Two straws in the wind

Two straws in the wind

The drop in fuel prices is putting on hold a major aspect of supply-chain reinvention that would have been a natural consequence of oil prices remaining at $147 per barrel or scaling even loftier heights. This is the decentralization of distribution centers.

Generally speaking, the fewer the distribution centers a retailer maintains to serve a national store network, the longer the distance between the DC and the store, and thus the more truck miles and fuel required to get goods onto store shelves.

What earlier this year was an intensive, collective investigation by retailers and vendors into the merits of DC decentralization in order to reduce truck miles has abruptly slowed to a trickle. They know the opportunity is out there, but it's for another day. "It is a game plan that has been penciled out, but I don't see it being put in place because of cost," said Blaine Kelly, senior vice president at CB Richard Ellis.

Not only have oil prices collapsed, but with the economy potentially in a lengthy recession, they are unlikely to rebound soon. However, new DCs require millions in investment that shipper companies are unwilling to commit to in the current climate.

One result, some observe, is a sharp upswing in the use of 3PL warehouse services. Deals with 3PLs usually cost more, but they take advantage of current existing DC capacity and are usually much shorter in duration -- a 3PL contract can be signed for as short a time as a year or two, providing the shipper with a short-term, flexible solution as he bides his time awaiting clearer signals from the economy.

"Their mindset is, ?We're really not sure how this will shake out a year or two from now, so we would rather outsource and have the ability to make changes rather than putting $50 (million) or $100 million into the ground in another DC,' " said Tony Chiarello, senior vice president at AMB Properties.

This is confirmed from recent discussions with 3PLs in Asia. Not only are they supplying warehouse space that shippers currently don't want to invest in, but cost-saving services such as consolidation and packaging redesign that shippers pay little attention to in flush times are now in high demand.

Could Southern California ports finally be waking up to the idea that damage done to their reputation among shippers is self-inflicted? During good times, with cargo growing at double-digit rates, it was easy to assume that their franchise was secure and indulge in the luxury of leading the world in promoting green port policies.

Now that economic fortunes have reversed, the container trade and the economic machine it has long represented to the region isn't the punching bag it was only months ago. Even though cargo is down -- total TEUs through October were down 5 percent in Los Angeles and 10 percent in Long Beach -- it's becoming clear that the damage isn't just economic.

A consensus has been emerging in the trade field that cargo is taken for granted or, worse, isn't welcome, in San Pedro Bay. Sensing an opening, those who for years have been screaming in virtual silence that the ports are systematically squandering their future through a cavalier attitude to shippers and other stakeholders, have gone on the offensive.

"I have some members who are port tenants who are so pessimistic that they have told me that they feel the San Pedro ports are on their way to becoming ?boutique ports' which will primarily serve the local market -- albeit a large one," John McLaurin, president of the Pacific Merchant Shipping Association, told the recent TOC Americas conference. "It is not surprising then that cargo interests are seeking alternative gateways to the Southern California ports in what is viewed as a dysfunctional governance system. This effort to avoid California started prior to our current economic crisis, and it is not simple to unwind these concerns."

The powers that be may be waking up to this reality. The talk now is of monetary incentives for shippers to bring cargo through Los Angeles, $10 per TEU if one proposal goes forward. Here's another idea: joint sales calls to the headquarters of the 100 largest shippers by the ports of Los Angeles and Long Beach, together with the local leadership of the ILWU. There is nothing like unity among key players in the port to send a convincing message to the cargo that their business is valued.

Peter Tirschwell is senior adviser of The Journal of Commerce. He can be contacted at 973-848-7158, or at ptirschwell@joc.com.