Batten Down the Hatches
Labor disputes could disrupt U.S. West Coast port traffic this spring. Is your company ready?
As the U.S. West Coast dock employers' Pacific Maritime Association (PMA) and the International Longshoremen and Warehouse Union (ILWU) prepare for contract negotiations this spring, many companies are concerned about a potential supply chain disruption and the effect it would have on their operations and the overall U.S. economy. Turmoil could halt the flow of approximately 25,000 TEUs a day.
It wouldn't be the first time PMA and ILWU disputes had turned disruptive. During the 2002 contract negotiations, the PMA introduced computer technology to the ports in the form of scanners, sensors, and barcoding to make cargo-tracking and flow more efficient. These technology upgrades led to the elimination of 10 percent of union jobs. Intense talks ended in a 10-day lockout with normal port operations resuming only after an intervention by President George Bush.
A history of disruptions
During the 2008 negotiations, the PMA charged that the ILWU engaged in disruptive activities at ports aimed at creating leverage during the contract discussions, but the ILWU claimed individual members were merely protesting U.S. military involvement overseas. Eventually both sides reached a compromise as wage rates were increased and automated cargo-handling systems were introduced to speed the flow of goods and enhance security.
In the upcoming negotiations, the primary issues appear to be the jurisdiction of certain port-related jobs, some considered outside the current contract, as well as healthcare costs and pensions. While the discussions are likely to center on these relatively less controversial issues, they may be more time-consuming, compared to prior years when attention focused on automation and wages.
The union recognizes productivity improvements and subsequent headcount reductions are inevitable. ILWU President Robert McEllrath recently stated: "We know that automation is coming. In fact, the ILWU has a long history of accepting automation provided that all associated work is assigned to the ILWU." However, the recent affiliation of the Panama Canal Pilots Union with the ILWU provides a potentially new dynamic to the talks.
Developing your plan
If negotiations between the PMA and ILWU lead to port disruptions, companies will respond by shipping more by air, which would increase costs and lead to capacity challenges, transit time delays, and reduced supply chain reliability -- all of which add up to lower revenue. Past stoppages in fact cost the U.S. economy an estimated $1 billion a day.
Leading companies will assess the impact of potential disruptions on the current state of their supply chain and create response plans that minimize their effect on landed costs and/or delivery times. These plans will need to evolve over time to reflect the progress of negotiations and the types of mitigation actions available at any given point. The evaluation of potential outcomes, well before they actually occur, is critical and can make or break a response plan.
Phase 1: Assess the impact
Port disruptions may cause companies to deviate from their existing supply chain strategies and optimize cost versus service within the constrained environment.
For example, cost-driven companies may have to move products via alternate ocean routes with higher transit times, leading to poor product availability and lost sales. Companies focused on responsiveness may currently be moving product via air freight but could face sharp capacity constraints as a ripple effect of port shutdowns. Thus, companies may need to work with their logistics service providers to book space in advance and secure alternate routings to avoid paying rapidly increasing spot prices to keep their freight moving.
Knowing the financial impact of disruption enables companies to develop a pre-disruption plan that balances investment in developing and implementing a contingency plan versus the cost of responding without planning.
Phase 2: Explore your options
Sample contingency response options for affected product flows in the case study of a U.S. West Coast port disruption include:
- Develop alternate sources of supply: Suppliers closer to the demand points will avoid material movement via transportation points or ports deemed to have higher risk of disruption.
- Build onshore inventory: Increase safety stocks of materials that are typically routed via ports with high potential of disruption.
- Plan for alternate routes: Map out and assess alternate, contingency routings to move products.
- Evaluate air freight strategy: Examine the impact of a mode shift from ocean to air by comparing the tradeoffs of cost, transit time and service.
A company should evaluate the constraints, benefits and risks of each option in the context of its supply chain strategies to ensure that the responses are in alignment with its supply chain goals and objectives.
Phase 3: Quantify your risk
Some response strategies such as building onshore inventory and developing alternate sources of supply require long-term planning and implementation horizons. Thus, the earlier a company starts planning for the potential disruption, the more response options it has and the better prepared it will be to minimize any impact. For a helpful risk prioritization tool, see the UTi white paper containing the full version of this article.
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Due to the uncertainty and potential significance of a disruption, companies should build contingency plans based on the scenarios they believe to be relevant to their supply chains. The earlier companies initiate planning for potential scenarios, the better prepared they will be to make informed decisions.
About the authors
To learn more, please contact one of the authors above or your local UTi office or account representative. Also read "Steering Clear of Supply Chain Disruptions" in the March 2014 issue of Inbound Logistics magazine.