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Supply Chain by the Numbers

- June 14, 2018 -

  Supply Chain by the Numbers for Week of June 14, 2018

UPS Union Says Yes to Strike Threat; US Boxcar Shortage as CSX Leaves Pool; IMO Sulfur Rule Change to Bankrupt Cargo Ship Lines? Inflation is the Supply Chain is Growing



That is the share of UPS and UPS Freight drivers that voted Tuesday to authorize a strike against the company if UPS does not agree to what the union sees as an acceptable contract by July 31 when the current contract expires. It was 21 years ago, in 1997, when UPS teamsters walked off the job for 15 days, causing much havoc in supply chains – and that was before ecommerce. UPS employs some 280,000 union workers. The most contentious issues include the what the union sees as very low wage for part-time workers; healthcare and pensions changes proposed by the union; subcontracting work, especially feeder work [or over-the-road work between hubs], to non-union contractors; and UPS’ demands for drivers to work a 70-hour week as needed. One edge UPS has this time is that rivals FedEx and the USPS have little slack capacity to literally pick up the load. Conversely, surveys show the public has a very favorable view of UPS delivery drivers, and may take their side in a strike in the court of public opinion.



That surprisingly, is the current size of the US box car fleet – down from more than 660,000 in 1971, according to AllTranstek, a railcar management and consulting firm. Why the plunge? More goods are being shipped via trucks, while railroads developed cars specifically for bulk commodities such as grain and oil. All this in the news this week as it was reported that rail carrier CSX’s decision to largely pull out of the long running box car pooling system about a year ago. That system contains about 25,000 cars in a pool managed by a company called TTX. Participants in the pool can use the cars as their own, whle having as many railroads as possible in the pool helps match empty cars with cargo nearest to where they are unloaded. It wasn’t working, however, for CSX, which says the boxcars were often being sent to customers on other rail lines, requiring CSX to ship the cars back empty, sometimes past its own customers. The CXS move has sent the system into some level of chaos. At International Paper’s Savannah, Ga., plant, the paper giant spends a lot of time separating CSX box cars from those of other companies that can still be shared. A mix-up can result in a $2,000 fee from CSX for each car sent on the wrong tracks.



That is the likely increase in the cost per metric ton for low sulfur fuels to power cargo ships that will be required under new rules from the International Maritime Organization (IMO) scheduled to go into effect Jan. 1, 2020. That will add billions of dollars to the annual operating costs of bulk cargo and container ships, putting many already financial struggling carriers at further risk. "We're all going to go bust," Junichiro Ikeda, CEO of Japanese container carrier MOL, told the UK's Financial Times last week. There is an alternative to buying the higher cost fuel: special scrubbers to remove the sulfur (linked to health and environmental issues), but they can cost as much as $10 million each. Ikeda may have good reasons to be worried: carriers have generally not been very successful in their attempts to pass on extra fuel costs to shippers, with net loss of over $1billion in the first quarter for the industry this year, attributed in large measure price to a spike in oil prices and thus the cost of bunker fuel for carriers. Ocean carriers initially announced surcharges to cover the cost of more expensive fuel consumed on some trade lanes, but these were ultimately absorbed into their freight rates, and thus lost in terms of being able to clearly recoup the actual increase in fuel costs.



That is the increase in the Producer Price Index, a measure of what seller of goods and services are getting for their products, through May of this year. The PPI is similar to, but different from, the more familiar Consumer Price Index, as it includes non-consumer goods in the calculation. That is the highest gain for the first five months of a year since 2012, and was driven largely by increases in gasoline and other fuel costs. New projections from the Federal Reserve say that its preferred inflation measure, the Personal Consumption Expenditures (PCE) price index (which excludes food and energy) is now likely to run slightly run above its 2% target level this year – a rate of price growth the US has not seen for some time. Inflation – still moderate for now – appears to be creeping back into the supply chain. That view was also supported last week by the Prices Index level measured in the Institute for Supply Management’s monthly purchasing manager’s report for May. The Prices Index came in at a huge 79.5 level, indicating the vast majority of companies are seeing higher input prices, as it is way over the 50 mark that indicates half of companies are seeing price increases and half are not. It marked the 27th consecutive month for higher commodity costs. This is becoming a real worry.

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