Mike Jones can’t help but be a little peeved at a question he has clearly been asked too often. It applies to a single quirk in the stunningly complex task of managing the global supply chain for Royal Caribbean ships – which is Jones’ job. Why, the question goes, does RCL buy some items in China, send them to the U.S. on the other side of the world, then send them back to China to supply its expanding fleet of ships serving that boom market?
On its face it appears to make so little sense that derision might seem to be part of the asking.
“If you’re on the outside, it looks pretty stupid,” Jones says. “But it’s far from stupid. It happens because the economics justify it. The regulations and the rules encourage it.”
According to Jones, Chinese officials do not recognize at this point that deliveries of items from China to our ships are considered export. They still treat it as a domestic delivery.
As such, the items – commonly dinnerware, towels and the like – are subject to a value-added tax (VAT) of as much as 17 percent. So, Jones says, it’s cheaper to take the items out of China, send them on a tortuous journey as far away as the U.S., and then return them to China for use on RCL ships there.
“We’re obviously trying to rectify any situation where we buy something, ship it across the world to someplace else and then ship it back,” Jones says.
A trial free-trade zone is being set up in Shanghai to address just such new-market idiosyncrasies. Data collection will allow Jones and his colleagues to see if a reliable consensus can be maintained among the array of jurisdictions that come into play.
“You have a central government at the Chinese level, you’ve got a local government at the Shanghai level, you’ve got a district government at the port, and the challenge is to get rulings that will apply centrally within China that are not just local,” Jones explains.
As tangled and counterintuitive as this may be, it doesn’t begin to speak to the big picture of supply chain management for RCL’s worldwide fleet.
“You’ve got a global arbitrage that happens because your ships move around and you can supply them in many, many different places,” Jones says. “So you look at a global pricing that says where can I get this thing with the best quality and the lowest price? What does it cost me to get it to where the ship is going to be? Then how do I compare that against what it is I want to buy locally?”
That goes for fuel – the cruise line’s single biggest expense – as well as food, beverages, marine parts for updates and repairs, computer systems, linens, light bulbs, plant food, cleaners, paint and on and on, much of which is continuously consumed and needs to be constantly replenished.
“As you can imagine,” says the man who oversees it all, “there are a lot of spaghetti charts that go with this.”