The rising costs of the west coast port situation

There is another “temporary” halt at the US west coast ports as both sides try to reach an agreement. This nine-month discussion has not only been about labor issues but it has also highlighted other issues including a shortage of chassis at the ports and the ports’ ability to handle larger cargo ships and the growing vessel alliances. The result has been delays in trade, trucks waiting, railroads waiting and vessels waiting to dock – at last count, there are now close to 30 vessels sitting off the coast of California waiting to dock. This past week, Hanjin finally had enough and announced it would drop its call to the Port of Portland. Hanjin is the Port’s largest customer and this will be a severe economic blow to not only the Port but the surrounding area. For example, 40% of Oregon’s agriculture is exported to Asia and thus will strike a blow to this industry as these goods will now incur added transportation expenses as they move to other Ports in the region.

It’s not just Oregon’s agriculture industry that is feeling the effects of the west coast port slowdown. California citrus growers noted they have lost over $500bn in foreign business. The meat and poultry industries estimate they are losing $40m a week. In fact, the Agriculture Transportation Coalition estimates total US agricultural export losses – for fruits, vegetables and meats shipped by container were running about $400m a week in December (the latest month available).

The agriculture industry is not alone; the automotive industry is also feeling the effects. Fuji Heavy said its switch to air may increase its costs by $60m per month. Delays at the ports have further resulted in Toyota suspending overtime work at some plants in North America and Honda announced it would reduce production at plants in Ohio, Indiana and Ontario. Meanwhile, US automakers, GM, Ford and Fiat Chrysler noted they were not experiencing “significant” problems in shipping or production.

But, perhaps the biggest industry and also the most vocal so far in its frustrations with the port situation has been the retail industry. Positive vibes such as an improving economy bodes well for the industry and as such, imports are expected to go up for 2015. But…the west coast ports are putting a definite damper on this potential boon for the industry. Kurt Salmon estimates that congestion at the west coast ports could cost retailers as much as $7bn this year – this includes estimated costs for higher carrying costs for goods and missed sales due to below optimal inventory levels.

There are, of course, alternatives around the US west coast ports – Canadian and Mexican ports, US east coast and Gulf ports and air freight – all of which have noted increases over the past months but none have really been able to determine what percentage or what the financial gains of the situation have been. Regardless shippers, whether retailer, meat supplier or automaker, are paying more for these diversions and shifts. For example, retailer Ralph Lauren noted in its recent earnings call that it opted to use air freight and shift some delivery to the east coast. By doing this, it added 3 to 10 days to transit times however, it allowed it to maintain service levels. Another example is an agricultural supplier that rerouted its goods from the west coast to the Port Houston for export. But this proved costly with not only additional land transportation costs but Panama Canal fees as well.

Perhaps it’s time to rethink the entire North American supply chain and Walmart may have already developed an exemplary model. According to a company spokesperson, it has not seen any material impact on its business thus far. Walmart is one of the largest importers of goods from China, estimated at $20bn annually. It is not dependent on just one or two ports and utilizes ports on both coasts as well as the Gulf. It also has distribution centers strategically placed across the region.

But, for small to medium sized businesses, it may not be as easy as that. It will definitely take some reengineering, along with some creativity, to redraw these supply chains. Technologies can play a big role for these companies – for example TMS can be used to determine/book mode and rate of transportation. For the meat industry it may prove more difficult as according to Tyson’s CEO, shipping alternatives for the industry are limited.

Another option is reshoring to bring manufacturing back to the region and thus remove the need for imports. This is already occurring in certain industries but is it a viable solution for all?

Regardless, the US has a mess on its hands and the latest development indicates the government may finally be acknowledging the existing and future damage that closure of these 27 ports entails. On Saturday, President Obama directed the Labor Secretary to renew talks between the two factions.

This is certainly a start, particularly with so much at stake such as the government’s export initiative which is under threat as foreign buyers look elsewhere to supply lumber, other raw materials for manufacturing and for perishables including meats and fruits. Furthermore, the possibility that larger vessels may simply bypass the US, or most of it, could economically damage the US as it continues to gain strength. This scenario could result in unnecessarily extending US business supply chains which then could lead companies to carry more inventory and thus, higher costs.

In addition, as noted in a previous Ti briefing, Congestion at US ports is driving a freight crunch (November 3, 2014), the port situation is having a ripple effect across the country. Intermodal volumes at Union Pacific fell 3% while BNSF Railway noted intermodal volumes declined 8% in 2014 due largely to the port problems.

Even if there is an agreement soon, clearing up the backlog could potentially take the rest of the year. The situation has also highlighted other concerns such as the need to invest in freight corridors and infrastructure, upgrade ports in preparation of larger vessels, the need for companies to rethink and optimize supply chains and to have a plan ready to implement as soon as there is even a hint of potential disruption. So, instead of what the National Retail Federation recently noted in a press release, “don’t hold our supply chain hostage”, companies instead need to take the reins and make the needed changes in their supply chain before this happens again – and it will – until needed investments are finally agreed upon and implemented. Remember 2002?