Size matters: Port dispute cripples small companies
When it comes to who will weather the West Coast port problem, size matters.
That's because large retailers and manufacturers typically have multichannel supply chains in place. This gives them options for shifting cargo to different shipping routes around the almost-paralyzed ports to maintain inventory and supplies. Of course, it takes time and money to put those options into action.
"This is impossible to change quickly if you didn't foresee this problem," said Kevin O'Marah, the head of research for SCM World, a logistics think tank. "The big guys, though, they could smell this coming."
Air freight? Some cargo, typically high-value merchandise like electronics, can go onto planes. While the increased freight cost eats into the margin, it's better than the cost of losing sales entirely because of a missing shipment. But for the vast majority of cargoes, ocean is the most cost-effective mode of travel.
Exporters, especially agricultural outfits, have it the worst. Their best option is to try and truck or train their goods to the Gulf Coast to catch a ship going through the Panama Canal to Asia. Those services are limited and the time involved can be problematic for perishable goods.
"Agriculture is the real problem," said O'Marah in an interview. "No one wants to see farmers with rotting food."
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The alternatives for importers are a little more varied.
Shift cargo to Mexico/Canada. This has already happened to a certain degree. But it's presenting some problems. These ports aren't as big as their American competitors, so there are capacity limitations. Also, goods that take the detour have to cross the American border, which adds time and expense.
Go through the Panama Canal to the Gulf or East Coast ports. This, too, has already happened to a certain degree. But capacity is limited because only ships below a certain size can fit through the canal.
Ship from Asia directly westbound, through the Suez Canal, to the East Coast. This is where large importers have an advantage. They usually have some product going that route anyway. And since the ship lines they use serve both the West Coast and the East Coast, the task becomes one of redirecting shipments rather than getting a new vendor and setting up a new supply route. Still, any disruption hurts operations.
"We continue to hear from our members who are facing challenges with the ongoing slowdowns/congestion at the West Coast ports," said Jon Gold, who handles transportation issues for the National Retail Federation, in an email. "Even if a contract was settled today, it will still take them 45-60 days, at a minimum, to clear out the backlog that currently exists. We have definitely heard from more and more members who are looking to shift cargo away from the West Coast ports."
And there are immediate dollar impacts as well. Shipping lines, of course, charge higher rates for longer distances. Shipping directly to the East Coast typically commands at least $2,000 per container more than going through the West Coast. Of course, many of these ship lines have imposed a $1,000 "West Coast congestion" surcharge as well.
The costs are likely to drag on the economy. Deutsche Bank Wednesday said the West Coast port slowdown likely subtracted one full percentage point off of Q4 economic output.
In the end, American importers large and small are likely to reassess their sourcing because of this ongoing port dispute between the dock workers, represented by the International Longshore and Warehouse Union, and the employer group, represented by the Pacific Maritime Association.
"More and more companies are looking for a more diversified sourcing profile, particularly away from China. .... All the megatrends are going against the West Coast ports," said O'Marah of SCM, which counts among its members Fortune 500 companies such as HP, Samsung and Amazon.
Still, not every one agrees.
"Ports in California, Oregon, and Washington handle just over 50 percent of all containerized cargo entering all U.S. ports. It's not clear why people seem to think the capacity for coping with that flood of goods exists elsewhere," said Jock O'Connell, international trade advisor for Beacon Economics.
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