Rising labor costs in Asia. Fuel prices at record winter highs. Asian currencies revalued upward. For retailers and direct importers, the warning signs are clear: Supply chain costs are rising rapidly.
Although that’s bad news for shippers, it bodes well for key import gateways that can help trim supply chain costs by offering extensive ocean and intermodal rail services, domestic equipment availability and a concentration of transload and cross-dock warehouses.
Transloading centers are particularly important as importers maintain the lean inventory strategy they first employed during the 2008-2009 recession and have extended through the start-and-stop recovery. In doing so, they’ve adopted a just-in-time model that’s created a transloading boom.
But not everyone on the service side is in position to take advantage. To do so, ports, shipping lines, railroads and equipment providers must have the information systems, processes and facilities to help foster a shift in supply chains from moving marine containers inland intact under a “push” strategy to a “pull” approach in which goods arriving in 40-foot marine containers are transloaded into 53-foot domestic containers and trailers and delivered to retailers precisely when needed.
Warehouse operators, and the communities where they’re located, also must prepare for an environment in which transload and cross-dock warehouses are closer to rail hubs so the domestic containers can be trucked to the intermodal railyards at a lower cost, while reducing pollution and traffic congestion.
“Don’t plan for the past. Think outside the box,” said Robert Leachman, professor of industrial engineering and operations research at the University of California-Berkeley. Moving logistics activity closer to seaports is cheaper than double-decking freeways to serve distribution hubs 50 miles from the ports, Leachman told this month’s California Maritime Leadership Conference in Sacramento.
Supply chain strategies are influenced greatly by the value of the cargo being shipped. About 25 percent of U.S. containerized imports from Asia involve low-cost merchandise. Containers carrying this cargo often are shipped intact to inland locations to minimize transportation costs.
Moderately valued goods comprise about 50 percent of the containerized imports, and expensive merchandise accounts for the remaining 25 percent. In handling these cargoes, retailers want to reduce their inventory carrying costs, which increase with the value of the merchandise.
Big-box retailers dominate the trans-Pacific trade, with a 40 percent share of containerized imports. Original equipment manufacturers account for about 25 percent of the imports. Regional and small retailers, small OEMs and assembly plants account for the remaining 35 percent of imports, Leachman said.
Seeking to determine the implications of the increase in supply chain costs, Leachman ran a computer model in which he assumed total supply chain costs would increase 15 percent. He also predicted big-box retailers would increase their share of U.S. imports.
In this scenario, the percentage of low-value merchandise will drop to 19 percent of U.S. imports from 25 percent, mid-value merchandise will remain about the same at 49 percent and high-cost merchandise will increase to 32 percent of total imports.
Leachman projects retailers’ supply chains will shift toward a pull strategy in which consumer merchandise is imported through a major gateway and drayed to a nearby cross-dock facility. Only merchandise in demand somewhere in a retailer’s national network would be transloaded into domestic equipment for immediate inland movement. The rest would be trucked to an import warehouse where it would sit until the retailer determines where the merchandise will be sold; the goods then would be reshipped in domestic containers and trailers.
The key driver is that retailers don’t want to carry inventory, said Scott Weiss, director of business development at third-party logistics provider Saddle Creek. Retailers have more control over their supply chains than direct importers because retailers order product based on purchase orders, while importers order production based on their projection that orders will materialize, he said.
Retailers value a pull strategy where product is handled at a warehouse or cross-dock facility, often at the importer’s expense, and is transloaded into 53-foot domestic equipment for shipment only when it is needed.
In this respect, an import warehouse also may serve as a replenishment facility, said Cliff Katab, president of the Performance Team, a Santa Fe Springs, Calif.-based trucking and logistics provider. Third-party warehouses on the West Coast also will intercept local cargo, peeling it out of the marine container in Southern California and transloading remaining cargo into domestic equipment to be shipped to the eastern U.S.
3PLs operating under this strategy must have sophisticated information technology systems to track and trace cargo. The 3PL depends upon product-specific forecasting from customers, Katab said. Because the 3PL incurs physical costs, it must keep its operation as lean as possible, he said.
To optimize the “cash-to-cash” cycle, retailers often require importer-vendors to hold inventory at their own cost until it’s needed in stores, said Jon DeCesare, president of World Class Logistics Consulting in Long Beach, Calif. “It shortens inventory in the pipeline and guarantees timely delivery to the stores,” he said.
As national retailers increase their share of U.S. imports, ports that enhance this pull strategy can expand their share of imports. Los Angeles-Long Beach handles about 45 percent of U.S. imports from Asia, and half of all vessel strings from Asia stop there first. Southern California attracts the largest vessels in the Pacific, has extensive rail and trucking services to inland locations and boasts about 1.5 billion square feet of warehouse and distribution space. “It’s hard to beat,” DeCesare said.
National retailers also ship through the Pacific Northwest, South Atlantic and through New York-New Jersey in what is known as a four corners strategy. Prince Rupert, British Columbia, is attempting to attract distribution facilities and wants to become a center for these value-added logistics services, DeCesare said.