IOT Supplychain Visibility Test 947

 

Supply Chain Visibility real-world experiment @ Ride Joburg 947 Cycle Challenge

This past weekend was one of the highlights of the cycling calendar in Johannesburg, South Africa. The Virgin Active Ride Joburg 947 Cycling Race (https://ridejoburg.co.za/)  took place on Sunday 20 November 2022.

Some quick facts:

• Ride Joburg 947 cycling race is the world's second-largest timed cycle race (after the Cape Argus which is the biggest of its type)
• The Ride Joburg 947 race typically draws between 20 000-30 000 competitors, but this year the ridership might have been slightly lower - we have not yet been able to confirm the accurate number of participants for 2022
• This year’s route distance was extended from the traditional 94.7 km to a somewhat more challenging 97 km (60.27 miles) and took place at an altitude ranging between 1400 to ± 1740 meters above sea level.
• Sunny Highveld summer conditions prevailed with temperatures exceeding 30°C (86° F) in places

 

Data from Strava - an app for sports people (for comparative purposes)

Real-time tracking

Cogniplex decided to put Tive’s Solo 5G™ tracker to the test, under real-world conditions - during the Ride Joburg 947 Cycle Race. 

• 1x Tive Solo 5G tracker was discretely slipped into a Cogniplex Ride Joburg mountain bike rider’s backpack, safely nestled between energy bars and energy drinks for the ride.

The tracking unit  

      The Tive Solo 5G tracking unit is small and discreet

• Weight                                     100 grams
• Accuracy:

• Cellular                        500 m
• WiFi geolocation          50 m
• GPS                             5 m

The tracking unit placed inside the backpack

What sets the Tive unit apart from other trackers is the range of readings it can make in addition to basic location reporting. Analysis of the trip data reported the following:

·        Real-time location

Driving to the event we were redirected twice due to misunderstanding road closures, but still arrived well in advance at FNB Soccer City for our batch starting time. 

• Note that the Tive Unit is not a navigational tool directing you where to drive, but rather a reporting tool recording where the unit travelled.

Live tracking - screenshot was taken post-event covering movements over 24 hours

The platform offers:

• geo-fencing, 
• clickable and zoomable maps down to street level, 
• data at each measuring point along the route. 
• While we only used 1 tracking unit for this experiment, the platform has the capability of tracking multiple tracking units simultaneously.

Each of the readings below can be tied back to a specific date, time and GPS location. This means a detailed audit trail is recorded onto a cloud for each trip, recording at any given moment:

·        Real-time temperature

Note that the temperatures were recorded inside a backpack, meaning external/ambient temperatures could have been higher

Temperature readings

·        Humidity

Again, recording inside a backpack. The higher readings around 2 pm were recorded when the rider stood under a water hose to cool down

                                                                                Temperature readings

·        Real-time acceleration

Acceleration is measured in G-force (a measurement of the type of force per unit mass) and not in km/h. 

These measurements in the context of logistics could indicate rough handling (e.g. dropping, knocking, bumping or throwing of items), or bad road conditions (traffic or other accidents, sudden stops or extreme braking).  For our rider, this meant uneven road surfaces and speeds of up to 55 km/h, and dropping the backpack once or twice.

Acceleration readings

Tracking your precious - Supply Chain applications

This platform offers real-time visibility across the different functions and geo-locations in your supply chain. Adding a Tive Solo 5G unit or more than one unit to your cargo, whether stored in a warehouse, or carried by your own trucks, or third-party/outsourced transporters (3PL, 4PL etc) offers the following benefits:

• The units are easy to activate and easy to use, with a battery life of up to 90 days (depending on reporting period setting selected). 
• Tracking units can be individually charged with a cell phone charger.
• The tracking unit can measure local conditions in time units ranging from 2 min to 5 min. This means every 2-5 minutes you can monitor in real-time the following conditions:
• Location – monitoring the actual location to detect delays, possible unauthorised stops, or deviations from approved routes
• Temperature – monitoring temperature-sensitive cargo, cold chain products, and perishable products e.g. to monitor SLA compliance, product or health & safety standards, etc
• Humidity – monitoring humidity-sensitive cargo, electronics, cold chain, and perishable products e.g. to monitor SLA compliance, product or health & safety standards, etc
• Light – confirming whether the truck/packaging has been compromised or opened along the way
• Acceleration – detecting bumps, knocks, and heavy handling will enable you to pinpoint damages and prove negligence for breakage

Not only does the Tive Solo 5G allow you access to real-time condition confirmation, but it also comes with the added benefit of historical data accessible from the cloud for a period afterwards ranging from 24 hours to 90 days.

Benefits of Visibility on your Supply Chain

The benefit of having full and real-time supply chain visibility provides bonafide fleet operators/transporters as well as cargo owners/importers / exporters with the peace of mind to:

• Drive accountability
• Monitor transporter performance
• Monitor safe handling of goods
• Enforce SLAs and penalties
• Prove damages and reduce claims
• Reduce unnecessary stops, route deviations, and unexplained delays
• Track late cargo

We are happy to report that both our Tive Solo 5G tracker and our rider (eventually!) completed the journey and got back home safely.

 

Should you need more information or wish to have a confidential discussion about your specific requirements, please contact Benjamin@cogniplex.co.za

• Please note that Cogniplex is not an event organiser, corporate sponsor or in any way associated with the owners and organisation of the Virgin Active Ride Joburg 947 event of 2022.  
• All trademarks and IP is the property of their respective owners. 

Need more information? Want to start a pilot project? Please contact us

If you have found this article useful or interesting, please share it with others in your company or industry.

#IOT  #supplychain #riskmanagement

Dude where's my cargo? Supply Chain Visibility Example

 

Dude where's my cargo? 

Estimated reading time: 4 min

A hypothetical supply chain risk scenario unfolding in real-life 

Short summary translation of the above newspaper article that appeared in the Rapport newspaper on 12 June 2022: 

A transport broker contracted a reputable transport company and made available cargo to be transported with the very reasonable expectation that said cargo (maize meal) would be carried from Point A (Meyerton SA) to Point B (DRC) by the appointed transporter. 

Why was this a reasonable expectation?  - The transporter 

• was a reputable and reliable company,
• specialised in cross-border cargo,
• had good references from a range of clients,
• had done this type of trip before,
• appeared to had a reliable fleet, and
• the necessary minimum payments were made.

However, according to the newspaper article, the client in the DRC informed him after some time that some scheduled deliveries never took place, despite payment and import clearances. Due to delays caused by border clearances and Covid19-related supply chain delays, the time required to do a one-way transport increased from an average of 14 days to 45 days. This made it difficult to gauge progress. Despite querying the progress often, the transport broker was assured all is under control and in accordance with the schedule. For this reason, the problem was not picked up much earlier. 

It is only after a phone call was received from a (probably) irate client in the DRC, that the transport broker's lingering suspicions got the better of him and he realised something major was amiss. He then jumped in his car, drove to the transporter’s premises, and much to his shock and horror discovered rows of semi-covered pallets of maize meal exposed to the elements: sun, wind, rain, and insects.  

This matter is now before the court.

This situation was preventable

We are using this real-world example, not in order to finger-point any type of transport service provider or attempt to allocate blame, as that is the matter before the court. For this reason, we also removed the names of the parties involved as it is not particularly relevant to the point being illustrated. 

This case, however, is a real case study where a number of parties to a cargo shipment that has to be transported from A to B have to rely on each of the other role players to do the right thing at the right time and thereby prevent any potential transport risk from materialising.    

The client (and their broker):

• Had to rely on the verbal confirmation of the service provider/transporter without any 3rd party or IT system confirmation of facts,
• Did not have reliable means of communication with drivers,
• Did not have agents at way-points to confirm status,
• Did not have any access to real-time reporting on the location of the cargo, and was, therefore, unable to track actual trip progress made,
• Did not have any real-time information on the condition of the cargo, and was, therefore, unaware that the cargo was left standing in the sun, wind and rain for an extended period of time.

Supply Chain Visibility

With the help of modern technology, some of these risks can be detected, monitored, managed and in some cases even prevented:

• Cargo items being exposed to elements (sun, wind, rain) or experiencing fluctuations in temperature leading to damages, losses, insurance, and legal claims,
• Transport and Border Delays, 
• Late deliveries,
• Unnecessary detours, 

If your company or somebody you know had a similar horror story, there are now Internet-of-Things (IOT) solutions that can assist you to monitor your fleet from the relative comfort of wherever you have internet access: a Fleet Visibility Platform offers you the following advantages

1. Transparency - having real-time end-to-end IOT visibility into where your operational assets/inventory/shipments are, with hyper-accurate location data, despite using different 3rd party logistics providers or channels, such as warehouses, handlers, or distributors in multiple locations. 
   
   
   

   Attribution: vecteezy.com/members/illustration4stock224427

2. Keeping track of critical performance data - Key indications such as transit time, stops and halt periods, loading times, and whether or not unauthorised pauses or unexpected delays happened are all available on the fly. This gives you information, allowing you to predict whether your operational assets, inventory, or freight will arrive on time, ahead of schedule, or late. It also allows you to keep track of the performance of your suppliers.
3. Auditability - Having an audit trail to demonstrate the real-time condition of fragile or high-value inventory / perishable shipments. Knowing whether the goods were handled in accordance with the SLA and/or regulatory compliance standards throughout the route.
4. Real-time condition reporting – Knowing the status of your perishable/fragile shipments in real-time, as well as being able to pinpoint and apportion blame for damage as it occurs.

5. Actionable insights in real-time to:

• Protect your business operations against both known risks and unforeseen events and disruptions.
• Respond to and manage exceptions by making fact-based decisions.
• Lower expenses and minimise damage to perishable and fragile goods, as well as shrinkage and/or losses of high-value items.
• Improve the quality of forecasting and inventory management,
• Maximize operational efficiency,
• Increase customer satisfaction,
• Improve profitability,

 For more information please visit: Cogniplex Visibility Solutions 

Need more information? Want to start a pilot project? Please contact us

If you have found this article useful or thought-provoking, please share it with others in your company or industry.

#IOT  #supplychain #riskmanagement

Operations and Supply Chain Visibility - what is it and why do you need it?

 

SYNOPSIS: Having no visibility, real-time insights, or reliable data on business operations or the current status of your supply chains is conceptually not too far removed from driving blind. This article briefly explains some use cases and advantages of operational and supply chain visibility platforms and systems.

ESTIMATED READING TIME: 5min

First posted on LinkedIn - read the ORIGINAL POST here

You wouldn’t drive your car blindfolded, would you?

Driving blind is a dangerous and potentially life-threatening practice, perhaps best left to trained movie stunt professionals on movie lots. The rest of us, social influencers included (even those with very deep pockets and extensive liability cover), should best stay far away.

While the image in the title has been Photoshopped somewhat, this image ☝️☝️ is the real deal and comes from a YouTube video in which a popular YouTuber filmed himself driving blindfolded. The video sparked a public outcry and negative news coverage, as one could expect. This resulted in the video initially being age-restricted and demonetised, and then subsequently removed by YouTube.

The risks caused by driving blind are rather obvious and easy for all to see - apart from the aforementioned YouTuber, and include at least the following:

• Inability to see where you are going.
• Inability to see how the situation around your vehicle and inside the vehicle is changing in real-time.
• Inability to effectively make informed decisions in real-time or timeously execute corrective action to best adjust to the developing risks and changing situations around you.
• You are very likely to cause or end up in an accident, incurring costs, losses and liability claims, including but not limited to loss of life.

Swimming in a Sea of Business, Operational and Supply Chain Risks

The same goes for managing and coordinating the various activities inside a business: in today’s equally volatile and fragile economic climate, no accountant worth his salt will manage the finances of a business blind-folded either – meaning without knowing with a reasonable degree of certainty how much the expenses are, who needs to be paid or when the payments are due, or how many invoices are outstanding and how much is owed by each debtor.

If visibility is such an obvious requirement for driving and finances, why are there parts of business operations that are still “operating in the dark”, figuratively speaking?

Have a look at almost any media outlet or newspaper and one will see headings describing losses, damages, delays, bottlenecks, shortages, and other supply chain challenges brought on by a mix of internal and external factors as well as foreseeable and unforeseeable risk events. Many existing but previously manageable challenges were upgraded and further exacerbated by the great Supply Chain crisis of 2021-2022. This in turn was brought on by (some would say ill-considered) pandemic emergency measures, which caused systemic shocks, stock outages, and shortages, shutdowns of suppliers (both temporary as well as permanent in nature); significant supply chain delays; economic hardship; and increased volatility around the world. In the process, some entirely new problems were created. The only constant is change.

In no specific order, below please find a short list of 12 examples of current supply chain and operational challenges, many of which may or could affect business operations in the Southern African (or international) market:

Please scroll through this list. While this is by no means intended to be an exhaustive or comprehensive list, it does highlight the wide range of challenges that local businesses confront from time to time, some of which occur daily, including:

• Supply disruption due to lockdowns 
• Cargo and freight handling delays, accidents and incidents
• Wastage, damages and shrinkage to perishable foodstuffs, fresh fruit and veggies
• Political unrest, riots and looting targeting the supply chain, transporters, and warehouses
• Import and export delays, shipping delays, border congestion and delays
• Counterfeit products, supply chain control gaps, shortages and stock-outages
• Natural disasters, flooding, transport infrastructure (ports, docks and roads inaccessible), unavailability of services due electrical outages, water bursting, etc

Many of these problems are caused by external factors beyond the control of the average company; they are not isolated occurrences; they are not limited to specific suppliers or carriers; they are not necessarily industry-specific; and they can and do affect the entire Southern African economy, including international supply chain networks. And these issues have disastrous effects on operational efficiency and bottom-line profits. Research by McKinsey indicates that “supply-chain disruptions cost the average organization 45 percent of one year’s profits over the course of a decade.”. For South African businesses, the cost of e.g. importing goods has increased significantly, with a 400–500% cost increase for freighting a 12-meter container by sea from China to South Africa, even for large organisations with bargaining power. On some international trade routes, shipping costs have increased much more. Risk has increased significantly. Many of these costs are passed on to the consumer, who is now faced with rapidly increasing living expenses, rising inflation, and considerably less discretionary spending power, which, in turn, reverberates throughout the economy.

It is therefore advisable to use every tool in your arsenal to pro-actively respond to the changing situation around you. Because every load counts.

So what is Visibility?

Visibility platforms (software + tracking devices) compile and analyse real-time data across the shipping journey to provide end-to-end shipment visibility across different industry applications.

This means a commercial customer has the ability to track-and-trace assets or inventory live and in real-time, e.g. from the point where the item/shipment leaves the farmer's, manufacturer’s, supplier’s, or service provider’s warehouse/distribution centre up to the point where it arrives at the destination, allowing you to keep track of the current location, condition, and status of these items throughout the journey.

• Visibility platforms are frequently used for supply chain visibility but can have other related applications, e.g. large and complex business operations. It is important to understand that the visibility requirements can vary somewhat between e.g. a logistics business/farmer/manufacturer/distributor/retailer/importer/exporter, which could be very different from the visibility requirements of a bank or a pension fund.
• Different technologies are on offer and the platform can obtain data via API, directly from telematics or other types of tracking IOT devices.

6 Reasons why your business needs visibility

Consider how your company could profit from having Real-Time Visibility into your operations and access to a Single Version of the Truth:

1. Transparency - having real-time end-to-end IOT visibility on where your operational assets/inventory/shipments are, with hyper-accurate location information, despite using numerous 3rd party logistics providers or channels, such as warehouses, handlers, or distributors in multiple locations
2. Tracking important performance data - Key indicators such as transit time, stops and halt periods, loading times, or whether unauthorised pauses or unexpected delays occurred are all available on the fly. This provides you with knowledge, allowing you to forecast if your operational assets, inventory, or freight will arrive on time, ahead of plan, or behind schedule. And allows you to keep track of supplier performance.
3. Auditability - Having an audit trail to prove real-time conditions of fragile or high-value inventory / perishable shipments. Knowing if the cargo was handled in accordance with SLA and or regulatory compliance requirements for the duration of the trip.
4. Real-time condition reporting - Knowing the condition of your perishable/fragile shipments in real-time, and being able to pinpoint and allocate accountability for damage if and when it occurs.
5. Real-time actionable insights to:

• Make fact-based decisions to respond to and manage exceptions,
• Reduce costs and minimise damage to fragile and perishable goods, shrinkage and or losses of high-value goods,
• Identify operational bottlenecks,
• Make data-driven decisions to develop business cases, mitigate risks or loss prevention strategies,
• Improve the quality of forecasting and inventory management,
• Maximise operational efficiency,
• Increase customer satisfaction,
• Improve profitability,
• Withstand and defend against disruption.

The aforementioned cover some of the advantages that Visibility platforms have to offer – including aggregated, real-time data about the movement of freight along the shipping journey, providing end-to-end shipment visibility.

6. For rather obvious reasons, then, it comes as no surprise that research by the authoritative market intelligence and investment advisory firm, CBInsights, emphasised the importance of prioritising supply chain and operational visibility platforms as a focus area for retailers. What’s good for the goose …er retailer, is probably worth seriously thinking about for other players across different value chains and different industries, too.

So, if given a choice, you would not drive blindfolded, right? Where do you see Visibility adding the most benefit to your business?

Need more information? Want to start a pilot project? Please contact us

If you have found this article useful or thought-provoking, please share it with others in your company or industry.

#IOT #retail #supplychain #riskmanagement

Photo-credits:

All media belongs to their respective owners.

Shark photo Jacob Owens + Warehouse Photo by Bernd Dittrich found on Unsplash

How to Eat an Elephant - an Introduction to Project Management

 

Training Course: How to eat an Elephant © Cogniplex 2021

Cogniplex was fortunate to be approached by a faculty department in one of the leading South African Universities with a request to assist them with the skills development of departmental resources. While this is not the typical type of assignment we would usually undertake, it was an interesting opportunity to do something different and to transfer skills.

Between April - June 2021, we presented a series of 4 training sessions on Introductory Project Management. These sessions were delivered in a combination of Microsoft Teams software and video material for a total of 6 hours:

• Live/Real-time Online training sessions
• Live Classroom-based sessions
• Pre-recorded on-demand training      

The training material covered:

• Personal experiences and challenges on past projects
• Interactive group challenges 
• Defining projects
• Understanding project constraints 
• How to plan projects
• How to manage projects
• Fundamental learnings and recommendations

Various real-life examples from everyday life and a range of real-world commercial projects in different parts of the world were used as a basis for discussions and case studies. Some sessions were interactive and e.g. made use of remote group participation tools such as Miro whiteboards, Menti and group discussions. Feedback received from participants was overwhelmingly positive. 

For further information, please contact us via the contact button on www.cogniplex.co.za 

HOW CAN CONSULTING HELP YOUR BUSINESS NAVIGATE PANDEMIC IMPACT

WHICH SOLUTIONS ARE AVAILABLE TO ASSIST BUSINESS EXECUTIVES AND BUSINESS OWNERS TO SUCCESSFULLY NAVIGATE THE PANDEMIC IMPACT AND POST-COVID SITUATION?

SYNOPSIS: Covid-19 and government responses thereto has significantly disrupted many industries and related business operations. Business executives and owners alike are searching for solutions to the many business challenges and increased risks they now have to manage daily.

Original article published on Quora.

ESTIMATED READING TIME: 2 min

Since early 2020 millions of businesses of all sizes all around the world have been affected by the impact of Covid-19 and, more specifically, negative and compounding impacts directly resulting from government regulatory responses to the Covid19 pandemic.

Businesses have been affected in different ways, including but not limited to:

• Significantly increased supply chain volatility and risks: Loss of suppliers, late delivery, unavailability of raw materials, looting or hijacking of supplies or deliveries
• Clients going out of business, increases in bad debt, slower inventory-to-cash-turnaround cycles, or inability to buy traditional order sizes, significantly loss or reduced demand,  volatility in demand from one period to the next, difficulty in accurately predicting sales or stock volumes
• Disruptions to business operations - temporary or longer-term shutdowns of infrastructure, changes to key markets, inaccessibility of facilities, additional business restrictions or compliance requirements, working from home, adjusting to a distributed work-force 
• Significant technological innovation and disruptive technologies gaining momentum
• Increased business disruption, loss of revenue, increases in unbudgeted costs, increases in unanticipated risk, inability to settle debts and pay running expenses
• Increased cybercrime, fraud, corruption, money-laundering
• Loss of key personnel and expertise
• And sadly a number of businesses have had to shut down altogether. 

While some like to believe everything will go back-to-normal and the good old days will return as soon as we reach herd immunity in our town, district, province or country, that is unlikely to be the case. The expected impact of the pandemic and related lockdowns and business interruptions will be felt for months and possibly years to come. Some industries are undergoing significant pressures and changes such as digitization are disruptively changing entire industries and business sectors. 

Different categories of Business and Management Consultants can advise and assist businesses with a variety of Covid19 and lockdown related business challenges (in no specific order):

• Reviewing and developing Strategies, redesigning Business Models to adjust to the “new normal”
• Identifying, mitigating and limiting supply chain risks, reshoring, nearshoring and replanning supply chains, sourcing new suppliers
• Rebalancing / optimising manufacturing/logistics/broader business operations impacted by changes in sales/legislation/business improvement: maximise revenue, reduce expenses, improve customer experience, risk management
• Improving access to information and decision-making with the use of data analytics/Adjusting or optimising KPIs and Metrics
• Asset disposal
• Business Rescue focussing on the rehabilitation of financially distressed companies (businesses unlikely to pay all of their debts as these become due and payable)
• Business Turnaround focussing on developing and implementing a set of actions required to save an organisation from business failure and return it to operational normality and financial solvency
• Balance sheet restructuring, working capital, bridging finance, debt restructuring, repayment relief and debt relief, new sources of debt, trade financing solutions
• Restructuring and Reorganising business entities
• Mergers & Acquisitions, Listings/IPOs, raising funds
• Optimising financial and tax planning, insurance, reducing financial risks
• Improving Governance and compliance with changing legislation
• Forensic investigations, developing and implementing controls to identify, prevent or report risks
• Plan, execute and de-risk projects and programs
• Embracing digital transformation (4ID), ranging from e.g. process automation, setting up data lakes, optimising architecture, to implementing Artificial intelligence, Machine Learning or IIOT solutions, identify risks and network vulnerabilities, improving business resilience and business continuity
• Interim management
• Crisis management
• Human Capital, Cultural and HR aspects - workforce planning, HR transformation, organisational design
• Improving marketing ROI, venturing into or improving existing e-commerce operations

This is a broad and non-exhaustive summary of what consultants can do for businesses impacted by Covid19. There is a wide range of consultants focusing on different industries and functional competencies - reach out today if you need assistance.

             

Have you given any thought to using consultants in your business or have any questions? Please comment in the comment section below.

If you have found this article useful or thought-provoking, please share it with others in your company or industry.

Impact of Capacity on Revenue Potential

Considering Capacity Cuts?

SYNOPSIS: When trying to rebalance cost structures in the face of business disruption or uncertain demand, it is important not to underestimate the role of capacity in revenue management or the potential impact of permanently removing capacity. 

This article was republished on LinkedIn.

ESTIMATED READING TIME: 3.5 min

Waves of Disruption

As the economic tsunami (substantially caused by the Covid-19 pandemic) continues to pummel economies, many industries have had their hands forced by a combination of economic realities and or lockdown regulations. The disruption and economic fallout thus far have not been limited to a specific industry and it seems no, or preciously few, industries have been spared. Then there is the knock-on effect – the reverberations in one industry is felt in many others.

• According to the Restaurant Association of SA, nearly a third of SA restaurants had already shuttered since the onset of the lockdown[1], their best efforts to stay open notwithstanding. Comparatively, in the US, restaurant closures by July 2020 represented the highest total business closures in the country, surpassing retail [2].
• South African motor vehicle financing transactions (and possibly to an extent total vehicle sales) in Q2 is down by -71% compared to the number of new and used cars financed over the same period in 2019. In Europe, sales for the half-year reduced steeply by between -35% (Germany) to 51% (Spain)[3]. Russia is down -23%, Brazil -39% and Japan around -23%.
• South African factory output had dropped 49.4% by April[4] compared to EU figures indicating -20.9% [5].

Adjusting to changing market conditions

As a result, business executives are forced to strategise, and where possible re-calibrate overheads and variable costs to right-size the cost base in the face of reduced demand or increased demand uncertainty (#NewNormal). Some common cost savings strategies deployed to date include:

• Retrenchments
• Salary cuts
• Reducing shifts
• Temporary factory shutdowns
• Reducing stock and reviewing re-order levels

It is becoming clear that some industries (notably capital-intensive industries) have been forced into taking a longer-term view, while others have already been dealt their cards and seriously handicapped by the fallout:

• To date, the container shipping industry has responded with an unprecedented high number of blank sailings (tactical sailing cancellations) - resulting in 10% of the global fleet sitting idle in May and June[6]. 

• Owners are now looking at more serious measures to right-size capacity, resulting in shipping lines such as Hapag-Lloyd (5th biggest container shipper line in the world) announcing an indefinite postponement of an order for a new fleet of 23,000 TEU mega-ships [7]. 

• This type of decision impacts industry capacity which, in turn, has a knock-on impact on e.g. ports and harbours - now resulting in planned port capacity expansion being curtailed by 40% over the next 5 years[8].

• The biggest cruise line operator in the world, Carnival Corporation, confirmed its plans to sell a total of 13 of its ships this year, in a bid to deal with the losses faced due to the COVID-19 pandemic [9]. 

• Due to Covid-19 factory lockdowns, commercial airline manufacturers such as Airbus and more notably Boeing, have fallen behind with deliveries of new airlines[10]. Boeing has also specifically been hit by customers cancelling orders in 2020, resulting in it bearing the brunt of 800 or more cancelled orders[11] to date.

Considering the Impact of Capacity Reduction

Why is Capacity Reduction a much more serious decision than e.g. reducing shifts or salary cuts? If we break it down (simplistically speaking): 

Revenue is a function of Price x Units sold 

Subject to the constraints of: 

• Market demand, 
• The Business Model, 
• Internal Capacity and 
• Productivity.

For capacity-driven operations, maximum revenue is thus limited by inter alia demand and capacity. It is difficult to increase demand, and even more unlikely for sales to exceed demand. Attempting to sell more than available capacity permits, or to sell more than productivity allows is not sustainable or feasible in the long run either. Optimising productivity to match capacity is also difficult.

However, once the capacity has been reduced, the supply curve moves left and maximum income potential shifts down. This means maximum income potential has been fixed at a permanently lower level unless a way can be found to significantly increase the following to sufficiently compensate for the loss of Capacity:

• Demand, 
• Productivity and or 
• Price 

For industries and companies where capacity is a key driver of costs and revenue-generating ability, while any cutting back of capacity could yield significant savings, it could equally impact revenue management and (depending on costs structures) possibly even the ability to break-even. While it does not make financial sense to have unused capacity sitting idle for extended periods of time, cutting capacity is still not a decision to be taken lightly. 

In some cases, notably the likes of Airbnb and Uber, they rely on in-sourced (crowd-sourced) capacity and they are not hamstrung by their infrastructure or capital. For more traditional companies, however, such as rental fleet operators, logistics companies, transport, manufacturers, warehouses, office buildings, hotels and recreation, a cut in capacity has more strategic and longer-term implications:

• Capacity influences the ability to retain or gain market share.
• Reduced capacity will have a more significant impact on the variability and certainty of revenue e.g. 1 out of 10 units becomes unavailable vs. if 1 out 5 units were unavailable.
• If participants in any industry start shedding capacity (equipment, buildings, vehicles etc) simultaneously, e.g. by selling it in the open market during a period of low demand, this can result in oversupply, prices will fall further and this can result in losses.
• If any hypothetical future economic improvement occurs or if demand increases there could be significant competition to regain capacity. This could result in long delays - meaning everybody will have to wait their turn and it could take years to get back to historic capacity levels.
• If suppliers of capacity have been significantly affected themselves (e.g. Boeing) and they are still catching up with the backlog or have had to scale down permanently, this could lead to significant cost increases, specifically in the event of a bidding or price war, until the market has self-corrected again.
• If capacity is sold and the cash is used to e.g. pay for day-to-day expenses or to service debt, it might influence the business's ability to expand capacity again in future.

When considering strategic alternatives and definitely before finalising any decisions, consider the following:

• Experiment with your digital twin or conduct financial and operational simulations to better understand the impact of proposed capacity cuts on both the business and bottom line.
• Consider possible alternatives such as outsourcing excess capacity, re-allocating capacity to different product lines, hybrid shared-capacities, licensing or shared operating agreements.
• Thoroughly assess market conditions, current demand, disposal costs and the probable range of net realisable values before you decide to sell.
• Evaluate and decide on a case-by-case or unit-by-unit basis.

How do you suggest dealing with the thorny issue of excess capacity? Please comment in the comment section below.

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[1][1] https://www.iol.co.za/business-report/opinion/facing-an-existential-crisis-the-restaurant-industry-starts-fighting-back-3734ccf4-09f1-45dd-b57f-ccce1f38dfcb

[2] https://www.barrons.com/news/pandemic-an-apocalypse-for-restaurants-in-us-01596340207

[3] https://www.spotlightmetal.com/international-automobile-markets-slumped-sharply-a-950697/

[4] https://www.news24.com/fin24/economy/factory-output-falls-by-the-most-on-record-in-april-20200709

[5] https://www.reuters.com/article/us-eurozone-economy-industrialoutput/euro-zone-industry-output-recovers-less-than-expected-idUSKCN24F0XI

[6] https://www.joc.com/maritime-news/container-lines/carriers-could-make-permanent-capacity-cuts-prolonged-downturn-drewry_20200714.html

[7] https://www.porttechnology.org/news/hapag-lloyd-postpones-mega-ship-order/

[8]https://splash247.com/pace-of-boxport-capacity-expansion-forecast-to-contract-at-least-40-in-the-wake-of-coronavirus/

[9] https://www.marineinsight.com/shipping-news/worlds-biggest-cruise-line-operator-to-sell-13-ships-to-cope-with-losses-due-to-covid-19-pandemic/

[10] https://www.statista.com/chart/19713/airbus-vs-boeing-deliveries/

[11] https://www.seattletimes.com/business/boeing-aerospace/boeing-has-lost-more-than-800-orders-for-the-737-max-this-year/