Tag: Panama Canal

OM in the News: Navigating Supply Chain Disruptions

“Historically, supply chain teams react to crises only after they have already begun,” writes Material Handling & Logistics (Dec. 19, 2024). A crisis starts and the team goes into fire-fighting mode. After the situation is remedied, teams return to business as usual, only to await the next crisis. Balancing strategic imperatives with solving these short-term crises is the key to effective supply management.

For years, supply chain professionals have been forced to play defense, constantly reacting to minimize disruptions as they arise. This approach not only diminishes employee productivity by forcing them to constantly switch between projects and contexts, but it also undermines the perception of the function’s strategic importance.

The Panama Canal is no stranger to challenges and complexities brought about by natural disasters, geopolitical tensions, or technical failures

But new technology is transforming the way supply chains are managed. Instead of addressing problems as they arise, procurement professionals can identify opportunities for strategic value early and often, developing proactive response plans for dealing with predictable disruption events. While the specific timing and severity of disruption events like hurricanes, port closures, labor strikes, or country shutdowns are difficult or perhaps even impossible to predict, there are a finite number of event types each year that can disrupt supply chains, and thus a finite number of response plans that can assure resilient continuity of supply.

With the advent of new predictive procurement tools like those we discuss in Module G (Applying Analytics to Big Data), supply planners and purchasing teams now have the capacity to reduce the chaos of unexpected disruptions.  AI-driven tools are now helping to streamline and automate labor-intensive tasks, allowing procurement teams to quickly identify alternative suppliers and manage spot-market opportunities when unexpected challenges arise. By analyzing data trends, such as historical supplier performance metrics and environmental factors, these predictive procurement systems enable businesses to make more informed decisions proactively.

Identifying alternative sources of supply within a company’s existing supplier base is key, since qualifying new suppliers can be time-consuming, and expanding the total number of suppliers may introduce unnecessary complexity. Also,  securing carriers with secondary capacity is equally important, as logistical challenges often arise when transport routes are disrupted.

Classroom discussion questions:

  1. What tools do AI provide supply chain planners?
  2. What canal issues have companies faced the past two years, and how have they dealt with them?

OM in the News: Two Canals–Two Problems

More than 50 ships queued to cross the Panama Canal on a recent day—from tankers hauling propane to cargo ships packed with food. A prolonged drought has led the canal’s operator to cut the number of crossings, resulting in longer waits. The tolls that ships pay are now around 8 times more expensive than normal. A single Panama Canal crossing costs around $500,000. But the canal operator has cut the number of daily ship crossings in half (from 36 to 18)  and shippers have to go through a bidding process where the highest offer (sometimes $4 million) secures a crossing.

A Houthi helicopter attacking a ship off the coast of Yemen

Over 7,000 miles away, vessels that move containers through Egypt’s Suez Canal are waiting for naval escorts or avoiding the passage altogether to take a much longer voyage around South Africa. Ship operators fear that their crews could be imperiled on the journeys through the Red Sea by missile or drone attacks from a Yemen-based rebel group. Houthis have attacked more than 50 ships since November​, including a cargo vessel loaded with fertilizer​ that sank into the Red Sea and another that resulted in three deaths.

The Suez’s problems are geopolitical and those in Panama are climate-based, but both are roiling global trade and supply chains, writes The Wall Street Journal (March 11, 2024) Cargo volumes through the Suez and Panama canals have plunged by more than a third. Hundreds of vessels have diverted to longer routes, resulting in delivery delays, higher transportation costs and economic wreckage for local communities.

Ship operators are bracing for months of uncertainty in the waterways where some 18% of global trade volumes crossed last year. It’s the first time that both are disrupted simultaneously. Daily freight rates on some routes between Asia and the U.S. surged to more than $20,000 per box, five times higher than current levels.

Businesses are starting to feel the ripples. Tesla and Volvo paused vehicle production for 2 weeks in January because of parts shortages. Some apparel companies opted for their spring fashions to be delivered by air instead of sea to ensure items arrived on time. As more businesses return to pre-Covid practices of keeping minimal inventories and rely on timely deliveries, they are more vulnerable to disruptions if bottlenecks at the two canals continue.

Classroom discussion questions:

  1. What options do shippers have?
  2. How can supply chain disruptions be avoided?

Guest Post: The Panama Canal Backlog

Prof. Howard Weiss shares his OM insights with us monthly.

Recently, there has been a bottleneck of ships waiting to go through the Panama Canal with over 120 ships waiting, reports Institute for Supply Chain Management (Aug. 29, 2023). The main cause is that there has been a drought, lowering the canal’s water level which reduces its capacity. (This also happened in 2016 and 2019). Normally, 36 ships would pass through the canal every day. At the moment the limit is 32 ships. The waiting time average is roughly 10 days rather than the 6 days it had previously been. Shipping companies have three options to mitigate the problem.

Reduce ship weight Some companies have reduced the number of containers on a ship. This reduces the ship’s weight which reduces its “draft”. The reduction in containers can take place at the ship’s origin or in Panama by placing the containers on the Panama Canal Railway which runs across the country. As a result of this reduction, shippers have been adding surcharges to their clients. For example, Hapag-Lloyd has added a $500 per container fee on Asia to US east coast routes.

A caravan of cargo ships sits in the Pacific Ocean last week, waiting to enter the Panama Canal

Use a different route There are several alternatives both by sea and land to avoid using the Panama Canal, each with its own advantages and disadvantages. By sea, a ship can go around South America. While the distance is considerably longer, the ship can make stops at major ports in South America such as Brazil, Argentina and Chile. The Suez Canal may be a less expensive option to the Panama Canal as the Asia to U.S. East Coast distances are roughly the same as when using the Panama Canal. Going around South Africa is another option. Land routes include the Panama Canal Railway.

Increase priority at canal In order to use the canal, shippers need to reserve a slot. The fee depends on the type of ship and other factors and ranges from $10,500  (small vessels) to $400,000 (largest vessels fully loaded).  A few daily slots are left open and auctioned off through the “Transit Slot Auction” which essentially allows ships to jump the line. This auction fee is paid in addition to the normal fee. The base price for the auction is $100,000 and recently a company paid $2.4 million.

Discussion Questions:
1. Cite a waiting line situation where one can improve his/her place/priority in the line.
2. What other operations decisions require examining time and cost tradeoffs?

OM in the News: How the Panama Canal Project Collided With Reality

Construction on the new locks in August 2014. They were supposed to be completed for the original canal’s 100th anniversary that year
Construction on the new locks in 2014. They were supposed to be completed that year.

The New York Times is at its best when it tackles journalistic investigation, as it did with its front page, 5 page feature called “The New Panama Canal: A Risky Bet” (June 23, 2016). The article is the perfect way to introduce the critical topic of project management (Chapter 3). It is the tale of an intense 2-year competition, and how Sacyr, a Spanish company in severe financial distress, learned that its rock-bottom bid of $3.1 billion had won the worldwide competition to build a new set of locks for the historic Panama Canal.

What can go wrong in a massive project like this–or like so many of the others we note in Chapter 3’s Global Company Profile featuring Bechtel (which lost the bid they thought they had wrapped)?  Here are just a few answers: (1) disputes over how to divide responsibilities; (2) executives who did not fully grasp how little money they had to complete a complex project with a tight deadline; (3) a multicultural team whose members did not always see things the same way; (4) work stoppages, porous concrete, a risk of earthquakes, and at least $3.4 billion in disputed costs (more than the budget for the entire project)!

For more than 100 years, the canal has been a vital artery nourishing the world economy. The new locks were sold to the nation and the world as a way to ensure that the canal remained as much of a lifeline in the hyperglobalized 21st century as it was in the last. But 7 years after the contracts were signed, and the locks declared ready for use, the expanded canal’s future is cloudy at best, with its safety, quality of construction and economic viability in doubt. The bid by the winner was 71% lower than that of Bechtel. Shocked Bechtel executives were incredulous, saying Sacyr “could not even pour the concrete for their bid amount.”

Classroom discussion questions:

  1. Where did the project go wrong?
  2. What ethical issues did the project managers face?

OM in the News: The Panama Canal’s “Fat Lane” and US Supply Chains

What do Warren Buffet, the Panama Canal, and products from Asia  to Wal-Mart  have in common?The Wall Street Journal (Nov.11, 2011) writes that they are all part of the complex calculus of changing  global supply chains. Right now, about 70% of US imports from Asia arrive by ship to the West Coast, with much of those goods transferred to Buffet’s Burlington Northern RR for transit to the rest of the nation.

But in 2014, Panama will rock the world of logistics with the opening of its new “fat lane”– a game changer  that  creates a threat to western ports and railroads. It takes about 18 days to make the ship and train journey from Asia to West Coast and then across the country. The all-water route through the canal takes 22 days. But the ship-to-rail route costs 10-25% more.

With the expanded Panama Canal, the Wal-Marts and Targets of the world are planning to ship more product to East Coast ports on huge ships that can carry 12,000 standard 20-foot containers–3 times the current capacity. This avoids labor strife in the past decade that clogged West Coast ports, and helps diversify  logistics systems. It has also triggered a raft of upgrades at East Coast ports to accommodate the bigger vessels.

The reaction from western ports:  Our speed of delivery and superior facilities will stem any loss of business. Many customers don’t want time-sensitive inventory sitting on ships traversing all-water routes. If your goods are stuck in the supply chain, they’re not passing the cash register. Besides, future ships (already being ordered) will carry 18,000 containers, which will not fit through the expanded canal.

But the Journal concludes that the expansion will be good for all ports. It will facilitate rising trade with Latin American for commodities, create round-the-world service by larger ships, and make the US logistics system more competitive globally.

Discussion questions:

1. How does the expansion impact East Coast retailers?

2. What are the OM advantages of the wider canal?

OM in the News: Logistics and The Port of Savannah

Although logistics is one of many topics in Chapter 11 (Supply Chain Management),  USA Today (Oct.3, 2011) details its critical role in an article about the Port of Savannah, the nation’s fastest growing shipping port. The bustling 1,200 acre site touches the lives of 44% of the US population, serving as a supply line to 15 states, and is one of the few ports handling more exports than imports (only the Port of LA is bigger). But Savannah is at an important crossroads, as the Panama Canal completes  (in 2014)  its first major expansion in 100 years. When that project is done, the canal’s locks will be able to hold cargo ships 3 times the current capacity. This means that cargo currently unloaded at West Coast ports, and shipped by rail across the US, will be able to dock directly at East Coast ports like Savannah.

The only problem is that Savannah (and most other Eastern ports) do not have channels deep enough to handle these larger vessels (called “post-Panamax” ships). A long sought channel-deepening project would result in 15-20% cheaper shipping costs. For example, Home Depot, which imports about 20% of its goods through Savannah, says: “The deepening of the port creates efficiency and lowers the cost of doing business. We can pass the savings on to our customers”.

The holdup: the federal government. The Port asked for permission to start the harbor project in 1996. Congress authorized a study in 1999. But approval for the $569 million expansion  requires the signoff of the Secretary of Commerce, Secretary of Army, Secretary of Interior, and the EPA. Port officials complain that this ” is one of the longest studied projects in history”.

Discussion questions:

1. Why is the dredging of the Eastern ports an important topic in OM?

2. Why is Savannah a major port for product exports? (Other Eastern ports include Miami, Jacksonville, Ft. Lauderdale, Charleston, Baltimore, Wilmington, Philadelphia, NY, and Boston).