Hanjin 3

A couple of weeks ago I posted a short article on how companies can prepare for and respond to supply chain disruptions (Hanjin Revisited). This was a follow-up to an earlier article on the Hanjin bankruptcy and its impact on businesses globally (Hanjin and Turmoil in the Shipping Industry … Should we have seen it coming?). Two further points worth noting are the systemic problems faced by the maritime shipping industry and what appears to be poor bankruptcy planning on Hanjin’s part.

We should not focus too much on the issues specific to Hanjin lest we lose sight of the problems impacting the industry at large. Was the Hanjin bankruptcy an exception or a harbinger of bigger issues to come? My concern is that it may be the latter. Weak global trade and overcapacity contribute to the problem. Nerijus Poskus, pricing and procurement director for San Francisco-based Flexport, has pointed out that not long ago prices hit historic lows worldwide, with shipping rates from Shanghai to Los Angeles as low as $600 per container.

 chinacontainerSource: Shanghai Shipping Exchange

Simply put, supply currently outstrips demand, resulting in an untenable environment whereby many carriers are transporting goods at prices below operating costs. And the Boston Consulting Group has predicted a further 30% increase in container shipping capacity by 2019.

This problem is exacerbated by the fact that operating materials costs are increasing (irrespective of the decline in fuel costs). Additionally, increased emissions regulations, and the technology required for compliance, coupled with the cost of mitigating security risks, are further driving profits down.

Additional debt, in an already highly-leveraged industry, is not the answer, as Hanjin can now attest to. The industry response will likely be diversification into higher-margin business segments, strategic alliances to enhance profitability and industry consolidation to leverage economies of scale. And, hopefully, a staving off of further bankruptcies.

The bottom line for companies employing ocean freight is that they should not take solace in these historically low shipping costs. While this may represent a short-term windfall, the risks associated with an industry in turmoil represent a greater threat, as Hanjin customers have seen.

Which leads us to the second issue, Hanjin’s bankruptcy planning. A recent article in the New York Times addressed this issue.[1] As noted in the article, when an airline files for bankruptcy, sufficient insolvency planning and engagement of bankruptcy professionals early in the process ensure that aircraft are not stranded on the ground in unfavorable situations and, in the case of cargo, that transported goods are not quarantined or otherwise made unavailable to the owners. While ocean transport carries with it certain challenges not shared with air cargo, better front-end liquidity planning on Hanjin’s part could have prevented or significantly mitigated the situation of companies not having access to their goods for weeks or longer.

 

[1] Stephen J. Lubben, “Lack of Planning Hampers Hanjin Shipping Bankruptcy”, September 15, 2016.

Hanjin Revisited

September 30th. It’s been a month now since Hanjin Shipping filed for bankruptcy. So what has happened over the past month? A lot … but not enough.

A little over a week into the chaos U.S. Bankruptcy Judge John Sherwood granted the company provisional protection from creditors. This enabled some ships entry to U.S. ports so that the owners of the cargo could begin the process of retrieving their goods. That happened on Friday, September 9th. The next day a couple of the dozen or so Hanjin ships destined for the west coast were given permission to dock at the Port of Long Beach. This was welcome news to the retailers anxiously awaiting merchandise for the start of the holiday shopping season. But the release represented only a small percentage of the $14 billion in stranded cargo.

And not only did the goods begin to flow but the company began to gain access to badly needed funds in the form of loans. About two weeks ago a former Hanjin chairwoman pledged $9 million in private funds, and Hanjin Shipping’s parent company pledged to raise $90 million, funded primarily from Korean Air Lines and Korea Development Bank, Hanjin’s lead creditor. These funds would presumably go toward continued release of stranded cargo. According to Reuters, HP, Inc. filed papers in court stating that it would be willing to pay right away to get its cargo off Hanjin vessels.  This was to avoid “irreparable harm” to its business.

But significant problems remain. As late as last week John Ahearn, global head of trade at Citi, told CNBC’s Squawk Box, “There’s an enormous amount of merchandise that’s still on the seas and no one knows what’s going to happen with it.”

Many retailers and manufacturers are still struggling, and as the holidays approach the situation becomes direr each day. Some of the hardest hit are small and medium-sized businesses that don’t have the ability to absorb losses that larger companies do. And, as John Ahern noted, the banking industry incurs indirect exposure as those same companies’ financial conditions are compromised.

I know some of this first-hand, as two of our clients have been impacted by raw materials and merchandise stranded on Hanjin vessels. Fortune Magazine reported that over half of the 141 Hanjin vessels are blocked from docking.  With this much chaos, some companies may not yet be aware that they have been impacted by this bankruptcy.

So all of this leads to three overarching issues that I don’t believe have received enough attention: supply chain preparedness and response, systemic shipping industry problems and poor bankruptcy planning on Hanjin’s part.

Supply Chain preparedness and response. I touched on this briefly in a prior article when I asked how companies can anticipate, prepare for and respond effectively to supply chain disruptions such as this going forward. In that article I cited four principles, Awareness, Agility, Resilience and Redundancy. Let’s look at a few examples of how companies could apply these principles to prevent, or at least significantly reduce, future disruptions:

  • Awareness:  Enhanced business intelligence. “Keeping your finger on the pulse” of what’s going on across your entire supply chain. Regularly monitoring the condition of your suppliers and staying in very close, deep, regular contact with them. Understanding the impacts that seemingly disparate events can have on each other from a “whole system” perspective.
  • Agility: Developing multiple, alternative strategic/action plans incorporating diversification, and a commitment to rapid deployment of any one of them – “just in time” – when unexpected events occur. In other words, contingency planning.
  • Resilience: Streamlining the way you do business, internally and externally, to enable faster, “just in time” decision making and deployment. Ensuring effective supplier relationships that extend resilience across the supply chain. Regular surfacing and “fleshing out” of potential issues before they occur. Aggressive credit exposure management.
  • Redundancy: Where possible, establishing multiple sources of merchandise, raw materials and transportation. Establishing a redundant infrastructure so you can receive, produce and distribute products in the event of unexpected disruptions. Diversifying your supply chain portfolio.

In future articles, I will address the systemic problems plaguing the shipping industry and the issue of bankruptcy planning, but before closing, I could like to acknowledge valuable contributions to this ongoing dialogue by two experts in their respective fields. Rob Brown, president of Incite! Decision Technologies, reiterated the importance of monitoring supplier financial health, contingency planning, purchasing portfolio diversification and effective purchasing policies. And Andy Gastley, vice president at Insurance Office of America, provided insight as to how some in the insurance industry are dealing with policy exclusion from this type of disruption.

Hanjin and Turmoil in the Shipping Industry … Should we have seen it coming?

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On the last day of August, Hanjin Shipping, the world’s seventh largest container carrier, representing almost 8% of all of the United States trans-Pacific trade volume and 3% of global shipping capacity, filed for protection in South Korea’s bankruptcy courts and was granted court receivership two days later.

Needless to say, the shipping industry has been thrown into a state of turmoil, with countless container ships either stranded offshore, unable to dock and likely inaccessible for weeks or months. In the worst scenario, several have been seized by private charters, creditors or government authorities, including several reportedly seized in China and Singapore.

The total cargo already loaded onto Hanjin vessels and at risk of being tied up indefinitely has been estimated to be as much as 540,000 twenty-foot equivalent units (TEUs). So let’s take a moment and put this in perspective. Panamex vessels (those that could pass through the Panama Canal’s old locks), of which there are still many, can hold between 3,000 and 5,000 TEUs. Post-Panamex and New Panamex vessels between 5,000 and 14,500 TEUs. The bottom line is that we’re talking about a lot of stranded container ships.

Shipping customers, from the likes of LG Electronics and Samsung to major retailers such as Wal-Mart and Target, were caught flat-footed, unable to retrieve their goods and not knowing when, if ever, they will be able to do so. LG Electronics, for example, has begun making contingency plans for its cargo currently quarantined on Hanjin vessels, in the event they are seized.

But the ripple effect extends far beyond Hanjin’s direct customers. Third party providers, from tugboat operators and trucking companies to stevedores and freight forwarders, all of whom depend on shipping activity for their livelihood, are at risk. Some will not survive. Others will struggle for months or years to recover.

The other short-term impact, already being felt throughout the world, is rapidly rising shipping rates, regardless of whether these increased rates are sustainable. A day after the bankruptcy filing, according to Nerijus Poskus, director of pricing and procurement for the freight forwarder Flexport, rates from China to west coast ports increased from $1,100 to upwards of $1,700 per container, literally overnight. Similarly, rates from China to east coast ports increased from $1,700 to $2,400. Competing carriers are rushing to fill the vacuum created by Hanjin’s bankruptcy, and to capitalize on a windfall opportunity. Ultimately, at least in the short term, the consumer will pay.

So this leads me to a question. To what extent was the Hanjin bankruptcy expected, or should it have been based on the facts at hand? I heard someone last week refer to this as a “Black Swan event”. Back in February I wrote about a thunderstorm in Albuquerque, New Mexico that virtually shut down Nokia’s and Ericsson’s supply chains, an unexpected occurrence from which the latter company never fully recovered (How a Lightning Strike Almost Destroyed a Company)[1]. That was a Black Swan event. The Hanjin bankruptcy clearly is not.

Investopedia defines a Black Swan event as one that “deviates beyond what is normally expected of a situation and is extremely difficult to predict.”

In the case of Hanjin, the writing could not have been more clearly “posted all over the wall” in bright red ink. On a company-specific level, Hanjin has been hemorrhaging money for years. In the first half of 2016, the company lost 473 billion South Korean won ($430 million). It had accumulated a debt of 6.1 trillion won ($5½ billion), almost a fifth of which was due before the end of 2017. Hanjin’s losses and this debt, at the end of the day, pushed the company’s creditors to their limit and they decided to pull the plug. To compound Hankin’s woes, it owns less than half of its fleet, leasing the rest at fairly high lease rates. While experts disagree regarding Hanjin’s fate, there is a likelihood that the company will not recover.

On a macro scale, the industry has been struggling for the past several years. Notwithstanding the uptick last week, shipping rates have been depressed and probably will remain so. Trans-Pacific shipping demand has been sluggish for some time, as global deals are replaced by regional ones, China shifts its focus to domestic consumption, and the dynamics of the global economy change. In light of depressed demand, the industry has struggled with excess capacity. These factors are highly unlikely to change in the near term, and other carriers may risk the same fate as Hanjin.

So how can companies anticipate, prepare for and respond effectively to supply chain disruptions such as this going forward? What lessons can be learned from the Hanjin experience? In the February article I laid out four principles, Awareness, Agility, Resilience and Redundancy to help businesses deal with unexpected (albeit, I would argue in this instance, predictable) events such as this.

In the next article we will revisit these principles and how they apply to supply chain disruptions such as the Hanjin insolvency.

 

[1] www.mgcobb.com, “How a Lightning Strike Almost Destroyed a Company”, February 10, 2016

Risk-taking business leaders – did they learn differently as children??

What can we learn about leadership from our childhood experiences? How might our early life lessons shape our tendency to take risks and innovate as entrepreneurs and business leaders?

Growing up in Atlanta during the 1960’s was considerably different from today. My immediate neighborhood and the business district were miles apart, but it was my world to explore. Early Saturday morning, I would set out on my bike with a group of friends and not return home until late at night. Since this was decades before cell phones, our parents had no idea where we were, but somehow we survived. This was how we learned to push the boundaries and take risks. (Of course, some risks were unnecessary adolescent dares.) It occurs to me that, by and large, we don’t give our children the freedom to do that. As the father of two daughters, I must admit that I’m as guilty as the next guy in being overly protective of my children.

Recently I ran across an article from several years ago written by Greg Siering, of Indiana University about the importance of risk-taking and failure in the student learning process. The gist of the article was that risk-taking should be encouraged as a fundamental part of the learning experience. It occurred to me that our early childhood experiences significantly influence our tolerance for risk when we get older. So that raises a couple of questions: By protecting our children against risks, whether on the playground, in their neighborhoods or at home, are we creating generations of naturally risk-averse corporate leaders? And if we accept the natural relationship between risk-taking and entrepreneurism, are we setting the stage for an inclination against entrepreneurism in the future?

Richard Branson tells this story of when he was around five years old. On a return trip from shopping, his mother, Eve, stopped the car and told him to find the rest of the three-mile trip home alone. This experience, along with many other influences attributed to his “mum”, shaped who he is today, a highly successful, risk-taking entrepreneur.

So is there a parallel between risk-aversion in child rearing today and what we see in large companies that are unwilling to take risks for fear of jeopardizing the position they have built on past successes? There’s comfort in the status quo when things are going well. I wrote about this latter point in an earlier article, Risk and Innovation. Have the successes of recent generations also created an environment that discourages risk-taking for fear that we will jeopardize the trappings of our success?

Now I’m not advocating dumping our small children out of the car miles from home and having them fend for themselves. (Though, I will admit that my daughters have been threatened with this.) But what I am suggesting, or at least proposing for consideration, is that we look for ways to encourage risk-taking in our children. It could make all the difference in the world, for them and for our entrepreneurial society, when they grow up.

How a Lightning Strike Almost Destroyed a Company

Friday, March 17, 2000.  By all accounts it was a typical day. The week was winding down and preparations were being made for the weekend. There was a lot to talk about in the news. The US elections were heating up in the lead-up to what would prove to be one of the most contentious presidential elections in US history. Consumer prices were rising. Secretary of State Madeleine Albright was about to announce the easing of sanctions against Iran. And extreme volatility was expected on Wall Street after the biggest Dow Jones one-day point gain to-date just the day before. But none of these events would compare, in terms of global impact, to the thunderstorm that rolled through Albuquerque, New Mexico that evening. [1]

It was around 8pm that a lightning bolt hit a high-voltage line, causing a power surge throughout much of the state. As a result, a fire broke out at the Royal Philips Electronics chip manufacturing plant in Albuquerque. The fire lasted no more than ten minutes. An initial assessment by workers on the scene indicated that only minor damage had been incurred. However, further investigation revealed that millions of chips had been contaminated.

Philips management struggled to deal with the fire’s aftermath. Their two largest customers, Nokia and Ericsson, would likely suffer the greatest impact. Together they represented 40% of the Albuquerque plant’s shipments.

Monday, March 20, 2000.  Philips engineers and managers concluded the disruption would last about a week and that when the plant returned to normal they would fill their two largest customers’ orders first. They placed calls to Nokia and Ericsson and told them as much.

Option A– Thousands of miles away, the two companies’ reactions to the news were in stark contrast to each other. In Helsinki, Nokia’s production planner and component purchasing manager, who had already identified a supply chain anomaly before the call, were skeptical, surmising that Philips had grossly underestimated the extent of the problem. They promptly notified their senior management, who took immediate and decisive steps to mitigate the impact of the supply chain disruption. They prevailed on Philips’ senior management to collaborate closely with Nokia by shifting production to facilities in other parts of the world. They quickly redesigned their chips so they could be produced by other Philips and non-Philips plants, and they identified and reached out to alternative manufacturers, who rose to the occasion by responding in short order to Nokia’s pressing need. Nokia’s decisive action and collaborative spirit paid off. In the third quarter of 2000 it realized 42% profit growth and a 30% increase in global market share.

Option B– Ericsson management, on the other hand, adopted a very different approach. Prior to the call from Philips, they had not detected a supply chain problem. And they took at face value the news from Philips that the disruption would be short-lived. Their “business as usual” reaction would prove to be disastrous for the company. It wasn’t until the end of March that Ericsson executives realized the extent of the problem, and by the following month it became evident that they had very few options at their disposal to deal with the situation. In July, the company reported that, largely as a result of the New Mexico fire, its mobile phone division had incurred a $200 million second-quarter operating loss. In January, Ericsson reported a division loss of $1.68 billion for the prior year and a 3% loss of market share. In October 2001 the company announced the formation of Sony Ericsson, a joint venture with Sony Corporation. Unbeknownst to the public, Ericsson had begun negotiations with Sony in the midst of the crisis from which it would take years for them to overcome. In fact, Ericsson’s corporate health was not restored until 2004, but with revenues of half what they had been in 2000.

So what’s your take about this story? The contrast between Nokia and Ericsson can teach us a lot about how successful companies react to crises after the fact. But successful companies can also take important steps to prepare for crises before they occur.

We have found over the years that the following four overarching principles, Awareness, Agility, Resilience and Redundancy, will help companies prepare for and respond effectively to unexpected events:

Awareness

  • Enhanced knowledge of primary and adjacent areas that could impact your business
  • Acceptance, awareness and anticipation that there are things you don’t know (known unknowns) and things you do not even realize you don’t know (unknown unknowns)
  • Viewing each risk as one of many possible disruptions across the value chain and during the life of your organization – all of which interact as part of a whole system
  • Expansive thinking about possibilities – pushing the knowledge frontier envelope and looking for asymmetries
  • Enhanced business intelligence across broad, multidisciplinary networks and through diverse eyes
  • Active use of decision analysis tools

Agility

  • Development of multiple alternative strategic/action plans incorporating diversification
  • Commitment of rapid deployment of any one of them – “just in time” – when unexpected events occur
  • Regular deployment exercises to instill agility and rapidity in responding to unexpected “trigger events”
  • Enhanced scenario analysis and “role playing”
  • Open mindedness to different, even unorthodox, business models and structures
  • Aversion to oversimplification

Resilience

  • Streamlined and decentralized/distributed organizational structures to enable faster, “just in time” decision making and deployment
  • Encourage of active debate and deliberation across vertical and horizontal lines – no groupthink
  • Regular workshop-based learning exercises
  • Expansion of thinking across various approaches
  • Regular surfacing and “fleshing out” of critical issues before they occur
  • Aggressive credit exposure management

Redundancy

  • Establishment of multiple sources of critical raw materials
  • Establishment of a redundant infrastructure that affords the ability to produce, deliver and distribute products and services in the event of unexpected disruptions
  • Supply chain management that incorporates redundant inbound and outbound channels to defend against unexpected disruptions
  • Building robust organizations with talent redundancy
  • Establishment of alternative information systems
  • Establishment of multiple organizational lines of decision making

We will address these overarching principles in more detail in future articles.

 

  1. Amit S. Mukherjee, “The Fire That Changed an Industry,” FT Press, October 1, 2008.

What I Have In Common With Richard Branson and Paul Allen!

It was the one question that I had not anticipated. The answer changed my outlook on how to do business.

In the early stages of my consulting practice, I was meeting the chairman of the board of a struggling medical products venture. Mentally rehearsing my successes and why they had uniquely prepared me for this task had been part of my extensive preparation.   As any fledging entrepreneur will attest, there’s a lot riding on every opportunity.

Arriving for lunch at a posh private club in Atlanta, I was prepared to tell him all the reasons why he should hire me to help turn his company around. After we had dispensed with the perfunctory small talk, he leaned across the table and asked me the one question that I will never forget: “Tell me about your greatest failure and how it changed you.” While the question was unexpected, the answer immediately popped into my head.

Back in the eighties, three colleagues and I started a company producing hard disk drives in an effort to capitalize on the rapidly growing personal computer industry, still in its infancy. We had high aspirations. But we lacked the agility and working capital to succeed in a rapidly changing environment. In short order we tanked, never turning a profit. The company lost it all, the partners lost some money and momentum, but I learned more from that experience than perhaps anything else I have done.

It turns out that I’m not alone when it comes to watching a new business implode. Odeo, Traf-O-Data and Virgin Cola are not the names you’ll hear on the news or in a discussion at a cocktail party. Yet these companies share the same fate as my company. They’re a few of the countless examples of products that never made it, the results of early failed ventures of entrepreneurs who went on to enjoy great success.

Take Odeo for example. Evan Williams and Noah Glass left Google in 2004 in order to develop a podcasting platform that would change the world. In Williams’ words, Odeo would be “the best one-source solution for finding, subscribing to, and publishing audio content.” Sound familiar? It should, because that’s basically what iTunes does. Even though Odeo seemed like a great idea at the time, it never got off the ground once Apple announced the launch of iTunes. But Williams didn’t view Odeo as a failure. On the contrary, he learned from the Odeo experience and went on to launch Twitter, a highly successful media giant.

Paul Allen has affectionately referred to Traf-O-Data as his “favorite mistake”. That’s the product he and Bill Gates started in the early 70’s. The business, built on the concept of processing traffic flow data, incurred losses for six years before it folded. But the young entrepreneurs were undeterred. They learned from their mistakes and kept going and we all know “the rest of the story”.

And that brings us to Virgin Cola. Richard Branson has launched dozens of companies under the Virgin brand. Some have succeeded. Some have not. Virgin Cola was one that never made it. But Branson, who claims to have lost count of his business failures, is undaunted. In fact, he is a master at turning mistakes into new opportunities.

The list goes on and on.

Our culture likes winners, and the media reinforces everyday the myriad seductive stories of success. More often than not we reward success and punish failure. We view failure as a sign of weakness. But in reality, our failures, not our successes, are what teach us, what nurture our growth. Paradoxically, failure, it turns out, breeds future success, but only if we understand how to view it in the proper perspective and to learn from it.

 

Risk-embracing Organizations

It seems that almost every day there’s a new book or article about risk-tolerant versus risk-averse organizations. These authors tell us how it is through taking risks that we change and grow, both as individuals and as companies. However, the most successful, entrepreneurial leaders don’t just tolerate risk. They embrace it. They create a safe and nurturing environment for people to take risks, to share ideas, to try new things, to step outside their comfort zones, and to learn every step of the way. That’s where innovation and meaningful change occur.

At the same time, business leaders must understand the boundaries associated with risk-taking, uniquely defined for their organization and its stage in the business lifecycle. This is often a delicate balancing act, but most companies I’ve worked with miss the mark by erring on the side of risk-aversion. As a result, their ability to remain competitive and grow is severely compromised.

So how do companies strike the right balance and create an environment that embraces the taking of the right amount of risk? While there is no one, textbook answer, I have found over the years that the following ten steps can have a significant impact.

It starts at the top. Every executive, from the CEO down, must be on board and actively support the plan.

Define the risk appetite that is right for you. Every company is unique. But test your assumptions about risk and push strongly on the boundaries that you believe define the risk you’re willing to take.

Define the boundaries. Once you understand your appetite for risk, define the boundaries that will be established at all levels of the organization, but, again, push yourself outside of what may be most comfortable to you.

Articulate the plan. Leaders should spell out for the entire organization their commitment to, and encouragement of, creativity and risk-taking as a part of the company’s commitment to growth.

Measure, feedback, reward, acknowledge. We perform the way we’re measured and rewarded. Put the right metrics and rewards in place that encourage and reward the taking of risks within the established boundaries. Publicly acknowledge when people do bold things.

Share ideas. Encourage the active and unabashed sharing of ideas, no matter how crazy they may seem, across the entire organization.

Create the right physical environment. Create space and time for people to get away periodically from the day-to-day, an environment that encourages creative thinking and the sharing of bold ideas, a time and place to tune out the distractions.

Lead by example. Show others that it’s OK to take risks, that it is encouraged, in the way you act.

Fund it. Make sure your company’s budget allows the organization’s members time, training and resources to extend their boundaries, be creative and take risks.

Dispense with old paradigms. Don’t revert back to your old habits and ways of thinking when it comes to implementing change. And never, ever, rely on committees to do the hard job of transformation.

This last point deserves a brief story from my past. Several years ago I was consulting for a large, bureaucratic organization. The company was challenged, losing market share and in need of a change if it expected to remain competitive and grow. I advised the CEO that part of the solution lay in transforming the business environment from one of risk-aversion to one of risk-encouragement. I shared some reading material with him and gave him some space of his own to digest my advice. Several weeks later I circled back only to find that he had indeed heeded my advice, by setting up a committee of his top, bureaucratic leaders, to formalize a step-by-step risk-tolerance program! The lesson here is to dispense with your old ways of thinking and doing things if you have any chance of success.