The Infrastructure Squeeze on Global Supply Chains (page 3)
-- Supply Chain Management Review, 10/1/2005
Page 3 of 4 Use alternative ports and/or diversify port usage. Perhaps the most common strategy that importers are using in the transpacific trade is to reduce the volume of intermodal cargo directed through the ports of Los Angeles and Long Beach. Many are routing cargo through alternate West Coast gateways, such as Oakland, Calif.; Tacoma, Wash.; Seattle; and Vancouver, British Columbia. According to the Pacific Shipper, in the first quarter of 2005, containerized imports grew 42.7 percent in Seattle, 26.7 percent in Tacoma, and 36.5 percent in Oakland. Vancouver saw so much growth that in early 2005, it had to put an embargo on new import shipments for nearly two months until it could clear a backlog of intermodal cargo with the railroads.
Some importers are even looking beyond the United States and are pushing ocean carriers to serve new ports in Canada and Mexico’s Baja peninsula. For example, construction is in the first phase for a port at Prince Rupert, BC (five hundred miles from Vancouver), and a study is being completed regarding the feasibility of operating a deep-water port in Punta Colonet, Mexico (about 150 miles south of San Diego). Yet, these new ports are not without their own obstacles. A port at Punta Colonet is expected to take five years to build due to the lack of basic infrastructure, and rail service is still constrained in both Canada and Mexico. Canadian railroads are running close to capacity, while Mexico lacks reliable, secure, and efficient railroads. These limitations, along with increased inland transportation costs, may hamper the effectiveness of such alternate gateways and may make them cost-prohibitive. Similarly, some carriers are developing plans to add vessel strings from South China, Southeast Asia, and the Indian Subcontinent to the United States via the Suez Canal, even though the nautical distance is longer than transiting the Panama Canal. To be economically viable, however, vessel strings will need ships in the 5,000 TEU size, which are scarce in the charter market. Companies are not just seeking new ports and routes, they are also spreading their shipments across multiple ports. This diversification reduces the risk that a glitch or terrorist event at one port will delay all inbound product movements. Spreading volume across more ports, however, will reduce economies of scale and require additional coordination, which will increase administrative costs. Using an alternative port may also increase total transportation costs, depending upon the inland destination and routing. As these strategies indicate, transportation constraints seriously challenge the supply chain principle of simultaneously increasing service and reducing costs. Shippers are currently incurring increased transportation costs just to meet minimum/current service levels; achieving higher service levels may prove to be cost-prohibitive.Place orders with foreign factories earlier and ship before peak season. To cope with the delays and better manage lead time uncertainty, importers are increasing their own lead times and placing orders with their Asian suppliers earlier. Longer leadtimes are not a great alternative, but they are more tolerable than variable leadtimes in the eyes of importers. As mentioned, customer surveys consistently show a desire for predictability over speed. This strategy, however, inflates cycle times and increases safety-stock requirements — the opposite of traditional supply chain goals. Additional safety stock, in turn, increases total assets and the accompanying inventory-carrying costs. Placing orders earlier also requires an accurate forecast. But as time is added between the forecast and the event it is trying to predict, the risk of forecast error only increases. As a result, the potential for not meeting customer demand and inventory obsolescence also rises.
Alter distribution center strategies. Many importers are rethinking their distribution center strategies in terms of number and placement. Some importers, including big box retailers, believe it makes sense to locate distribution facilities near port gateways to get product under their control more quickly. This might require adding facilities closer to the ports. As a result, distribution network design will not only need to consider criteria like demand, transportation, and handling but also whether the network needs to have a facility on one or both coasts. Most consumer goods companies already have five to seven U.S. distribution centers (usually not at port locations) in order to hit the required service levels expected by most of their customers—usually one- to two-day delivery from the distribution center across the entire network. Additional port facilities will only increase distribution costs whether the facility is company-owned or handled by a third-party logistics (3PL) provider. Obviously, the number of distribution centers affects the total inventory-carrying cost. Additional DCs increase facility management costs, inventory levels, and the complexity of the decision about what items to store in each distribution center. These cost increases will somewhat offset any reduced inland transportation expenditures from having more DCs.
Transload at West Coast 3PL facilities. Another option for improving overall transit time is to use a port-to-port ocean rate and take possession of the container at a West Coast port. This way, the container can be immediately transloaded into rail or truck equipment at an importer’s or third-party logistics provider’s facility rather than relying on the ocean carrier to move the container intermodally by rail on a through bill of lading. For extra-hot shipments, team drivers can be hired to speed delivery. Continued...
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