Monday, 19 November 2012

Skills gap threatens Britain's industrial renaissance

As remarked in a previous report, "Supply chain shifts threaten Asia," there are many hidden costs attached to outsourcing manufacturing to the Far East to serve markets back in the West. These include inflexibility, poor responsiveness from far off factories, poor quality issues, wholesale intellectual property theft, large minimum production runs and Nature's fury which can wreck JIT delivery schedules. Many outsourcers overlooked these significant costs but the biggest oversight, and this is not hindsight, was the threat from rising production and distribution costs which are now beginning to make the Far East a less attractive, if not uneconomic, place to locate. That does not mean that the Far East will fail to attract foreign investment, but rather that it means such foreign investors will concentrate on serving the regional markets instead, given their potential for huge growth.

So just how fast are these production and distribution costs rising and will it mean that UK and European manufacturers face a golden manufacturing opportunity? Since 2003 wages in Thailand have jumped from US$3 a day to $10 a day while shipping costs have risen by 20%, says one British parts supplier for pick-up trucks. Elsewhere in Asia wage rates have been soaring. In China, minimum wages in the provinces have risen by more than 20% in the year to September and the Chinese government has pledged to double workers' average income this decade. According to one American consultancy, if Chinese wage rates rose 30% a year, the renminbi by 5% a year against the dollar, along with freight rates, it would be as cheap to produce in America as in China by 2015. But already certain products can be made in America cheaper than in China. Likewise, in Britain it is already cheaper to produce high-end clothes rather than in places such as China, Bangladesh and India.

There is no doubt that many British companies are bringing back to the UK some or all of their manufacturing side but it is, perhaps, still only a trickle rather than a trend, but many trickles reach their oceans as mighty, raging rivers. That trickle, however, will be effectively dammed if Britain cannot overcome its serious shortage in manufacturing skills, particularly at the hi-tech end. It is thought, for example, that in Britain's West Midlands there will be around 90,000 hard-to-fill manufacturing jobs over the next five years. One French fashion house now makes between 50% and 70% of its entire global production in the UK and would like to make more there but complains that Britain no longer has the skills.

It may come as a surprise to many readers that recent research claims that Britain is producing more manufactured goods than in 1966 when manufacturing employment was at its peak. This is due to survival strategies put in place by manufacturers to mitigate the effects of globalisation. But these successful firms are now concerned about the lack of high-tech skills in the labour market and some are even worried that their businesses many not survive into the next decade owing to their inability to recruit employees with the right expertise.

Closing the skills gap

There is no doubt that if Britain is to take advantage of the golden opportunity for a manufacturing renaissance then the skills gap must be closed. The British Government is fully aware of this and has some laudable initiatives, like the £140 million being pumped into high-value manufacturing and the financial support for its quango, Skills for Logistics. But the fact is that the firms that need the skilled labour do not have the capacity to offer training because they are largely SMEs.* Such training schemes were largely offered by the big firms which have subsequently relocated from the UK. This means that it it clear that much more is needed to encourage apprenticeships and may even require far more spending on school education to make manufacturing more appealing at GCSE and A level. This may require rewarding some schools better than others who can show that they are producing pupils more suited to a manufacturing society than a services economy so that pupils will be guaranteed jobs waiting for them rather than the arts degree graduates for whom the jobs paucity leaves them walking the streets unsuccessfully looking for work. The government may even need to overhaul school education root and branch for there can be no doubt that the level of education attained by many pupils leaving school is abysmal. The current GCSE qualifications attained by British pupils at 16 has been discredited as a dumbkopf version of its predecessor, the GCE O level, and there is far too much reliance on course work.

Such remedies can be very costly for the Government already strapped by a chilly economic climate but there are ways that both Government and the people, in concerted actions, can add billions of pounds to the Exchequer's coffers. Owing to the complexities of global tax laws, many leading corporations take advantage of low tax rate economies and tax havens. There is nothing illegal about this though the argument that such avoidance is profoundly immoral is unassailable. There has been much recent media criticism of American companies, like Google, Amazon and Starbucks, paying little or no tax in Britain where much of their sales and profits arise. One British MP claimed that Google, Amazon and Starbucks paid a UK corporation tax rate of 0.4%, 2.5% and zero respectively, compared with the current UK corporation tax of 25%.

Finding the cash

It will take time to resolve this through normal channels because it calls for international regulation but concerted action by aggrieved consumers could bring far quicker results. If people wish to change odious corporate cultures there is no greater weapon in their hands by far than collective, sustained and focussed boycotts of the offenders' goods and services. It is an irresistible power that is every boardroom management's potential nightmare.

Apart from the multi-billion pound loss to the Treasury through tax avoidance schemes, money which could be well spent preparing Britain for a manufacturing renaissance, there is a more alarming reason why this insidious canker must be lanced, and quickly. As pointed out by one British department store that pays its taxes in full those firms that pay little or no UK corporation tax have an unfair advantage over those who do and in time the vast sums saved on tax avoidance could be reinvested in the businesses so that, all other things being equal, they would out-compete the full tax-paying companies. Eventually, that could leave the Exchequer so short of revenues that much of its social spending would have to be slashed, risking social collapse and anarchy.

Balance of payments remains untamed spectre

Britain now stands at a crossroads presenting a golden opportunity for a more assured, long-term future. The right route must involve a manufacturing renaissance concentrating on the high, value-added products, in particular, but that will never be achieved without the closure of the skills gap. If this opportunity is missed Britain seriously risks raising the spectre that once was a frequent hot political issue -- a balance of payments crisis. The importance of these statistics has faded in recent decades owing to the liberalisation of financial markets that allowed firms and countries to ramp up their borrowings to fill the gap. But the trouble with debts, as the recent turmoil in the PIIGS** members of the EU so painfully shows, is that if the creditors' confidence in the ability of debtors to repay the loans is shattered then financial Armageddon looms.

Britain's fervent espousal of a finance-based economy to the detriment of manufacturing has had a corrosive impact on the balance of payments. In the second quarter of 2012 the UK's balance of payments deficit reached a record £20.8 billion and the deficit on goods reached £28.1 billion, the largest ever recorded. Back in 1950 Britain had more than a third of its labour force in manufacturing and there was a trade surplus in manufactured goods equal to 10% of GDP. That trade surplus has now fallen to a deficit more like 4% of GDP. Is there any wonder that there is a widespread feeling that the country has put too much faith in finance at the expense of manufacturing?

Capital inflows required to finance national trade deficits may stop, possibly abruptly, if there are mounting, imagined currency or default risks. As far as defaults go the imagined has turned to reality for many countries. For Britain, the default risk is lower but not fanciful. With a fair wind and the right moves to rebalance the economy away from a scenario dominated by paper pushers and City pinstripe bookies, Britain faces a once-in-a-lifetime, golden opportunity. It now remains to be seen if the coalition Government has the resolve to steer the right course and carry the nation with it.

*SMEs: small and medium sized companies
**Portugal, Ireland, Italy, Spain, Greece 

Friday, 2 November 2012

Unique articulated forklift will save warehouses millions

It may seem pushing the limits of credulity to claim that a newly launched, special kind of forklift delivers instant truck payback and much more by cutting new/altered warehouse building and running costs. But that is just what Translift Bendi* has done with its Mini Bendi pedestrian articulated forklift developed in close cooperation with ASDA, one of Britain's largest food retailers and part of the Walmart group, the world's largest retailer.

There is nothing new about the ability of articulated forklifts to reduce new or redesigned warehouse building and running costs or even eliminate satellite warehouses entirely. What is new, however, is the introduction of forklift operations with pedestrian traffic in a safe way and so save substantial costs that would otherwise be incurred if truck operations were entirely separated from pedestrian workers.

Undeniably, the articulated forklift is by far the most versatile of forklifts thanks to its 220 deg fork mast rotation and large cushion tyres that combine all the virtues of outdoor counterbalance trucks with internal warehouse machines working in very narrow aisles (VNA) down to 1.6 mt wide. Such versatility can substantially cut forklift numbers and avoid costly warehouse expansion. But just how is the Mini Bendi, costing around £20,000, able to help ASDA not only reduce construction costs but also running costs and what are the hard figures?

A typical ASDA store in the UK costs around £10 million to build, and ASDA's Simon Grass, back-of-house development manager, believes the Mini Bendi has saved 0.5%, or £50,000, from the building cost, including £4,000 on sprinklers. As he explains: "Reducing the building costs helps to maintain hardly any cuts in the building panels, therefore no waste. The steel columns are lower, reducing steel tonnage and costs. In terms of the building and how it looks it is now lower and more acceptable when running through the planning procedure. We now have a truck that offers greater flexibility as well as efficiency and productivity benefits compared with other types of handling equipment."

ASDA has hundreds of large superstores in Britain, with more planned, which gives an inkling on the potential for multi-million pound savings that the Mini Bendi can achieve nationally, and far more if marketed globally. As Simon Grass was keen to stress: "It is not just new stores that benefit from the Mini Bendi. When ASDA reviews one of its more established stores within the estate, the Mini Bendi can save significant space, time and money in the back-of-house areas, as ASDA can reduce the capital spend on realigning the warehouse to separate colleagues and forklifts. This is because the Mini Bendi can perform the same tasks as many of the existing reach trucks within the estate. ASDA can simply swap them over and the area becomes pedestrian friendly."

As a business, ASDA constantly looks at ways to separate pedestrian and forklift trucks to minimise the cost of accidental collisions. However, when segregating it would often lead to usage and productivity becoming inefficient, explained Mr Grass, but "We no longer need to compromise."

Owing to the truck's way of working, ASDA can now have pedestrian pick within the same area, permitting the stores to drop and fill effectively. This supports the reduction in the building footprint and thus improves the building's selling efficiency because ASDA can either build a smaller store or increase the selling space. Either way, it makes no difference to the store running costs like rates, possibly rents, and all the utility costs, all of which the Mini Bendi confers for the building's lifetime -- a truly remarkable return from a humble, pedestrian lift truck.

Wednesday, 24 October 2012

Asian quality issues can undermine Western businesses

As explained in my last blog: "Will technology reshape global supply chains," the perils of outsourcing manufacturing or parts supplies to Far Eastern countries are many but, perhaps, none can be worse than poor quality issues that cause their western customers to collapse. The crucial importance of checking quality issues in any Far Eastern supplier when considering outsourcing cannot be overemphasised, as the recent collapse into Administration of the UK company, Manganese Bronze, (MG) vividly shows.

MG makes London's iconic black cab taxis but it struck a deal with its Chinese partner, Geely, in 2006, who took a 20% stake in the company and transferred taxi production to China. The rationale behind the move, as it is for most companies outsourcing to China, was to reduce production costs to compete better on the world markets.

The latest cause of MG's financial embarrassment was the recall of 400 of its London taxis following problems with its power steering. It succeeds a fiasco in 2008 when it was forced to withdraw 5,000 taxis after some burst into flames. Reports claim that the latest fault was caused by a component from an unnamed Chinese supplier, introduced as part of wider moves to cut costs.

There are parallels to this even within Europe when a reputable company switches to a cheaper country within the EU without always informing their customers. One British manufacturer of forklifts, for example, had a reliable relationship with a West German gear box manufacturer who subsequently sought supplies from East Germany where quality issues fell short. The result was the British company spent 10 times as much rectifying problems as it received in compensation from the German supplier. And that does not include any potential sale losses caused by the damage to the truck brand. The incident also damaged the German company as the UK truck producer switched to Italy for its gear box supplies.

It should not be thought that Chinese manufacturing quality is inherently risky. When Japan was recovering from World War 2 the Western perception of its production quality was one of shoddy, cheap products. Today, Japan's quality issues, especially in car production, albeit with a few recent hiccups, is second to none. There is no reason why China should not become a top quality producer but it may need State intervention to hasten the process before too much damage is done. The Chinese authorities should also be more vigorous  in dealing with wholesale intellectual property theft committed by its corporations. Another British forklift producer whose trucks came from Taiwan felt obliged to reshore its production back to Britain because of concerns by its component suppliers who were reluctant to supply because they feared leakage of their product designs to China for copying.

It should be said in fairness to Chinese producers that there are other problems with MG that seem to have contributed to its collapse. MG reportedly tried to secure a £15 million loan from Geely because it stopped sales while investigating the steering fault and so had no income. Geely owns Volvo so such help would not have been too onerous but it may have felt wary about a bailout given the discovery a few weeks earlier of a £3.9 million accounting black hole allegedly connected to the introduction of a new IT system. When its delayed interim results were announced it showed widening losses of £3.6 million for the six months to the end of June and it has made only losses for the last four years. This seems to indicate that despite several years of Chinese production their production costs could not be reduced sufficiently, hardly surprising given strongly rising Chinese wage rates and soaring fuel bills impacting distribution costs. This has salutary lessons for all companies setting up businesses in China supplying customers half way around the world. China is losing its allure because the law of comparative costs in their favour is diminishing.

At one time holding a virtual monopoly in the London black cab taxi market, MG's woes grew as its market share fell when new entrants, like Mercedes, secured successes with its Vito model. Nissan is also about to enter the London cab market. Even so, as many other Western companies have found when outsourcing to the Far East, keeping a handle on quality issues is very difficult and so should be considered carefully as a key determinant when outsourcing.

Sunday, 30 September 2012

Will technology reshape global supply chains?

There are many forces at work in the global supply chain which are already beginning to reshape global logistics but one which has yet to have any impact is, arguably, changes in productive technology that could undermine the prime reason behind offshoring production to far flung countries ---lower costs, particularly labour rates.

Hitherto, the main reasons forcing a rethink on global supply chains have been concerns over rising costs, both at the production level and in distribution, poor quality, prolonged time to market, wholesale intellectual property theft and natural calamities. The last of these can be disastrous in a world economy geared to JIT (just-in-time) deliveries. There are also political risks but fortunately these have not had any impact so far. They may also be augmented by environmental concerns which lead to some form of taxes because offshoring has boosted carbon emissions. Despite all these risks, global corporations have not been dissuaded from offshoring to cheap labour countries on a significant scale because the law of comparative costs is still in their favour.

That law, however, could be turned against cheap labour countries by advances in technology which will give high wage economies the edge. Already, in some respects, America is cheaper than China in the production stakes and that gap is narrowing. But that trend could be galvanised through the application of robotics that will replace many low wage menial factory tasks.

An interesting example is Rethink Robotics' Baxter robot that can learn any menial assembly line task. It, and doubtless others like it to come, can increase the productivity of US manufacturers and so help them keep business that would otherwise move overseas. Mounted on a gurney, its two arms, five cameras and sonar sensor that detects motion through 360 deg around it, and enough intelligence to learn tasks within an hour, Baxter can work safely beside humans at remarkably low cost owing in part to its low price tag of US$22,000. Based on three years of an 8-hour shift, that is the equivalent of $4 an hour, almost half the minimum wage in Britain. According to Rodney Brooks, Baxter's brainchild, "We are spending hundreds of billions of dollars doing this kind of work in China and we want companies to spend that here, in a way that lets American workers be more productive." Baxter's upgrades will also be free to enable more complex tasks like two-handed manipulation, and early next year the company will release a set of programming instructions so users can create their own tasks and attachments for the machines.

Plausible though this scenario may be, and while it could have some initial impact, it could cause more problems in the long run of a political nature. Cheap labour economies will develop their own capable robotics when they see that their cheap labour no longer makes the law of comparative costs work in their favour. Production costs are important but these can be changed as market forces dictate. What cannot be changed, however is the exposure to natural and political risks and sharp changes in fuel costs and wage rates. Given that universally applied robotics will not give any one country a competitive edge, the more likely scenario to unfold is a trend towards regional manufacturing, with many companies wanting to produce their products as close as possible to their customers. This will have manifold advantages, like minimising the natural and political risks of stretched global supply chains, enhancing the environment, and lowering distribution costs. Given China's and other Asian countries' social problems of burgeoning populations and their growing aspirations, it is to be hoped that any changes in international trade patterns will be managed skilfully to avoid major social upheaval.

Wednesday, 26 September 2012

China and Japan's chauvinism threatens global logistics

Once again the global supply chain geared to JIT (just-in-time) deliveries shows just how Asia is a high risk trade partner without a robust recovery plan to sidestep disruption to supplies for western importers. This blog has repeatedly warned of the folly from placing too many eggs in one supply chain basket. The Japanese tsunami in 2011 and the Thailand floods showed just how nature alone can cripple global supply chains. As if that were not enough we now have the political risks surrounding the disputed, uninhabited islands known as Senkaku to the Japanese and Diaoyu to the Chinese in the East China Sea. Readers should not be surprised that Asian politics is threatening the global supply chains. In my blog of April 25, 2011, headed: "Japan's earthquake must force JIT supply changes," I warned: "Nature, it should be said, is not the only threat to the supply chain. There are also significant political risks."

Japanese factories produce about 40% of the world's electronic components, and in some cases is the only source of supply for items like parts for jet engines. China's Guangdong province provides 80% of the world's basic electronic components and is the largest source of rare earths, so essential for electronic devices. This shows how vulnerable the world is to any political upheaval in this region.

Japan and China, the second and third largest economies with an estimated £218 billion trade relationship, have been a 21st century success story but that success could be seriously set back by the current dispute over typhoon-lashed, uninhabited islands.

Inflamed feelings in both China and Japan, whipped up by a jingoistic media with Government connivance, has already caused considerable economic damage. Japanese businesses in China have been ransacked and closed down. Japanese car makers in China have ceased production following calls for a Chinese boycott of their cars, leading to estimated losses of £154 million so far. The Organisation for Economic Cooperation and Development is so worried by the flare up that they believe it is making the world economy more fragile than at any time since the 2008 financial crisis.

It is difficult to discern what is really behind the flare up over five small islands. Historically, China has the stronger claim that stretches back to imperial times, long before Japan forcibly annexed the islands in 1895. Geographically, the islands are also much nearer China (about 150 miles) compared with over 600 miles to mainland Japan. There are believed to be valuable natural resources like gas but if this is the motive for militaristic passions then is should not be difficult for both governments to reach agreement on development of the islands' surrounding resources by mutual consent and share the revenues equally.

America could help here by hinting to Japan that it will not honour the US-Japan security treaty if Japan is attacked by China around the disputed islands and only come to its aid if mainland Japan is threatened. America right now needs a Pacific war entanglement like a dose of the plague. Its economy is in an unholy mess built on an appetite for unsustainable debt, fanned by rampant banking greed and military spending supporting world-wide bases and numerous military entanglements.

As always, trade is the hand-maiden of prosperity and the surest guarantor of peace. Both Asia and the world have too much tied up in trade interdependence for that to be jeopardised over a few barren rocks. And Japan, in particular, should recall the words of General MacArthur at the dawn of the Atomic Age when taking the Japanese surrender in Tokyo Bay: "It must be of the spirit if the flesh is to survive."

Sunday, 16 September 2012

Logistics skills training neglect costs billions

Logistics skills training has a poor image in the United Kingdom even though Britain ranks highly in the world league for logistics efficiency so why is an industry worth £74 billion a year employing one in twelve of the workforce regarded almost with disdain and what does it mean for the rest of the world?

In my blog: "Lousy logistics wastes billions" (May 5, 2010) I referred to the waste caused by inappropriate materials handling hardware and software in the supply chain. Globally, the annual waste undeniably runs into billions of  pounds and is typified by the wrong type of forklifts for the job, ignorance of slick warehouse management systems (WMS) with good stock forecasting programs and lack of double-deck lorries which could reduce the £25 billion a year losses caused by road congestion. And that is only a just a few of the problems. But nowhere did I mention how the right kind of logistics skills training could transform logistics efficiency even more which is so necessary to slash the waste.

At a London press conference on September 12, the Skills for Logistics (SfL), tasked by the UK Government to tackle the skills and productivity needs of employers in the logistics sector, the issue of training neglect was laid bare. Mike Jacksons, CEO of SfL, remarked that " over years training has been dire but it's improving. Too often you get people making buying decisions that are nothing like as good as they should be." As if to emphasise that, Paul Brooks, director of Unipart Logistics, added: "The operations managers are generally poor procurers of skills development. This gives a clue to why the right logistics hardware and software are not being used as much as they should be.

The logistics industry image is still perceived to be poor and so cited by SfL as one of four barriers to better development. Many, if not most, jobs are only four hours a day, three days a week, "so what we have to offer here is full time jobs," says Mr Jackson. Many jobs also involve night work or work in cold temperatures. At entry level the financial rewards are also unimpressive.

While there should be incentives to encourage promotion within all ranks it seems there is inadequate support to taking on new, logistics-savvy recruits at graduate level. These recruits might be young and 'wet behind the ears' but they are likely, through their holistic logistics training, to effect change within a company more quickly. Any such changes which improve the bottom line would mean more in the pot to share among all logistics employees and so cement their loyalty.

Just how much skills matter can be gauged by one company's experience. Gist is a sizeable UK logistics services provider employing 5,000 on 53 sites in the UK and mainland Europe. By taking logistics skills training to heart it has seen a 6% improvement in fuel consumption, 33% fall in employee accidents and a 35% cut in low grade vehicle damage. There has been a 20% fall in employer liability claims, a 22% rise in productivity, a 26% cut in absenteeism and a 36% fall in labour turnover. These savings far exceed the extra costs for training and given Britain's high position in the global logistics efficiency stakes the scope for savings elsewhere in the world is probably immense. Adequate logistics skills training is a win, win, win situation. It makes the logistics service providers more profitable, it keeps their customers' costs from rising uncomfortably fast and it helps the environment in so many ways.

Saturday, 11 August 2012

Carbon challenge will drive warehousing's future

Challenging times lie ahead for the road haulage industry which will see the logistics map of Britain change almost beyond recognition. That, at least, seemed to be the message from the 20th one-day seminar on "Improving Business Performance," organizied by the Road Haulage Association (RHA) for its members and hosted by Toyota Material Handing UK at its Leicester premises on June 19.

Road hauliers no longer work in splendid isolation from the warehousing function as many now operate their own distribution centres and undertake storage and handling functions once performed by manufacturers, importers and retailers. It is, therefore, crucial to know where they will be not just next year but 10-30 years ahead. Should they, for example, consider relocating to port centric locations with rail-embedded models or setting up LDCs to reduce final delivery distances, and what must they do to be seen as carbon angels?

Phil Harrison, director of LCP Consulting, tried to answer that in his thoughtful talk on "The Future of Warehousing." His key message was that carbon was the big, long-term challenge and that conventional solutions, would not be enough. In short, "The future for warehousing will be driven by the carbon challenge," epitomised by local 'carbon' sites using electric delivery trucks within a 20-mile radius instead of the current 60 miles based on ic engine trucks.

Industry rides virtuous circle

Mr Harrison had plenty of pointers to back his thesis which suggests the industry is riding a virtuous circle, starting with centralisation. This has seen a trend to fewer and bigger sites to the point where tonne/km are no longer growing with GDP. In 1984 a 38,000 mt2 warehouse was considered big but in 2008 a 100,000 mt2 site was unremarkable. The trend has also been upwards, from an average storage height of 6 mt to 14 mt.

Pleasing to any road haulier's ears was Mr Harrison's examples of what the virtuous circle could mean going out to 2050. He believes that Britain's road share of freight tonne/km will fall from 65% to 50% (not so pleasing, perhaps) but that the percentage of truck kilometres run empty will fall from the current 27% to 17%. The average weight-based load factor he sees as rising from 59% to 70%. The 'Green' camp will also be pleased, as the projections are for a 40% improvement in energy efficiency and a 30% cut in the carbon content of the energy.

But container terminals, in particular, can already do much better than that. At the world's most automated container port in Hamburg, 84 AGVs (automated guided vehicles) source their annual needs of 50 million kw from entirely renewable sources. Using this carbon neutral electricity has cut the whole terminal's carbon footprint by around 60% but there is more good news to come. Demag Cranes have developed all electric container handling AGVs that will completely eliminate local CO2 emissions. They will run for 17 hours on one battery charge thanks to the battery power train being twice as efficient as a diesel-electric one.

The drive to minimise carbon emissions, is not, of course just about preventing catastrophic climate change. It is also about the importance of preserving healthy lives. In Europe's northern countries around 50,000 people die prematurely owing to air pollution caused by cargo ships. That is why by 2015 all cargo ships in the English Channel, North Sea and Baltic must reduce the sulphur content of their fuel by 90%.

Future structures are already emerging to support Harrison's views. These include rail-embedded centres to manage in-bound flows and port centric locations. There are already city hubs aggregating the last 25 km and shared user hubs and services sites, regional mini distribution centres (DCs) and hubs.

Container growth will spur property changes

Some of Harrison' s views were supported by Jon Sleeman's paper on "Goods Transport Trends." Jon is a director, research, at Jones Lang LaSalle. These trends are driving activity in the property sector and in particular the envisaged strong growth in container traffic will see growing demand for port centric logistics. Forecasts show a 182% increase in container traffic between 2005 and 2030, from 7 million to 20 million TEU per annum.

Port centric logistics has the potential to provide more efficient logistics solutions by eliminating many return empty container trips. They also enable maritime containers to by fully loaded and they reduce transport costs and carbon emissions. The PCLs may challenge the 'golden triangle' national distribution model.

Online shopping will also shape the property market. E-commerce has hitherto been served by national fulfilment centres within reach of the main parcel hubs to enable late cut-off times to be offered to customers. But food retailers are moving away from vans using local supermarkets to make home deliveries and are now setting up specialist food retail fulfilment centres because sales volumes have risen sharply. This has implications for higher sales of automated warehouse equipment. Such E-fulfilment centres could challenge the existing map of UK warehousing by increasing demand from centres within, or on the edge, of major urban areas. Rail freight growth projections, if achieved, will also affect the property market. There is increasing interest from retailers and manufacturers for rail-connected sites.

In conclusion, Mr Sleeman expects rising demand for warehousing at or close to major container ports, warehousing on intermodal sites and storage in or on the edge of major urban areas for home delivery and 'last mile' solutions. As regards Off-pitch locations which are poorly located in relation to the key freight corridors, these could become obsolete.

All that, however, is in the future and hauliers cannot take their eyes off the ball on serious issues today, like safety and how to squeeze more revenues from existing operations. Too often some of the 400,000 HGVs on Britain's roads roll over, sometimes with fatal consequences, and usually they are caused by load movement owing to poor or non-existent load lashings. Ray Engley, head of technical services for the RHA, outlined the extent of the problem, causes and solution in his talk on "Load Securing -- from Theory to Practice".

Load security problems persist, particularly in curtainsiders, because there is evidence of poor practice, inconsistent enforcement, and no straightforward standard for operators. However, from April 12, 2012 VOSA's enforcement approach to load securing has changed to make it clear and more consistent.

In an example from a 2011 stop day, where vehicles were found defective, 49% of them related to inadequate load securing, 24% had no secured load and 15% an unstable load. The advice to combat this is simple enough. In the event of doubt on load security, RHS members should carry out a risk assessment for the load being carried. But is it really that simple, wonders this writer. As in warehouse forklift operations where the need to move goods out the door quickly to meet time constraints is often present, so, too, hauliers working under similar constraints where the business culture emphasises operational speed, conspires against any practices that may slow down throughput rates.

There is one peril lurking within road transport which often escapes mention -- the deliberate overloading of ISO containers. Quite apart from the many millions of pounds this behaviour deprives ship owners and governments, the accidents from such overloading can be horrific and far reaching, as in the case of the MSC Napoli container ship grounding off the Devon coast a few years ago, where gross overloading was a serious contributory factor. This problem will not be resolved effectively until weighing of containers at ports is made mandatory. "It's a major issue," said Mr Engley, "and we are working with the BSI to evaluate rules on loading containers." Ultimately, however, the IMO must be the enforcer but despite its many sound bites on promised action it has so far failed to deliver.

Thursday, 19 July 2012

Re-shoring issues may slow Asian growth

In any discussion on the economics of global trade the opposing camps rarely deal with the impact that shifting foreign trade patterns can have on socio-political issues, not just for the present but, more disturbingly, also for the future. One of these dichotomous debates is the off-shoring versus re-shoring manufacturing issues currently being exploited by the American presidential candidates. A key issue, however, that could decide if the re-shoring back to the homeland will outvie the off-shoring trend of recent years will be logistics, by which I mean all the forces that can impact the global supply chain. Some of those forces are impossible to foresee accurately but are, nevertheless, highly potent, while others are of a more sinister nature. These include natural calamities, fears over rampant intellectual property theft and ubiquitous, staggering corruption.

Off-shoring, of course, is nothing new. It has been part of the global trade scene for over 100 years but with one big difference. In the past, when manufacturing centres were set up in another market, they were confined largely to industrialized, developed countries. Over the last few decades, however, there has been a huge shift of such jobs to developing countries, or what was called the Third World. This has led to substantial job losses in countries where businesses outsourced to cheaper countreis like China. In the 10-year period, 2000-2010, America lost nearly 6 million manufacturing jobs, many to off-shoring. The adoption of JIT delivery techniques, however, over the last two decades or so, has exposed the vulnerability of the global supply chains to natural calamities like earthquakes and floods. Other risks yet to test the JIT model include pandemics, catastrophic crop failures and political upheavals.

These concerns are are now encouraging global corporations, in particular, to redesign their global supply chains to make them more resilient to unquantifiable but serious shocks. This means re-shoring back to the mother country or at least near-shoring to eliminate the threats to JIT supplies posed by natural calamities,  which could worsen if global warming accelerates.

The prime reason driving the trend to off-shoring was and remains the much lower production costs in developing countries. That advantage, however, has diminished as costs in these countries, especially China, have risen sharply to close the costs gap. In 2005, for example, Chinese production was 31% cheaper than in advanced nations, according to one group's calculations. By next year that gap is likely to be only 16%. Add on the logistics costs of shipping half way around the world, which could be 5-10% of sales values, and in many cases it would make sense to re-shore at least some production back to the homeland country.

Global corporations are now considering a change of tack on off-shoring of manufacturing, which if realized could slow development in poorer countries. According to an online survey by Boston Consulting Group, some 37% of manufacturers with sales over $1 billion and about half of those with more than $10 billion of sales plan or actually are considering bringing production back from China to America. Other corporations, however, are choosing to switch from China to other, cheaper sources in the Far East, but these countries are just as prone to natural calamities , like the floods in Thailand this year which seriously hit global businesses geared to JIT component supplies.

There are many other reasons driving even medium-sized businesses to re-shore back to their homeland, and possibly others yet to be tested. These include serious concerns over staggering intellectual property theft in China, poor quality, demands for large orders which imposes higher costs on importers and thus negates the JIT principles, unreliable supplies and long delivery times. The last of these places importers at a disadvantage to nimbler, locally-based producers, able to react more quickly to changes in customer demand.

Lest it be thought otherwise, outsourcing is not inherently deleterious to the global community. Far from it. When corporations outsource to cheaper countries they do not do so just because labour costs are much lower. They also look to develop sales opportunities in new markets, which does not only enhance their own earnings. Germany, for example, has done well from its exports of luxury cars to China because the rapidly-growing Chinese economy has created many Chinese millionaires, a phenomenon greatly helped by foreign countries outsourcing production to China. It is a classic example of how growing global trade is of mutual benefit.  Perhaps the greatest single benefit of outsourcing has been China's major role in helping to keep the lid on Western inflation rates.

Never underestimate customer power 

The rush to outsource, however, should not be based purely or largely on lower production costs without careful consideration of all the relevant issues. If customer considerations are ignored the results could be dire. In Britain, many functions have been outsourced to Indian call centres. This has led to customer backlash for the simple reason that customers had difficulty understanding the Indian accent. Now, companies like BT, Britain's biggest telephony/broadband supplier, is re-shoring all its call centres back to
Britain before year's end.

Businesses may feel dismissive about future, dimly perceived political threats arising from their off-shoring activities. "Our business is business, not politics," they might declare, but they would be crass to ignore the latent risks from political upheaval, even within their homeland countries. When people have had a taste of high living standards, whether earned or not, they don't like losing it through persistently high and rising unemployment. In such circumstances, scapegoating of multi-nationals could arise, and governments could be forced to re-evaluate how they could arm twist companies to keep jobs in their own countries. Worse still, perhaps, people-power could lead to crippling repercussions for off-shorers through widespread boycotting of their goods.

In a savage indictment of a long-term stagnant economy, Japan's young, unemployed graduates are a disturbing pointer of what could await other advanced, industrialized countries. In a country of 127.8 million people the suicide rate is 24 per 100,000, one of the world's highest, and it appears to be linked to socio-economic negative factors. Data analysed between 1985-2009 found that suicide rates were significantly correlated with unemployment rates. About a third of the suicides were in their twenties, including many graduates seeking jobs unsuccessfully.

Pundits are often fond of mouthing mantras like the need to improve maths and science among the middle-skilled and medium-waged occupations, but that is easier said than done and try telling it to the well-educated Japanese graduates still looking for jobs after years. Corporations that ignore these warning signs risk unimaginable consequences.

Monday, 28 May 2012

How Mitt Romney could threaten global logistics

Just as politics and economics are often deeply entwined so, too, politics can impact logistics for better or worse. That scenario could soon be tested after America's presidential elections later this year if the republican candidate, Mitt Romney, wins the presidency. Such a victory could have unfavourable, seismic implications for global logistics, not because Romney is inexperienced in smart business that makes use of morally questionable tax havens like the Cayman Islands, (his personal wealth has been put at between US$190 million- $250 million) but because his foreign policy nostrums have an almost xenophobic, pugilistic air.

Among his reportedly pugilistic posturings is a promise to launch a US-Israeli war with Iran if the latter continues to develop its allegedly nuclear weapons capabilities. He has also described Russia as the number one geopolitical foe and in the primaries he vowed to start a trade war with China. As if that were not enough he wants to extend the war in Afghanistan until the Taliban are defeated.

Such rhetoric is akin to the virulence of America's hard right evangelicals on the make, to whom he looks for support, and as a Mormon Romney's theological naivety has much in common with the evangelicals. Both are rooted in the belief that America can do no wrong owing to their exceptionalism. Both have parallels with Israel's 'chosen race' belief and, indeed, Romney has a long-standing, close relationship with Israel's Benyamin Netanyahu. But playing the Israel card may just be Romney's way of soothing any suspicions his evangelical base may have.

Romney has surrounded himself with advisers like Eliot Cohen, the man who wrote the forward to Romney's foreign policy manifesto and who wrote that Saddam Hussein not only helped Al Qaeda but developed weapons of mass destruction. Such a monstrous lie, however, does not seem to have tarnished his image in the Romney camp.

No austerity for the military

Romney is campaigning on an austerity ticket but with one big difference. Reportedly, he wants to grow the Pentagon budget so fast that it will reach 4% of GDP, a huge hike over the increase under George Bush's tenancy. By 2016 his military spending would be close to 40% more than budgeted under Obama, a level not seen since the cold war.

Such a huge increase can only be financed in two ways: higher taxes and spending cuts, particularly in the welfare budget. But Romney has already promised tax cuts so the burden will fall heavily on those least able to defend themselves: the old, the poor and the ill, through welfare cuts. This seems curiously at odds with the Christian ethos of righteous living, which must include feeding His sheep, but more of that later.

Some believe that once in office Romney would mellow his pugilistic posturings and be a far more traditional republican than George Bush but what if they are wrong? How could that affect logistics costs and does he have any justification for his dubious foreign policy stance that almost demonizes certain countries?

Trade is the handmaiden of prosperity and prosperity the lasting foundation of peace. Any talk of a trade war with China, therefore, can only be irresponsible and unstatesman like. China is certainly no angel in foreign trade, its record on intellectual property theft, in particular, is a running sore that must be excised. But the American electorate should not lose site of the facts that not only has China kept world inflation down it has helped save America from serious economic upheaval by purchasing American IOUs.

War and the American debt problem

America's total public debt, including intra-Government debt, is put at $15.7 trillion, or a disturbing 102% of GDP. Of the $10.95 trillion of debt held by the public, nearly half, or $5.1 trillion, is owned by foreign investors, the largest of which are Japan and China, with just over $1 trillion each. Without Chinese bank rolling of the American government debt it would be difficult to see how America could keep its interest rates low. There appears to be a correlation between America's soaring debt problem, $500 billion a year since 2003, and the prosecution of costly overseas wars in the Middle East. The Iraq war has certainly cost America over $1.5 trillion and the Afghanistan intervention is estimated at $2 billion a week, and that does not include the aftermath costs of dealing with the permanently maimed, the widows and orphans.

If Mitt Romney had any idea of how geo-logistics* can make or break combatants in a land ideally suited to guerrilla warfare he might think twice about ramping up military effort there at a time when America's finances are shaky along with most of Europe's. As for demonizing Russia he may care to reflect that Russia has agreed to let the coalition forces in Afghanistan send their military baggage home by rail through Russia. Such an act will save Britain alone £4 billion in military hardware write offs because the cost of airlifting the lot to western Europe would exceed the value of the hardware. By recalling a far greater debt the free world owes Russia, the appalling sacrifices the Russian peoples made in ridding the world of Nazi tyranny, Romney might moderate his political nostrums, but that would require a comprehensive grasp of modern history.  
China and Russian bashing, therefore, is both unwarranted and unstatesman like.

Dangerous attitudes over Iran

What of Romney's attitude to a Judeo-Christian attack on Iran's nuclear capabilities and the implications for global logistics? If carried out, a worst case scenario would be to plunge the world into a depression, hardly the best time given the West's current flirtation with recession. The closing of the Hormuz Strait, for example, as an Iranian retaliatory measure, could send already painfully high oil prices soaring and that alone would cripple global logistics. And if attacked it would be a blatant act of war and any riposte against Israel's nuclear capabilities would be justifiable by the standards of warfare. Not surprisingly, perhaps, there was never any talk of chastising Israel when it embarked on a nuclear armament programme. Is it surprising, therefore, that Iran feels threatened by Israel's nuclear arsenal and might want to have its own nuclear weapons as a safeguard. After all, Israel has bombed Iran's nuclear facilities before. Israel, however, is more politically stable than Iran, if somewhat too bellicose at times, and the latter would be wise to eschew nuclear weapons if, indeed, it is pursuing that path.

Politics has always been a low profession but it becomes more dangerously so when leaders espouse theocratic elements, a good reason why America's founding fathers ensured that state politics should be purely secular and unfettered by theological clutter. The problem is, however, that political mountebanks could woo and win over the theologically naive. The American people are basically good at heart and the world owes an indelible debt to their sacrifices for democracy. But many Americans, especially in the Bible Belt, are insular and gullible and it is these traits which in the hands of a manipulative president could become a dangerous weapon.

The price of freedom may be eternal vigilance but that vigilance must be righteously minded. Can one say that of Mormons and the more virulent scions of hard right evangelicals? Quite apart from the touchingly naive origins of Mormonism, their pioneering days were not without blemish. In the relatively peaceful 1857-58 Utah Mormon war, leaders of the local Mormon militia ordered the Mountain View Meadows massacre of civilian emigrants merely passing through Utah, hardly a saintly act, latterly or otherwise. As for the hard right evangelicals, could it not be said that their TV evangelist leaders' true God is mammon? They have exploited generous American tax law which grants tax exemptions to religious movements. In other respects, however, they run their operations like well-oiled businesses and have amassed huge property fortunes. Can man serve both God and mammon? By their fruits ye shall know them and to the hyprocrites and false prophets the Nazarene had this to say: "I never knew you: depart from me ye that work iniquity." Perhaps the next time that the plate comes around with behests to give generously because the cost of maintaining the fleet of corporate jets is soaring the gullible might question if they are backing the right horse.
*How geographical issues can impact logistics.   

Tuesday, 22 May 2012

Systemic corruption rapes Ireland's fair land

In the global corruption stakes Ireland is not a front runner but arguably it leads the field for allowing corruption and cronyism to bring a country so low so quickly with near disastrous, environmental consequences. The economic consequences of reckless bank lending to beguiled, naive mortgagees are bad enough as Ireland once more sees its brightest and best young generation forced to emigrate for lack of work, leaving behind broken-hearted parents but, according to Prof. John Sweeney, president of An Taisce, (Ireland's National Trust) the rape of the environment brought on by the economic crisis could dwarf that crisis through an international energy shortage, ecological collapse or runaway climate change.

Ireland is still a land of stunning, melancholic beauty, where lakes, rivers and the seas attract anglers and tourists from around the world, so is the environmental risk fuelled by corruption at all levels in the planning process and national government as serious as An Taisce claims and can the economy be turned round quickly enough to avoid decades of stagnation?

Economics will not be mocked

On the second point the jury is still out but the lesson is clear enough. When greed bestrides the saddle the devil will finally exact its merciless due. Venal politicians often trump economics but ultimately economics will always trounce politics, leaving in its wake shattered, bewildered, ordinary folk least able to defend themselves from the worst excesses of intractable, casino-style mercantilism, whilst the catastrophe's architects enrich themselves.

The EU and the IMF have done about as much as they can to ease the burden on Irish taxpayers by cutting the interest rate and repayment terms on the Euro85 billion bailout from 5.8% to 3.5-4% and extending the repayment period from 7.5 years to 15 years, which according to Irish officials will save the Irish taxpayer Euro600 million to Euro700 million a year. As part of the agreement to this revised deal the Irish government drew up an austerity programme detailing four years of tax rises and spending cuts.

The potential problem with austerity programmes is that it could reduce rather than raise economic growth and so leave a country less able to repay its international debts. Reneging on those debts, however, is not a sensible option. If nations are not chastised for their fiscal delinquency then they will never learn from economic history and, like Greece, are likely to become recidivist sovereign debt welchers, par exellance. Greece is a classic example of allowing political aims and endemic corruption to override economic good sense, and like Ireland, when adopting the Euro currency, it was like catching a falling knife. Both countries could not adjust their own interest rates to cope with changing national fortunes while at the same time they were allowed to borrow at ludicrously low interest rates which fuelled the Irish and Greek property booms.

Nemesis was not unpredictable

As in America, the unsustainable Irish property boom, fuelled by cheap credit and corporate greed, was the country's economic nemesis but it could not have been realised without a scandalous disregard of financial good governance, which was certainly not confined to Ireland. German banks, in particular, were only to eager to lend to Irish banks to stoke the housing and commercial property boom. But there is something in the Irish Psyche which loves a gamble but when the gamble involves borrowed money on a national scale then it becomes a potentially disastrous, destabilising force. That, however, does not mean that Joe public should be treated contemptuously simply because Joe public is, by and large, untutored in economics. They look to those they voted into power for good governance but the elected have betrayed them for their own venal ends.

There was nothing opaque and unpredictable about the growing banking storm in 2007. As I warned in print* five years ago: "The Bank of England's rate policy since being spooked by the dot com bust six years ago, aided by overly eager banks to lend irresponsibly, is a major cause of dangerously high national indebtedness. The banks and credit card companies may well pay a high price for their rapacious stupidity through record numbers of strapped consumers seeking voluntary insolvency deals." If a mere, hack journalist can foresee these events then readers can be assured that Governments, their advisers and irrepressibly greedy financial institutions also saw it but to their indelible shame did nothing to avert it. But in Ireland's case it took in far more than self-serving financial institutions on the make. It also involved corruption on an unimaginable, unprecedented scale in the property planning process.

In the State of the Nation, a Review of Ireland's Planning System, 2000-2012, the National Trust for Ireland said: "It is now clear from the recent publication of the final report of the Mahon Tribunal that together with a failure of the regulation of the financial sector during the 'Celtic Tiger' property bubble there was a catastrophic and systemic failure of the planning system which was characterised by endemic corruption, lack of transparency and marginalisation of voices that tried to draw attention to inherent weaknesses."

Environmental issues could dwarf economic crisis

Prof. John Sweeney, president of An Taisce, said on April 12, 2012: "In carrying out our work in the planning system An Taisce's purpose is not blinkered opposition to development but opposition to blinkered development. The lesson that must be learnt from the 'Celtic Tiger' era is that the persistent marginalisation of questioning voices weakens our democracy, economy and our society. Without greater perspective and even handedness to ensure we tread more lightly on the Earth we become more and more vulnerable to systems failures -- any of which could dwarf the current economic crisis such as international energy shortage, ecological collapse or runaway climate change."

A report by Mr Justice Mahon exposed endemic and systemic corruption and cronyism at the heart of the Irish planning system and which reached the highest levels of government. "There is no doubt that the systemic failure of planning in Ireland helped inflate the property bubble, leaving in its wake a great deal of poor quality development , reckless over zoning, chaotic sprawl, a legacy of 'ghost' developments and widespread environmental degradation," he said. Of particular long-term concern is 'locked-in' long-term costs of high dependency on greenhouse gas emissions. "The reality is that Ireland is now reaping the devastating consequences of those who promoted development-at-all-costs and seismic miscalculations," he added.

The legacy of profligacy

The profligacy of the 'Celtic Tiger' era has bequeathed an insidious legacy of very high per capita greenhouse gas emissions, significant water quality deterioration, a crisis in biodiversity and nature conservation, consistent breaches of EU law and a chronic over dependence on imported fossil fuels, mainly oil, storing up major costs for the future.

Perhaps purblind, An Taisce  was arguably too critical of out-of-town mega stores which research shows that 1.4 jobs are lost in town centres for every new job created out of town. According to one US study a general failure on the part of mega stores to trade with local suppliers and recirculate money back into the local economy sees a net loss of at least 150 jobs for each new out-of-town mega store constructed. But this seems to ignore that it is not just all about jobs. Large, out-of-town shopping centres are logistically more efficient than deliveries to many, small in-town shops, and by extension more benign to the environment. They are also cheaper and so allow shoppers to save money that could be spent elsewhere in the economy and so accelerate money's circulation.As regards failure to trade with local suppliers that is something that could always be remedied, at least in part, by the willingness of local suppliers to use the law of comparative costs in their favour.

No good governance --- No solution

Dire though the banking crash in Ireland is, the country will recover. Its well-educated, industrious, youthful workforce suits the country well for attracting high, value-added industries like consumer electronics, pharmaceuticals and even forklifts, albeit encouraged by a benign corporate tax rate which other EU member countries would like to see changed. But emigration of the country's brightest and most entrepreneurial is a worry, for Ireland can least afford such losses if it is to prosper and repay its loans.

Banking establishments, as Thomas Jefferson warned, are more dangerous than standing armies but if that is so then venal politicians and corrupt officials everywhere are their willing harlots and recruiting sergeants. Gelding both parties would go far to preventing a recurrence of the worst economic crisis to befall Ireland since the 1930s depression. The problem is how to do it, for politics, business and honesty are never easy bedfellows.

A good start would be a yes vote in Ireland's referendum on the EU fiscal pact on May 31. To give it its full title, The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, a yes vote would allow Ireland access to the Eurozone's future permanent bailout fund, the ESM. The pact's key word must surely be "Governance". Two thousand years ago a great publicist opined: "Without charity I am nothing." Could it not be said today that "without good governance we are undone"?
*Warehouse & Logistics News, London, February 1st, 2007

Wednesday, 9 May 2012

Debt and logistics defeat Britain in Afghanistan

Politicians and the military castes rarely have a firm grasp of economics and the impact that warfare can have on national finances. But a firm understanding of economics without a similar grasp of logistics is dangerously incomplete when the war trumpets beckon. Nowhere is this more obvious than in Afghanistan, where an 11-year war has humbled the coalition forces, including Britain, despite their overwhelming fire power against the Taliban. The reason is that the geo-logistics* have worked tremendously in the Taliban's favour. It is a war that will probably enter the annals of British military history as not only an unpopular war but one that cost so much and achieved so little.

Politics often trumps economics when calling on national finances but it is economics that will ultimately smite politics with a rod of iron and leave the people's aspirations dangerously unfulfilled. This scenario is now unfolding throughout Europe and America as years of debt-fuelled growth, often helped by war, and irresponsible fiscal governance come home to roost.

It could be reasonably argued that since losing an empire Britain has continued posturing on the world stage as though it were a world super power. But punching above its weight has dire economic consequences. Just as Government debt allowed Britain to finance foreign wars since the establishment of the Bank of England in 1694, and along the way helped create the world's greatest empire, war-created debt finally became the empire's nemesis, forcing the sale of many overseas assets, years of austerity and taking on of American loans that took decades to repay. Debt is a great instrument for expanding economic growth but it is not to be treated insouciantly. Such disdain, at all levels, ever since World War 2, now drives nations finally to  realize the consequences of ignoring soaring debt and good economic governance.

So how come that a far off, arid land that most people might have difficulty locating on a world globe could humble not just Britain but the NATO coalition forces and the world's leading super power, America? Military logistics is not just about controlling the supply chain effectively to deliver all that is required to the war theatre at the right time. Britain's own army logistics corp, supported by centuries of experience, does a fine job delivering the goods, despite the lamentable record of an incompetent Ministry of Defence that has cost taxpayers billions of pounds. Logistics is also about how the chosen battlefield can be used to degrade an enemy's military ambitions.

Logistics favour the Taliban

As previously pointed out in my blog: "Logistics will be Britain's Afghanistan calvary," Afghanistan is a harsh, arid, unforgiving land, prone to temperature extremes, two thirds mountainous and honeycombed with caves -- ideal guerilla warfare terrain. It is this geography, admittedly helped by surrounding countries' suspicions of the occupying forces, which is the Taliban's greatest weapon, a weapon that in per capita terms costs the coalition forces on the ground at least 10  times as much as the Taliban.

The financial costs of the Afghan war beggar belief, and even more tragic is that the hoped for return for the outlay has not and will never be realized. As the former British ambassador to Afghanistan, Sir Sherard Cooper-Coles, explained to the House of Commons, the only solution to the Afghan problem can be political one. He believes that the Afghan war is costing Britain £6 billion a year but the British Government claims  that between 2001 and 2010 the cost was only £11.1 billion, even though it now admits that the Afghan war is absorbing 30% of the MoD's £35 billion annual budget. The real figure will be much more and, of course, will continue to rise for many years after the last of the coalition troops have left to pay for the maimed, the war widows and their children.

Just how Afghanistan's terrain can send the cost of logistics soaring can be gauged by the coalition's exit plans for the 2014 pull-out, which would have been very much more if Russia had not decided to allow NATO to fly all its 140,000 troops and supplies to Russia for onward journey by rail to western Europe. Until now, much of the coalition's supplies have been flown into Afghanistan at a cost of about US$14,000 per tonne. A railway solution through Russia would have cost only US$500 a tonne. Using a land route for bringing all the military supplies through the passes to Karachi would have been too risky so the daunting prospect of a new Dunkirk lay ahead. Airlifting all the supplies to western Europe would have cost so much that much material would have had to be abandoned. In Britain's case that would have meant leaving £4 billion worth of military kit behind. If that had been lost, one British officer opined, "Without it we will not recover for a generation." NATO and Britain, in particular, has much to thank Russia and President Putin for their accommodation, but even so the exit cost will be staggering and the withdrawal has been described as the biggest logistical challenge for the military since the second World War.It will involve moving 11,000 cargo containers and 3,000 vehicles.

Armaments and wars currently cost the world an estimated US$1.479 trillion annually, but the true costs of anything are the alternatives foregone. Such a staggering sum could have provided much hope rather than despair for the impoverished, sick and oppressed. Mistrust of one's neighbours is, perhaps, mankind's greatest tragedy. It is also humanity's most damning indictment.
*How geography impacts logistical operations

Wednesday, 4 April 2012

Somali pirates face nemesis?

If Press reports are true then at long last Somali pirates face their nemesis from a military solution that this writer has been advocating since December 2008. It seems that an Anglo-French naval force will attack pirates' camps and target their boats before they put to sea. Such action would be legal, says Britain's Attorney-general, Dominic Grieve.

Such an approach makes sense because hitherto naval action was only taken at sea when fast pirate skiffs were attacking vessels or had hijacked them, and when pirates were captured they were often released to resume their depredations because no country wanted to assume responsibility and costs for bringing them to trial. If pirate vessels cannot leave their ports then they cannot hijack any more vessels, but it is not enough to simply blockade them. The Anglo-French fleet cannot stay indefinitely offshore so that is why fishing vessels large enough to act as pirate mother ships and their skiffs must be sunk in their lairs and their fuel and repair facilities levelled. But the force should resist any land engagements and leave that to the African Union peacekeeping troops already in Somalia. There is also the thorny problem of several hundred captured seafarers languishing in squalid conditions. The MV Iceberg, a ro-ro vessel, has just past two years in captivity, the longest ever, and of its multi-national crew of 24 one has committed suicide. Tragically, too, innocent fishing vessels would be lost.

'Calculated risk' approach was not cheaper

But why has it taken so long to reach this conclusion, a delay that has seen the murder of over 40 seafarers, the torture of many more and costs to the global economy of between US$7 billion and US$12 billion a year? There were, after all, historical precedents like the bombardment of Algiers in 1816 and 1824 which successfully ended the scourge of Barbary pirates permanently.

There were, understandably, fears by international umbrella unions like the ITF that the arming of merchantmen would place crews at greater peril, while insurance companies and even regional governments fretted over the imagined illegalities of arming crews. Yet it was plain to see that all the industry's attempts to resolve the issue "seemed doomed to failure", as I reported in my September 2010 blog, "Somali piracy may cripple global logistics." Putting a World War 2 fleet in the Indian Ocean, said Admiral Mark Fitzgerald, commander of NATO Allied Joint Task Force Command, Naples, would still not be enough to cover the whole ocean, and the pirate mother ships were attacking vessels over 1,100 miles from Somali shores.

Insurance companies do not emerge bathed in glory over this procrastination, which would shame earlier generations for their supine, spineless role. Although having to pay out on the pirate ransoms, the insurance companies jacked up their premiums so much that they earned far more than before the piracy began. When this writer interviewed captain Bjorn Haave, vice president of IFSMA, the captain naturally put the seafarers' safety interests first and said the whole area should be declared a no-go region except for escorted vessels bound for Somali ports. If insurers refused to cover vessels plying the infested areas many ships would have felt forced to use the Cape of Good Hope route, a logistically costly scenario that would have been very much more had it not been for the rock bottom freight rates spawned by the recession and a glut of new shipping tonnage entering the market. There would also have been the problem of West African piracy to contend with.

Ship owners themselves were also guilty in their namby-pamby response to this crisis because they chose the 'calculated risk' approach which they thought would be cheaper than a final solution. Events have glaringly proved otherwise. As a result, all parties involved have spawned a result that has left many hapless seafarers feeling abandoned if not also betrayed. It may well go down as one of the most shameful episodes in the annals of maritime history.

"War and courage have done more than charity,
Not your pity but your courage hath hitherto saved the unfortunate"
Friedrich Nietzsche

Monday, 26 March 2012

Unfair trade practices invite de-globalisation perils

Global supply chains are becoming more dynamic as the balance between off shoring, near shoring and re-shoring of production changes continuously but there is one threat to globalisation that few companies have catered for ---human frailties epitomised by unfair and illegal trade practices, which could lead to creeping de-globalisation and worsening social tensions, if not war.

Globalisation may not have done much for environmental progress but it has lifted many millions in developing nations out of poverty. And nor should it be forgotten that rich, developed countries, America in particular, have benefited hugely from China's rapid economic growth by suppressing inflation and buying up of US government IOUs. Any trade developments that reverse or trammel that trend would be a tragedy for the whole world.

As I warned in my last report, "Supply chain shifts threaten Asia," global businesses are reassessing their supply chains "which if not handled sensibly by the likely losers in the Far East... will lead to destabilising repercussions that could leave the whole world in turmoil." But if such reassessments lead to a flood of re-shoring back to or near to main markets it is in the interests of developing countries to do everything in their power to eradicate unfair trade practices that would accelerate such re-shoring. Nowhere is this more pressing than in China.

Re-shoring , it should be said, is not without risks to their promoters, which can often be as great as the risks of off shoring. One of the re-shoring risks is that costs will generally be higher than for those who remain offshore, but that is not necessarily so, especially as labour cost rises in China, for example, are galloping ahead of those in the West. Western-based companies also often ignore certain costs when making decisions on where to make products. When such costs are factored in, American costs may average only 12% higher than China's and in some cases undercut China by 22%, while at the same time remaining free of all the potentially disruptive forces acting on the supply chain. Far East suppliers also have a less than admirable quality record. The biggest potential risk not factored in, however, is the fall-out from long-standing unfair and illegal trade practices which are already leading to tariff skirmishes.

A long-festering sore between China and the West is China's unashamed, wholesale theft of intellectual property rights, in which Chinese intelligence agencies are allegedly involved. Described as the great brain robbery and "the greatest transfer of wealth in history", by the US National Security Agency's director, the costs of such theft to even single companies can be staggering. One US metallurgical company lost technology to China's hackers that cost US$1 billion and 20 years to develop.

China did not invent intellectual property theft but it is doing it on an unprecedented scale and there are already signs that their behaviour is backfiring in their face. To propel its economy, China must export more high end technology but if that technology possesses stolen software code, for example, then foreign buyers could be dissuaded from buying such Chinese goods by legal actions brought by the legitimate owner of the code. An example of this has already happened with Sinovel, a Chinese wind turbine producer, whose first major export deal, a contract in Ireland, has stalled because the turbines reportedly contain stolen code from America Super Conductor Corp.

China's law-breaking insouciance and unfair trade practices are beginning to invite retaliatory actions from countries other than America. Such ploys and behaviour like China's currency manipulation, restrictions on rare earth exports based on feeble grounds and the ordering of bureaucrats to stop buying foreign cars, mostly German, are enraging countries like Germany and Brazil, the latter of which has raised taxes on foreign cars and imposed other unfair practices. China's heavily subsidised manufacture of solar panels has also undermined Germany's solar panel industry.

Anti foreign trade measures have even taken a bizarre twist in India, which proposes a tax on some international mergers retroactive to 1962! This would mean that Vodafone, for example, is liable to pay US$2.2 billion in taxes on its purchase of Indian wireless operations. The result of all these unfair trade practices is that the US, the EU and Japan have filed a formal complaint against China to the World Trade Organisation.

The fears over intellectual property theft cannot be overestimated. Countries like Taiwan, considered a risky source for leaking patented technology to China, are also beginning to lose manufacturing business back to Britain. Even so, these fears will be tolerated by those companies wishing to maintain a manufacturing presence in emerging Far East markets, in particular, as those markets become more important in the long term. Yet this, too, is not without risk, especially in China. Western companies planning joint ventures in China involving technology transfers should remember that others who have gone before them have subsequently been dumped or otherwise sidelined.

In recessionary times, when Western manufacturing jobs are disappearing at a politically inconvenient rate, if any issue is likely to stoke up clarion calls at election times for at least a level playing field it is intellectual property theft. China should recognise this and move from imitation through theft to innovation through its own research establishments. China knows it has more to lose than any western nation in a trade war, but will it behave more honourably before it is too late? As the World Bank president, Robert Zoellick, warned those who would get tough with China, "once you start a trade war there is no telling where it will end."As with people who grow super rich, the wealthier big nations become the more arrogant and reckless they behave. The omens are not reassuring.

Wednesday, 15 February 2012

Supply chain shifts threaten Asia

Global businesses are reassessing their supply chains which if not handled sensibly by the likely losers in the Far East, economically, politically and socially, will lead to destabilising repercussions that could leave the world in turmoil.

Trade is the handmaiden of prosperity but like a woman it can be fickle. Over the last 15 years, for example, China has prospered from its innate dynamism unleashed by a change from collectivism to capitalism. It depended heavily on stetched supply chains based on just-in-time (JIT) deliveries but those supply chains are now being seen as problematic owing partly to their inherent inflexibility which leaves them vulnerable to sudden changes in customers' demands. Other major concerns are soaring soaring Chinese costs, the disruptive power of Nature's fury, like the Japanese tsunami and Thailand's floods which hammered manufacturing in both countries, leading to multi-billion pound losses through lost production around the world. If all that were not enough, countries like China have scored an own goal through its blatant disregard for intellectual property rights and wholesale product counterfeiting. And, as always, changes in exchange rates are another threat and European currencies have weakened, giving them an advantage. There are also serious concerns about product quality.

The result of all this is that in Britain, in particular, manufacturers are stepping up their purchases of parts and materials from domestic suppliers, according to one survey of 362 manufacturers organised by General Electric. The research shows that 27% of those questioned said that in the past year they had raised the amount of purchases made from UK-based producers, compared with 13% who were buying less. For some UK manufactures the change in supply sources is stark. One SME, for example, a Yorkshire-based maker of industrial machinery, now sources 90% of its annual needs of iron castings from UK suppliers, as against 40% three years ago. One of its key reasons was reliability of supply. A problem here is that if something goes wrong from a far-flung supplier it can be very difficult to resolve. A UK-based buyer, however, can usually resolve the problem with a local supplier over a 'phone call or a visit to the supplier.

Another company, Sherwood Electronics, which makes cable assemblies for computers and railway equipment, has raised the proportion of cable-related components its obtains from UK producers from 40% to 55% with a matching fall in purchases from Asia. The company found that rising costs of Asian-sourced items had increased by 30% over the last 17 months compared with single digit rises from UK suppliers.

A demand from UK buyers for smaller batch sizes can also play into local suppliers hands. This pushes buyers to selecting suppliers based in Britain rather than in far-flung offshore suppliers like China. It is, as it were, an ironic development in that JIT deliveries are now being turned against the birthplace of JIT -- Japan.

Missed costs mislead

Western manufacturing companies, according to the Reshoring Initiative, of America, often ignore certain costs when making decisions on where to make products. One of these includes factors such as total cost of ownership, which includes aspects like intellectual property risk, the cost and time of travel to visit distant suppliers and the negative impact of dividing manufacturing from engineering staff back at HQ. By ignoring these costs it could be shown that America was, on average, 108% higher than China but when factored in to allow for the total cost of ownership America averaged only 12% higher and in some cases undercut China by 22%.

Some big US manufacturers like Ford, Caterpillar and General Electric are beginning to move some production back to America, though it is small so far. Apart from lower wages that drove companies overseas, another reason was cheap fuel but oil has risen four fold since 2002 so shipping costs have jumped. China's wages have also averaged rises of 15% a year over that time.

The result of these adverse movements against the Far East, according to supply chain analysts, is that by 2014 it is predicted that the production of 20% of goods now made in Asia and destined for US consumers will shift to the Americas. According to one study by Accenture, 61% of 287 manufacturers surveyed reported that they are thinking of moving operations closer to customers.

If this "secret" shift becomes a tidal wave it will yield an environmental dividend through lower fuel emissions, especially from ships which are not governed by environmental strictures like road transport users. But if the shift is not handled well then the disruptive fall out would be significant. Working against that scenario, however, is the likelihood that China's growing wealth will boost its local production to satisfy soaring local demand. In the process, however, China's huge balance of payments surpluses with its trading partners could begin to dwindle unless it husbands its bulging treasury wisely. Like oil rich Middle-East states, China has invested heavily abroad, particularly in Britain, not only to ensure raw materials and energy supplies but also to
ramp up its overseas investment income.

The military stumbling block

One development that could jeopardise all that, however, is China's military caste's desires to don the mantle of a great military power, exemplified by a big build up in naval strength spearheaded by an aircraft carrier with, allegedly, up to four more planned. China has plenty of internal social problems which will inevitably lead to much higher spending on internal security as it struggles to contain a soaring crime rate and civil disturbances with only 150 police officers to 100,000 people. China also needs every Renminbi it can muster to cope with the inevitable natural calamities to come. High military spending, therefore, is unwise, especially as it has a knock on effect with neighbours like India, who feel obliged to spend billions of pounds beefing up its air force while so many of it people subsist in abject poverty. If China followed the teachings and warnings of its ancient, illustrious sages by avoiding such costly, vainglorious, military spending then it would go down in history as the first powerful nation to do so in recent times. That would be true greatness but history suggests that it will be ignored and so the people will be denied their hard-earned dues.

Tuesday, 24 January 2012

Britain's Ministry of Defence loses billions to theft and incompetence

It would seem that just as mega banks are too big to let fail so, too, huge government departments, like Britain's Ministry of Defence (MoD), are beyond the rules of good governance. For the fifth successive year the MoD's annual accounts for 2010-11 have been qualified and the MoD has no plans to comply with international financial reporting, as laid down by the Treasury, within the foreseeable future, says the Defence Committee, chaired by James Arbuthnot, MP.

Such insouciance is breathtaking, especially at a time when Britons are passing through, perhaps, the worst austerity measures since World War 2. Britain's local authorities are constantly admonished by Government to eliminate waste and cut spending but should the Treasury not look to the mote in its own eye and is it not time for the MoD to clean out its Augean stables?

The Defence Committee is dismayed that the Chancellor of the Exchequer, George Osborne, has not responded to its letter asking what his policy is on Departments who defy Treasury accounting rules. The MoD could also not provide adequate audit evidence for over £5.2 billion worth of certain inventory and capital spares. "These problems are likely to persist until, at the very earliest, 2014-15," says the Defence Committee.

In a staggeringly euphemistic statement, James Arbuthnot said: "The repeated qualification of the MoD accounts reflects badly on the MoD's financial management. The situation is unsatisfactory and the MoD and the Treasury need a clear plan to address the shortcomings in the MoD's accounting systems."

Such gross accounting and logistical incompetence, however, does not only undermine Britain's task of reducing Government debt, now put at over £1 trillion for the first time, or over 70% of gross domestic product. It also poses serious security issues. Two years ago, when I last mentioned this subject under my headline: "MoD's stock mismanagement threatens security," I referred to the Army's relatively new £1.3 billion BOWMAN tactical communications system, which provides integrated, secure radio, intercom and Internet services. Only 89% of these assets then could be accounted for by the end of the year owing to problems with accounting for radios in use on the battlefield. These radios were worth £155 million and it is a reasonable bet that some have fallen into the wrong hands.

It should be made clear that this is not simply an accounting issue gone alarmingly wrong and out of control. Massive fraud and theft are also involved. "The Committee is concerned that the level of theft and fraud in the MoD appear generally to be increasing year on year and that the level of value recovered from theft and fraud is low, " said James Arbuthnot.

Theft and fraud is not new to the MoD, whose financial black hole has reached about £38 billion. Back in 1983 the Army's COD Donnington warehouse went up in flames, and at £174 million the uninsured fire loss was the costliest in the country's history. The fire's cause was never proven but one mooted cause was arson because the Falklands war allegedly occasioned a comprehensive stock audit which, it was claimed, would have exposed serious stock losses, and so tracks had to be covered by a fire. What is certain is that the sprinkler system failed to work and it is very rare for sprinkler heads to fail. According to warehouse fire statistics there was also an even chance that the fire was arson as nearly half of all UK warehouse fires are maliciously caused.

If ever a Government department responsible for spending billions of pounds of hard-pressed taxpayers' money every year needed forensic accountants with top line logistics experience and robust systems in place the MoD must be top of the list. But it must be backed up by ruthless,
committed, and capable security personnel to root out the fraudsters and thieves for condign punishment.

Saturday, 14 January 2012

Costa Concordia's wreck exposes unlearned safety lessons

Yet again a cruise ship tragedy shows that the marine industry is still prepared to sacrifice passenger safety on the altar of profit. The cruise ship, Costa Concordia, reportedly hit submerged rocks around 9 pm, January 13 when only hundreds of metres from a harbour on the small island of Giglio off the Tuscany coast. The 114,500 tonne vessel with over 4,000 people on board suffered a 100-ft gash and quickly began to list to starboard. It is this listing action which exposes the most serious deficiencies in lifeboat capacity common to most cruise ships, despite their legal compliance with safety legislation. Three people are confirmed dead with reports of up to 70 others missing. All 24 Britons on board were reported unharmed.

One line of enquiry into the accident is looking into an electrical fault which could have caused loss of ship control but whatever the cause it is the ability to cope with the aftermath that should concern all potential cruise ship passengers most. The fact is that current SOLAS regulations do not adequately protect all passengers on board cruise ships primarily because lifeboat capacity is typically 25% short when listing precludes use of all lifeboats on the opposite side of the list. But it gets worse.

This writer has been on various big ship cruises and conducted a survey of 10 large cruise vessels' lifeboat/craft capacity. In all but one vessel there was a 25% shortfall in life craft capacity when listing was applied to the equation. The problem is further exacerbated when allowance is made for the heavy use of inflatables, typically holding 25 people each, which is a cost consideration as they are so much cheaper than rigid, covered lifeboats and they help meet safety compliance.

While inflatables can be useful the fact remains that most would not be davit-launched but jettisoned to self inflate on hitting the water. This means that many passengers would be expected to jump up to 50 ft or more into what could be a freezing, raging sea and somehow scramble into them, irrespective of obesity and any infirmities they may have. Alas, that is just what some passengers felt compelled to do on the Concordia in a bid to swim to the shore. One travel broadcaster and writer said that many of the 150-capacity lifeboats were not deployed owing to the list and subsequent rolling over onto her side. If a stricken vessel's list is very rapid then there could also be problems launching lifeboats on the listing side.

This time round the world was spared another marine tragedy of Titanic proportions. Close proximity to the shore, benign weather and the use of five helicopters prevented huge loss of life but in other circumstances it could have been tragically different. More and more cruise ships are now moving in hostile waters of the polar regions, thousands of miles from inhabited land and, sometimes, other ships. Had the Concordia been in these harsh waters and rolled over in similar circumstances the loss of life would have far out rivalled the Titanic 100 years ago, again a ship that met the then current Board of Trade regulations on lifeboat capacity.

So far the cruise ship industry has been lucky, escaping relatively unscathed from serious loss of life. But there are recent tragedies disturbing enough to demand action on lifeboat capacities. In 2006, for example, the Al Salam Boccaccio 98 sank in the Red Sea after quickly listing. Of the 1,400 people on board there were complaints among the 400 survivors that there were insufficient lifeboats. This vessel also had an extra deck installed which would have raised issues of ship stability. To pack in as many passengers as possible, new cruise ship leviathans have ever more decks. Sharp ship turns at high speed have been known to injure passengers who reported a near flipping of their ship.

Could at least some good emerge from the Concordia wreck? If it spurs progress towards more lifeboats on cruise ships to cope with listing problems then yes it would. But the supine response of the marine safety industry so far, depicted by all the lessons unlearned, does not inspire much confidence, to the industry's indelible shame. Passengers and crews deserve and expect better. Must it take another Titanic to prove a point? Evidently, it must.