Threat of ‘stranded assets’

You are a busy supply chain professional. Should future developments in supply chains be based on the scenario that has existed for your time working in the field? But, scenarios can change, caused by market forces, technology developments or government action.

When unplanned change occurs, logistics assets built for one mode of moving goods can be ‘stranded’. The financial choice becomes either the users continue to pay in some way for the superseded investment, or the costs are written off and investors pay.

An example of assets that may not be used over their operating life are at ‘hub’ airports. Here, money was spent to accommodate the Airbus A380, in the expectation of increased passengers and freight. However, passengers and freight customers have shown a preference for airlines to fly ‘point to point’, rather than changing planes at a ‘hub’. While Airbus has cancelled further construction of the A380, the infrastructure investments remains at airports that will not service the aircraft.

Similarly, it has been the strategy of shipping companies to use ‘ultra large container ships (ULCS) on some routes, to reduce their unit operating costs. However, questions are now being raised concerning the long-term viability of these ships. But this is only after ports have made large investments to accommodate the ships. If shipping companies restrict the ports that ULCS serve, then the investments at other ports will become ‘stranded assets’; but the costs incurred must still be covered.

Then there is the damage to public roads from larger (and heavier) trucks that reduce road transport operators’ unit costs. However, operators do not pay the full cost, so taxpayers must fund the increased road repair costs.

These examples illustrate that although supply chains are linked, investment decisions are made by individual entities for their own policy or profitability reasons. And these may incur additional costs to those directly invested in the ‘new’. Also, when trade lanes and supply chains again change, some entities are able to ‘walk away’ from responsibility for the earlier decisions. This leaves others to absorb the costs.

Influencing supply chain decisions

Reading media articles, eCommerce continues to be a topic of interest. But, a broad awareness is required by supply chain professionals about the possible effects of current and future decisions on supply chains and total costs. For eCommerce, some of these influences could be:

Regional trade agreements:  In the Asia region, the Regional Comprehensive Economic Partnership (RCEP) was recently agreed; signing the final document is expected in 2020. The RCEP includes the 10 ASEAN members, plus Australia, China, Japan, New Zealand and South Korea. This agreement will cover about 40 percent of global trade.

There is a potential for the RCEP to develop from a trade facilitation agreement into a region common market for goods and services Also, the potential exists to establish an Asia-Pacific trade facilitation agreement. This would combine the RCEP with the 11-member Trans-Pacific Partnership (TPP). The latter agreement includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Without the involvement in negotiations of America and India, these possibilities may be easier to achieve.

The immediate benefits from trade facilitation agreements are obtained by commercial organisations. To gain the benefits requires an understanding of the terms and conditions – a role for an organisation’s supply chain group. The effects of trade facilitation agreements takes time to flow through supply chains, but the long term changes to trade lanes and flows can be profound. These will be influenced by future developments in IT.

Information technologies: The future need for facilitators, such as forwarders, consolidators, brokers and Non Vessel Owning Common Carriers (NVOCC) could be reduced. This will be due to computer applications that handle the direct booking of containers to transport operators and the use of blockchain technology to enhance the ‘track and trace’ requirements of shippers. With direct transactions between buyer, seller and transport operator, there is the potential for smaller quantities to be delivered direct from and to smaller ports and centres on a regular basis. This could influence operations at ‘hub’ and regional ports.

Hubs and regional points: From a transport operator’s viewpoint, providing a ‘shuttle’ service between ‘hubs’ with larger transport units (ships, aircraft, trains and trucks) reduces unit costs. This is dependent on each transport unit being fully loaded, with minimum turnaround time at loading and unloading ‘hub’ points. Goods are then distributed to the final destinations, using smaller transport units and multiple warehouses.

While hub-and-spoke transport systems can be good for a transport operator, there are external costs of handling the trans-shipment from ‘hub’ to destination. These include specialised equipment and infrastructure to handle larger transport units, the full cost of using public infrastructure, congestion and pollution. The EU has estimated these costs at 2 percent of it’s GDP.

Inventory location and levels: The urge for fast (and ‘free’) delivery to consumers via eCommerce is encouraging construction of multiple small warehouses located closer to populations centres – but more warehouses require more inventory. Also, when goods are shipped on larger transport units between ‘hubs’, the ‘flow’ of goods is reduced. This can result in increased shipper inventory held near receiving points. Artificial intelligence (AI) promoters argue their software can better ‘sense’ demand, using internal and external data, therefore more inventory is not required. However, this is yet to be proven at scale across multiple enterprises.

Shipping alliances: The current three shipping alliances for containers are concentrated on the Asia-Europe and Asia-America routes. But, there are questions being raised concerning the longevity of the alliances. This is due to: future growth of the land-bridge from China to Europe; trade becoming more regional and container capacity aligning closer with demand. In addition, shippers (the customers) would prefer to send smaller shipments via ‘point to point’ services, which includes smaller ports.

These pressures could encourage a future re-evaluation by governments and operators, concerning the total costs of ULCS ocean transport and other modes of ‘big’ transport.

The five elements noted above are both independent and inter-dependent. They may also not occur. But, the potential effects on your supply chains from changes in your organisation’s current scenario could be substantial. Better to be aware, through undertaking a risk analysis of your supply chains, using various scenarios.