Posted on 09/05/2016 1:02:10 PM PDT by Lorianne
We are about to learn once again that lack of resilience is the flip side of efficiency. The world's seventh largest shipping firm, Korean-based Hanjin Shipping Co. Ltd., failed to rally the support of its creditors last week and was forced to file for bankruptcy.
Retailers and manufacturers worldwide are in a bit of a panic as the fate of goods on Hanjin ships shifts into the hands of courts and lawyers for creditors intent on seizing Hanjin assets in order to ensure payment of outstanding bills. Much of Hanjin's fleet is chartered, that is, owned by others, and those owners want to make sure they get paid their charter fees or get their ships back pronto.
The result has been that half of Hanjin's container vessels are currently blocked from the world's ports for fear that the ports will not be paid for their loading and unloading services. Other shippers which include trucking companies which carry containers to their final destination are reluctant to take on Hanjin freight for fear of not getting paid. (You are perhaps seeing the main theme here.) Meanwhile, the sudden drop in available shipping containers and ships has caused shipping rates to soar as businesses scramble to make other arrangements for items still to be shipped.
U.S. retailers are so panicked that they have asked the U.S. Department of Commerce to step in to help resolve the breakdown which is likely to hurt those retailers during the upcoming Christmas shopping season.
Let's take a step back to understand how this all happened. Clever business owners have learned to run so-called "lean" operations to compete with their equally lean competitors. One way to be lean is to reduce idle inventories which just sit in expensive warehouses by arranging to have what the business needs delivered practically every day. The approach is often referred to as a warehouse on wheels and also as just-in-time delivery.
With little or no inventory of essential goods and raw materials retailers and manufacturers are subject to disruptions all along their supply chains which reach around the globe. A breakdown at any step can quickly bring activity to a halt on the factory floor or on the sales floor.
Just-in-time is very efficient financially (until, of course, it isn't). Little money is tied up in inventories or the space to warehouse them. But just-in-time is not very resilient. It used to be that businesses stockpiled goods and critical resources to ensure against disruptions. But the advent of computerized tracking combined with more efficient shipping practices worked to end the stockpiling of inventories.
I wrote about the vulnerabilities of just-in-time delivery systems back in 2006, 2008 and updated the 2006 piece in 2011. My suggestion back in 2006 that just-in-time systems were likely to recede in the wake of repeated shocks has proven to be premature. But the wisdom of running hospitals, for instance, on just-in-time supply principles seems foolhardy. It seems logical for hospitals as emergency facilities to be prepared for a mass catastrophe (earthquake, hurricane, etc.) with substantial medical supplies. Along these lines, does a three-day supply of food now available in most metropolises seem like wise planning?
The Hanjin bankruptcy also calls into the question the wisdom of allowing so much freight--7.8 percent of all trans-Pacific U.S. freight--to be handled by one carrier. And yet large size and just-in-time systems create what economists like to call economies of scale. Goods and services are provided more cheaply.
But such systems are not resilient. Resilience often requires redundancy and that spells inefficiency in today's business climate. It is, however, what we see in nature. Humans have two kidneys, but can survive with just one. Some genes are redundant, able to perform the same functions. There are 4,186 known species of diving beetles, lots of redundancy to ensure survival and biodiversity.
SNIP
I agree that the idea of businesses ordering, just according to sales, does not work in the long run and ends up costing money.
COSCO/China Shipping can’t be far behind.
“Just-in-time” logistics systems have been in place, ever since the inception of ‘Total Quality Management’, a theorem devised by W. Edwards Deming.
I always just assumed they were Chinese.
You see their shipping containers regularly on trains.
It is an economic Catch-22. If you stock inventories to avoid disruptions of supply your costs and thus your prices must rise and you become uncompetitive. If you do not stock up you run the risk of not having product to sell.
“It is an economic Catch-22. If you stock inventories to avoid disruptions of supply your costs and thus your prices must rise and you become uncompetitive. If you do not stock up you run the risk of not having product to sell.”
This is all part of risk analysis. All the “what ifs” are run through over and over again and costs are assigned to each one. The company that will get stuck with the tab, knows what the cost of this is and they probably (not always) had a mitigation strategy in place.
If it’s product that is a guaranteed seller, there is no risk in carrying stock. It can actually be beneficial, because you can raise the price of already purchased stock should your costs of new stock rise. It’s only stock that sells slowly that you run the risk of carrying it, because it may not sell in the end.
LOL! Journalists.
It's not the warehouses that are expensive. It's the inventories.
“Lack of resilience is the flip side of efficiency.”
And we have a winner!
-—The Hanjin bankruptcy also calls into the question the wisdom of allowing so much freight—7.8 percent of all trans-Pacific U.S. freight—to be handled by one carrier.-—
I question this statement - ‘allowed’ by whom? What controlling legal authority (a la Al Gore) should be the final arbiter in the global shipping industry?
Let’s get back to the mentality of allowing market forces determine who ships what and how often. It can be painful at times, but there is nothing more efficient and durable as the free market.
They are not economists, are they?
Hey, free buzzwords!
;)
They had continuous problems completing production to fill the orders on time--they spent $1 million USD a year on expediting product shipments to the customers.
Job paid me real good, though. And my inner 12-year old loved driving that forklift!
All is well!
Pay no attention to this!
Queen Hillary will fix this!
As this story and its FResponses illustrate, modern just-in-time logistics is incredibly efficient and frighteningly fragile. The system runs beautifully when everything works, but if the music stops for more than a few days, everything can break down. With chaos looming around the world, redundancy is beginning to look a lot more attractive than efficiency.
Just-on-time food delivery to retail outlets—throw in a 48 hour disruption and set it all off!
I would love to hear from a knowledgeable Freeper explaining the consequences of this.
Earlier today I read the first accounts, and the statement that ships en route would not be allowed to dock or unload anywhere in Canada or the U.S. West coasts.
What's up with that?
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