Supply chain fixes for stand-still ports

By Patrick M. Byrne -- Logistics Management, 4/1/2005

Right now — and it doesn't really matter when you're reading this article—container ships carrying imports from Asia are backed up at the ports of Long Beach and Los Angeles. Chances are, those ships are carrying your company's goods, since Long Beach and L.A. handle 75 percent of the total dollar value of products brought in through the West Coast.¹

Even when they finally reach the docks, those ships probably will wait for as many as four shifts before being assigned labor. And the containers they unload may sit for several days once they leave the ship because railroads are under-equipped and understaffed. Trucking isn't much better: Fewer motor carriers are frequenting West Coast ports because they burn so much time and fuel waiting for containers.

So what's a shipper to do? Switching to deep-water ports in places such as Mexico; Mobile, Alabama; or up the Eastern Seaboard is one possible solution. But such alternatives often raise other problems. Some are logistical: insufficient rail infrastructure, for example, or warehouse availability. Others are geographic, such as having to route shipments through the heavily taxed Panama Canal. These problems aren't limited to inbound shipments; with U.S. exports increasing, ports must handle more outbound cargo.

Waiting for West Coast ports to increase their capacity also is a non-starter, since there is little room for them to grow. And in the few spots where expansion might be feasible, local authorities often prefer to develop the land for residential or other non-logistical uses. Even such straightforward initiatives as expanding ports' hours of operation have hit the wall due to legislative inaction and labor/management disagreements.

For the time being, the only real solution may be to work around the problem. Some companies, for example, are simply reducing the number of shipments they bring in through the West Coast. Others are building extended lead times into their shipping schedules. Wal-Mart, for example, opted to ship its 2004 holiday merchandise early. By September 2004, much of its holiday merchandise was already snug in the company's distribution centers. There are, however, other strategies shippers can adopt besides "ship less" or "ship earlier." Here are several:

Put more in less space. Hewlett-Packard thought inside the box when it set out to bring more products into the United States. HP designed its products so that they could be packaged in smaller boxes, enabling the company to ship more in less space.

Be specific with suppliers. Computer maker eMachines tells suppliers precisely what to ship—right down to the individual parts level. International apparel manufacturer/retailer Zara, meanwhile, keeps close tabs on sales. By size and color, it knows exactly which products its retailers need—and are likely to sell—each week.

Be more realistic with forecasts. In some cases, if a company thinks it could sell 10,000 of a particular product, it would do well to import 9,000 and avoid costly returns. For most PC manufacturers, returns cost $200 per item—more than the $150 profit companies typically make on each unit. Shippers should look at the economics of being out of stock infrequently versus having too much product frequently. This sort of holistic view is typical of companies that have achieved high performance in planning and forecasting.

Re-examine your outsourcing programs. Outsourcing supply chain management functions is an effective solution only when companies integrate superior strategies with superior service providers. A couple of years back, the debut of Sony's PlayStation 2 was less spectacular, to say the least, than that of Microsoft's Xbox. Figuring prominently in the 1:5 sales ratio were issues all along Sony's heavily leveraged supply chain. Without PlayStation 2 systems on store shelves during the holidays, potentially loyal Sony buyers switched to the Xbox.

Pay extra—once in a while. Depending on the circumstance, when it comes to high-value and time-critical items, such as fashion apparel and key industrial parts, availability rules. In today's sellers' market for ocean traffic, therefore, the high cost and inconsistent availability of containers and vessel capacity may require occasional diversion to alternative forms of transportation. (For now, at least; as shown in the chart on Page 33, demand for rail and truck transportation is forecast to greatly increase in the next 15 years.)

Be more strategic about pricing. Retailers that keep close tabs on what sells and why it sells are empowered to adjust prices—i.e., raise them—in response to supply issues. To improve margin performance, manufacturers could do the same, provided that such moves have been pre-specified in contracts or sale agreements.

Perhaps the most important action you can take to survive chronic congestion is to pursue several initiatives at once, concurrently improving your strategic, executional, and collaborative performance. Conversely, the biggest mistake might be to put all of your eggs in a single West Coast basket.

¹ Raine, George. "Backlog at the Ports," San Francisco Chronicle, Sept. 3, 2004