Shape of Shipping

Gradual changes in the costs of international shipping over the last decade are beginning to have a profound impact on the entire North American economy. 

The good news is that the underlying cost of moving containerized goods from Asia to the Eastern half of North America will drop in the next few years. In addition, congestion in the Long Beach and L.A. ports will be reduced. These effects will become more apparent when the expanded Panama Canal locks open in early 2016.

Most goods imported from Asia today flow through West Coast ports and are then moved eastwards, overland, by intermodal and truck. The expanded canal, larger ships, Eastern port dredging and other port improvements will reduce the overland flow, allowing more goods from Asia to enter through Gulf and East Coast ports. These changes will provide an economic boost to these areas. 

Container Volume Growth

A recent Journal of Commerce article predicts that when the new Panama locks open in early 2016, there will be double digit percentage growth in container shipments via the canal the first year, followed by an ongoing 5 percent year-over- year growth thereafter. If these projected growth rates are realized, by 2020 additional containers handled by Gulf and East Coast ports as a result of the Panama Canal expansion would grow by more than 1.3 million a year. Other projections foresee even higher traffic. 

Two primary considerations must be balanced – transit times and cost savings. The additional transit time to ship from Asia to the East Coast through the Panama Canal adds anywhere from two to 10 days in comparison to West Coast ports, depending on the destination. However, there are also delays in the current method of shipping. The ports of Los Angeles and Long Beach, the largest West Coast ports, are at or near capacity and are experiencing serious congestion and labor issues, adding cycle time and inventory carrying costs, as well as negatively affecting inventory availability and delivery downstream. Furthermore, congestion in the high-volume Chicago rail yards frequently adds a day or two of delay for every container shipped through the city. The cost difference to ship via the Panama Canal is the major driver for change, since each new large vessel can allocate its operating costs across three times as many containers as current ships, therefore significantly reducing the landed cost per container. 

Planning For Disruption 

The landscape painted above sounds very promising. However, until this becomes reality, the supply chain disruptions being experienced today in Long Beach and L.A. will most likely continue in some form. This congestion is being magnified by the backlog of ships waiting to be unloaded and, even when purged, delays occur. Presently, companies that have not planned for this type of supply chain disruption are faced with increased cycle times, lack of inventory and increased shipping costs. It is estimated that it will take months to free up the pipeline. Downstream, customer service is and will continue to be negatively affected with respect to fill rate and delivery times. 

The number of companies that have a top-down, formal, effective supply chain risk management program is surprisingly low. Companies that analyze their entire supply chain network and develop contingency plans based on itemized, potential disruption events are better prepared for the present disruptions. A flexible network that allows for quick response to changing conditions would be able to handle sudden changes. Analysis and understanding of potential solutions such as prior pipeline fill, out-of-network shipping, use of alternate ports, expedited transportation modes, lead time compression and alternate supplier sourcing, as well as the resultant service and cost implications, is critical in today’s ever-changing worldwide business network. Future supply chain disruptions will occur in some form, so a well-structured contingency plan is vital. 

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