cut annual energy costs by £200 million, mainly through improved lighting hardware and techniques, insulation and energy saving doors. But forklifts also have a serious role to play in combating pollution issues. These are the articulated forklifts* that can work in aisles only 1.6 mt wide compared with the 3.5 mt and 2.6 mt needed by conventional counterbalance trucks and reach trucks respectively. These articulated trucks also outperform the other trucks in terms of working height and versatility. Such is their value that in certain circumstances they can allow businesses to close down satellite warehouses and thus save on warehouse energy costs, forklift numbers and mileage. If rented, they have been known to deliver instant truck payback, which goes a long way to explain why so many warehouse operators now design their warehouses around articulated forklifts.

Nature itself is also pointing towards the need for more logistics rethinking. Several times this year Nature's fury in the Far East has humbled global supply chains based on JIT deliveries. There is evidence that manufacturers are abandoning global supply chains for regional ones but it is not Nature alone that is responsible for this shift. Corporations are also concerned about rising costs in the formerly cheap supplier countries, unreliable deliveries, variable quality and even counterfeiting issues. Even so, environmental concerns are likely to take up more board time when companies realise that as much as 70% of a manufacturing company's carbon footprint can come from transport and other costs in its supply chain. If the trend towards smaller regional supply chains closer to their main markets gathers pace then that will favourably impact the environmental scene. What the implications of this shift will be for the prosperity of these emerging countries is difficult to say but it could be a bumpy ride.
*The three UK makers of articulated forklifts are: Translift Bendi, Flexi Narrow Aisle and Aisle-Master

Sunday, 6 November 2011

Will Thailand's floods redesign supply chains?

Natural calamities, it seems, are at last forcing global corporations to reassess their stretched supply chains geared to just-in-time (JIT) production but will that reaction die on the vine? In my last report (Supply chain shift and counterfeiting threaten Asia) I mentioned the minor, human forces driving a rethink on JIT global supply chains, including rising costs in the Far East, unreliable deliveries, unpredictable quality and fears over counterfeiting. I also mentioned the more serious risks posed by natural calamities in countries where the concentration of production resources exposed the folly of putting too many JIT supply eggs in one basket.

On April 25, in my report, "Japan's earthquake must force JIT supply changes," I warned of the need to diversify supply sources away from natural, calamity-prone countries where there were choke points for many products like cars and consumer electronics, owing to the high concentration of production resources. Now, only seven months on from the Japanese earthquake and tsunami, the world must contend with another natural calamity, with far-reaching repercussions for global supply chains -- the disastrous floods in Thailand.

The effects of the Japanese earthquake and tsunami on March 11 on the global supply chain are still being felt and production losses around the world will run into many billions of pounds, hitting the auto and consumer electronics industries particularly hard. Thailand's worst flooding in 50 years will have similar seismic effects on the global supply chains supplying the same industries, again because global corporations ignored a cardinal rule of JIT philosophy -- always have a fall back, effective disaster recovery plan.

It must be said, however, that Thailand, south-east Asia's second biggest economy, bears part of the blame that now sees global businesses with eggs on their faces. The country has allowed unrestrained industrialisation and real estate developments that has bequeathed an inadequate drainage infrastructure, not helped by political in-fighting, indecision and rampant corruption. For that folly Thailand will now pay a high price, which could destabilise the country. The deluge has destroyed one quarter of the nation's rice crop and put 700,000 people out of work. Many small businesses and people have lost their uninsured properties. The country's finance minister estimates the economic damage to his country at 1.7% of gross domestic product. That would equate to a loss of £25 billion in Britain.

Such lack of good governance, however, is common elsewhere in Asia where there are supply chain choke points, a case in point being south-east China where, as I predicted on April 25, much of the country was deluged by the worst floods in over 50 years, causing billions of pounds worth of damage. On that occasion the world was saved from serious supply chain disruptions, but it was a close run event.

It would be wrong, however, to be too judgmental of these countries, for the task of defending their industries against nature's fury is herculean. But will these economies now suffer more in the longer term as global businesses come under pressure to rethink the way they produce and distribute?

A rethink is certainly essential but that does not mean countries like Thailand should be abandoned as a cheap source of supplies. Rather, the answer lies in such calamity-prone countries taking measures to afford better protection and warning from flooding, and some diversification of supply sources so that unpredictable shortages in one country can be at least partly offset by supplies from more climatically stable countries. This would prevent plunging developing countries back into penury, a process that would only slow global economic growth and exacerbate political tensions.

Despite the signs that at long last such natural calamities are forcing global corporations to think of redesigning their supply chains, some commentators believe that the lure of cheap production costs in a highly competitive world will overcome such natural shocks and leave JIT supply chains unaltered. Corporations must answer to their shareholders and markets do not reward prudence. Such disregard for the protection of employees is dangerous but that is not a sin confined to corporations. Governments, local and national, are just as culpable over natural calamity warnings.

Nature's warnings are often neglected, with catastrophic consequences. This purblind reaction seems to be unfolding on the small island of El Hierro in the Canaries. Earthquakes cannot be predicted, yet, but volcanic eruptions, often associated with earthquakes, usually give ample warnings. As sure as I can be, I greatly fear that the sea bed volcanic eruptions close to El Hierro will explode violently, accompanied by earthquakes, within a few weeks, causing significant loss of life and property damage. Fortunately, an ash cloud is unlikely to blanket the other islands.
El Hierro's residents should leave now.

Saturday, 29 October 2011

Supply chain shift and counterfeiting threaten Asia

In the once vibrant fishing port of Lowestoft, England, a small forklift company has changed its procurement model that reflects the start of a logistics trend that could have seismic implications for emerging Far East economies, particularly China. The driving force behind this nascent trend is supply chain fears and unprecedented intellectual property theft.

In a country where nearly all forklift production and sales is foreign owned, Britain was once a leading forklift producer. Today, a handful of niche specialist producers, mainly of articulated forklifts, is almost all that remains. But the Lowestoft company is not yet a specialist producer. Rather, it is selling main stream counterbalanced forklifts and is winning sales overseas. That company, Nexen Lift Truck Technology, took the bold decision to move the production of its X-range of forklifts and its entire R&D programme back from Taiwan to the UK.

The company, says MD, Tim Mason, "had been frustrated by progress at getting its X-range models in production at its Taiwan plant." Curiously, perhaps, it cited one reason as the shortage of a skilled workforce. "To overcome these delays and in response to several component suppliers reluctant to release specialised development items to Taiwan for fear that they may be copied in China we have taken the very big decision to move all our R&D activities to our European head quarters in the UK."

Nexen believes that the move will enable it to expand its forklift range at a significantly faster rate and also meet increased demand from the North American market. But how justified is concern over China's counterfeiting proclivities?

Counterfeiting could hammer China

There is no surprise that an emerging economy like China should avidly take to massive counterfeiting, partly as a quick-fix boost to its burgeoning economy. After all, other countries in their early development days did the same thing, like Japan in the 1950s and subsequently Hong Kong and India. That does not, of course, excuse their behaviour, but the scale of copyright infringement is breathtaking. From only about US$5.5 billion in 1982, the economic value in global counterfeiting had soared to an estimated US$500 billion in 2003. It is the fastest growing criminal enterprise worldwide and China is by far the worst offender.

The theft does not only deprive owners of intellectual property rights of huge revenues. It also means that such perpetrators have a huge advantage in bringing new products to market. Unlike their honest competitors, they can simply copy designs and so avoid huge sums invested in research and development. This subtle "pick off", as the scam is called, is a form of intellectual property theft that occurs at the high end of counterfeit sophistication and so poses a significant risk to established manufacturers. Is it any wonder, then, that copiers are able to offer cars, for example, under another brand name, at a fraction of the cost of the genuine article.

To their credit, the Chinese government has moved to remedy the situation through legislation and destruction of pirated goods but corrupt local officials fail to enforce the new laws. Aggrieved, genuine product producers, therefore, cannot expect any resolution some time soon. Only last year it was claimed that in China 78% of all software sold was pirated, according to the Business Software Alliance's 2011 Global Piracy Report. The global average rate is only 42%.

The extent of counterfeiting is far from confined to the end products, like autos and consumer electronics. There are now hundreds of foreign auto parts suppliers in China, for example, and this movement of the auto supply chain to China means intellectual property piracy is not only a risk facing other OEMs but also the supply base. Nexen's component suppliers to Taiwan, therefore, have every reason to be fearful.

Mini renaissance for UK manufacturers?

The concerns over copyright infringement, however, are now being augmented by bigger concerns over stretched supply chains becoming ever-more costly and unreliable. Labour rates in those Far East countries are rising fast, along with commodity prices. In Britain, a weak pound is adding to cost pressures. Consequently, UK retailers are sourcing more locally in Britain. One of Britain's biggest home shopping companies, N Brown, has more than doubled its base of UK suppliers, which boosted a handful of small textile manufacturers in Leicester and Manchester, though the company still sources less than 5% of its textiles from the UK. But according to a recent survey by the Economist Intelligence Unit, more than half of UK manufacturers expect to increase domestic sourcing over the next few years.

The attraction of overseas sourcing has always been low cost, which outweighed irritants like unreliable delivery, long supply chains and often unpredictable quality. But the recession has highlighted the risks of a complex global supplier network and long lead times. One UK company, for example, had a warehouse full of aluminium castings from an emerging markets supplier, for which the group had no orders. Renegotiating the contract proved impossible.

Businesses are now becoming more aware of the risks and volatility involved in a geographically large supply chain. There are signs that mid-ranged parts supply from the east are now shifting back to the UK supply sources, especially for products where labour accounts for a relatively low proportion of the total costs.

There is one risk, however, that took an earthquake and tsunami to bring home to the world the folly of JIT supply chains originating in natural calamity-prone regions. As a principle, there is nothing wrong with JIT supply and production provided certain ground rules are rigorously obeyed. One of those rules is to avoid putting all one's supply chain eggs in one basket. Japan was and remains a choke point for around 100 products essential the the electronics and auto industries. The destruction wrought by the earthquake and tsunami last March cost the global economy billions of pounds in lost production, and still continues, as JIT components quickly dried up and could not be supplied from elsewhere. Guangdong province in China is another serious choke point for many electronic products, in particular, and rare earths elsewhere. Thailand is yet another example of a hostage to nature. The continuing flooding there, the worst in 50 years, is the latest example of how nature's fury can disrupt a too tightly stretched global supply chain. Computer prices are set to rise because Thailand is home to about a quarter of the global hard drive assembly facilities. But other industries, like cars and cameras, are also seriously disrupted.

These regions will continue to be exposed to the inevitable natural calamities to come so western manufacturers must secure several other supply sources, preferably insulated from natural calamities, even if, initially, that raises procurement costs.

Monday, 3 October 2011

ITF launches humanitarian response to piracy

With piracy at sea hitting an all-time high in the first three months of 2011, the ITF Seafarers' Trust charity* and the TK Foundation launched a new initiative on September 29, the Maritime Piracy Humanitarian Response Programme (MPHRH) to help all those seafarers and their families cope with the traumas of piracy. "Until now, there has been little coordinated help for those who are suffering," said Roy Paul of the Seafarers' Trust. All that will now change as the comprehensive programme attempts to build up a network of first responders and get psychological help for affected crews and their loved ones. The programme will be a continuum of care functioning before, during and after piratical attacks.

Given the shameful attitudes of some ship owners towards their traumatised crews, the ITF initiative is desperately needed and the task ahead dauntingly huge and complex. Dr Peter Swift, MPHRP Chair, praised those shipping companies for implementing the industry's best management practices and sound practices to address the humanitarian needs of their crews and their family members but "regrettably many have not," he said. It is reminiscent of those dark early days of World War 2 when captured British merchant seamen were not compensated for their loss of personal possessions or even paid while in captivity, leaving them stressed over how their families would cope at home.

Laudable though this imitative is, it deals only with the symptoms of piracy, growing steadily stronger over the last seven years. Nearly 4,000 seafarers have been taken hostage in the past five years and detained for months in appalling conditions. Tens of thousands of others have been the victims of attacks. Today, nearly 300 seafarers are being held hostage on ships off the Somali coast -- all of them under increasingly violent conditions. Having "crossed the line from savagery into torture," said Dr Swift, often drug-crazed pirates leave crews stripped naked in cold stores for hours, tie crew's genitals with cable ties and subject them to mock executions and even keel hauling.

The annual cost of piracy is now put at $12 billion, but that probably does not include the cost of holding higher stocks as ships take longer to reach their destinations via the Cape of Good Hope. In terms of human costs, Dr Marion Gibson, psychosocial consultant to MPHRH, told this writer that the families of returned hostages felt aggrieved that in many cases pirates were not being punished for their crimes. This is one of the most abject, shameful aspects of the pirate scourge. Some hundreds of Somali pirates were released this year, many of whom were on their third arrest. Some countries are reluctant to try pirates, partly on cost grounds, and countries like Kenya and the Seychelles are already overloaded by pirates.

Anti piracy barriers must be eased

Pirates are doubtless grateful for many other obstacles put in the way of their capture and condign punishment. Some countries have laws against merchant ships entering their countries with arms on board and there are insurance obstacles. ITF itself is opposed to arming seafarers and advocates offering no resistance when attacked. The various navies on station in the Indian Ocean are doing their best with limited resources but as one NATO admiral said: "You could put a World War 2 navy out there and it still would not be enough."

Given the inability of the navies to eradicate the scourge, I asked Rear Admiral Ort, Chief of Staff of NATO's HQ in London, if the international community should not go one step further, once all hijacked crews and their ships had been released, by preventing further hijackings and attacks through the arming of crews or placing armed private contractors and trained, seconded naval personnel on board. After all, one American NATO admiral admitted that merchantmen should be armed.

"First of all," replied Admiral Ort, "I would say it is more complicated because whatever we do at sea is actually only fighting symptoms. The real cause of the problem lies ashore. It is directly related to the fact that Somalia is a failed state without the necessary institutions. So the longer term structural solution involves building Somalia as a nation state to deal with this. Obviously this is longer term but shorter term we are stuck with fighting the symptoms." The admiral also voiced concerns over armed private contractors on board. "Some are really very good but obviously some of them are less so," but he did confirm that trained, armed naval personnel are now being supplied to merchantmen but the problem here was one of capacity owing to the thousands of ships transiting the Gulf of Aden every year.

Logic, therefore, inescapably points to the need to offer some seafarers training in weapons handling and anti-boarding tactics in return for financial inducements. The multitude of barriers to this would have to be eased while the emergency lasts. "We as an international community need to get our act together," said Rear Admiral Ort. Failing that, the piracy scourge will worsen unless, perhaps, a final solution is adopted reminiscent of the bombardment of Algiers in 1816 and 1824. That option, however, would tragically involve many innocents and would outrage international opinion. But it should be remembered that even the restoration of national good governance in Somalia may not be the solution. Other countries, after all, which are not failed states, have been emboldened by the Somali pirates' runaway success and are making life particularly difficult off the west coast of Africa.
*ITF's ability to offer badly needed help is circumscribed by its limited funds. Donations would be welcomed at:

Thursday, 18 August 2011

MoD's logistics shambles hides Afghan war's true costs

In what must be the most damning indictment yet of Britain's Ministry of Defence (the Department), the Committee of Public Accounts, chaired by Margaret Hodge, MP, has exposed the utter shambles of the Department's logistics operations, which have defied resolution for 25 years. In its 43rd report of this session, issued on August 19, the Committee explained that the Department had promised over the last 25 years to resolve the long-standing problems associated with its supply chain: late deliveries, missed targets and inadequate cost information. Yet the problems persist.

If all that were not enough in terms of hiding the true cost of the Afghan war, for example, and the colossal waste of hard-pressed taxpayers' money, there are also serious potential perils for the front line British troops serving n Afghanistan. The MoD accepts that historic under investment has meant that its management information systems and the underlying IT systems are not up to the task. This means that "the risk of failure of these warehouse inventory systems is extremely high and was recently rated as 'critical' by the Defence Logistics Board. If these systems fail then the result would be shortages at the front line within as little as 30 days," says the report.

In any military theatre logistics can decide the outcome of battles and even wars. As Erwin Rommel remarked: "Before the fighting proper the battle is won or lost by quartermasters." He could usefully have added: "provided the quartermasters know their art." That art cannot be efficacious without timely, accurate data on all logistics aspects and that has been lacking for all of the 10-year Afghan war. So what does this logistics shambles mean in terms of costs and were the reasons for Britain's entry into the Afghan war soundly thought through?

Lamentably, military minds, alas, are rarely original, knowing little of history and even less of logistics in a geographically challenging terrain. Sir Sherard Cooper-Coles, Britain's former ambassador to Afghanistan, remarked that the then Chief of General Staff, Sir Richard Dannatt, told him in the summer of 2007 that if he did not use in Afghanistan the battle groups then starting to come free from Iraq he would lose them in a future defence review. "It's use them or lose them," he said. Such a curios, if not crass, reason for justifying an Afghan combat beggars belief and ignores the potency of the Afghan terrain's impact on foreign invaders' logistics.

Sir Sherard believes that the Afghan war is costing Britain £6 billion a year. The true cost is much more than that and may well never be known because the MoD "does not know the full costs of its current activities or the cost of alternative supply options," says the report. Moreover, the £6 billion does not include the cost of supporting maimed military personnel, war widows and their children and the suicides following any wars.

The failure to collect basic data about where supplies are stored has directly contributed to the Department's accounting being qualified for three consecutive years. These qualifications are likely to continue because the MoD's promise to resolve the issues, through a major initiative called the "Future logistics information services project" is not expected to be implemented until 2014.

If an efficient supply chain can be established it would release resources for the front line. The Committee believes that the MoD must place greater emphasis on securing value for money and that there is room for it to find efficiencies in the supply chain without jeopardising operational effectiveness. This could see an end to the practice of having to cannibalize Typhoon jets and military vehicles owing to lack of supplies often caused by late deliveries. In the six months to November 2010, for example, over 40% of supplies were 30 days or more overdue.

Such efficiency improvements are worthwhile but will they make any significant impact on Britain's hemorrhaging of resources at a critical time when the Government is struggling to cut its deficit? Alas, no. To give but one example, consider the costs of prosecuting a war in a far off land where the terrain is ideally suited to guerrilla warfare and so works in the Taliban's logistics favour. The MoD spent at least £347 million in 2010-2011 on transporting supplies overseas but this does not include the cost of military supply flights. In 2010 there were 130,300 individual deliveries made to Afghanistan and 31%, in tonnage terms, went by air. The Committee's 43rd report does not give details of that tonnage nor the air freight costs but some idea, perhaps, can be obtained from what it has cost America to transport an entire brigade of 3,900 men and 15,000 tonnes of supplies by air. The cost was $14,00o a tonne, making a total of $210 million. Had the supplies gone by rail through Russia, which currently forbids munitions passing through its country, the cost would have been only $500 a tonne, a prime example of how logistics thwarts the coalition forces. If the Taliban were more effective at sealing the land routes through Pakistan then the logistics costs would soar to unacceptable levels.

Any logistician can see that the war in Afghanistan is unwinnable for the coalition forces, militarily speaking, and that to remain there for several more years is just throwing more good money after bad and shamefully wasting lives, leaving a sorrowful legacy for their loved ones.
War has not always been entirely negative. People living today could not enjoy their current living standards, helped by many scientific discoveries, without the prior, painful emergence of large political groups like nation states.

Given the nature of man, such a political process could only have been forged on the anvil of war. But the world is moving into uncharted, dangerous waters in which technological progress has far outstripped man's moral progress, little changed since Stone Age times. This serious mismatch is surely the greatest challenge and threat facing mankind today. If the reptile within cannot be tamed permanently then the outlook for mankind is grim at best, if not terminal. As a famous general warned at the dawn of the Atomic Age: "It must be of the spirit if the flesh is to survive."

Tuesday, 16 August 2011

Windjammers promise logistics boons

Commercially viable windjammer cargo ships, augmented by methane-powered engines, could be the answer to all green logisticians' prayers -- predictability on long-term freight costs. It would also deliver huge environmental benefits. The development is the brainchild of Northern Ireland-based B9 Shipping* who claim that their ships will derive 60% of their thrust from wind and the remainder from Rolls Royce spark injection engines powered by methane gas extracted from thousands of tons of food waste.

Compared with oil-burning ships, the B9 gasjammers will deliver competitive, predictable freight rates and equal performance, needing no bigger crews and ensuring optimal health and safety compliance. All sail control will be from the bridge and the masts will be over-engineered. But there are other financial inducements. B9 ships will accrue huge savings from fuel offsets and stand to generate significant income from the carbon trading opportunities. Shipping lines, however, should not break out too many champagne bottles because the technology, although proven and in use, is severely limited by ship sizes.

B9's market research has focused initially on developing a 3,000 dwt short-sea coastal vessel, small beer compared with the majority of much larger ships. Even so, there are 10,000 similar-sized vessels operating world wide so the potential for greener logistics is significant. A 3,000 dwt vessel, the Maltese Falcon, fitted with the Dyna-rig system, has been operating successfully for some time so the company is satisfied that this is the optimum size for immediate development. The initial primary market is dry bulk, particularly wood pellets for the production of carbon neutral heat and power. "This cargo," says director, Diane Gilpin, "runs on a liner route and enables us to demonstrate our technology whilst we have a chance to work with the logistics sector to develop ways of integrating workable, fossil fuel-free propulsion in the existing logistics systems." Their designers, however, already have 5,000 dwt versions on the drawing board.

Climate change concerns could also boost the company's case. Manufacturers are abandoning global supply chains for regional ones. Companies are increasingly looking closer to home for their components. This means that US or European operations are more likely to source from Mexico and Eastern Europe respectively than China, partly because energy is more costly and less plentifully available. Perhaps as much as 70% of a manufacturing company's carbon footprint can come from transport and other costs in the supply chain. But it is not only climate change that poses serious threats to the global supply chain. As the the Japanese tsunami in March showed, it is unwise to concentrate component sources in one, earthquake-prone country while relying on JIT deliveries. A similar, potential risk exists in the heavily industrialised province of Guangdong in south-east China, the home of much of the world's electrical sub assemblies and components. This region is prone to heavy flooding, as the recent June floods, the worst in 55 years, tragically showed and about which this column warned on April 25.

B9 Shipping is currently working with two separate global enterprises developing gasjammers specifically to meet their commercial needs in the immediate future. The first is a chemical tanker where existing oil burners have been forced to slow steam. This obviously slows up JIT delivery and so negatively impacts production costs. By adding a B9 ship the company effectively hastens the supply chain throughput by providing more tonnage whilst not adding any significant emission burden. The client is also comforted, knowing that the cargo price will remain far more stable than fossil-fuel powered ships.

The second client is a cruise company seeking to build relatively small, high-value cruise ships for their existing customers. The smaller, more intimate cruise offerings are hit harder on a per head basis by escalating fuel prices and since their offering is about 'intimacy' they cannot employ the economies of scale solution being used by much of the cruise shipping sector. By cutting their reliance on fossil fuels they can maintain their current prices and offer an enhanced product by promoting a truly 'green' cruise, for which the company sees significant future demand.

Healthier cruising promised

Cruise lines and the shipping industry in general, however, have another incentive to go 'green'. What, perhaps, few cruise passengers and seafarers realise is the risk to their health that diesel particulates, especially, pose not only to those on board but millions of people living close to busy coastal shipping lanes. Only recently have scientists been able to calculate the specific impact of ships' toxic emissions because their known carcinogenic emissions, like particulates and compounds of sulphur and oxygen, are also emitted by factories, motor vehicles and power plants.

The findings of the latest European research are disturbing. One European Commission study suggests that shipping pollutants are cutting several months off the life span of every European. The study lead author said the growth in international trade and cargo ships, many of which originate in China, would make that far worse. He predicts that by 2020 Britain's west coast will be so badly affected by shipping pollution that average life expectancy for people living in or near coastal towns would be cut by 20-30 months.

The current situation, which sees shipping spewing out more than 3% of global carbon, has been allowed to develop because shipping's international nature excludes it from most national laws controlling pollution. This means that 289 million tonnes of fuel burnt by the world's 100,000 cargo ships each year can be sourced from the cheapest, most contaminated sources. These may contain 2,000 times the levels of sulphur allowed in diesel fuels sold for cars, plus many heavy metals and other contaminants, a thought that should disturb cruise passengers when they are showered by soot particles and detect the stench of diesel inside and on deck, an experience this writer has had on several cruise ships. The fact is, very large engines in some ships can spew out the same levels of toxins as 50 million cars in a year and spread them for hundreds of miles on winds.

Renaissance for British shipbuilding?

B9 Shipping's efforts deserve support but not just from the shipping industry. Currently, the Renewable Transport Fuel Obligation is confined to land so that a UK-UK cargo moving by road using some biofuel attracts an incentive payment This does not apply to sea transport on a similar UK-UK route. The Department for Transport agrees with B9 Shipping's logic that encouraging a modal shift from road to sea, reducing road congestion, makes good sense but thinking is one thing, doing is another. Now is the time for Whitehall mandarins to get their fingers out by changing the legislation.

Such a sensible move would also deliver a palpable boost to British jobs, heralding, perhaps, a renaissance in British ship building in Belfast and northern England. The company anticipates a need for 50 ships by 2020 to give the biomass industry compliance with the 10% energy in transport target of the Renewable Energy Directive. Other uses for the ships are emerging in the rapidly-developing low carbon economy, including bio-fuels, recyclate and captured carbon destined for sequestration.

Over time, B9 Shipping anticipates further opportunities will arise to replace the 10,000 similar-sized coastal vessels operational across the world. The company will build its ships in the UK, thus helping to regenerate former shipbuilding cities. Sailors in these gasjammers will also be incentivised by being allowed to share in the returns of the company. "The more they work under sail, the less fuel we will need to use, and we would pass this saving on to them," explained Diane Gilpin. The romance of sail could return in the form of races in the fleet to outperform each other, redolent of the tea clipper days but without the fatalities.

Thursday, 4 August 2011

China must shun high military spending

Those who forget history are doomed to repeat it, warned the Spanish philosopher, George Santayana, and China looks perilously close to falling into that vipers' pit. China's rapid economic development over the last 15 years has been phenomenal, based on growing global trade and the abandonment of business based on collectivist lines in favour of capitalism. It has made many Chinese millionaires and raised the living standards of millions. All that, however, could be jeopardised if China pursues a policy of penal military spending when pressing issues at home demand addressing.

The latest example of China's military ambitions is the finishing touches being put to its first aircraft carrier, a 60,000 tonne unfinished vessel bought from Russia ostensibly to be used as a casino at Macao. This may have proved a cheap buy but analysts believe China has ambitions for building four more, which would burden hard-working Chinese taxpayers with a multi-billion pound price tag. Much money has already been spent on submarines and much more will be spent on stealth aircraft and developing a long-range aircraft carrier killer missile.

Given China's interests in energy supplies and trade that now span the globe is it unreasonable for China to have a much larger naval presence? Retired general Xu Guangju, of the People's Liberation Army, thinks not. "An aircraft carrier is the symbol of the power of your navy," he says, and "China should at least be on the same level as other permanent members of the UN Security Council who have carriers." He adds: "the development of our armed forces is connected with the development of our economy."

In an earlier age this would have been an understandable sentiment. The British Empire, for example, grew rich on overseas trade but it was trade with a military fist ready for use if need be. This was tenable so long as Britain could exact cheap victories with superior weapons like the maxim gun against spear-equipped natives, and stay ahead with a science-based industrial military complex. China itself was a victim of this mismatch during the Opium Wars of the mid 19th century. Britain's steam-powered gunboats annihilated China's sail-based war junks and so imposed its will to dope millions of Chinese in the pursuit of trade, one of the darkest episodes in British imperial history. But when Britain came up against a modern, industrial-based economy like Germany, the cost of two world wars bankrupted the country, saddling it with debt that took about 50 years to repay.

Military ambitions lack merit

History is littered with examples of how high military spending brings nations low. The fall of the Roman Empire is a prime example. There were many reasons behind Rome's fall but perhaps top of the list was inflation connected with huge military spending. This led to frequent debasing of the silver denarius from over 95% pure to 0.2% silver by the reign of Claudius 2 in 268-278 AD. During the reign of Augustus the army's strength was put at 250,000 troops. By the time of Diocletian it had reached 600,000 and often they had to be paid in gold. Numerous wars simply added significantly to inflation, and as one of the Christian Fathers, St Gregory Naziamuz, said: "War is the mother of taxes." He could also have added that war was the mother of inflation.

For another example China need look no further than how it came to acquire the rusting hulk of a Russian aircraft carrier. Russia, quite simply, was busted by huge military spending. America, too, is groaning under the burden of a huge military budget at a time when the country's grey population are fearful of cuts to social spending and medicare. The Pentagon's budget for 2012 is $553 billion and US military spending has doubled in real terms since 2001. The Obama administration has vowed to cut military spending over the next five years but it may be too little, too late to avoid social tensions erupting at home when the middle class and the poor view with rising hostility the tax breaks for millionaires and billionaires and oil companies making record profits. Selfishness is a great disturber of the peace.

China's defence spending will rise 12.7% this year to £56 billion but many analysts believe the country spends more than it states publicly. This spending binge is having deleterious effects elsewhere as India, for example, has recently announced an 11.6% rise in military spending to £22.4 billion, apparently to counter China's growing strength.

History and more recent economic and scientific developments suggest that China's military ambitions lack merit and are fraught with economic and social risks at home. China has nothing to fear abroad, militarily speaking, for the world needs China as China needs the world but it has much to fear from Nature's fury and so should be conserving its hard-earned revenues to cope with the inevitable natural calamities to come, rather than squander them on vainglorious military designs which can only alarm their neighbours.

At home, China has more to worry about on the economic front. Chinese state-owned banks' loans to local governments may be under estimated by $0.5 trillion and one ratings agency, Fitch, believes the country's total non-performing loans portfolio could reach 30%, while a Credit Suisse analyst thinks many local governments will have to default.

China's inflation, currently at 6.4%, is also rising, despite various interest rate hikes, a trend that will be worsened by high military spending. That can only undermine China's competitive abilities. Further economic pressures will be added by demographic changes as China's one-child family policy starts to unravel.

If all this is not enough to convince the Chinese Government of its folly in pursuing high military spending then perhaps the words from one of the country's own sages will convince them from across the centuries. Sun Tzu warned in 400 BC: "Where the army is, prices are high, when prices rise the wealth of the people is exhausted." Hard-working Chinese people deserve better than that.

Friday, 15 July 2011

China poses high JIT supply risks

Logistics industry 'experts' are beginning to question the practicality of just-in-time (JIT) manufacturing following natural disasters like Katrina, Iceland's volcanic ash cloud and Japan's costliest earthquake in March but there is nothing wrong with the JIT concept, and its savings will ensure its permanence. It is the need to diversify supply sources which must be addressed, even if that means financing new investment in areas less prone to natural disasters and, perhaps, paying higher prices through less advantageous economies of scale.

Businesses cannot feign ignorance of the natural risks to the global supply chain and their stupidity of putting too many eggs in one basket. Insurance companies have long since developed models of the likelihood of earthquakes, floods, hurricanes and tornadoes for America and other countries. The simple fact is that global corporations were mesmerised by the low production-cost economies of the Far East and so were prepared to brush aside supply chain disruption risks

Japan's March earthquake and tsunami caused over $300 billion in damage, reveal Government estimates, but its broader impact on the global economy may prove even more profound. As I warned last year in my blog: "Has volcanic ash lessons for logistics," the Icelandic eruption was a wake up call to reassess JIT techniques. Japan's tremblor was more of a thunderclap call because Japan is home to nearly 100 manufacturing choke points that would affect businesses worldwide.

Japan, however, is not the only worry about risks to the JIT-oriented global supply chain. A similar crisis in China's heavily industrialized Guangdong province could have even more widespread economic effects. In my April 25 blog: "Japan's earthquake must force JIT supply changes," I mentioned that Guangdong produced many electrical products upon which the world depended for its JIT supplies and which was also exposed to disruption from natural calamities. I even warned that "south-east China will be slammed by a natural calamity, be it seismic or flooding, within months." Just two months later much of south-east China and elsewhere was deluged by the worst floods in 55 years, directly affecting 37 million people, causing over $5 billion of damage, killing over 200 people and destroying or damaging over 500,000 homes. It seems that this time round those export industries in Guangdong were not seriously affected but the lesson is clear. Global industries must now wean themselves from total dependence on China for its purchases.

The risks, however, do not end with natural calamities. There are also political and mercantile risks as the recent spat over China's almost monopoly grip on rare earth elements (REEs) demonstrates. There is nothing rare about the 17 rare earth elements but they are essential for communication devices, weaponry, computers, hybrid cars and flat screen televisions, to name but a few. The disturbing fact is that China has 97% of total world production. It also has the biggest reserves, about 36% of the world's total. China recently announced its export quotas for REEs would remain unchanged for 2011 but the inclusion of rich "ferro alloys" in the quota system means a fall in rare earth exports of 10%. Consequently, some rare earth prices have risen 10-fold this year.

China's reliability must also be questioned following its cuts of REEs to Japan last year after a diplomatic dispute. Mining companies are now rushing to develop new deposits in America, South Africa, Australia and other countries but these supplies will not be available for another year or two and there still needs to be investment in capacity to refine and fabricate them.

If natural disasters are not enough to convince global corporations to reassess their JIT practices then perhaps when both nature and the dark side of mercantilism combine forces to squeeze supplies the lesson will be learnt. Wiser heads, however, will not wait that long.

Saturday, 18 June 2011

Raising military spending now would threaten economic stability

It is an axiom that defence is the first duty of government but who or what is the greatest threat now? Traditionally, the enemy has been seen as foreign governments, and latterly terrorist organisations but there is another enemy, insidious, ignored but potentially far more destabilising and it always lurks within -- economic irresponsibility.

When an economy collapses spectacularly then also the social fabric dependent on it is rent asunder, leading to grave social unrest if not revolution and intractable government. Just such a crossroads is dangerously close now but if it is to be averted then military spending must be reined in now, regardless of foreign war commitments.

Robert Gates, the outgoing US Defence Secretary, was right to chasten some NATO member countries for paying nothing at all towards the Libyan fracas, despite all having signed up for the intervention. What was not said, however, was the reason for the wrist slapping. It was not simply that is seems unfair for America to shoulder the lion's share of NATO's costs. It has been doing that for many years and currently contributes 75% of total costs. It is that America can no longer tolerate free loaders because its own economy is stricken by vast military spending over the last decade.

Such spending is remorselessly bleeding the country dry and laying the foundation for serious global economic instability. The US debt is currently stated as 64% of GDP but that does not include off balance sheet items like Medicare and Fannie and Freddie, which if added would see the ratio soar to 500%. With figures like these it is hardly surprising that a recent poll showed that about half of all Americans believe that their country will default. This feeling was doubtless raised by Standard & Poors more recent downgrading of the outlook for the US debt.

Britain is further down the road to economic disruption than America, and labour unrest over necessary Government cutbacks and pension reforms is already set to explode this summer. As in America, a laissez faire attitude to casino-style economics and spendthrift government was combined with high military spending on foreign wars. The 10-year war in Afghanistan has cost Britain at least £6 billion, not including the care costs of maimed service personnel, and widows' pensions. Currently, Afghanistan is estimated to be costing the coalition forces $2 billion a week and in the first nine years of war cost at least $105 billion.

Robert Gates seemed to express surprise that the mightiest military alliance in history (NATO) is only 11 weeks into an operation against a poorly-armed Libyan regime in a sparsely populated country before running short of munitions. Given the Afghanistan experience, where the Taleban are far less well-armed and fewer in number, that is a curious reflection.

The grave risk now is that these wars will generate more strident calls for increased military spending at a time when economic problems at home cannot possibly justify such calls on the public purse. The London Times in a leading article banged the jingoistic drum by calling for more military spending while portraying China as the coming bogeyman for world stability as it raises its defence spending by nearly 13% this year. The Chinese government, for all its faults, deserves better than that odious branding, especially in view of its contribution towards global fiscal stability through purchase of US Treasury assets and keeping inflation rates low. That said, China would do well to rein in such military spending to conserve its resources for the appalling costs of future, inevitable, natural calamities.

It must be indisputably clear that now is not the time to raise military spending by countries tackling serious, home-grown economic problems that, if not solved by debt reductions, will engulf the countries in civil strife or worse. As Paul Ryan, the new Republican Chairman of America's House of Representatives Budget Committee said, if the US did not get its finances in order "We will have a European situation on our hands and possibly worse. The consequences of not tackling the mounting debt burden would be dire. We would have the riots in the streets. We will have the defaults. We will have all those ugliness problems." If nothing changes, investors will grow nervous and refrain from buying Treasuries. Such action would send interest rates soaring and the contagion would spread to Europe, where national debt defaults grow more likely by the day.

Between that and global prosperity is nothing more substantial than the filament of confidence, which if snapped would usher in not disaster but catastrophe. It is the enemy within that can be the most dangerous enemy of all.

Monday, 25 April 2011

Japan's earthquake must force JIT supply changes

It is, perhaps, ironic that the first country to adopt Just-in-Time (JIT) supply techniques avidly should now be the cause of a rethink on JIT global supply chain deliveries that could leave Japan worse off.

JIT supply issues have done much to cut costs by reducing inventories at every level of the supply chain. The West's outsourcing of much production to Far Eastern countries, particularly China, has also raised living standards of their peoples sharply and helped western countries keep a lid on their inflation through cheaper imports. As a technique, therefore, JIT is here to stay but as the Japanese quake and tsunami of March 11 clearly showed, many supply chains have become too rigid and wedded to outsourcing components to low-labour cost countries prone to high earthquake risks, floods and typhoons. "In many cases, tightly stretched global supply chains do not make sense any more," said Robert Martichenko, chief executive of Leancor, a US logistics company.

In my blog of April 23, 2010, headed: " Has volcanic ash lessons for logistics?" which touched on the supply chain effects of the Icelandic volcanic eruption, I warned that "vulnerability to disruption must be reduced." That disruption was on a far lower scale than last month's Japanese quake but big enough to spur a JIT rethink. But it is clear that many companies have failed to put in place back-up plans to cope with emergencies like the Japanese catastrophe. They were content to place all their eggs in one basket like Japan or China owing to low production costs while ignoring the obvious risks of natural disasters. But even where companies had a disaster-recovery plan in place, room for manoeuvre depends largely on the nature of the industry. What use, for example, is a disaster-recovery plan if parts cannot be duplicated outside of Japan, as is the case with parts for Boeing jets?

The degree of dependence on Japan for critical parts is alarming. Japanese factories produce about 40% of the world's electronic components and Hitachi Chemical has 70% of the global market for a type of slurry used by chipmakers to polish wafers, and its plant was damaged by the tsunami. In China, mainly in Guangdong province, 80% of the world's basic electronics components production, along with a great deal of final assembly, shows the potential for disruption here to affect global industries. In such industries there are few opportunities to mitigate the consequences of severe natural disasters in south-eastern China.

The March 11 quake and resultant tsunami expose the over reliance on one source of component supply. The costs, this time around, are so huge that, hopefully, some lessons will be learned and acted upon. Japan's earthquake and tsunami are estimated to have cost the three big Japanese car makers at least a $1 billion hit to profits. One consultancy estimates that the tsunami-related disruption will cut worldwide light vehicle output by 2.7 million vehicles in this year's second quarter of which one million will be in Japan and 475,000 each in North America and Europe. In Britain, Toyota was the third car company to announce production cuts owing to the Japanese quake. Toyota's plants in France, Turkey and Poland will also be subject to cutbacks.

In time, rising production costs in China will favour a shift of production back to countries concerned to have a more secure source of supply unaffected by natural disasters. There are, however, other reasons favouring a production shift back to regions close to their markets, like flexibility to react to market changes more responsively. This process has already begun but it is not to argue that countries like China and Japan should be eschewed entirely as a manufacturing base for components. Rather, China and Japan should be considered as only one of several supply sources so that disruption in one country can quickly be compensated by production ramp ups elsewhere . This will require key investment in more geologically and climatically favourable countries.

The problem for many global corporations is that they are mesmerised by cheap production costs in disaster-prone countries. They know the natural disaster risks but feel that their infrequent occurrences on a major scale justifies the risks. But the past record of natural disasters is no guide to future trends and so, hopefully, the Japanese quake last month will be a wake up call for greater diversity of supply. Nature, is should be added is not the only threat to the supply chain. There are also significant political risks.

Uneasy though it is for me to assume Cassandra's role, I have strong feeling that a natural disaster, be it seismic or flooding, will slam south-east China within months, despite this area's
relatively low seismic activity. The last serious quake to strike Guangdong was in 1918, leaving around 1,000 dead. Another severe quake here could, perhaps, test the global supply chain in some products to almost breaking point, unless companies act now.

It is a tragedy that when history is ignored it becomes as dust-laden garbage. It becomes far greater and crasser tragedy still when it is deliberately ignored for commercial expediency. History, after all, can bight back.

Tuesday, 5 April 2011

Bank of England's hidden agenda guts all savers

There can now be no doubt that the Bank of England (BoE) has abandoned all pretence of controlling inflation through the interest rate mechanism, once considered its core function since its independence over 10 years ago. And like America's Federal Reserve Bank, it is now trying to serve two masters, despite the Nazarene's missive on such futility. On the one hand the BoE still professes to want to curb inflation but on the other it keeps interest rates at historically low levels ostensibly to help the nascent recovery and so bring down unemployment. But in pursuing the first objective through ludicrously low interest rates it merely risks a re-run of the credit mess following the bust and 9/11 which created crassly low interest rates and so unleashed a spending binge fueled by cheap, lax credit. The BoE's anti-inflationary policy has failed lamentably, though in fairness partly because of circumstances beyond its control. Its monetary policy committee is required to achieve a target of 2% inflation. The latest retail price index for February 2011 shows an annual rise of 5.5% while the Government's own preferred benchmark, the consumer price index, has soared by 4.4% over the same period. But is the BoE's low interest rate policy to encourage recovery a smokescreen for a more cynical ploy that will have unprecedented adverse impacts on pensioners and all those who saved hard for their old age? The numbers suggest that it is. "Banking establishments are more dangerous than standing armies," commented Thomas Jefferson. How right he was but in ways, perhaps, that even he did not realise. Such an ostensibly august institution like the BoE was, in fact, born out of the perceived necessity to finance war. With the power to create credit up to 12 times the cash deposits placed with it, the BoE used debt to finance the British Government's wars throughout the 18th century until the national debt soared to over 200% of gross domestic product (GDP) at the end of the Napoleonic wars in 1815. Such a debt level was not seen again until World War 2, while today it stands at 60% of GDP, a level not seen since the late 1960s. Debt, it seems, is the Devil's chaplain. Clearly, debt has some advantages. It can, for example, facilitate economic growth and allow consumers to have their desires fulfilled now rather than years down the line when they have saved enough to buy goods outright. The flip side on runaway debt levels, however, has disastrous potential. It is the BoE's hope, and probably the Government's, that by keeping interest rates absurdly low it will encourage business investment and private consumer spending. But will it? Compared with collectivist economies, capitalism's one great disadvantage is that the decisions to invest and the decisions to spend are taken by two different groups. Capitalist economies can encourage investment through government incentives like lower taxes and low interest rates, but it cannot force the public to spend more as as result. The risks that the current BoE and Government's policy may fail in their pump-priming objective are high because the huge debt levels taken on by government now mean public spending must be drastically cut and many workers fear for their jobs and when fear stalks the land the public's propensity to save rises. Business will not invest much more if they see a public spending less. Meanwhile, the dangerously low interest rate policy has other recovery impediments. It takes four to five building society investors to support one mortgage borrower. While borrowers benefit from low interest rates and so may be inclined to spend more, the savers supporting them all suffer real falls in their disposable incomes because inflation and tax now far exceed investors' derisory returns of 3% or less. It is, perhaps, the BoE's greatest, most shameful transfer of wealth from the frugal to borrowers. But there is seemingly worse behaviour afoot. The UK government's debt for 2011 is estimated at £932 billion, or 60% of GDP. Its spending on state pensions will be £117 billion this year and while that may be indexed to the retail price index for annual rises it is clear that by keeping interest rates low the BoE will make it much easier for the government to repay its huge debts through depreciated money. At 5% inflation the Government's national debt would be cut by £51 billion in real terms after one year. The extra costs of the state pension in money terms would be only £5.85 billion over the same period. The case for continuing the low interest rate policy is unsustainable and grossly iniquitous on those least able to defend themselves -- the pensioners and small savers. If rates were allowed to rise to their long-term levels of 5% or 6% it would encourage the retired, in particular, to spend more and these far outnumber mortgagees who would be faced with spending less. Higher rates would also head off the reckless spending by investment banks, hedge funds and other pinstripe bookies which dreamt up new investment packages like collateralized debt obligations and credit default swaps, which together with derisory interest rates largely caused the worst credit implosion since the 1930s. There is, however, another lesson the British Government, in particular, must learn. The Chinese sage, Sun Tzu, remarked in 400 BC : "Where the army is prices are high. When prices rise the wealth of the people is exhausted." With Afghanistan costing the British tax payers well over £6 billion a year, Libya at least £3 million a day, with the potential for far more, and military spending commitments like two unnecessary aircraft carriers and the Trident submarine replacement cost looming on the horizon, such events can only be inflationary. When America grappled with the rocketing inflationary consequences of the Vietnam war in the 1970s it led to Federal fund rates hitting 20% and soaring unemployment to get the situation back under control. The message from the Fed was that unemployment had to take a back seat to fighting inflation. It is a lesson that thus far seems to have been lost on the BoE. Now is the time to raise rates significantly before it is too late.

Sunday, 20 March 2011

Japan's earthquake exposes global supply chain unpreparedness

Just-in-time (JIT) production techniques have revolutionized global business efficiency but as the recent Japanese earthquake and tsunami clearly show JIT is not without its disasters waiting to happen for those lacking foresight and preparedness. As pointed out in my blog last April 23, under the headline: "Has volcanic ash lessons for logistics," the Icelandic ash cloud should at least have spurred a rethink on JIT techniques but there seems little evidence of it.

The ash cloud was on a far lower disruption scale than the Japanese quake since it merely affected airfreight, although some 25% of the UK's freight business by value moves by air. Perhaps because of this low disruption factor, global businesses simply shrugged their shoulders. Hopefully, they will be less inclined to do so now.

JIT-oriented manufacturers are exposed to many disruptive supply risks and even the smallest and most unlikely of these can have a disproportionately huge impact on the bottom line. When a Southampton container crane collapsed in 2006, for example, while unloading parts for the Honda car plant in Swindon, the shortage of parts brought the entire plant to a standstill.

This time round, the Japanese quake and tsunami that have devastated much of north-east Japan could cost Japan's big three car makers a combined $1 billion hit to profits and that does not include damage to car plants. Moreover, in Britain Toyota has stopped all overtime working at its Burnaston plant, and General Motors said it would close two European plants because of component shortages.

There are also growing concerns that other manufacturing sectors, particularly electronics, will be disrupted by parts shortages. Producers of both high and low-tech products rely on components that, in some cases, are made by a single supplier, many of them Japanese. Japan, it seems, is home to nearly 100 manufacturing "choke points" that could affect businesses worldwide. YKK, for example, makes most of the world's zips while another company dominates the world market for bicycle gears.

There are techniques for efficient disaster recovery, anticipatory measures and production philosophies that could sidestep or ameliorate supply chain disruption*. Insurance companies, for example, 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 ignored or dismissed by managers. Given that Japan is a high risk earthquake area does it make sense to have all one's eggs in one basket as regards certain vital parts? Wiser counsels would advise access to alternative sources not exposed to earthquakes and floods, even if that means partly financing new investment. This may be unwelcome news on Japan's job front but it is the greater good that must prevail.

The ramifications of the Japan quake, alas, have far-reaching consequences beyond the impacts on the supply chain. It is already panicking the financial and commodity markets which just could herald a setback to a delicately recovering global economy. A minor foretaste of this scenario occurred on January 4, 2006 when a strong earthquake hit the Gulf of California, a one in an 11-year event. Damage was insignificant but it briefly panicked the foreign exchange markets and pushed copper prices to new heights. Only weeks before, in my city desk column for Warehouse & Logistics News+, my concluding comment on the Katrina hurricane aftermath was: "There is a feeling in this column's bones that worse natural calamities are to come, including a tectonic event in the Gulf of California."

Readers need not concern themselves why I felt such an event was due soon but the lesson for all supply chain personnel is clear: Have some alternative supply sources in earthquake-free zones or future earthquakes could move the supply chain earth for you.
*See Yossi Sheffi's book: "The Resilient Enterprise," MIT Press, Cambridge, Massachusetts
+Warehouse & Logistics News, London, September 19, 2005

Sunday, 27 February 2011

Somali piracy's end game nigh?

Two critical mistakes by Somali pirates could soon end their mayhem which has caused unprecedented damage to the global economy at the hands of so few. The first was their murder of four American hostages on February 22 and the second is that they have reportedly reached a multi-million dollar deal with the Islamic militant terrorist group, al-Shabaab, allegedly linked to al-Qaeda. In return for a safe anchorage at Harardhere and the release of pirate chiefs by al-Shabaab, the pirates will reportedly pay 20% of all ransoms to al-Shabaab, who captured Harardhere last year. This dramatically raises the stakes which can end in only one of two ways -- a far worse costly disruption to world trade or punitive military intervention both at sea and on land.

The latter move to deal with terrorists is a game changer, believes Wing Commander Paddy O' Kennedy, spokesman for the EU naval force operating in the Horn of Africa, because it could change the rules of engagement. Payments of ransoms to terrorists are illegal so any hostage sailors could find themselves languishing in squalid conditions for years, as opposed to months so far. Faced with such threats it is hardly surprising that the International Transport Workers Federation (ITF), an umbrella organisation representing 720,000 seafarers worldwide, sees "no alternative but to stop putting people and ships within their reach, with all the effects that could have on world trade and oil and food prices."

The ITF is now, therefore, advising seafarers and their trade unions to begin to prepare to refuse to go through the danger area. In a warning to shipowners, ITF said: "The risk of passing through the affected area and the knowledge of the inhuman manner in which captured seafarers will be treated amount to a breach of their duty of care to seafarers. It is also reckless, to a point, that should a seafarer be killed by a pirate attack while the vessel transits the high risk area, it would amount to corporate manslaughter. We call on the military to neutralise the threat caused by the use of mother ships."

There seems, however, to be a problem with mother ships in that the pirates have reportedly changed tack by seizing large fishing vessels as mother ships and using their hapless crews as human shields. It is, therefore, perhaps fatuous for the ITF to call on the military for this specific help unless such ships are entirely crewed by pirates. Its other pronouncements also betray woolly thinking. It calls on flag states, for example, to deploy naval assets to protect ships from piracy but but many tiny flag states, like St Vincent and the Turks & Caicos Islands, have scarcely two brass farthings to rub together and to expect them to take custody of convicted pirates is a fanciful notion. An American Nato admiral also advised that even a World War 2 naval fleet would be inadequate over such a vast area and called on merchantmen to be armed.

Belatedly, the ITF is coming round to the view that merchantmen should be armed but not by seafarers. Rather, they favour military personnel or private armed guards, subject to agreement by trade unions. It also calls on the UN to take all necessary measures to address the underlying, shore-based situation in Somalia which has allowed piracy to flourish, without saying what those measures should be. A long-term UN armed presence will have little appeal to America and European nations, given past experiences, already overstretched with current military obligations and straightened economic circumstances at home.

There is no doubt that arming of merchantmen will help but by itself is unlikely to end the pirate scourge. It is not just al-Shabaab that will be taking baksheesh but local officials who have been taking up to a third of ransom monies, much of which, claims John Drake, a piracy specialist with the security firm, AKE, "is already falling in al-Shabaab's hands."

Lightning punitive actions in all known pirate ports, with carefully planned rescue attempts of hostage sailors, seem to be closer. There is, of course, an alternative -- a complete boycott by all seafarers of the Arabian Gulf and much of the Indian Ocean. But in global economic terms the consequences of that would be disastrous, making the current $7-12 billion annual piracy cost look like small change. There would also be a political price to pay through more instability in a region already wracked by despised, corrupt and incompetent regimes. Egypt, for example, could have done so much more to deploy its 12 frigates on anti-piracy patrols and so cut down the loss of its Suez Canal transit fees. Even relatively stable neighbouring countries could have trouble coping with the loss of tourism revenue from cancelled cruise ship calls and other disruptions.

The time is surely nigh for condign punitive action of the kind Algiers received nearly 200 years ago, which permanently ended the centuries-old scourge of the Barbary pirates. It would, of course, have sad consequences as innocent parties would suffer along with the guilty but history clearly shows that down through the ages pirates have only ever respected one language -- applied superior force. It is not enough to sink them at sea. Their lairs must also be neutralised -- an action that has no legal bar.

Thursday, 17 February 2011

Containerisation's ugly side risks lives and costs billions

Global distribution costs have dramatically fallen since containerisation of shipping cargoes began in the 1950s but it has not been without a high price in risks to lives, ships, their cargoes and the environment. The causes are various, including poor training, cost cutting and, worst of all, deliberate fraud that denies governments and shipping lines billions of pounds in lost revenues every year.

After nearly 60 years of container shipping it seems incredible that there are still no mandatory instruments requiring the weighing of containers at ports, nor guarantees that all those involved in transport and handling of containers are fully informed of the state of packing, stowage, lashing and security of the cargo. Belatedly, that may start to change following the International Labour Organization's (ILO) forum, to be held in Switzerland, February 21-22, on safety in the supply chain in relation to packing of containers.

But global agreement on any issues is ponderously slow and for containerisation issues that is a tragedy, for the price of tardy deliberations will see more lives lost, injured and cargoes ruined. The public are largely unaware that container handling and transport problems are not confined to sea-borne journeys. It could be, for example, that in Britain more than 75% of lorries are not loaded safely. In 2009 officials from the Health and Safety Executive (HSE) and Vehicle Operator Services Agency stopped 40 vehicles during 3 days of checks in Wrexham, Birmingham and Humberside. The majority needed remedial action to make the loads safe for onward travel and unloading. The problem is exacerbated by containers because loads are hidden until opened. Over a 3-year period in Britain, 14 people were killed and over 2,000 injured by cargo falling from vehicles when they were being loaded or unloaded. On the roads fatalities also occur because poorly restrained container loads can cause multi-vehicle accidents.

Preventable losses are huge and much of it stems from inadequate training and cost cutting. In 1999 one in three shipping containers was found at fault, claimed the UK P&I Club, the world's largest marine mutual insurer. This meant one in six container journeys caused cargo damage costing owners $5 billion every year. Today that figure must be far higher.

Best practice will not defeat the unscrupulous

Much of the problem could be cut by using the right packaging and installing the loads correctly. But before any container is stuffed it should be thoroughly inspected for problem areas like holes, protruding nails, inadequate lashing points and porous rust patches, plus any residues from previous cargoes that could contaminate a new cargo. Stretch and shrink wrapping offer good protection against water and air bags can be quickly installed as alternatives to conventional shoring. These are all common sense measures and ably explained in the P&I Club's video: "If you think any fool can stuff a container think again!* but they are no protection against unscrupulous container stuffers bent on deliberately overloading their containers or falsifying cargo documents.

David Cockroft, ITF's general-secretary, said: "So far, best practice and self regulation have failed to stop the worst kind of accidents, and we are therefore recommending that international mandatory instruments be developed that guarantee that those handling and moving containers are informed of their weight, state of packing, stowage and securing, as well as their centre of gravity and whether or not any fumigants or dangerous substances are present." This clearly shows the need to make weighing of containers at embarkation ports a key mandatory requirement. Many container stuffers may overload their containers unwittingly but a scale fitted to a pallet truck and forklift would cost only £800 and £2,000 respectively so there is no excuse for feigning ignorance or relying on guesstimates. The temptation to overload deliberately, however, is huge because shippers can save so much by swindling shipping lines and governments out of billions of pounds every year.

The purpose of the ILO forum is partly to reach consensus on a common approach throughout the supply chain for the correct applications and enforcement of the appropriate standards for packing containers. Such lucubration, however, should not be an excuse for tardy deliberations, during which more lives will be lost and injured. Incorrectly stuffed and overloaded containers can sink ships. Given the size of the latest box ships being launched or considered, including 12,000 TEU vessels, the loss of just one such ship could cost over £1 billion in cargo losses alone.

It is bad enough that ships must cope with monster killer waves that could sink the largest of vessels without giving nature a helping hand through human shortcomings, deliberate or otherwise. It also reflects badly on an industry that has known of the problems for decades but only now is tardily starting to address them to remove the ugly side of the business.
*For a copy visit:

Friday, 11 February 2011

Somali piracy --- sympathy is not enough

The recent Somali pirate attack on the Beluga Nomination 390 nautical miles north of the Seychelles plumbed new depths of barbarity. It brings nearer the likelihood of an irremediable military strike on all known pirate ports harbouring the mother ships which give the pirates the range to attack over 1,000 miles from their shores.

The incident on January 22 involved taking aside three captured seafarers for punishment as reprisals for an abortive attempt by the Seychelles coastguard to free the hostages, during which one Somali pirate was shot dead. The tortures reportedly included keel hauling and hanging seafarers up by their ankles while their heads were under water. At least one sailor was murdered in cold blood, bringing the total murdered so far to over 40.

In a press release issued by the International Transport Workers Federation (ITF) on February 2, BIMCO, the International Chamber of Shipping, Intercargo and Intertanko all declared their outrage at such cold-blooded murder, adding: "We express our deepest sympathy to the seafarers involved and to their anxious families." But sympathy can never be enough and nor is the industry's repeated calls to urge governments to empower their naval forces to take fast and robust action against pirates and the vessels under their control, before passing ships are boarded and hijacked.

As explained in my last report on Somali piracy headed: "Somali piracy may cripple global logistics," Admiral Mark Fitzgerald, commander of NATO allied joint task force, Naples, said: "We could put a World War 2 fleet out there and it would still not be able to cover the whole ocean." He advocated arming merchant ships in the Horn of Africa.

The ITF has so far opposed the arming of merchant ships for understandable reasons but it and the shipping industry must realize that if they take no action to defend their ships with lethal force then the logic for a crushing military strike on known pirate ports against all fishing vessels large enough to act as mother ships is incontrovertible. Even ITF's General-Secretary, David Cockroft, recently chastised the majority of those who make the most from shipping for "Doing little or nothing." Insurance companies, it could be said, even have a vested interest in playing no part in a resolution as they are making far more money since jacking up premiums 4-5 fold than they are paying out in ransoms.

The ITF believes this latest atrocity marks a shift in the behaviour of Somali pirates and that shipowners and their crews will be re-evaluating the current determination to ensure this vital trade route, through which 40% of the world's sea-borne oil trade passes, will remain open. This will include alternative routes like around the Cape of Good Hope, which would severely raise transport costs and delivery times. Piracy is already estimated to have cost the global economy between $7 billion and $12 billion a year but that does not include the impact on just-in-time production techniques.

Shipping's supine response exacerbates seafarers' woes

Shipping lines and their trade bodies may bluster indignantly about the piracy menace but their supine response so far has only encouraged ever-more piratical attacks, which now sees an estimated 500 seafarers imprisoned in squalid conditions for many months. Underlying this discreditable response is the industry's preference for the "calculated risk" approach and the fact that their increased costs can be passed on to consumers hard hit by the credit crunch. Such nonchalant thinking, however, is particularly dangerous for developing countries dependent on subsidised staples like wheat. Last September this blog site warned about the consequences of Somali piracy on Egypt's economy, which could see Suez Canal transit fees plummet, and chastised the Egyptian regime's shameful refusal to deploy its 12 frigates adequately on piracy patrols. "There could also be incalculable damage to Egypt's economy through the loss of billions of dollars in canal transit fees which could destabilize the whole country," I warned. So far, estimates reveal that Egypt is losing $642 million a year as ships reroute to avoid the canal, a sum equivalent to a quarter of money spent on food subsidies. Sadly, that instability exploded last month as discontent over annual food inflation hit 18%, the world's highest. There may be other reasons for Egypt's social discontent but Somali piracy is not unconnected to the country's economic woes.

History shows punitive action works

Fortunately, at long last some shipping lines are taking more robust action to defend their ships, and according to Wiki-leaks, ex-SAS officers are being hired by foreign shipping firms through a private commercial firm. But some believe that these hired officers are seen as bait because the shipowners believe that the Royal Navy will intervene to rescue them and free their vessels. Such a scenario seems unlikely but it raises concerns that the Royal Navy is being forced to act as an international police force because other navies are failing to pull their weight off the Horn of Africa, not least Egypt. This is a pity because even a very small military response has already been effective. In November 2008 the Royal Navy shot dead two Somali pirates while repelling an attack on a Danish cargo ship off the Yemen coast. American navy officers at the time ascribed a sharp fall in pirate attacks in the first half of 2009 to this British intervention.

It would surely be far more effective, therefore, if decisive action was taken against all known pirate ports harbouring the pirates' mother ships. There is, undeniably, a tragic element in such punitive action in that innocent fishing vessels would be sunk along with the guilty but when pirates ply their trade they declare war on many nations and in any war collateral damage is unavoidable. There is also the safety of hostage seafarers to consider.

There is no legal bar to such action as the UN Security Council Resolution 1851 authorises military action against piracy on Somali territory. But if such action is considered too punitive then the only other effective means must include the arming of ships passing through the infested seas. The former initiative, however, would be much cheaper and quicker and there are historical precedents to prove its effectiveness. For centuries the Barbary pirates were the scourge of the Mediterranean and the Atlantic but when their Algiers stronghold was bombarded in 1816 and 1824 and their ships sunk their stranglehold was broken permanently and 1,000 Christian slaves released unharmed. It is to be hoped that it will not take centuries to eradicate the Somali pirate scourge.

Sunday, 16 January 2011

Britain will yield to Afghanistan's logistics costs

The British military may call the tune on resources for Afghanistan but it is the power of economics and logistics that will be the final arbiter of its fate. This observation also applies elsewhere, more so than ever in America where gathering adverse economic forces will sap the military's capabilities and ultimately the support of its citizenry to wage an unwinable war costing $2 billion a week.

As Britain's former ambassador to Kabul, Sir Sherard Cooper-Coles, remarked to the House of Commons' Foreign Affairs Committee last November: "It is a political problem that needs political treatment.... and it is time for the politicians to take charge of the project, as I believe the new coalition government is doing." The problem, as he sees it, is that Afghanistan needs a new political and regional settlement that cannot be delivered by military force. He sees the Afghan constitution as unstable because it is highly centralised and therefore does not go with the grain of Afghan tradition. "We need something much more decentralised," he added, which cannot come soon enough as efforts so far to build a durable causeway of good governance between the narco-mafia and the Taleban have not succeeded, admitted Sir Sherard.

The undesirability of allowing the military unquestioned support was hinted at in supplementary written evidence by Sir Sherard delivered in January. "Good soldiers.....are not especially imaginative. Nor, until relatively recently, did many senior officers have intellectual pretensions." He believes "the war in Afghanistan has given the British Army a raison d'etre it has lacked for many years, and new resources on an unprecedented scale. In the eyes of the Army, Afghanistan has also given our forces the chance to redeem themselves in the eyes of the Americans.....of the British Army's performance in Basra."

It beggars belief that the British military mindset should be concerned about what its allies may feel about the Army's image and that is should take a real war to justify its existence. Such numskull thinking, however, gets worse. Sir Sherard explained how the then Chief of General Staff, Sir Richard Dannatt, told him in the summer of 2007 that if he didn't use in Afghanistan the battle groups then starting to come free from Iraq, he would lose them in a future defence review. "It's use them or lose them," he said.

Logistics ignorance costs billions

If Britain's top military brass and its politicians had a thorough grasp of logistics they might just have baulked at the cost of military intervention in Afghanistan, however strong the deferential desire to please the Americans. This is because the Taleban's greatest weapon is logistics, which in per capita terms is costing the coalition forces 10 times as much as the Taleban.

Sir Sherard believes that the Afghan war is costing Britain £6 billion a year but the true cost is likely to be much more when consideration is given to the high cost of supporting maimed military personnel, the war widows and their children. But it seems that even now the Army has no intention of cutting its demands on the public purse. Its latest request is for the supply of 12 Challenger 2 main battle tanks that would cope better with IEDs. They would not, however, be immune to armour-piercing missiles, as the Afghan countryside testifies with its numerous wrecks of heavy Russian tanks.

Jingoistic journalism's ignoble role

In Sir Sherard's experience, "Ministers were reluctant to question the military advice put to them for fear of leaks to the Press suggesting that they were not supportive enough of the troops." Ignorant, jingoistic journalism, therefore, also plays an ignoble role in the Afghan mire. But ministers risk widespread public anger if they continue to ignore the economic consequences of overseas warfare at a time when Britain's government finances are sorely stretched and the public hard hit by economic cutbacks.

In America, the economic situation is worse but potentially far more dangerous to global financial stability. From just 0.1% of gross domestic product (GDP) back in 2001, America's structural gross federal deficit, excluding one offs like bail outs, is now 8%, or $1,230 billion. This compares with Britain's 7.9% of GDP. In a startling warning, Paul Ryan, the new Republic chairman of America's House of Representatives budget committee, said that if the US did not get its finances in order, "We will have a European situation on our hands and possibly worse. The consequences of not tackling the country's mounting debt burden would be dire. We will have the riots in the streets, we will have the defaults, we will have all those ugliness problems," referring to the French teenagers lobbing Molotov cocktails at cars because the retirement age would be moved from 60 to 62.

Currently, the US government borrows about 40 cents in every dollar it spends. The big fear over the deficit is that if no action is taken investors might punish the US for its fiscal laxity and so undermine its triple A rating. This would have consequences for foreign affairs and defence. Mike Mullen, chairman of the joint chiefs of staff, warned last year that the debt pile could limit the flexibility of the US in funding its military. Last week, the Pentagon announced that it would trim its annual budget of $500 billion by $78 billion over the next five years compared with its earlier projections.

Meanwhile, it should not go unnoticed that the West's involvement in costly wars is doing for China what the aftermath of World War 2 did for Japan -- strong economic growth unencumbered by wars. China is now banker to America and seems to have pretensions to be the same for the EU. That would shift the balance of power dramatically in ways that are not entirely comforting at present.