As you may have heard, West Coast ports are having some labor issues. The Pacific Maritime Association (which represents the shipping lines and terminal operators) and the International Longshore and Warehouse Union have been going at it, affecting about 20,000 workers at 29 West Coast ports. (Can’t name 29 Wet Coast ports? See here.) The LA Times has a nice summary of what is in play. In a nutshell, management claims that the union is engaging in a slow down (effectively striking while getting paid, see here) while the union claims that they are responding to safety concerns (at LA and Long Beach) and that management is misrepresenting their position. In any event, what has resulted is lots of delays and a slew of ships waiting off the coast for their chance to unload. (Never seen a slew of ships? Check out these images.)
OK, that’s all well and good, but how is this affecting supply chains? The sheer scale of the problem is rather mind-blowing. If it were just a question of losing one port, things wouldn’t be too bad. Ships bound for LA, could be sent to Oakland or Seattle. But it’s the entire West Coast. If the goods need to be offload to an US port, that means going all the way to the Gulf Coast or the East Coast. It’s not clear that is an easy solution. Part of why LA and Long Beach are such busy ports is that they have an entire infrastructure to support them. Even if a ship could get to, say, Charleston, it’s not clear that it would do a lot of good for some of the customers whose stuff is on the ship. If a company’s whole logistics system is based on breaking bulk in the Central Valley, having a bunch of containers in South Carolina is, at best, an inconvenience.
Let’s look first at the auto industry. Automotive News reports that a number of Japanese automakers with North American production are having to rejigger their schedules and find other means of getting needed parts (Honda cuts production, Toyota airlifts parts amid West Coast port labor strife, Feb 13).
Honda, starting Monday, will reduce production at plants in Ohio, Indiana and Ontario as the labor tension has slowed delivery of “critical parts to keep the production lines running smoothly and efficiently,” Honda spokesman Mark Morrison said today.
Parts such as electronics and transmissions are in low supply, Morrison said. …
Toyota’s North American plants are also making changes because of shipment delays. The automaker said it has adjusted overtime at some of its plants.
“In an effort to minimize production disruptions Toyota is expediting shipments by air — a standard shipping method we use as needed. We continue to monitor the situation,” Toyota said in a statement.
At some level, it is a little surprising that Honda and Toyota are so exposed to port disruptions. They both have a large number of facilities in North America and (you would think) have a large network of North American suppliers. The reality is that they do have such a network. According to the article, Honda has over 700 North American suppliers and 80% of the parts in its North American vehicles are produced on the continent. But at a time like this, 80% ain’t enough. A car without a transmission isn’t particularly helpful. If those transmissions are sitting off Long Beach, Honda has to cut production.
At least Honda and Toyota have some scale going for them. Poor Subaru has a much smaller manufacturing footprint here and thus a smaller supplier base. They’ve been airlifting parts since last month to the tune of an extra $60 million a month.
The port snafus are also (unsurprisingly) impacting apparel brands (West Coast ports: Retail’s $7 billion problem, CNBC, Feb 9).
According to a Kurt Salmon analysis, congestion at West Coast ports could cost retailers as much as $7 billion this year. That congestion cost comes from a combination of the higher price of carrying goods and missed sales due to below optimal inventory levels. …
Without naming names, Kurt Salmon retail supply chain strategist Frank Layo said a number of retailers have begun to shift shipments to East Coast ports, or are buying extra inventory in advance to mitigate inventory disruption, though those measures are only temporary Band-Aids for a potentially large wound. …
While retailers are often reluctant to directly discuss supply chain disruption, the topic has become more prevalent in recent retail earnings conference calls. Last week, both Ralph Lauren and Michael Kors executives addressed the issue.
The interesting part here is that not all retailers have the same exposure. According to the article, some had been optimistic that the issued would be resolved by now. Instead, they have been caught with their pants down. I am a little reluctant to completely blame these firms. They placed a bet and, yes, it turned out badly but I am not sure that means they were utterly foolish. The contract between the operators and the union ran out nine months ago. That’s a decent stretch of time and I can see where a retailer might believe that no one would jeopardize holiday shipment etc by letting this stretch on and on. If things had turned out differently, they would be bragging on their earnings calls about how their margins have held up better than rivals.
So some people are looking bad. Is anyone looking OK? There is an interesting answer to that.
When considering which retailers might fare better than others at least in the short run, Layo said, “near-term winners may be fast-fashion retailers who have built the cost of airfreight into their margin structure. Over time though, expect them to face increased air rates as others need emergency capacity.”
Examples of fast-fashion retailers include Forever 21, Sweden’s H&M, Zara (owned by Spain’s Inditex) and Britain’s TopShop.