Logistics — the actual moving of stuff — is the real nitty-gritty of supply chain management. Running ports and railroads has become an essential part of the global economy and is a critical for any firm that relies on a dispersed set of suppliers to produce its goods or a broad distribution network to sell its products. The LA Times had a pair of articles on how this playing out in the Southern California region (LA., Long Beach ports fight to stay dominant, Jan 4, and Freight trains make big comeback in nation’s transportation network, Jan 3). The port story is really interesting. Together, LA and Long Beach are the busiest ports in the US but they have suffered with the economy. Volume fell by 2.5 million containers from 2008 to 2009. That is more containers than Savannah, Georgia, (America’s fourth busiest port) handled. The ports are doing what they can to rebuild volume and hang on to customers. They advertising (in trade magazines; don’t expect to see them buying ad time during the Super Bowl) and the Port of LA is reducing fees and rents.
But regaining the ports’ market position may not be that easy:
In 2000 the playing field was very different. Five of the world’s 10 busiest ports were in the U.S. and Europe. Los Angeles and Long Beach ranked seventh and eighth, respectively. Back then, Vancouver was only the 13th-ranked port in North America, and not even Canada’s largest. Savannah’s port was smaller than Vancouver’s. Manzanillo and Lazaro Cardenas, both on Mexico’s West Coast, had very little traffic. The port at Prince Rupert, on the edge of the Canadian wilderness in upper British Columbia, wouldn’t open for business for seven more years.
Now seven of the world’s busiest ports are in China. Los Angeles and Long Beach rank 16th and 17th. The change reflects not only China’s emergence as the dominant manufacturing economy, but also the way U.S. retailers and the shipping lines that carry their products are spreading their business around. Retailers have diversified the ports they use, forging a “four corners” strategy that also includes harbors in Canada, the Gulf Coast and the East Coast, said John Husing, an independent economist who tracks the effect of international trade on the Inland Empire, home to one of the nation’s largest warehouse and distribution hubs for import cargo. That has meant more cargo to places such as Vancouver, Houston and Savannah.
“It may cost a little bit more, and it may be a little slower, but they feel more secure using a variety of ways of getting their cargo to customers rather than simply relying on Los Angeles and Long Beach,” Husing said.
When Dean Smith chose a four corners strategy it slowed the game down. Here, it aims to make sure the game keeps going. The West Coast port strike of several years ago made clear that being dependent on one flow of material creates risk in a supply chain. Moving goods through Canada or Houston may not be the cheapest or fastest option but it does allow on to hedge some risk. According to the article, there have been related developments that have sped this along. For example, the Canadians have expanded rail access to the US from its West Coast ports. Another factor is the shipping lines:
And the world’s largest shipping lines just endured their worst year ever in terms of financial losses. Through the third quarter, the 22 biggest ocean freight carriers lost more than $11 billion, according to AXS-Alphaliner, a maritime research firm in Paris. After such losses, the shipping lines can be expected to do more of what they had to do in 2009: Stem the red ink by sharing ships and consolidating routes at fewer ports of call.
It will be curious to see how this plays out. If global trade quickly rebounds to the levels of 2006, there maybe enough volume for everyone to keep busy. If trade is slower to come around, importers could be big winners here if they are able to play ports off against each other.
The article on railroads, largely focuses on the future prospects of US railroads in light of Warren Buffett’s purchase of Burlington Northern Santa Fe. It too has some intriguing numbers:
Over the last 20 years, ton-miles of freight hauled by the nation’s biggest railroads doubled, from 876,984 ton-miles in 1985 to 1,770,545 in 2007, according to the most recent government figures. Paul Bingham, managing director of world trade and transportation markets at research firm IHS Global Insight Inc., projects that number will grow 14% within a decade.
One thing rail has going for it is that it is more fuel-efficient than trucking and thus offers significant cost advantages:
“There wouldn’t be big-box retail and globalization if you had to truck in all those containers — it wouldn’t be worth the cost,” said Anthony Hatch, a rail consultant in New York.
What is clear is that betting on railroads right now is a safer bet than betting on any single port. LA and Long Beach might not bounce back but trains are going to be needed no matter which port the goods come to.