Mitigating Supply Chain Risk: Planning Around Port Disruptions

Transcription

1 Cognizant Insights Mitigating Supply Chain Risk: Planning Around Port Disruptions To reduce the business impact of U.S. port shutdowns, retailers need a framework to help them assess their global supply chain capabilities and make decisions that ensure a consistent supply of imported goods. Executive Summary As supply chains increasingly globalize, and retailers spread their sourcing arms across the world, the role of international trade and commerce is growing geometrically. Retailers already rely heavily on imports (both directly sourced and via third-party vendors) to fulfill their inventory. Hence, disruptions to port operations can have a devastating effect on their business operations. This white paper looks at the impact of port disruption on retailers supply chain operations and offers ways to mitigate any and all consequences. We also present an overview of options available to importers to manage risks associated with import operations in the event of a port shutdown. U.S. Imports: A Brief History The U.S. is the world s second largest importer, after the EU, 1 with a net value of imports nearing $2.73 trillion in More than 80% of U.S. imports are goods ($2.268 trillion) as opposed to services, and the consumer goods category constitutes close to one-quarter of this figure, at $533B (see Figure 1). Breaking Down U.S. Imports $115 $309 $450 $533 $681 $548 Industrial Machinery & Equipment Capital Goods Consumer Goods Automotive Food, Feeds & Beverages Services Source: tradepolicy/p/imports-exports-components.htm Figure 1 cognizant insights june 2015

2 A large portion of these imports flow into the country as containerized traffic via major U.S. ports. The U.S. imported 22.5 million TEUs (twenty feet equivalent) in 2013, 2 and retailers corner a major share of these containerized exports. Rising Retailer Imports West Coast ports handle about 70% of the market share of U.S. imports from Asia, earning it the title of Gateway of Choice for goods sent to and from Asia. However, the collective share of the East Coast and Gulf Coast ports have steadily increased over West Coast ports in the last few years, as these ports are increasingly percieved as viable alternatives by importers (see Figure 3) Top Retailers, Imports in TEUs Given the high volume of imports, any disruption to port operations arising from natural or man-made causes has a critical impact on retailers business operations and profit margins. Understanding the Impact of Port Disruptions A typical import lifecycle for a retailer occurs over a four to six-month period, and involves many departments, from merchandising through supply chain and logistics (see Figure 4, next page). Source: Aggregated data from Figure 2 Walmart Target Home Depot Sears Lowe s According to the Journal of Commerce s 2013 top importer list, 33% of the top 100 importers were retailers. Five of the top six importers are retailers, and the top 10 list each year is dominated by giants such as Walmart, Target and Lowe s (see Figure 2). Collectively, these retailers constitute almost 70% of the traffic, measured in TEUs. 3 According to the Journal of Commerce s 2013 top importer list, 33% of the top 100 importers were retailers. Five of the top six importers are retailers, and the top 10 list each year is dominated by giants such as Walmart, Target and Lowe s. Given the proximity to China s ports and connectivity via major shipping lanes, the bulk of these imports arrive at West Coast ports. The ports of Los Angeles and Long Beach together handle about 40% of U.S. imports from Asia. Together, The complexity is further increased due to various regulations and governmental bodies, such as the U.S. Customs and Border Patrol, involved in the import process. Disruptions to port operations also have a crippling impact on the overall economy. In addition to natural calamities, labor issues have disrupted port operations in the past, such as the recent negotiations between the International Longshore and Warehouse Union and Pacific Maritime Association. Share of U.S. Containerized Cargo (Imports) 60% 55% 50% 45% 40% East Coast ports West Coast ports Source: USA Trade Online/Martin & Associates. Figure 3 cognizant insights 2

3 The Import Lifecycle 2-5 months prior to in-store date Create PO Classify Products Domestic Transportation 2 weeks through in-store date Receive Goods Party Screening Control Determination Key Import Processes Product Classification Import Documentation Landing Cost Calculations Customs Entry Filing & Clearance 1 month prior to in-store date 1-2 months prior to in-store date Calculate ELC Seller Gets PO Export Process Ship Goods Buyer & Broker Receive ASN Create Import Documents Figure 4 The Monetary Impact of Long-term Supply Chain Operational Disruptions According to academic estimates, the 11-day lockout at West Coast ports in 2002 incurred billions of dollars in losses. 4 The shutdown was nothing short of an operational nightmare for retailers. Buyers had to expend time and effort to prioritize shipments to be flown in or re-routed to the East Coast. Stores, meanwhile, started to experience out-of-stocks, and holiday orders were delayed beyond the season and had to be canceled in some cases, thus impacting the financial health of offshore suppliers and factories, as well. Even when the strike ended after 10 days, shipments were so backed up that retailers ended up receiving some goods after Christmas and had to sell the products at marked-down prices just to clear inventory. Merchandising was hit hard by first the scarcity of inventory and then an out-ofseason oversupply scenario. The prolonged labor contract negotiations in 2014 slowed down port operations yet again, and retailers margins were impacted. Lululemon Athletica stated that its fiscal-year fourth-quarter revenue would be hit by as much as $10M due to the shipment backup. 5 Clothing retailer Ann, Inc. took the initiative to receive shipments via air-freight for the holiday season, which significantly impacted margins. 6, 7 The risk is more pronounced for specialty retailers due to the time sensitivity of their products. Supply Chain Challenges A large-scale disruption to port operations typically results in shifting import timelines and the need to move goods to alternate ports, thereby leading to spikes in traffic and difficulty securing resources for transportation. From a logistics point of view, reserving a container (20 ft., 40 ft. etc.) for the preferred lane (origin to destination port) can get difficult, especially for specialized equipment. In some cases, the resources could even be allotted in a round-robin approach in spite of million-dollar deals between the retailer and the shipping lines. This scarcity is not just limited to reserving equipment; it also includes planning for a trailer to move goods inland. For cases of IPI, the multimodal operator or railroad carriers might run at full capacity or be overbooked. In 2014, retailers made contingency plans to meet the fallout. Between April 2014 and June 2014, there was an unprecedented increase in port traffic compared with the same period in fiscal year Having learned from their past experiences, retailers advanced their import cycles to ship goods early to mitigate the repercussions of a feared shutdown. Importers also shifted cargo to East Coast ports, which reduced West Coast port activity from 62% of all U.S. retail container cargo handled in January 2014 to 59% in May Some companies even split volumes to send some goods to other ports on the East and Gulf Coasts. 8 cognizant insights 3

4 Port Traffic Spike Causes Congestion Surcharges Thirteen carriers, including American President Lines (APL) and Hanjin Shipping announced a congestion surcharge (CSU) for containers from Asia to all U.S. destinations, effective Nov. 26, The surcharge averaged $800 for 20-foot containers, $1,000 for 40-feet containers, $1,125 for 40-foot HQ containers and $1,265 for 45-foot HQ containers. Other carriers, such as Mediterranean Shipping Co., CMA CGM, Hanjin Shipping and Maersk Line, have also levied CSUs on West Coast shipments. 9 Inventory Management From a supply chain perspective, the decision of lost sales vs. high inventory holding costs (buffer stock) vs. contingency logistics costs is a strategic one. During the West Coast shutdown in 2002, Dell implemented a just-in-case strategy to build up additional inventory in anticipation of a port shutdown. While its competitors attempted to address their logistical nightmare, Dell managed to capitalize on the situation by building inventory beforehand. 10 Benefits Inventory Management The possibility of inventory unavailability can be eradicated. Strategic decisions can be made, and consensus can be built on higher inventory holding cost. Profits can be better managed, with known product margins. Constraints Distribution center storage capacity is needed to support overflow. Capital is blocked for a significant period. Mitigating Risks, Impact on Downstream Operations To meet fallout due to port disruptions, we suggest that retailers adopt diversified strategies to prepare for all contingencies. This approach considers the following factors: Sourcing decisions. Inventory management. Alternate routing strategy. Sourcing Decisions To rationalize sourcing, retailers must investigate advancing the sourcing cycle, seasonal vs. staple merchandise sourcing, and category of goods (i.e., low vs. high value and commodity attributes, such as perishable, hazardous, etc.). Alternate Routing Strategy When it is too late to revise a sourcing decision, and the business is not comfortable with building up inventory, the only option available is to analyze the risk and seek alternate routing options. By Sea All the sea-based alternate routes are well-thoughtof, and are completely water-based vs. intermodal or trans-shipment (see Figures 5 and 6). U.S. Sea Gateways Canadian West & East Coast Ports Sourcing Decisions West Coast Ports East Coast Ports Benefits Constraints New or existing suppliers can be identified to meet the expectation. Near-shoring and domestic supplier options can be explored or leveraged. Stress is increased on suppliers due to new volumes and timelines. Additional suppliers and their service commitment needs to be identified. Figure 5 Mexico & Panama Gulf Ports cognizant insights 4

5 U.S. Port Gateways 12 days 11 days Prince Rupert Seattle 12 days Seattle/Tacoma 1 13 days Oakland Los Angeles/ Long Beach 17 days 7 days New York/New Jersey 3 days Norfolk 3 days Dallas Atlanta Savannah Marine ports 1 day 1 day Inland destinations 22 days Houston Marine routes 21 days Inland routes Lázaro Cárdenas 1 Los Angeles/ Long Beach New York/New Jersey Chicago Memphis Norfolk Savannah/Charleston Dallas 1 day Houston 22 days 21 days 3 days 3 days Routes from Northeast Asia to major inland destinations (Chicago, Atlanta, Dallas/Ft. Worth) Comparative shipment times from Northeast Asia to Chicago, Memphis and Dallas Figure 6 Alternate routing for the West Coast: The Canadian Gateway or East/Gulf Coast ports are the preferred routes over West Coast ports for contingency planning. > > Vancouver, Prince Rupert: Inter/multimodal for inland via rail. > > Prince Rupert has the best connections to the Midwest and Gulf Coast through the Canadian National Railway Co. (CN). > > Port of Lazaro Cardenas also has rail corridor connections to the U.S. South Central region. Lazaro Cardenas target market in the U.S. is Texas and the Gulf Coast. Alternate routing for the East Coast: West Coast and Gulf Coast ports are the preferred alternates for the East Coast. The Canadian and Mexican intermodal connectivity to Eastern and South Central America are equally competitive. > > Canadian and U.S. West Coast ports all serve Chicago and the Midwest. > > Pacific Northwest ports have a comparative advantage in reaching more northerly inland markets (Minneapolis). > > Prince Rupert specializes in intermodal moves to Chicago and Memphis via the Canadian National Railway. > > Halifax and Montreal: Inter/multimodal for inland via rail. Halifax: Canadian National Railway. Montreal: CN and Canadian Pacific Railroad. > > Port of Lazaro Cardenas is a good alternative to the West Coast, as well. Trans-shipment hubs: The Caribbean transshipment triangle, encompassing Colon, Freeport and Port of Spain, is called on by larger vessels carrying cargo from the Far East, Asia and America (north, south and central). These preferred hubs are called by feeder vessels that can distribute the offloaded containers to destinations throughout the Americas. > > Panama East (Atlantic/Caribbean Coast): Manzanillo International Terminal (MIT), Cristobal, Colon Container Terminal (CCT). > > Panama West (Pacific Coast: Balboa, Panama International Terminal). > > Caribbean Hubs/Freeport Container Port (Bahamas), Kingston ((Jamaica), Caucedo (Dominican Republic), Cartagena. Post-Panamax, these ports will have an impact on all-water cargo movements from rest of world to the U.S. Gulf Coast and East Coast and viceversa. cognizant insights 5

6 Alternate Routing Strategy (By Sea) Benefits Constraints Alternate routing options would help with planning for uncertainties and provide opportunities for leveraging them when needed. Imports can be distributed across various gateways as a strategy. Agility of logistics business partners can be assessed in case of emergency. Optimal routing is dependent on the shipment s final delivery destination. Resources need to be secured during peak/disruptions. Business partners need to be identified to import through a new gateway. Additional border formalities and compliance need to be considered when operating through other countries such as Canada, Mexico, etc. Business partner associations are new or experimental. By Air This should be the preferred option for high-value and/or high-customer-impact commodities, in which a stock-out is simply not an option. This is a typical hand-to-mouth strategy: Compute the right quantity of inventory required to meet demand until port downtime, and airlift this limited stock (precious) to locations closer to the distribution center or stores. Alternate Routing Strategy (By Air) Benefits Constraints Viable option for delayed planning, which may Premium freight costs will significantly occur for various reasons, such as production delays, high-value commodity, unexpected disruptions, etc. Lead times are shorter across the supply network, from importing through the last mile to the distribution center or stores. cognizant insights impact margins. Does not qualify for all types of commodities. Space needs to be secured in case of last-minute planning challenges. Service vs. cost is a paramount decision. 6

7 Diversified Strategy Mix Decision Type Supply Chain Stage Suggested Actions Key Factors Sourcing Inventory Routing Strategic Tactical Operational and executional Early in the supply chain cycle. Prerequisite for the purchase order to be cut. Advancing the sourcing cycle. Domestic partnership/vendor. Near-shoring. Availability of vendors, both domestic and nearshore. Capability of existing vendors to support advanced order cycle. Capability of existing vendors to support additional volumes. Latest by midway through the supply chain cycle. Staple vs. seasonal. Substitute items. Build up inventory/ safety stock. Lost sales vs. inventory holding cost. COGS, retail prices, profit margins. Inventory aging. DC storage capacity. Anytime before the shipment is onboard the carrier equipment. Alternate ports/ trans-shipment hubs. IPI/multi-modal. Air freight/ocean. Logistics partners: Carriers, shipping lines, freight-forwarders, etc. Expertise of logistics partners to support contingency. Geographical spread of logistics partners. Securing resources during peak/ congestion. Shortest to longest lead times. Total logistics cost. Trade barriers, compliance, duty. Financial implications: International commercial terms (INCOTERMS), letter of credit, etc. Cost vs. time trade-off. Figure 7 Import Supply Chain Risk Assessment Figure 7 defines the trade-offs among the three strategies and the key factors within each. Our assessment framework helps retailers understand the current business capabilities with respect to import supply chain operations. The framework identifies the current import landscape and determines the agility of the importer s supply chain. With a pre-defined set of assessment questions, key decision parameters can be collected to deploy the most suitable importrelated risk mitigation strategy. Figures 8 and 9 (next page) offer a snapshot of key business entities and their capabilities, as well as key factors to consider across the different entities and their impact on every possible strategy. These can be assessed to determine their current state and ability to adapt to a risk mitigation strategy. cognizant insights 7

8 Assessing the Business and its Capabilities for Mitigating Supply Chain Risk Entities Capabilities Organizational Focus Organizational Risk Sensors Risk strategy planning Factors influencing Risk Mitigation Assessment Risk Mitigation Assessment Supply Chain Alternate Routing Global Trade Compliance Transportation Network Assess capabilities Adopt a strategy Business Partners Business Process & IT Systems Logistics Service Provides Vendor Process and Systems Figure 8 Factoring Degrees of Influence A quick checklist of imperatives for making an appropriate supply chain decision. Capabilities Factors Degree of influencing the decision Accessorial Charges Surcharge Alternate Routing Operational Readiness Global Trade Aspects Figure 9 Sourcing Inventory Routing Port Congestion Charges (CON) Low Low High Peak Season Surcharge (PSS) Low Low High Panama Canal Surcharge Low Low High Suez Canal Surcharge Low Low High Intermodal Charges (Rail / Road) Low Low High Intermodal Fuel Surcharge (IFS) Low Low High U.S Rail Fuel Surcharges Low Low High Broker Charges Low Low High Characteristics of the Commodity High High High Special Handling Requirement Low High High Lead Times High High High Vessel Schedule Low Low High Routing Options High Medium High Inland Trucking/Rail Capacity Low Medium High Bill of Lading (BL) Low Low Medium Cross-border Compliance Medium Low High Customs Documentation Medium Low High De-consolidator Process Low Low High Letter of Credit (validity, terms, etc.) High Low High INCO Terms on PO FOB, CIF, etc. High Low High Insurance Terms Specific to Port/Country Medium Low High Importer and Exporter Consensus Medium Medium Medium cognizant insights 8

9 Looking Forward To prepare for periodic shutdowns or possible disruptions due to contract negotiations and natural disasters, it is essential for business and supply chain professionals to build contingency planning into their systems. Importers need to begin developing alternate ports of entry to diversify their import traffic around the country. Over-reliance on either East or West Coast ports can greatly hamper operations in the case of man-made or natural disruptions. Further, importers also need to shore up their domestic supply chains by creating import warehouses, distribution centers and a transportation landscape to meet these challenges. The strength of the supply chain is measured by its ability to be responsive and agile in an emergency. Importers should thus look at building risk mitigation planning and execution as a competency within their global supply chain processes and systems. To contend with unplanned port closures, they need the ability to decide on cost vs. service tradeoffs, as and when required. Footnotes 1 U.S. Imports and Exports: Components and Statistics, About.com, 2 Top 25 North American Ports, Journal of Commerce, 3 Ibid. 4 Brad Plumer, Could a Port Strike Really Cripple the U.S. Economy? The Washington Post, Dec. 27, 2012, 5 Clark Schultz, West Coast Port Slowdown Weighs on Retailers and Shippers, Seeking Alpha, Dec. 19, 2014, 6 Andria Cheng, West Coast Port Dispute Threatens to Derail Holiday Season, MarketWatch, Nov. 10, 2014, 7 Carter Evans, Goods Held Hostage in West Coast Port Battle, CBS News, Jan. 15, 2014, 8 Robert Bowman, Retailers Step Up Holiday Imports in Case of a West Coast Port Strike, Forbes, July 9, 2014, 9 Corianne Egan, 13 Carriers Reinstate Congestion Surcharges to U.S. West Coast, Journal of Commerce, Nov. 25, 2014, 10 Bill Breen, Living in Dell Time, Fast Company, cognizant insights 9

10 References Charles W. W. Mitchell, III, Impact of the Expansionof the Panama Canal: An Engineering Analysis, Spring 2011, Expansion%20of%20the%20Panama%20Canal%20FINAL%20with%20Chapters.pdf. Brandon C. Morrison, Race-to-the-Top: East and Gulf Coast Ports Prepare for a Post-Panamax World, May 2012, MP-Brandon%20Morrison-FINAL.pdf?sequence=1. Zepol 2013 U.S. Port Report, Top 100 U.S. Importers in 2013, Journal of Commerce, Top 100 U.S. Importers in 2012, Journal of Commerce, Top 100 U.S. Importers in 2011, Journal of Commerce, K.C. Conway, North American Port Analysis, Colliers International, December 2013, colliers.com/-/media/files/marketresearch/unitedstates/2013-na-highlight-reports/q4-2013/ Colliers_NA_Port_20132H_FINAL?campaign=port-2H. Scudder Smith, Parsons Brinckerhoff, U.S. Container Trade Outlook, LAEDC International Trade Outlook Conference, June 5, 2014, ScudderSmith pdf. Panama Canal Expansion Study, Phase I Report: Developments in Trade and National and Global Economies, U.S. Department of Transportation Maritime Administration, November 2013, About the Authors Kasiviswanathan Palanisamy is a Senior Consultant within Cognizant Business Consulting s Retail Practice. He has over 12 years of experience across supply chain and information technology and has worked on projects involving third-party logistics, freight-forwarding, business process management, consulting, product lifecycle management and package implementation, with clients in the retail and consumer goods markets in areas encompassing warehousing, transportation, global trade, inventory management and point of sale. He can be reached at Palanisamy.Kasiviswanathan@cognizant.com. Rachit Anand is a Senior Consultant within Cognizant Business Consulting s Retail Practice. He has over four years of experience in the IT industry in consulting, ERP and business analysis. He has worked on marquee engagements with leading global retailers in the areas of supply chain, global trade, e-commerce and omni-channel retail. He has an M.B.A. in Supply Chain and IT from the National Institute of Industrial Engineering, Mumbai, India. Rachit can be reached at Rachit.Anand@cognizant.com. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 217,700 employees as of March 31, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at or follow us on Twitter: Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ USA Phone: Fax: Toll Free: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) Fax: +44 (0) infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, India Phone: +91 (0) Fax: +91 (0) inquiryindia@cognizant.com Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. Codex 1344