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DG&A's Transportation Consulting Blog

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This has been a challenging month. Hurricane Harvey caused huge damage in southeast Texas and Hurricane Irma is expected to cause major damage to Florida and the east coast of the United States (as it did to several islands in the Caribbean). We should not forget the recent forest fires in British Columbia and California. Tornadoes, earthquakes, and ice storms seem to be occurring with much greater regularity and ferocity. These natural disasters have been very disruptive to the smooth flow of people, goods and services for many companies. They have also made life difficult for supply chain professionals.

Of course, disruptions to supply chains can come from factors other than weather or natural disasters. Quality control problems, piracy, export restrictions, and computer system hacking are just some of the factors that can come into play. To make matters worse, most of these disruptions are unpredictable in timing and scope. Each shipper has to make an assessment of the potential risks to their supply chains and make recovery plans.

According to Patthira Siriwan, senior project manager for supply chain development in North America for Damco, the combined logistics brand for A.P. Moller-Maersk, supply chain risks can be categorized into five groups: operational, social, natural, economy and political/legal. Damco defines supply chain risk management as “attempts to identify risks and quantify their commercial financial exposures as well as mitigate potential disruptions at each node and lane in the supply chain.” Supply chain risk models can vary from the rudimentary to the sophisticated. In the case of the latter, complex “what if” analyses can be performed. This allows the shipper and/or receiver to identify potential trouble spots and map out alternative supply chain strategies.

In an article in the Journal of Commerce, Siriwan indicated that shippers tend to focus on “factors with the biggest impact on their supply chain, such as on-time performance, supplier lead time variability and carriers by origin or trade lane.” Shippers need to perform some sort of probability analysis on the impacts of each potential disruption, with a particular focus on alternative vendors, carriers, origin points and ports and destination ports. Looking ahead to the balance of 2017, there are some major predictable (tropical storm Jose) and unpredictable risks that could drive up supply chain and transportation costs. The latter could include the impact on fuel costs as a result of unrest in Venezuela or war in the Middle East or war with North Korea.

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A few weeks ago, I gave a presentation to a group of transportation professionals at a Best Practices in Cross-Border Freight Transportation conference in Buffalo, NY, sponsored by SMC3. I made the point that changes in just one variable, Currency Exchange, could make or break a company. As I look back over my lifetime (I am an old guy), Canada – U.S. exchange rates have varied from a Canadian dollar being worth $0.61 US to $1.10 US. As evidenced by the past few days, these currency fluctuations can occur quickly and without warning.

Furthermore, these types of variances can have huge impacts on shippers and carriers. If you look at some of Canada’s core industries (e.g. newsprint, minerals), the effects can be devastating in terms of market competitiveness, north-south freight flows, freight rates, empty miles, - - - even business survival.  Currency exchange fluctuations are just one of a number of variables that can change quickly and without much warning. There are a host of others.

Think about the winter we came through in the first quarter of this year. Is this the result of climate change? Will this be, as some suspect, the new normal? Have you made plans in the event that the next winter is as bad as the last one? We are still dealing with rail congestion as a result of the harsh winter and we are about to enter the fourth quarter. In addition to winter storms, we are seeing an upswing in other types of weather issues (e.g. tornados) in America and other countries.

Think about the Middle East that is a powder keg today. What if war breaks out in a variety of locales? What if ISIS tries to attack America? What if some sources of energy supplies are cut off and diesel fuel prices spike? What happens if the economy spikes? Think about the driver shortages today, the challenges in attracting drivers into the industry and the potential impacts on the supply of truck and rail equipment if the demand for transportation services is not met with an increase in supply. What would significant increases in freight rates do to your business?

Think about the possibility of an economic slowdown in Asia, Europe, Russia and/or South America, countries that are still dealing with the aftermath of the last recession. What would happen to our economy if some of these economies falter? We are living in a turbulent and fragile world.

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One of the distinguishing features of 2013 was the number and range of crises that took place in many parts of the world.  We witnessed the terrible collapse of a building in India that was filled with garment workers, the typhoon in the Philippines, car bombings in the Middle East, the flood in Calgary, tornadoes in the United States and Mexico, the rail car disaster in Lac Megantic, Quebec and many others too numerous to mention.  Even here in Toronto we had a flood in July and the ice storm just before Christmas, both of which took direct aim at our home.

The two Toronto natural disasters provided me with ample opportunity to observe, first hand, the crisis management responses of some of Canada’s largest companies.  In fairness to these companies, there were hundreds of thousands of homes that were affected by these storms.  It takes time to restore essential services to that many homes and offices within a reasonable time frame.  Heat and power were restored within 3 days after the onset of the ice storm; telephone, cable TV and internet service took more than a week.

One of the most important elements of any company’s disaster recovery plan is the way it communicates with its customers.  While recorded announcements are helpful, it is important to be able to access a live person.  With one of our major service providers, this never happened.  Their phone rang but it was never answered.  When I passed one of their service personnel in the street, he supplied with a Twitter hashtag where I could keep abreast of developments.  My question to him was, what do you do when you have no electricity, no telephone service and no internet service? 

Another large provider did answer their phones but their people were trained to not provide direct answers.  They simply stated that they would be repairing our service the next day.  For three consecutive days they provided the same answer but did not follow through.  This was very annoying.  A third large supplier did answer their telephones and did come by at their designated time.  However their exterior technicians would not fix an internal problem and passed it off to an internal technician.  This resulted in an even longer delay.

When I think back to the ice storm in Montreal about a decade ago, I recall that our freight brokerage business was able to support our Montreal based clients by using our Toronto customer service department as a back-up.  In a crisis, whether natural or man-made, there are a range of problems that a freight company or shipper can face.  In addition to essential services, trucks and rail cars can be destroyed, cargo and buildings can be damaged and people can be injured or killed. 

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One of the 2013 trends identified in my last blog was the requirement for transportation professionals to ramp up their efforts at Risk Management.  In recent years we have seen a range of weather related natural disasters.   Of course, disruptions to supply chains can come from other sources such as terrorism, wars, accidents, the failure of various operating systems such as telephone and computer systems, quality control problems and export restrictions.  To make matters worse, most of these disruptions are unpredictable in timing and scope.

Supply chain risks can be categorized into five groups: operational, social, natural, economy and political/legal.  Each shipper has to make an assessment of the potential risks to their supply chains.  Supply chain risk management can be defined as attempts to identify risks and quantify their commercial financial exposures as well as mitigate potential disruptions at each node and lane in the supply chain.

Supply chain risk models can vary from the rudimentary to the sophisticated.  In the case of the latter, complex “what if” analyses can be performed.  These allow shippers to identify potential trouble spots and map out alternative supply chain strategies.  Historically, shippers have tended to focus on factors with the biggest impact on their supply chain, such as on-time performance, supplier lead time variability and carriers by origin or trade lane.

Based on the escalation of various risks in recent years, there is a need to take risk management to another level.  Shippers need to perform a probability analysis on the impacts of each potential disruption, with a particular focus on alternative vendors, manufacturing facilities, modes, carriers, origin points, ports, border crossings, distribution facilities and destination ports.

Looking ahead to 2013, there are some major (predictable) risks that could drive up supply chain and transportation costs.   These include the result of the ongoing debt discussions in the United States, the impact on fuel costs if there is more violence in the Middle East, a driver shortage if the economy rebounds faster than expected, the recession in Europe and other weather related problems.  In Canada there is a risk of a housing bubble which would have a major impact on its economy.  In addition, there are risks that cannot be predicted at this time.

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