Retailers Steering Away from Port Problems
By Rich Thompson, JLL
Port problems on the West coast are giving retailers more than just a headache; it’s more like a severe case of sea sickness. But diversifying supply chain strategies can take the edge off.
Although a tentative labor contract put workers back on the docks in late February, Bloomberg reports that the two busiest U.S. ports – Los Angeles and Long Beach – are still facing their largest backlog of ships in more than a decade. This could take months to resolve. The mess created by the delays is etched in retailers’ minds and margins, and according to an analysis from management consultant firm Kurt Salmon, costing the retail industry up to $7 billion in lost sales and expenses.
While there are promises to get back to business as usual on the docks, retailers are finding work-around solutions and diversifying their supply chain strategies so they can maintain their composure when rough waters inevitably strike. So, where are they turning?
Going Up
More retailers are looking to the skies, instead of being hampered congestion at sea. In its earnings conference call earlier this year, Ralph Lauren explained that disruptions on the West coast have them routing more product to East Coast ports and via airfreight. Similar sentiments have been expressed by other apparel retailers, such as Ann Taylor. The International Air Transportation Association (IATA) reported a 4.5% global increase in air cargo demand for 2014 from a year ago, and a 2.4% increase in North America.
Consumer demands to get products quickly is intensifying and they have little patience or understanding for what causes delays. This has retailers not only re-examining their sourcing strategies, but also where they can create buffers – for instance, paying higher shipping costs to guarantee on-time delivery or building up bigger inventories near their end customers to deliver their products quickly in the event of a problem. Cargo facilities are in particularly high demand around Chicago O’Hare, Miami International Airport and Los Angeles International Airport, where the markets are expected to experience faster than average growth over the next decade, according to JLL’s 2014 United States Ports, Airport & Global Infrastructure Outlook.
Dropping Multiple Anchors
Unfortunately, the National Retail Federation’s latest Global Port Tracker report states that the backlog at ports may only intensify over the next few months as shipments to the U.S are expected to rise. To navigate around possible delays, retailers are developing diversification strategies to move cargo to multiple ports, or shift more discretionary goods to the east. Intermodal solutions are becoming more popular as alternative ports are considered. Over the last seven years, 19 inland port facilities have either opened or been formally announced, according to JLL’s Perspectives on Supply Chain. Cities like Charlotte and Savannah have quickly become major hubs, thanks to their convenient transport connections to major metropolitan areas like Atlanta. The South Carolina Ports Authority reported a 38% year-over-year increase in intermodal rail growth for 2014, with rail volume doubling since 2011, largely driven by its Inland Port. While offloading goods on the West coast may be the ideal option, retailers recognize that they need more diversity in the routes their products take in order to mitigate risk when issues arise.
Getting Back to Solid Ground
Retailers are working to get their bearings now, well in advance of the holiday shipping season. They may find that some of the temporary solutions set up to avoid West coast delays may open the door to more permanent shifts in their distribution strategies, not only affecting the supply chain but also long-term real estate decisions.
Rich Thompson is a managing director and leads the global supply chain & logistics solutions team for JLL. He has more than 25 years of combined supply chain consulting and industry experience. He specializes in supply chain strategy, transportation and distribution, network optimization, third party logistics, and global logistics management.