Why are we talking about ports?
Imported goods and materials are getting delayed in West Coast ports because they can’t be unloaded and repackaged for overland shipping fast enough to keep up with increased ocean cargo volume. The Port of Los Angeles and Port of Long Beach together handle one-third of U.S imports, and last year was the third-busiest in the L.A. port’s history, just behind the record pre-recession years of 2005 and 2006.
Cargo can sit in port for seven to 10 days, sometimes as long as three weeks, according to Gene Seroka, executive director of the Port of Los Angeles, who spoke at a Kurt Salmon Senior Executive Forum in October.
Retailers are feeling the pinch financially, operationally and strategically. They’re seeking alternative shipping options in the short term and trying to find longer-term solutions for a problem that goes deeper than labor disputes.
How is this impacting the retail industry?
Retail and consumer goods companies are scrambling to adapt to these delays by finding new ways to get their products to customers. But short-term solutions are expensive, and at the same time that they’re paying for new alternatives, retailers are losing money to markdowns, inventory carrying costs and lost sales days.
Imports and shipping delays could cost retailers up to $3.8 billion this year. When coupled with the costs of rerouting products from West Coast ports, increased cost of carry, and missed sales opportunities due to out-of-stocks, retailer cost could increase to $7 billion this year. Further combined with likely rate increases due to import growth and congestion across the nation’s ports, 2016 costs could climb to as high as $36.9 billion over last year’s baseline cost.
Retailers and consumer goods companies that have publicly bemoaned West Coast port congestion include Ann Taylor, Tyson Foods, Cabela’s, New York & Co., Lululemon, Michael Kors and numerous others.
So what’s causing the problem?
The port congestion is the result of a confluence of complex structural, technological and labor factors, some of which include:
- Cargo ships are bigger than ever, but there’s not enough space to unload and process shipments or for maintenance of port equipment.
- Shippers need wheeled chassis to transition goods from ship to overland transportation, but chassis management changed recently, slowing and complicating these moves.
- The International Longshore & Warehouse Union’s contract expired in July. Contract negotiations over pay, benefits and safety continue, sometimes interrupting work.
- There aren’t enough truck drivers in Southern California. Drivers have been frustrated by hours-long container pickup lines blamed on chassis inefficiencies, and by the PierPass fee system, which uses financial disincentives to restrict pier access at certain times of day. Some drivers have stopped working at the port because they can’t make enough pickups to earn a living, further exacerbating the driver shortage.
What steps are retailers taking?
- Using more expensive shipping options such as air freight.
- Temporarily shipping to other ports. This is easier for some retailers than others, as not all retailers have structures and relationships in place at East Coast and Gulf Coast ports.
- Shipping via non-G6 carriers.
Over coming weeks and months:
- Investing capital in port equipment such as proprietary chassis.
- Exploring more long-term East Coast and Gulf Coast port options and considering infrastructure build outs, partnerships or outsourcing opportunities to hedge exposures to West Coast ports.
- Examining their sourcing strategies, including near-shoring.
- Reconsidering American manufacturing options.
- Investing in supply chain visibility technologies. Retailers without end-to-end supply chain visibility lack the ability to reroute shipments around a port strike, or to determine where a product shipment is located in transit to give customers accurate backorder estimates.
How does port congestion relate to consumers and investors?
Consumers are already seeing empty shelves. Retailers that are maintaining store stocks may be doing so by buying in advance and storing extra inventory, which will impact the bottom line and has already been cited as an issue in several retail earnings reports.
Eventually, consumers may start to see prices creep up to accommodate higher supply chain costs.
For on-deadline context and commentary on U.S. port capacity and its impact on the retail industry, contact Frank Layo, Kurt Salmon retail and supply chain strategist, at email@example.com.
6 February 2015