Avoiding a supply chain meltdown if West Coast dock labor negotiations sour.
Negotiations between the Pacific Maritime Association (PMA) and International Longshore Workers Union (ILWU) on a contract that expires July 1 are not expected to begin until mid-May, but some logistics professionals are urging businesses to start thinking about contingency planning in case there is a strike or lock-out of dockworkers as there was in 2002.
Stephen Hennessey, senior vice president and chief operating officer for the PMA, said in March that he has “every expectation of getting a contract” even if talks have to be extended.
ILWU jurisdiction over waterfront jobs and the rising cost of healthcare benefits are two issues that are expected to be at the center of the negotiations, but Hennessey said language in the existing contract is adequate for dealing with the increased use of automation at West Cost terminals.
Michael Goldsmith, senior director for the Americas trade lanes at the logistics company UTi Worldwide, said after East and Gulf coast dockworkers — represented by a different union, the International Longshoremen’s Association — reached a contract agreement with employers last spring, many shippers have focused on current issues and are not “thinking in the future proactively and planning their supply chain.”
While some of the company’s retail and fast-moving consumer goods customers have been asking about the issue, he said for others “the idea of a potential disruption or work stoppage on the West Coast due to the negotiations ongoing between the PMA and the ILWU is almost invisible. It’s not even on their radar.”
Jonathan Gold, vice president, supply chain and customs policy for the National Retail Federation, however, said in conversations with his members, he has found them very focused on West Coast negotiations. NRF in mid-February had begun a survey of its members to see what contingency strategies they are considering. Gold said NRF members would like the PMA-ILWU negotiations to begin sooner than mid-May so they can avoid the expense of contingency plans.
“It’s our job as logisticians, professionals in the industry, to inform and engage our clientele, mostly the U.S. consignees that are dependent on trade from the Asia-Pacific rim, as well as the European markets,” Goldsmith said. “The concern that I have this year is we believe that the negotiations are rather contentious. It is likely that a strike could result from the heated discussions that have been ongoing for so long."
“What automation has done is pretty much limited the number of stevedores necessary for port rotations,” Goldsmith added. He is concerned that if the ILWU doesn’t get what it’s looking for in terms of jurisdictional expansion, there could be a disagreement between the two sides late in the contract talks.
He said shippers should move quickly to create contingency plans, because waiting until the 11th hour “is the absolute Achilles heel to consignees in the U.S. If planning doesn’t start at least six months out, and forecasting models shift, the chances of their supply chain being disrupted becomes greater day by day.”
The PMA-ILWU contract expiration comes right at the beginning of the third quarter, a critical time for retailers moving holiday merchandise, and Goldsmith said if shippers wait until then to react there will be few options.
There is limited capacity on all-water services to the East and Gulf coasts via the Panama or Suez Canal, and he said it will not be possible to shift large amounts of cargo at the last minute. He also noted with the growing size of containerships, fewer can even transit the Panama Canal.
He said there is only limited space on services that call West Coast ports in Canada, such as Vancouver and Prince Rupert, or in Mexico, such as Lazaro Cardenas or Manzanillo.
Air freight capacity is limited and would become very expensive, he said, and shipping through the East Coast would result in longer transit times.
Goldsmith explained there is a strong possibility of delays at origin and carriers imposing hefty port congestion surcharges at East and Gulf coast ports of $1,000-$2,000 per 40-foot container.
“The reality is either one of those solutions … is very limited,” he said.
“So the USA consignee has to be aware of this now and be proactive in their planning in order to forecast, increase their inventories ahead of the game, and plan less shipping in the time of a potential disruption,” Goldsmith said.
Alec Campbell, global vice president of supply chain design and innovation at UTi, said the company has created a model to help shippers quantify what the risk associated with a port disruption would be and what the benefits and costs of different responses would be.
This “strategic value assessment” tool can help clients evaluate the tradeoffs in different strategies, he explained.
“Do you build inventory? Do you try to move via faster modes in order to reduce lead times? Do you go the lower cost shipping route? … We’ve really tried to combine those things into a specific approach we can tailor to each client’s unique situation,” Campbell said.
UTi has contract logistics experts who can give advice on overflow and temporary warehousing.
Richard Delseni, director, supply chain design and innovations at UTi, said an early start to contingency planning and use of a planning tool can help shippers put a number to their decision.
“Typically when things get hot there’s a lot of emotion that gets injected into the conversation,” he said. “This is a quantified way to help say, ‘OK, the risk number is 10; we are in a red situation; what do we do to change now?’ And not just to take the temperature six months out, but coming up with a plan to measure it at intervals between now and the contract date, or when the contract runs out.”
Each supply chain is different. Campbell noted one of UTi’s clients has three different supply chains — one aimed at the retail market, another at the medical industry and a third at industry. Each may need to be treated differently.
For example, the industrial customers demand a highly reliable supply chain because they need to keep their assets running, so the shipper can plan around that regular demand. The consumer product supply chain is more volatile. In the medical area, the company is contemplating whether it needs to build up inventory in case of a port disruption.
Campbell said UTi wants to get the conversation about contingency planning started with customers now, rather than later.
“There are lots of options to choose from. As we progress toward July 1 … the options become less and less. Space fills up, you’re reacting instead of getting out ahead of the crowd,” he said. “The worst thing you get out of an exercise like this is firming up your supply chain strategy and firming up your ability to work through these types of challenges.”