Hit by shortages in shipping space and equipment and squeezed by still-scarce credit, retail supply chains between Asia and the U.S are undergoing a sharp change in direction.
The shift is not in the direction of goods but in the management of products through distribution channels, and one reason logistics managers are concerned the early-summer strains in the trans-Pacific may stretch supply chains to the breaking point during the upcoming peak season.
Guarding cash and finding vessel capacity scarce, some retail importers that customarily took possession of goods in Asia are pressing Chinese suppliers to take over delivery from factory floors to store doors in the U.S. With little experience in the intricacies of trans-Pacific logistics, suppliers are scrambling to comply and looking for help.
The impact is stretching from the docks of Hong Kong and Shanghai to intermodal networks in North America, where distribution managers are coping with an unexpectedly large influx of container volume and shortages in the equipment they need to get goods to consumer markets.
It’s a result, logistics experts say, of changing corporate strategies and supply chains that are struggling to adjust. Global supply chains, they say, are being splintered in the drive to conserve cash.
“The long-existing supply chain model is broken,” said Patrick Ahern, vice president for international at National Retail Systems, a New Jersey-based provider of logistics to retail importers. “And it hasn’t been replaced by a new model.”
At the core of the stresses rippling through supply chain is the aftermath of the credit crunch that first tipped the global economy into recession. “Cash became king, and importers that used to be able to get lots of credit found it scarce, so they said, ‘Why am I paying someone (freight on board) Hong Kong when I’m not going to sell it for another 60 days?’ ” Ahern said.
“They are now saying to their suppliers, ‘Forget about f.o.b. Hong Kong,’ ” which transfers ownership of the goods and triggers payment to the supplier. “I’m going to give you a purchase order, and you’re going to deliver to me in three days,” he said.
That changes the way capacity is purchased in Asia, and the impact is hitting U.S. shores. Unable to find enough domestic intermodal equipment, some importers are pushing transload operators to store cargoes until the trailers show up, adding significant cost in terms of lost time and extra moves.
And the strains are proving a boon to third-party logistics providers, who are showing strong growth as the ability to secure space on vessels comes at a growing premium. Expeditors International of Washington, one of the largest freight forwarders in the trans-Pacific trade, last week said its profit in the second quarter could come in fully a third ahead of previous estimates because of growing demand. “We’ve experienced very significant year-over-year volume increases in both our air freight and ocean business,” said Peter J. Rose, Expeditors’ chairman and CEO.
That demand gave the Port of Los Angeles its busiest month for containerized imports in two years; it posted a 32 percent increase in imports in June year-over-year. More significantly, the bellwether port’s imports grew 8.7 percent from May to June. The signal of gathering momentum heading into the peak container shipping season was muddied by reports of month-to-month declines in container traffic at the ports of Shenzhen and Shanghai in June.
It’s a sign of a confused peak season, and one symptom has been the frantic calls the Toy Shippers Association has been getting from smaller toy makers in China.
“They are being required by U.S. big box retailers that can’t find vessel space to arrange delivery to their store doors,” said Dave Akers, managing director of the association, which negotiates freight rates and arranges logistics for its members.
“The suppliers who are strictly f.o.b. sellers are now getting involved in logistics issues they know nothing about. They don’t want to get involved in the logistics,” Akers said.
That means larger Chinese suppliers that arrange for their own logistics or U.S. companies with their own plants in China are in the catbird seat. “The suppliers who can manufacture products and deliver to the store doors in the U.S. have a huge advantage,” Ahern said.
But the shift in logistics responsibility is putting small and midsize Chinese manufacturers in a bind. They have been accustomed to delivering their products to Chinese ports where they turn over ownership to a retail importers representative and are paid, with the importers arranging for and paying the freight for the rest of the trip.
NRS, which specializes in retail logistics, is benefiting from the trend, which Ahern said is “going through the roof.
“Your average manufacturer hears that, and says, ‘What am I going to
do?’ ” Their first reaction is that it has to get a warehouse in Long Beach, staff it and get it fully loaded. “He starts figuring out how to do this, but by the time all that happens, he has lost the order,” Ahern said.
On top of this shift in logistics strategy came carrier increases in freight rates and the scarcity of vessel space caused by laid-up ships and slow-steaming. “So now your price has gone up, and you still can’t get a container,” Ahern said. As a result, retailers are struggling with cash flow, increased supply chain costs and increased transit time. “Their cycles don’t make sense any more. The math is bad.”
Unable to raise prices at the retail level and stuck with higher costs and tighter credit, retailer importers are pushing back on suppliers.
That allows retailers to conserve cash and reduce cycle time from purchase time to sale. And they don’t have to worry about getting the container or the railcar, or delivery to their stores. They also don’t have to worry about raising prices to cover increased transport costs because they can commit their suppliers to not raising prices for specific periods of time.
But at the U.S. West Coast’s “last mile,” intermediaries are seeing costs soar because of the shortage of 53-foot trailers as more goods are transloaded from smaller containers, and the shortage of trucks and drivers to dray containers to transload facilities. Movements of 53-foot boxes on U.S. intermodal networks grew more than 20 percent year-over-year in March, April and May, according to the Intermodal Association of North America, and operators say they are struggling to find enough 53-footers to handle the demand.
“The beneficial cargo owners are pushing backward if they can’t provide us with enough trailers to handle their needs,” said one port drayage and transload operator in Southern California, who spoke on condition of anonymity.
“When we dray those containers to our warehouse and don’t have enough trailers to handle the eastbound leg, the BCOs are asking us to do two things, either put it on the floor in the warehouse or leave it in the container.”
Neither option works for the operator.
“The worst thing that can happen to us, a transloader in a cross-dock operation, is to have them start storing their material here,” he said. Both options mean the company has to handle a load twice, increasing costs in terms of time, money and space.
“Cross-dock is not meant for storage. It’s meant for unloading a container and taking it right across the dock into a trailer and getting it on its way. We are not able to do that now.”
The long-haul truckers and intermodal marketing companies that use 53-foot trailers to haul freight by road or rail say the trailers are increasingly scarce because loads are not coming back to the West Coast from the areas to which imports are delivered. Truckers and IMCs refuse to bring the needed equipment back at their own cost and are asking shippers to pay a repositioning fee.
On the inbound side from Southern California ports, transload operators are getting hit by an equally serious shortage of drivers and trucks and by longer truck turn times. The number of independent truck operators that dray cargo from ports to warehouses and transload facilities has dropped from 14,000 a few years ago. Truck turn times at port terminals, which took between one to two hours last year, have increased to two to six hours this year as the terminals effectively cut PierPass hours in January by
20 percent and reduced staffing.
“You’ve got all of those factors coming together at the same time as the volume is picking up, which is starting to cause congestion,” the transload operator said. “We’re close to a meltdown here. I wouldn’t be surprised if we saw the likes of 2004 come back. We won’t have 100 ships at anchor, but we’ll have the same terminal congestion.”
Contact Peter T. Leach at email@example.com.