Cargo Crunch!

Feb. 17, 2005
Manufacturers are bringing sourcing back to North America, using more air freight and building inventories in response to tie-ups at West Coast ports.

As sure as earthquakes shake and volcanos erupt, what happened to thousands of manufacturers, distributors and retailers last fall will happen again. The only questions are, when, and how bad?

Last autumn's logjam that snarled the Ports of Los Angeles and Long Beach, holding up the delivery of goods contained on scores of ocean container ships from China and the Far East, may be a harbinger of similar problems to come. If that's the case, manufacturers had better gird their logistical loins for the next assault on their supply chains.

"We are expecting to see 8% to 9% more total cargo being shipped this year than last year," says John Urban, president of GT Nexus, an online ocean shipping portal used by thousands of manufacturers to book containers and shipping service. Adds an executive at a big ocean shipping firm, "We're just importing so much more than we ever have."

At the peak of the crisis last September, 83 vessels were stuck at the Ports of Los Angeles and Long Beach waiting to be unloaded. What's more, once they docked, each ship took six to eight days to unload, more than double the time it usually takes. Since then, the ports have hired more labor, but no one's claiming the jam-up of ships waiting to unload won't recur anytime soon.

Although GT Nexus enables logistics managers to keep close tabs on their materials, supplies and finished goods, at the end of the day, it's still the trucks, ships and rail lines that keep the supply chain taut and unbroken. As Urban puts it, "When there's no place for ships to berth in Los Angeles, no software will help."

Slow Boats From China

Manufacturers that sent operations overseas, particularly to China, saw delays in getting goods delivered here. As a result, they had to boost inventories or else find other sources for materials, parts and components. Some companies already are taking a hard look at their sourcing to determine if total dependence on China manufacturing makes sense from a strategic standpoint. "If you are a company that decided to move your manufacturing to India or China as an exclusive decision, then you were affected by these issues," says Greg Aimi, director of supply chain research at AMR Research in Boston.

"When there's no place for ships to berth in Los Angeles, no software will help."
-- John Urban, president, GT Nexus
For example: "We experienced some significant disruption to our supply chain, to the point that it caused component shortages," says Clark Sellers, director of material, program and supply management at Vought Aircraft in Dallas. The aircraft manufacturer receives shipments every two weeks from suppliers in Japan and Korea, bound for its plants in Hawthorne, Calif., and Nashville. Its shipments were delayed two to three weeks. "We actually were able to make up for the delay once we received the parts by working overtime and on weekends to meet our customers' delivery times," Sellers adds.

Vought hasn't changed its logistical scheme, but Sellers says the company will be watching the flow of supplies very carefully. "We'll keep an eye on the situation. We'll work with our subcontractors to have them ship a little sooner if necessary."

Other manufacturers are reevaluating their sourcing plans. "We're looking at our overall supply-chain design to determine where is the most optimal place to manufacture products, based on where our customers are and where our components are coming from," says Jim Molzon, vice president of customer fulfillment and global logistics at Solectron Inc. "You can have a semiconductor cross the ocean four or five times before it actually hits your living room in a finished product."

Even so, for some U.S. manufacturers, the impact of the ports' congestion was minimal to unnoticeable. "It didn't affect us that much, because we don't import that much from the Far East," says a spokesman for Owens-Corning, based in Toledo, Ohio.

Similarly, Possis Medical, a manufacturer of medical devices, didn't suffer. "We saw no effect on our operations because we don't get any materials from China," says Robert Scott, vice president of manufacturing operations and information technology and chief security officer at the Minneapolis-based firm. "Most of our materials come from U.S. companies or from Europe."

Some manufacturers, keenly aware of the downside risk of lengthy shipping times and slowdowns at seaports, have taken strategic steps to source parts in North America rather than the Far East. The idea is to avoid falling victim to events such as last fall's congestion and the 10-day lockout of West Coast ports in October 2002. During that action, nearly 200 huge container vessels, each holding thousands of shipping containers, remained becalmed in the ports of Oakland, Los Angeles, Long Beach, Seattle and Tacoma.

"We have not been affected to date. We've been changing over to get parts from North America."
-- Ed Eckenroth, plant manager, Dana Corp. plant in Stockton, Calif.
For the manufacturer that is vulnerable, those kinds of events can bring just-in-time manufacturing operations to a costly halt, as happened at Dana Corp.'s Stockton, Calif., plant. Since then, the truck frame plant has shifted its sources for most parts from Japan to plants in North America. As a result, during last year's West Coast ports' logjam, the Dana plant didn't miss a beat.

"We have not been affected to date," says Ed Eckenroth, plant manager. "We've been changing over to get parts from North America." The Stockton facility delivers finished pickup truck frames on a JIT basis to Toyota's truck assembly line at the joint Toyota-General Motors New United Motor Manufacturing Inc. plant in nearby Fremont, Calif., and likewise must receive incoming parts the same way.

Because Los Angeles was already at or near capacity in recent years, eight automobile manufacturers ship vehicles through the Port of Hueneme, north of L.A.

Solectron also saw little or no turbulence whatsoever in their supply chain during the fall logjam. "We ship the majority of our products by air, and our offshore manufacturing is predominantly in Asia and Europe," Molzon says. The Milpitas, Calif., company manufactures products in 23 countries on five continents and must depend on a network of thousands of suppliers.

In Solectron's case, the choice of air freight is largely dictated by the weight-to-value ratio of its products. Last fall, though, the company noticed an upswing in the use of air freight by other manufacturers seeking to find ways to work around the constipation at the ports. Despite the greater competition for space on air freight carriers, Solectron was insulated. "We work with our key air courier providers so that we are guaranteed to get our products on planes when we need to," Molzon says.

Still, getting air freight out of Shanghai wasn't exactly a gimme during the ports' crisis. Suddenly there were a lot more manufacturers eager to ship by air, regardless of the additional cost. Says Molzon, "Shanghai was a real challenge over the last six months to a year, but our products have moved by air consistently without interruption."

Technology can help. "We use a visibility tool that enables us to know exactly where our products are, whether they are in the air, or whether they have cleared customs on this side," Molzon says. The high-tech manufacturer uses an applications service provider, SSA Global, to help it keep track of shipments. "We know where our inbound materials are to our factories, and we know where our outbound finished goods are after they leave our factories."

Having this kind of early warning when a shipment is going to be delayed or stuck at a freight terminal is crucial. "Because our supply base is so diverse, having this visibility is very important," Molzon says. "Our plants have to have this knowledge of when things are coming in. We're deploying our lean initiative in manufacturing, so we have to have the right product arriving at the right time."

Despite its lack of dependence on ocean shipping, Solectron has found that air freight isn't without its own logistical concerns. "Certainly shipping things by air from China to the states has gotten more complex in the last few years. For one thing, the supply/demand balance is a lot tighter, so that airplanes are filled up."

As a result, Molzon recommends manufacturers dependent on air shipments make sure they develop strong partnerships with air transport services. "We think it's important to establish longstanding relationships with key providers of air freight services to ensure that we get lift out of a region when we need it," he says.

Solectron's logistics staff taps into SSA Global's network to obtain shipping information, and then ports this information into the company's network so that its plants and suppliers can be informed.

As part of Solectron's ongoing review of its overall supply chain, the company weighs not only the cost of manufacturing, but logistics costs as well as the cost of holding excess inventory as a buffer to guard against supply disruptions or delays. "You may save on labor by manufacturing in China, but the cost of holding excess inventory in the pipeline and the logistics cost may exceed the savings," Molzon says. "It still takes longer to get a product from China to Dallas than it does to make it in Dallas."

Alternatives To China

Some manufacturers are hedging their bets, moving a portion of their manufacturing to other parts of the world to reduce dependence on those ports that were affected. "We see companies modeling their supply chain to see alternatives to just making things in China," says Aimi of AMR.

"We experienced some significant disruption to our supply chain, to the point that it caused component shortages."
-- Clark Sellers, director of material, program and supply management, Vought Aircraft
For products with more variable demand, it often makes more sense to seek out manufacturing locales that can serve the end market more flexibly and quickly. "For the variable part of product demand, companies should consider making products in the U.S., Mexico and Eastern Europe, where the supply line is more flexible and faster, and avoid areas where there is significant congestion," Aimi suggests. "The reevaluation of the supply network can really help mitigate the logistical stumbles that can hinder a company from being able to deliver on demand."

For JIT-dependent manufacturers, the threat of slowdowns or interruptions in supply generally force them -- or their suppliers -- to keep excess inventory. "Companies in automotive have to carry more inventory," Aimi observes. "What you have is that the OEMs are operating just-in-time, and everybody else is holding their inventory buffer.

"They have to stock up rather than risk closing a plant down. If you have parts that are going to be delayed, you order double the inventory and hold it, in case the next shipment is late."

Boosting inventories to guard against shipping snafus, though, is a poor short-term solution to a long-term problem. "The cost on behalf of suppliers to double or triple their inventory buffers was significant," Aimi says. "I think it's an undesirable short-term solution to the problem."

He recommends that manufacturers use the first half of this year to tighten up their supply chains to reduce vulnerability to such a disruption in the fall. "The good thing," he says, "Is they have time to figure out the solution this spring before the heavier volumes come in the July to September time frame."

Smarter use of technology also can help manufacturers reduce the impact of unforeseen logistical problems such as shipping delays caused by port strikes and overloads. "Our systems are intended to enable companies to manage their supply chain as an orderly process," says Urban of GT Nexus, himself a former executive at American President Lines, now part of Singapore-based NOL Group. "For instance, our systems enabled companies to respond tactically to this problem, by showing them that certain terminals within a port had shorter delays."

Also, during the worst of the ports' crunch last fall, GT Nexus helped shippers reroute goods. "The Seattle gateway and rail connections were able to manage the peak with fewer interruptions, and customers got brokers to do clearance in Seattle instead of L.A.," Urban adds.

Shipping Industry Responds

In addition to adding labor at the ports, the shipping industry is building larger ships that can hold more containers and slowly expanding the size of port terminals where containers are off-loaded onto trucks and trains.

For instance, one bright spot on the horizon for shippers was the opening of a new 171-acre container terminal at the Port of Tacoma in January. The Pierce County Terminal serves Evergreen Marine, Lloyd Triestino and Hatsu Marine. The Puget Sound Ports of Seattle and Tacoma, in fact, saw a surge in business last year as shippers, desperate for a place to get their goods offloaded and transferred to truck or rail, diverted shipments northward.

Despite the addition of this new terminal, there is little being done to expand port facilities, not only in the West, but nationwide. "The Panama Canal is already at capacity, and New York already had TransAtlantic capacity issues," says a shipping industry executive. On the positive side, he points out that many of the ports have since added labor to speed the offloading of ships. "A lot of things are being done to address the issue, but expanding terminals is difficult and takes a long time."

More widespread use of technology at the port terminals also could help. Despite the digital revolution in the business world, many truckers are still using clipboards. It's little wonder, then, that during last fall's crisis at the Port of Los Angeles, for instance, the congestion on the docks was so acute that truckers often couldn't find the containers they were assigned to pick up, and simply turned around and went home. It's no secret that, even in a world in which many new automobiles come equipped with global positioning systems, "lost" containers are not uncommon in the transportation business.

"Very few companies have a systemic process surrounding how they manage their global supply chain," concludes Urban of GT Nexus. "If there's a port strike, a terrorist attack or a natural disaster, without that comprehensive picture, it will be very difficult for them to respond at all."

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