Port Shutdown Chaos Points to Need for Risk Mitigation

Although a last minute labor agreement averted the threatened shutdown of West Coast ports, the associated congestion created during the slowdown caused by the disagreement highlights the need for organizations to stay alert for supply chain vulnerabilities.

“Companies need to have strategic plans in place to mitigate supply chain risks caused by everything from natural disasters to socio-economic and political unrest that may cut off critical raw material suppliers, sources of manufactured goods, major transportation facilities, essential transportation modes, and so on, resulting in major disruptions in supply chains,” said Dr. Jeff Karrenbauer, president and cofounder of Insight, which provides optimization and simulation-based supply chain analytics and consulting services.

Port of Los Angeles

Port of Los Angeles

In the weeks and months leading up to the resolution, the International Longshore and Warehouse Union (ILWU) strike closed some of the nearly 30 West Coast ports, including those in Los Angeles and Long Beach, for days each week to the detriment of organizations around the country and around the globe.

Of course, a port shutdown is only one of the potential threats. Another lesson learned could be taken from the earthquake that nearly leveled the semiconductor industry in Japan just four years ago. “The electronics and automotive industries took a massive hit in the wake of that,” said Karrenbauer. “How many of these kinds of events is it going to take place before we pay attention?”

Unfortunately, too often the urgent takes the place of the strategic in supply chain planning and risk management. “We think we'll get to it next week, next month, or next year,” said Karrenbauer. “We have to remember that structured activity drives out unstructured activity—and that if we don't do something, we're going to keep getting smacked upside the head by natural disasters or premeditated attacks by an intelligent adversary.”

The key for organizations is to develop a structured risk management plan. Just as the average organization has a disaster recovery plan to safeguard data and systems, it needs to create a plan to mitigate risk in the supply chain, said Karrenbauer. 

As a first step, organizations should undertake a port location study. After identifying which ports the organization is using, study the cost and impact of choosing other ports. “What would it cost you to go to the Gulf coast? Or the East coast?” questioned Karrenbauer. “What if you diversify the risk?”

Since port shutdowns or weather challenges rarely happen simultaneously, diversification provides shelter from risk. “Look at the whole supply chain starting with demand and working through the whole system,” said Karrenbauer.

It's important to do the math to figure out where the biggest risks lie. Consider raw materials that your organization uses, taking into account the volume of that raw material, the volume of the finished product, the profitability of the finished products, and the number of suppliers being used for those products, advised Karrenbauer.

Audit both the manufacturing level and distribution points to understand the flow patterns and identify where over dependency on one logistics node, supplier, manufacturing facility, etc. might be evident.  “I want to do a complete flow pattern analysis of the supply chain from top to bottom, from raw materials to customers, with a strategic design tool that takes into account all the customers, customer demands, products, and capacity cost, and then get historical flows as well.”

All of this data provides a platform for performing “what if?” scenarios related to the loss of certain ports, facilities, suppliers, and products.

Further, this assessment needs to be done on an ongoing basis. “With the Panama Canal expansion coming down the stream, things will change again,” said Karrenbauer.

Since no electronics OEM has a crystal ball to predict upcoming challenges, well-informed planning is critical to success. Let us know in the comments section below about times that planning or lack of planning has impacted your supply chain.

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1 comment on “Port Shutdown Chaos Points to Need for Risk Mitigation

  1. Hailey Lynne McKeefry
    March 11, 2015

    LOS ANGELES – Mar. 10, 2015  – Shippers, carriers, longshoremen, businesses and consumers alike can breathe a sigh of relief in light of the tentative deal the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU) reached on February 20. For the past nine months, labor disputes between the PMA, which represents waterfront employers (e.g. carriers that provide deep sea cargo transportation services ), and the ILWU, which represents dockworkers, contributed to delays at 29 West Coast ports. These delays stemmed mainly from the ILWU's slowdown tactics, although the PMA's suspension of vessel operations for four days in February also contributed. The tentative five-year deal reached late last month should help restore shippers' confidence in the West Coast ports, which handle about 42.0% of the nation's containerized freight and cargo valued at 12.5% of GDP, according to the National Retail Federation.

    However, delays and uncertainty will continue to plague the ports in the short term and when the current deal expires. Port officials say that they will not clear their container backlog for 45 to 60 days. Because the ILWU and PMA do not typically return to full productivity and manning levels in the immediate aftermath of a contract resolution, this projection likely underestimates the backlog; the Port of Los Angeles reports a lengthier three-month period until their backlog is cleared. As such, goods will continue to sit on docks or ships for prolonged periods. Shippers with time-sensitive cargo, including perishable items, will incur the highest costs from persistent holdups. Additionally, the fact that West Coast port operations are consistently disrupted for months during years when labor agreements are negotiated (e.g. 2002, 2008 and 2014) tarnishes the ports' reputations. As such, in another five years, businesses reliant on West Coast ports can expect more congestion surcharges from the ocean carriers and trucking companies (i.e. providers of national trucking services and local freight trucking services ) that handle their containers, as well as major delays and inventory shortages.

    The latest PMA-ILWU dispute has driven home the importance of planning contingency routes, which many shippers are continuing to do until the congestion on the West Coast eases. Retailers and providers of freight forwarding services have shifted some of their cargo volume to ports on the East Coast, which are near major population centers and headquarters for many large retailers that dominate US container imports. Additionally, growing ports such as Charleston and Savannah experience little to no labor disruption. Shippers are also diverting their goods through Gulf Coast, Canadian and Mexican ports to avoid West Coast delays, and many have turned to air cargo transportation services as an alternative to ocean carriers for shipping high-value goods to and from Asia. Still, when West Coast ports are functioning at normal productivity and without crippling backlogs, they are regarded as the most cost-effective way to market for about 70.0% of US imports from Asia. The competitive advantage these ports can offer in terms of location and infrastructure makes the tentative agreement reached last month a positive step.

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