Saturday, 19 January 2013

'Green' issues could help reshape global logistics

The politics of business is to minimise costs but the problem for mankind today, more than ever, is the need to identify hidden or external costs which do not harm company balance sheets but leave a legacy of widespread costs elsewhere -- incalculable, insidious, death-dealing. Once identified, these costs should be carefully considered and fairly apportioned to those businesses responsible. More than that, however, ways and means must be found to cut these internal and external costs for businesses and that may mean changing attitudes towards business techniques like JIT (just-in-time) deliveries.

JIT, of course, is a business boon that allows firms to slash costly inventories which simply put money to sleep and carry other risks. But when supply chains become globally stretched and rely on parts and sub assemblies being airfreighted many times before the whole product is assembled in one place then that, along with other air pollution, carries a huge, incalculable external cost that seriously contributes to killing many thousands and robs economies of billions of dollars, largely through respiratory and cardiovascular diseases.

Pollution comes in many forms, both legal and illegal. The latter is the lesser problem that can be effectively controlled through determined prosecutions but the former is far more intractable and complex. But just how big are these legal pollutions and what can be done to cut them substantially while at the same time enhance corporate profits?

In China alone an estimated 500,000 people die every year from air pollution while many more are left seriously ill. This is not helped by the lack of environmental law enforcement and rampant corruption among big energy suppliers. Cars in the capital, Beijing, use high sulphur fuel which is higher than the national standard. The cost to China is breathtaking. It is estimated that in Beijing and surrounding regions the economy loses between US$19 billion and $39 billion a year owing to the side effects of PM 2.5 pollutants, much of it generated by cars and industry. That is equivalent to a loss of 3.4% to 6.7% of GDP for those regions alone. This air pollution, however, is not confined to China. Toxic-laden prevailing winds dump the insidious threat on South Korea, causing health problems for their citizens.

Dirty ships kill

In northern Europe about 50,000 die prematurely from cargo ships' emissions. This is because cargo ships use high sulphur content oil but as from 2015 all cargo ships plying north European waters must cut their sulphur content by 90%. Elsewhere in the world, however, this specific problem is being unfairly addressed. In Hong Kong smog kills 3,000 a year and much of that can be attributed to cargo ships' emissions. To their credit, container shipping lines like Maersk and 17 other operators have been using low sulphur fuel for the last two years to curb pollution but many others refuse to do so because it carries an extra cost burden and they are under no legal obligation to comply. Clearly, the Hong Kong authorities, who have not met their air quality targets set in 1987, need to act robustly and swiftly to deliver a level playing field. To be fair, they have cut the port charges but that covers only 40% of the added cost of going 'green'. If Hong Kong is to meet its air quality target then it must make all shipping lines comply over sulphur emissions. There may, however, be a problem when switching over to low sulphur fuel because on entering ports ships' engines have cut out, leading to helpless drift and collisions costing millions of dollars.

Around the world many authorities need to legislate for cleaner air but that will add costs to distribution companies, which ultimately will be passed on to the final consumer so it is important to consider ways to reduce their costs. One of those ways is to redesign global supply chains and another is to consider changes to the means of transport.

 Renaissance for rail?

Already, global supply changes are taking place which should favourably impact the air pollution issue and, perhaps, other climate threats. The rationale behind the outsourcing of production to far away countries over the last two decades was simply one of harnessing cheaper labour costs in those countries. But changes are under way which are not only eroding that cost advantage but also reveal the hidden costs of global outsourcing which were not allowed for. These include, for example, rampant intellectual property theft, (especially virulent in China), natural calamity risks that seriously disrupt JIT supplies, inflexibility to react quickly enough to changes in demand, poor quality issues and long production runs. This could mean that global supply chains will move to serving regional areas rather than global as western companies begin to re-shore back to their homeland or nearby countries. That will have a favourable impact on carbon emissions, especially from airfreight, but there are more 'green' dividends to come by changing and developing the means of transport.

A good example of how a change in the transport mode can pay 'green' dividends while also cutting internal costs is the new rail route from Chongquing, China, that passes through Kazakhstan, Russia and Poland before reaching Germany. This 11,179-km rail route will not only help western companies like HP slash transport costs to $10,000 per container, a third the price of air freight, it will halve delivery times to 21 days compared with 40 days by sea. Compared with air transport, rail transport's carbon footprint is only one thirtieth. In Britain, which has a well-developed rail network, the move to establish large container ports like that at London Gateway will see a big switch from road to rail container transport, reducing the carbon footprint by two thirds.

Sea shipping, owing to economies of scale, is the cheapest of all transport modes and the least polluting per container but there is scope to cut their emissions and costs through technology changes. A promising development here is the Belfast-based B9 shipping company which will use windjammers with automated sail trimming for most of the voyage, supplemented by Rolls Royce methane gas turbines for when winds are light and for port manoeuvring. The biomass fuel will be from discarded food mountains. The first vessels promised will only be of 3,000 tonnes, though there are plans for 5,000 tonne vessels, but B9 believes there are around 10,000 short-trade coastal ships in this bracket that could be replaced and so deliver a substantial environmental gains.

There are many other reasons to be optimistic over air pollution based around technology changes, like video conferencing and online selling but much can be done to cut distribution's carbon footprint significantly which, alas, has been exacerbated by global outsourcing and JIT delivery techniques.

Wednesday, 2 January 2013

Logistics wins the war for Taliban

It must now be abundantly clear that the coalition forces' war in Afghanistan is lost, an outcome that would surprise no one with any grasp of geo-logistics.* It is a dismal testament to the hubris of advanced nations' reliance on their modern weaponry in a hostile terrain where the costly problem of stretched logistics could be turned against the invaders. The war may well go down in the annals of military history as the one that cost so much and achieved so little.

There are, of course, many reasons why the coalition forces could not achieve a military victory, not least Afghan corruption and narco politics, but there can be little doubt that the cost of logistics was decisive -- the most potent weapon in the Taliban's armoury. But why were the logistics costs so high in the first place and how could a relatively poorly armed Taliban wreak such havoc?

To understand that, one must appreciate the prevailing regional politics. To Afghanistan's south and east lies Pakistan, a country of ambivalent feelings with provinces supportive of the Taliban. To the west is Iran, hostile to any American involvement, and to the north the former Soviet Union states and Russia, which would have required the latter's approval for land-based supplies from Europe. That left just two routes, one air and one land. The land route, however, is notoriously hazardous as it means using the mountain passes where supplies could be easily destroyed. Just one attack here destroyed 40 oil tankers. That left air transport as the main option.

The costs of airlifting supplies from Europe to Afghanistan are stratospheric. One tonne of supplies, for example, would cost US$14,000 compared with just $500 if a rail route had been possible. Put another way, the cost of airlifting a fully equipped American brigade would be over $200 million. This helps explain why the coalitions' total costs are running at an estimated $2 billion a week. Britain alone has reportedly spent £17 billion so far but the true cost is much higher as that does not include the cost of supporting the maimed, the widows and their children that will continue for many years after the war. There will also be a costly fallout from those service personnel who can, alas, be expected to commit suicide. In the Falklands War the number of UK personnel who subsequently committed suicide exceeded all the UK fatalities during the war.

Afghanistan's harsh, arid, largely mountainous terrain, honeycombed with caves, make it ideal guerilla warfare terrain, which Russian discovered to their cost during their occupation. These natural advantages were put to good effect by the Taliban whose per capita support costs were less than one tenth of the coalition forces. Their relatively low cost weapons exposed another cost problem for the coalition. In a recent Taliban attack on the sprawling Bagram air base the destruction of six jump jets cost over $100 million. Hi-tech weapons can be cost effective but they come at a very high price and their usefulness in  a guerilla war is marginal.

The horrific logistics cost factor has at last dawned on the British Government, who have announced an early, substantial withdrawal this year rather than 2014. Reports also suggest that the White House wants to reduce its current 68,000 troops to less than 10,000 in 2014. It is, of course, possible that the current, global economic climate has worked in the Taliban's favour, for debt financing of war is not popular back home when ordinary people are struggling under Government cutbacks caused by years of cheap credit binging, leading to unsustainable debt mountains.

So much for the costs so far but what of the achievements? It's true that much of Afghanistan has been free of Taliban trouble and that in the cities women and children enjoy a level of freedom and dignity unknown under harsh, Taliban rule. They do not want to see a return to Taliban rule, but that does not mean they will not get it. Wealthy Afghans are taking no chances. They are already moving vast sums abroad with a view to following the gold because they fear collapse after 2014 when the coalition will leave only a small presence. The only people to have truly gained are the army of foreign contractors replete from lucrative government contracts paid for by long-suffering taxpayers who have only more pain to come.

The world has grown tired of warfare and what the appalling costs mean for the global community. Global investors are, at last, rumbling those Governments who used the debt tap to finance their irresponsible binge spending over decades. They are on notice to rein back their profligacy and a major chunk of that is military related. Each year the world spends an estimated $1.47 trillion on armaments and warfare, depriving help from the sick, the homeless and elderly huddled around their winter fires insufficient to prevent death from hypothermia.

If military logistics teaches one lesson it is that if geographical factors can be harnessed by the invaded forces and turned into a potent logistics weapon against the invader then the latter is in serious and very costly trouble.
*How geography can impact logistics operations