Eruption and Disruption

The clouds of volcanic ash that all but shut down European airspace were just the latest reminder of the unpredictability in supply chains. Occurring without warning and impossible to predict, the eruption and its consequences validated all of companies’ time, efforts and money spent on developing contingency plans for supply chain disruption.

If the September 11 attacks and the three-day shutdown of U.S. airspace that followed transformed how companies view supply chain risk, last week’s episode, which had only begun to ease as this issue went to press, confirmed it.

We don’t know what the next major shock to the international transport system will be, but we have all the evidence needed that something will happen and without warning, whether because of a public health emergency, natural disaster, terrorist attack, strike or some other unknown factor.

The focus on risk will only increase, given that the climb out the recession is being characterized by less inventory and leaner supply chains, which will only increase the risk from disruption and the focus on risk mitigation.

Retail logistics directors speaking at a New Jersey meeting of the Council of Supply Chain Management Professionals this month agreed that, having been caught with too much inventory when the recession hit, a more conservative mindset with regard to inventory levels has taken hold and can be expected to last a while. When it comes to inventories, “No one’s going to open up the floodgates,” Paul Cox, Foot Locker’s vice president of global transportation and supply chain, told the group.

You can see the mindset of risk mitigation play out in many ways, including in port selections. The growth of Prince Rupert north of Vancouver, British Columbia, can be attributed in part, carriers say, to shippers spreading out their cargo volumes among several port gateways to minimize the impact of disruption at any one of them.

In fact, it seems the private sector is further along in preparing for crisis than the government is; the blanket shutdown of European airspace, when such an action may not have been warranted and led to unnecessary losses by airlines, illustrated an alarming lack of planning and ability to manage through a fast-moving crisis.

While disruptive to millions of travelers, including Journal of Commerce Editorial Director Paul Page, who was stranded in London for six days, the supply chain disruption this time was largely limited to airfreight. Ocean shipping was essentially unaffected. Losses in perishables will be the greatest, but delays also will hit electronics, fashion and other high-value cargo typically moved by air.

The disruption struck as air freight volumes are recovering strongly versus prior-year numbers and edging closer to pre-crisis levels. Air freight in January and February was more than 20 percent higher than the first two months of 2009 and just 3 to 4 percent below pre-recession levels in January-February 2008, according to transportation analyst and consultant MergeGlobal.

Behind the surge is a combination of inventory restocking, pickup in consumer spending and some shift from ocean to air because of container backups in Asia. The main questions emerging from the Europe predicament are how long it will take for airlines to get their networks back into balance, how long air freight backups will remain, and whether there will be any lasting economic damage.

Assuming European skies continue to reopen, airline networks will likely be back to normal within days. Airlines’ networks typically bounce back quickly from weather disruption, and as widespread as the disruption was — 95,000 flights canceled as of April 20, six days into the crisis — this will not be much different.

But air freight backlogs may take longer to clear, perhaps as long as two to three weeks, in part because many flights will be operating at 100 percent capacity as passenger backlogs clear, meaning less belly space for cargo on passenger flights, said David Hoppin, a MergeGlobal analyst.

The longer-term impact is most important. Economically, the sharp increases in shipping volumes — both air and sea freight — since late last year are still viewed, along with many other positive looking indicators, as incomplete evidence of a recovery.

Many still see the possibility of a backward economic slide. A large portion of the surge in demand, Hoppin said, appears to be due to inventory restocking rather than driven by underlying demand. With the stimulus waning in impact, the recovery could lose steam, he said.

The “air freight rebound is largely attributable to inventory replenishment rather than resurgent final demand (consumer spending and business investment),” MergeGlobal said. “It is not yet known how fast air freight will grow once the current inventory replenishment cycle is complete.”

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. He can be contacted at ptirschwell@joc.com.
 

For the full story: Log In, Register for Free or Subscribe