When weighing “Uncertainty on the High Seas,” the consensus among panelists at RILA LINK2019 was that West Coast port congestion appears to be a certainty.
Beneficial cargo owners have seen the ports of L.A. and Long Beach run from one period of port congestion to another, said Augie Drufke, vice president of supply chain for SharkNinja.
“That’s very troubling to us.”
Bryan Ward, senior director of international logistics at The Home Depot, said with importers trying to beat tariff increases, “we had unforeseen demand in the fourth quarter … and it caused major congestion.”
With that came uncertainty in the supply chain, Ward told the audience at the Retail Industry Leaders Association’s annual conference in Orlando, Fla., Tuesday. “If you don’t have the product on the shelf, you can’t sell it.”
Congestion and weather-related delays are going to happen, said Christian Tangen Pedersen, vice president and head of trade and marketing in North America for Maersk Line. “How … can we help our customers be ready for anything?
“How can we make it more efficient to get the velocity through the terminals?” asked Pedersen.
Multiple truck appointment systems are not the answer, according to Ward.
“It puts a lot of pressure on truckers to solve the challenges in L.A. and Long Beach,” Ward said. “You can’t have 13 or 14 different appointment systems and expect the trucker to figure out what system is going to work for them the best. It makes it really challenging. In theory, you kind of get it. … I understand the terminals need predictability.”
Drufke added, “We hope a universal appointment system comes to pass.”
Ward later asked, “How much forecasting can we give carriers to help them? I think we need to provide help forecasting volume. … That would help with terminal congestion. … Are you all going to pull forward a bunch more inventory or not? It impacted the supply chain drastically” in the fourth quarter of 2018 when importers were bringing in inventory to avoid higher tariffs.
Ward noted the ocean carriers’ forecasts are helpful as well.
“If anyone has the crystal ball in terms of ship utilization in the first quarter, please let me know.”
Pedersen said with infrastructure surrounding U.S. ports causing a bottleneck, ocean carriers are investing in smaller, more agile ships, technology and integrative solutions. He said Maersk had to up its technology game. “We’ve just launched container management 2.0 and our virtual assistant, Captain Peter.
“A lot shippers really challenged us,” he said. “Third parties are giving advance notification.”
Pedersen said cooperation is needed among the ocean carriers, ports, terminal operators and BCOs.
“We have to come together on technological improvements,” communication, cargo visibility and predictability, he said.
Distribution networks, meanwhile, are moving out.
“We’ve seen diversification of the gateways. We’ve seen a spreading out of the distribution networks” on the East and Gulf coasts, Pedersen said. “Based on the number of investments, the East Coast will continue to grow faster than the West Coast.”
Ward pointed out land is a necessity to berth the biggest ships and house the tallest cranes.
Drufke agreed, saying, “L.A. and Long Beach have a serious challenge. The footprints were laid out when ships were much smaller. It’s like trying to live out of your bedroom closet.”
The panel then turned to the low-sulfur fuel mandate for ocean carriers that goes into effect in January 2020.
“The change in sulfur is going to add some $13 [billion] to $15 billion in expense to the carriers. How that’s going to be shared with the BCOs and how will we pass it on?” Drufke asked.
“Each of the carriers has expressed a different opinion on how to approach it,” Drufke said, pointing out there’s even a difference in scrubbers — open or closed loop. “Open means you’re dumping it into the ocean. There is great deal of discussion right now about the pros and cons on either side of that.”
Pedersen noted, “I don’t think we know the impact fully of dumping the sulfur into the sea. … It doesn’t seem like a long-term sustainable solution.”
Pedersen said while enforcement of the low-sulfur mandate remains a big question mark, Maersk has “been very transparent from Day 1 about our choices. … We’ve also been very transparent about the cost impact.”
Maersk announced earlier in February that it had signed an agreement to source low-sulfur fuel from PBF Logistics as part of its plan to comply with the International Maritime Organization requirement that ships use fuel with a maximum sulfur content of 0.5 percent globally or equip their ships with scrubbers to remove sulfur from engine exhaust.
There has indeed been talk of cost, Drufke said. “Carriers that we’re talking with have given us a heads-up that it’s coming. … For sure there’s a bill that’s going to have to be paid.”
Ward said the low-sulfur fuel mandate isn’t just ocean carriers’ problem.
“This is a supply chain problem and we have to solve it together,” Ward said. “It’s a global issue that impacts a lot of people. We have to come together as a community of importers and ocean carriers and others to help solve this issue. It can’t just be thrown back on ocean carriers.”
Turning to tariffs, Drufke said the back-and-forth with China “is expected to go on for years. This first resolution … is only going to be a pause in a much longer discussion.”
Ward said The Home Depot “took a very rational approach” as to what made sense to import early from China.
“It was a math exercise and a space exercise. We are always looking at ways to save money and keep the right amount of inventory.”
China’s One Belt, One Road initiative, called “arguably the largest overseas investment drive ever launched by a single country” in a 2017 American Shipper commentary, may offer The Home Depot some other souring opportunities, Ward said.
“Today we source a lot of goods from China,” he said. “Does this open up sourcing opportunities that aren’t currently available to us and reduce congestion in some of the ports?”
The aim of One Belt, One Road is to boost trade and economic growth within Asia, Europe and Africa through infrastructure development of roads, rail systems, pipelines and ports.
Drufke said the One Belt, One Road initiative “is a $900 billion projected expense on the part of China.” He added that Made in China 2025, calling for 70 percent of products to be core manufactured in the country by that year, is a $300 billion investment.
“China is resetting the economy and they are on track to reset the supply chain of the world,” Drufke said.
“We go through these periods where history hinges. I think we’re on the threshold of one of those,” he said. “A lot of trade policies are holdovers from World War II. In modernizing those trade policies, we’re going to come out in a much better place.”
In the meantime, Ward asked how those in the room in Orlando could work together to solve disruption and variability.
“The need for speed and reduced variability is real for us. The identification of problems anywhere in the supply chain is a challenge in this space. It creates challenges all the way down the supply chain,” Ward said.
Drufke agreed that certainties cannot be found alone.
“No company, no enterprise has the competency to navigate these waters. The challenge is to find the right strategic partner,” he said. “How we will together work this out will be the only way to navigate through a challenging and in the end a very rewarding time period.”
The Home Depot may not be waiting for the right partner. Ward said the company is investing $1.2 billion in the “downstream supply chain. It’s addressing how we deliver to customers. It’s the one supply chain strategy.”