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Hanjin bankruptcy ripple effects in the U.S. supply chain

Hanjin chapter ripple results within the U.S. provide chain

South Korean company Hanjin, the world’s seventh largest container operator by capacity, filed for bankruptcy in late August. It’s very rare that a bankruptcy should cause global turmoil, but in this case the ripple effects are directly impacting the U.S. and worldwide retail sectors and supply chain. Even worse, the issues could persist for two or three months or more – right through the holiday shopping season.

Hanjin has been responsible for moving a lot of consumer goods worldwide. Its commanding fleet of 141 vessels, including 97 container ships, carry about 500,000 containers of goods throughout the world.  The company moves roughly three percent of containers globally and up to ten percent of those shipped between Asia and Europe. Hanjin also handles about 7.8 percent of the trans-Pacific trade volume for the U.S. market.

Pretty much all of that screeched to a halt when Hanjin filed for bankruptcy. What’s happening to the ships now, and all the products on board, varies from country to country and port to port. About 34 ships are stranded at sea, afraid to dock in the event that creditors could seize them. Another 28 vessels have been given permission to unload at ports in California, Spain and other parts of the world without fear of seizure. An additional 35 ship have turned around and started to head back to Korea with none of their cargo delivered.

When some of the ships were allowed to unload their products, it raised hopes that anxious retailers will receive their goods in time for the winter holiday season. However, only about $2 billion of the estimated $14 billion in cargo has been unloaded to date. Some ships that were able to make it into ports under protection of law haven’t been unloaded amid questions about who would pay docking fees, container-storage bills and dockworkers’ wages. Even in cases where Hanjin paid dockworkers wages up front to get products unloaded, the containers are still sitting at the ports because more money is needed to move the cargo to final destinations.

The South Korean government has indicated it has no plans to bail out the company. The Korean court will decide in December whether to accept the restructuring plan or let the company go under, In the meantime, the company is trying raise $90 million to pay workers to unload the vessels.

Ripple effect throughout the supply chain

The damage isn’t restricted just to Hanjin. Shipping containers are meant to be used, unloaded and reused again, not languishing on the docks or on ships. Hanjin containers are clogging up ports and truck yards, taking up space for other deliverables and creating a shortage of trailers to move ocean-shipping containers on U.S. roads. Some ports are even turning away empty Hanjin containers, convinced that the company will not pay for storage and handling fees.

That is beginning to worry freight handlers at U.S. West Coast ports. Shortages of trailers have happened even during normal amounts of trade – with one less player in the market, the problem will be exacerbated. Additionally, the loss of capacity could mean freight costs in the future may stay elevated for a long time. Slowing global demand also creates a risk for a capacity glut that could cause other carriers to fold as well.

The retailers and suppliers affected by this logjam of a shipping mess are starting to add up, too. Suppliers like HP Inc, Home Shopping Network and Samsung Electronics, and retailers like Target, Walmart, Home Depot, J.C. Penney, Kroger’s and more, are waiting on products to be delivered. Even worse, Hanjin is so large, some companies may not yet be aware yet that they’ve been impacted by the bankruptcy.

Terrible timing for supply chain woes

The congestion is coming during one of the worst possible times as retailers try to stock up on popular items before the holiday-shopping season. Whatever the most popular “it” items are this year, it’s very likely that inventories will be in even shorter supply than is typical for the holidays. It’s believed clothing and toys are some of the hot commodity items that will be most impacted by the Hanjin situation

It’s unlikely that the Hanjin ordeal could be smoothed over before the holiday shopping season starts. Meanwhile, the damage will continue. An 8-day strike in California ports in late 2014, early 2015 twisted economic data for months; it’s impossible to calculate Hanjin’s impact.  Because the company handled so much of U.S. Pacific trade, the shockwave from this bankruptcy is likely to be quite large. When a much smaller carrier went bust in 2001, it took six months to deal with that company’s meager 200 containers. This time around, scores of containers from Hanjin may never make it to where they’re needed.

Though the U.S. Department of Agriculture has stated that Hanjin’s bankruptcy would cause shipping difficulties for at least the next 2 to 3 months, the bigger problems might show up much further into the future. This back-up of orders is the immediate problem, but there’s a loss of overall worldwide shipping capacity already causing shipping costs to rise.

“The fallout of Hanjin Shipping is like Lehman Brothers to the financial markets,” Gerry Wang [chief executive of marine transportation company Seaspan] said. “It’s a huge, huge nuclear bomb. It shakes up the supply chain, the cornerstone of globalization.”

“There’s a tremendous flight to safety,” he said. “Freight rates have shot up like crazy over the short term.”

There may be one group taking a bigger hit than the retailers and transportation systems, though. Each languishing ship has a crew, sometimes as as large as 25 people, meaning as many as a thousand workers could be stranded on the ships. The ships have limited supplies and some have been running low on food and water. To add insult to injury, once they’re on dry land, the sailors could also face difficulties collecting their wages.

Retailer moves to protect flow of goods

Weather events, earthquakes, political instability, labor strikes, warehouse fires and a wide variety of other unpredictable events can unexpectedly reduce or eliminate the availability of any item. While it’s impossible to predict some supply chain woes, there are strategies retailers can take to try to reduce the damage before issues like this crop up.

  • Automated fulfillment optimization. Combat demand uncertainty by using automation to route digital orders to the distribution center best equipped to fulfill them. By selecting the best fulfillment center when supply emergencies erupt (such as when products are stranded by a bankrupt cargo carrier), retailers can be agile in their operations to meet customer expectations.
  • Frequent inventory statuses. Retailers often require weekly or daily inventory, or hourly during peak times. As the situation with Hanjin unfolds, more frequent inventory updates from suppliers will provide retailers with the information needed to update their e-commerce sites to sell only the number of items available.
  • Channel partner prioritization. Assign each channel partner a priority level in your fulfillment algorithms to ensure the highest-valued customers are served first. Prioritization can vary based on the retailer or how important the channel is to the individual business.
  • Networks add stability and new sources. Waiting for your (cargo) ship to come in could mean waiting on a supply that may never arrive. Joining a retail network like the one hosted by EDI Here opens up the possibility of having multiple vendors for the same product, giving retailers the agility to keep inventory flowing even when one supplier dries up.

When outside factors squeeze supply, retailers have to find ways to adapt. Preparing as best we can for uncertainty keeps the smartest retailers nimble and able to navigate the trials of a disrupted supply chain.

Want a primer on safeguarding your bottom line from disruption? Download our free e-book “Supply Chain, Interrupted” to learn how to incorporate visibility tools into your supply chain strategy.

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