Recent world events have emphasized the role North American ports play with respect to supply chain cost, reliability and flexibility. Rail reliability issues beginning in the 90s, West Coast labor work stoppages in 2002, on-going volatility in fuel prices and transportation costs, and currently, concerns over possible truck driver shortages have caused logistics managers to continuously evaluate transportation options, including ports.
For purposes of illustration, consider the case of two Kansas City companies that routinely import shipments to the Midwest, where they are distributed to Midwest and East Coast markets.
Ocean Port Gateways
The port or “gateway” used is important because it affects the overall transit time and cost of a shipment. Ideally, the gateway that balances delivery requirements with lowest overall transportation and inventory carrying costs is preferred.
Cost considerations that differentiate ports include ocean freight, inland truck or rail expenses, and port fees. Transit time considerations include how reliably ports have delivered shipments within expected schedule parameters.
“We look at capacity and history, and evaluate the port, and the ability of rail carriers to service the lane,” says Demdaco’s (www.demdaco.com) Phillip Lunceford. “Not all West Coast ports have had a good track record. Even port fees, like the recently expired Clean Truck Fees or Harbor Maintenance Fees can influence port selection.”
Clean Truck fees at the Port of Los Angeles were $35 per 20-foot container and $70 per 40 foot container for cargo drayed to and from the port on trucks built prior to 2006. This fee expired as of January 1, 2012, as trucks older than 2006 have been banned at the port, effective that same day. The Harbor Maintenance Tax (HMT) is 0.125 percent of the value of the import shipment entering any U.S. port. The HMT is not incurred on U.S. cargo if it enters via a Canadian or Mexican port.
Another gateway consideration is port diversification. In response to disruptions that began on the U.S. West Coast starting in the late 1990s, logistics managers began to allocate Far East shipments over more gateways, including East Coast gateways, using longer but less expensive Panama Canal “All Water Services” (AWS). This diversification built resilience into the supply chain by reducing the dependence on a single port. Prior to 2000, shipments from the Far East to most eastern North American destinations would typically enter the U.S. via the U.S. West Coast, where they would be transported inland.
Today, a higher percentage of these shipments enter the U.S. via the Panama Canal through an East Coast gateway, such as Savannah, Ga., or New York, N.Y., where it would either be trucked or railed to its final destination. AWS is particularly well suited to cargo with longer lead time allowances, such as low value cargo, where extending transit days does not increase inventory carrying costs beyond AWS transit cost savings.
Has AWS Trend Peaked?
The Far East cargo trend towards all water services has essentially stabilized, and will not increase substantially even after the widening of the Panama Canal is complete, as most supply chain managers have already diverted cargo with longer transit time tolerances to AWS. Incremental diversions opportunities to AWS are likely, one cause of which is discussed below.
Port diversification, while partially initiated based on West Coast labor interruptions, might just as easily push cargo back to the West Coast if East Coast port accessibility becomes uncertain. Current discussions about restrictions on port automation from the East Coast labor unions have been noticed in the industry.
One logistics manager who bucked the AWS trend is John Beasley of Jarden Consumer Solutions (www.jardencs.com). Beasley continues to use the ports of Los Angeles and Seattle because, while the threat of a West Coast labor disruption is certainly undesirable, he believes that for locations west of the Mississippi, diversifying port calls using Panama Canal AWS could not address the fallout of a West Coast port closure.
Gulf and East Coast ports would struggle to handle cargo diverted from West Coast ports, causing severe delays that just might equal delays on the West Coast, in Beasley’s view. His strategy has paid off, as cargo diverted to AWS has reduced congestion by reducing the amount of West Coast cargo handled. This combined with West Coast terminal improvements, such as on-dock rail, and improved inland rail infrastructure, such as double-tracking and expanded double-stack rail capabilities, have considerably improved rail speed and reliability for his shipments received via West Coast ports.
Finding Alternative Ports
Ports can also be used to adjust cargo transit times to accommodate varying lead time requirements. Supply chain managers often have to adjust deliveries for some cargo while needing to maintain scheduled deliveries for others.
Take the case of a sales forecast that is off because items are being sold at a slower rate than expected. In cases where shippers have negotiated with ocean carriers to provide services over several gateways, ports that result in longer transits can be used to carry inventory for a few extra days without incurring additional storage costs. Rates to these longer transit ports are sometimes, but not always, lower than ports with faster transits.
An example of this is a shipment from Shanghai to Kansas City, entering the U.S. either through Seattle/Tacoma (SeaTac) or Los Angeles/Long Beach (LA/LB). Beasley uses LA/LB for his fastest transit option, and Sea/Tac to slow shipments if needed, and to save storage costs.
As an aside, Beasley believes that the widening of the Panama Canal may reduce peak-season canal congestion to the point where a Shanghai-to-Kansas City shipment, entering the U.S. at the Port of Houston via the Panama Canal, may be reliable enough to provide another slow transit option. In fairness to the Ports of Seattle and Tacoma, it should be noted that it is possible for a shipper to get fastest transits using Sea/Tac over LA/LB, depending on the ocean carrier used, in which case the opposite port call strategy could be used.
A recent factor that may have an effect on the choice of a port is the practice of ocean carriers to operate ships at slower speeds, or so called “slow-steaming.” Slow-steaming is intended to conserve fuel, and reduce airborne emissions. One result from this practice is that transit times for some ocean carriers from certain areas, particularly Southeast Asia to the U.S. East Coast via the Panama and Suez Canals, have essentially equalized. Shipments from Vietnam to eastern destinations, for example, would previously have moved either through the Panama Canal or over a port on the North American West Coast prior to the practice of slow-steaming. Shippers west of the Mississippi will likely continue to utilize West Coast ports, while shippers east of the Mississippi will have the choice of West Coast ports, Panama Canal services and Suez Canal services.
More than 150 large 10,000+ TEU vessels, in addition to smaller vessels, are currently on order to be delivered by 2015. These vessels are expected to expand the current world containership fleet to the point of saturation, likely resulting in continued weak ocean freight rates over the next few years.
Questions about ports’ abilities to handle the extraordinarily high volume of container throughput during a single port call of one of these large vessels is a concern. Not all U.S. ports have the necessary infrastructure to accommodate these deeper draft, wider beamed and taller vessels. Deep drafts (up to 50 feet), high clearance bridges crossing ship channels, and terminals equipped with cranes large enough to span the width of these behemoths are all requirements.
Further, ports that do handle these super-sized vessels will be challenged to unload and load these ships in a timely fashion. According to one observer, however, who observed three cranes working a single 10,000 TEU ship in Long Beach, Calif., no noticeable loss of transit reliability has resulted to date.
Trucking and Rail
The rail connection between ports and inland distribution centers is essential in order to take advantage of the low cost intermodal option, and may be the most important port consideration. West Coast ports rail service to and from Kansas City is among the best in the Midwest according to our contacts, with daily intermodal departures provided by both the UP and BNSF railroads.
The near-term outlook for the U.S. trucking industry is for rising costs due to surging diesel fuel prices and steadily increasing constraints on labor supply. A high proportion of near-retirement truck drivers, and the new Compliance Safety and Accountability (CSA) initiative, which limits drive time and disqualifies drivers for past infractions, are raising concerns over future truck capacity shortages.
In response to these concerns, there is likely to be a continued modal shift away from over-the-road to lower cost rail intermodal for truckload shipments, and a corresponding need for shippers to be more aligned with intermodal as their distribution networks evolve. How does this affect ports?
Improved rail speed and reliability over the past few years have widened the basket of commodities that can tolerate rail transits. All major North American ports have intermodal rail service, but just as important is proximity to an inland rail-hub near a DC. Dray costs to and from the rail yard can make a big difference.
A TranSystems study highlights a truck operator who saved $300,000 per year in fuel and drive time by relocating his terminal close to an inland intermodal rail-hub.
Another consequence of rising trucking costs is that logistics managers are considering the addition of distribution centers that are closer to high-density customer and retail clusters to reduce “last mile” truck delivery costs.
A Midwest DC network serving North American eastern markets might expand to include a distribution facility in a northeastern state, to move closer to eastern markets. Far East shipments to Kansas City would most likely enter the U.S. at a West Coast port. Adding a DC in Pennsylvania, for example, to accommodate East Coast deliveries would likely expand the number of ports used to include an East Coast option.
Ports need to support distribution strategies by providing adequate trucking, rail and distribution services. Examples of inland strategies are transloading, where three 40-foot containers are loaded into two 53-foot containers or trailers at the coast, and two rather than three containers or trailers are moved inland, saving inland transportation costs. Use of the transloading strategy requires a supply of 53-foot equipment at the port of discharge.
Another strategy is to cross-dock, where merchandise is unloaded into a warehouse near to the port as inventory, and again usually 53-foot containers or trailers are loaded based on orders from inland DCs or inland retail outlets. In addition to equipment availability, distribution services providing cross-dock and transload operations are required.
Both of these strategies favor ports with a large ready supply of empty domestic equipment, and frequent intermodal rail departures.
Ports in close proximity to large population centers, in addition to ample distribution and rail services, have a particular advantage. The ports of LA/LB, for example, allow importers to distribute goods destined for high-density western markets from a facility in LA/LB, and the port offers excellent inland rail accessibility to serve Midwest and eastern markets as well. Ports that combine advantages such as these are highly preferred.
Considering all of the outcomes possible as a result of a changing transportation backdrop, one thing is certain: The objective of supply chain managers is to improve reliability, reduce transportation costs and maximize flexibility.
So, which is the best port for your import supply chain?
The port that best accommodates these objectives should be favored.
Joseph Geraty is a senior consultant with TranSystems’ Freight Transportation Analysis Group. TranSystems (www.transystems.com) provides engineering and consulting services to the transport sector and is based in Kansas City, Mo. The author wishes to thank Kansas City SmartPort (www.kcsmartport.com), which provided the contacts for this story, and the interviewees.