The Infrastructure Squeeze on Global Supply Chains
By Christopher D. Norek and Monica Isbell -- Supply Chain Management Review, 10/1/2005
Remember the days when just-in-time practices were the rage, and the philosophy that inventory is bad was pervasive? It was only a few years ago, when many companies began to follow the philosophy of keeping inventory to an absolute minimum to reduce asset investment and inventory-carrying costs. Keeping inventory low is still, of course, a goal. But, recent changes in international trade have made following this principle more risky.
Companies competing in the global arena today are finding that they have to consider a whole new set of supply chain strategies to cope with the new environment. Some of these strategies may appear to run counter to conventional supply chain practices. This article details the new approaches that need to be considered, outlining the advantages and disadvantages of each. Does this mean that such principles as minimizing inventory, reducing transportation costs, and slashing leadtimes are no longer valid? No. But in today’s global transportation environment, they may not apply as strongly and as universally as they have in the past.The Times are Changing
Several trends in international trade and transportation are combining to create a crisis in the United States transportation infrastructure.
1) Increased trade volume from Asia to the United States.
Over the past five to ten years, there has been a dramatic shift in production from the United States to Asia. In particular, inbound volume moving from China through West Coast ports has increased, exacerbating the trade deficit. Ocean carriers and industry experts predict that overall imports to the United States will continue to increase in double digits. This additional east to west volume is causing congestion at ports in California and Washington.
2) Expansion in ship size.
Beginning in 2004, ocean carriers introduced larger vessels into the transpacific trade, many in excess of 8,000 TEUs. The hope was that these vessels would add capacity and reduce per-slot operating costs. But, even with these larger vessels, importers are still finding that inbound space is tight. These vessels actually aggravate port congestion because only a few U.S. ports, such as Los Angeles and Long Beach, can handle their draft requirements. Furthermore, vessels of this size take longer to discharge and reload; with some staying in port five to seven days rather than the normal two to three days. This results in increased port handling times and reduced port terminal efficiency.
Over the past few years, importers’ contracts have included more free time (or the time cargo may occupy assigned space free of storage charges) for containers at U.S. port terminals. Container free time essentially functions as a cheap form of portable warehousing, allowing importers to postpone investments in capital-intensive distribution centers or reduce storage payments to warehouse operators. Storing containers at the terminals, however, has complicated the ocean carriers’ ability to fully utilize equipment and maximize profits. It also reduces both usable yard space and terminal productivity. In the past, carriers had felt compelled to offer increased free time as a competitive tool to gain business. Recently, however, ocean carriers have finally begun to understand that container free time is counterproductive to operational efficiency and actually results in more port congestion. As a result, they are now reducing the amount of extra free time offered to importers and have increased demurrage and detention fees in an attempt to turn equipment faster.
Similarly, railroads have begun reducing allowable free days and are increasing demurrage charges for holding onto containers past the expiration of free time. These charges are prompting shippers to change their operations. Ocean carriers, marine terminals, and railroads are now forcing shippers to turn containers more quickly to better control equipment and improve asset utilization. 4) Customs has made border security a much higher priority since Sept. 11, 2001.
The U.S. Bureau of Customs and Border Protection (CBP) has implemented many new requirements and guidelines, such as the Customs-Trade Partnership Against Terrorism
(C-TPAT). These programs often result in additional processing time, and regulations are expected to become even more stringent. CBP has also stepped up exams at ports on suspicious cargo, which adds to port congestion, causes delays in customs clearance, and increases costs to importers. The increase in random inspections of selected containers has forced importers to add days to their leadtimes as a hedge against unpredictable customs clearance times. Continued...
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