Part 1 of 2: Midsized shippers could drive growth of import consolidation strategy in SoCal.
By Eric Kulisch
More freight imported through the Los Angeles basin is being transloaded into 53-foot domestic containers for trans-continental delivery as shippers seek to gain greater control of their inventory, according to industry analysts and logistics executives.
TTX Co., a major supplier of railcar capacity, said transloading volume and its share of imports in Southern California reached an all-time high in the past year.
Service providers for years have swapped cargo from 40-foot ocean boxes into larger containers or trailers for certain customers, but the logistics practice is slowly gaining steam because merchants realize that inventory management benefits can exceed the traditional goal of transportation savings. At the same time, there is growing interest in transloading in the opposite direction — from rail to ocean containers for agricultural producers and other shippers that export.
The traditional reason for repacking inbound container shipments in domestic equipment has been to take advantage of the fact that the contents of three 40-foot containers can usually fit into two 53-foot containers or trailers. Shippers, such as Nike, engage in freight arbitrage when intermodal and truck rates are higher to determine if the cost of deconsolidation, and shuttle deliveries to a warehouse and back to the rail ramp, is less than shipping an extra unit.
During the past decade, transloading has become a core component of supply chain strategy for big-box retailers. They have determined that having flexibility to delay allocations to distribution centers, re-sort shipments near a port of entry and re-route them based on current demand at the store level, or to mix seasonal goods or other similar products from multiple suppliers for local delivery, offers much greater savings and better customer service compared to the old model of sticking to orders made months in advance and shipping homogenous loads straight from Asia to the final destination. Importers also use the process to bypass large, regional distribution centers and send fast-selling product to local flow-through centers designed for rapid replenishment, or directly to a customer site.
Manufacturers and distributors in Southern California also merge import cargo with domestic product being shipped east and perishable product is usually reloaded because ocean carriers don’t allow expensive refrigerated containers to retreat far from the port.
Instead of booking all-inclusive transportation through the ocean carrier, shippers can schedule port-to-port service and handle the inland move themselves, or through a third-party logistics provider.
Transload freight can either be stored in a warehouse for a short period, during which additional services such as labeling, sampling, palletizing or quality inspection may be performed — or merged within a matter of hours into a domestic container, a process referred to as “cross-docking.”
Transloaded products tend to be new releases as opposed to warehouse stock, experts say.
Lighter, less dense goods such as footwear, toys, home goods, electronics and apparel are ideal candidates for reloading because all the space in a container can be utilized. Heavier products, such as canned goods or auto parts, cause containers to exceed weight limits for highway transport before the box is completely full, leaving wasted space and defeating the purpose of mode-shifting, industry experts say. Logistics companies sometimes will mix heavier and lighter goods to maximize equipment utilization.
In key freight corridors to the Midwest, the vast majority of domestic container traffic involves transloaded imports.
A year ago, for example, it was hundreds of dollars cheaper to consolidate and ship Chinese-origin product to Harrisburg, Pa., and Memphis, Tenn., from the ports of Los Angeles and Long Beach than contracting with the ocean carrier to handle the rail booking and final-mile truck delivery, according to a new study of transloading by transportation planning consultant Cambridge Systematics. Using all-water transport through the Panama Canal from Asia would be the least expensive option to Harrisburg, but transload is the next best choice if the goods are time-sensitive.
The study, which was commissioned by the two ports, conversely showed it cost almost $1,000 more to transload and ship two 53-foot containers than three direct international boxes from the San Pedro Bay port complex to Chicago.
The rate disparity is a function of ocean carriers’ willingness to discount the all-inclusive rate for the inland intermodal portion of the move because there is sufficient export cargo available in the Chicago area to fill empty 40-foot boxes and help cover the cost of the return leg.
“Ocean carriers want marine containers in the Chicago area for the export business, whereas it is not as attractive to have a large number of empty containers in the Memphis area,” the study said.
Cambridge used spot-market rates. The cost-benefit analysis of transloading could differ for large shippers able to negotiate transport contracts with better pricing.
“But if you’re using transloading as an inventory management process, $1,000 a container is not what you’re after. Your inventory cost is way more costly than the cost of transportation,” John Isbell, a former Nike executive who co-authored the Cambridge Systematics report with his wife Monica, said in mid-November during a presentation at the Intermodal Association of North America-National Industrial Transportation League expo in Anaheim, Calif.
With the expansion of the Panama Canal now a few years away and competition intensifying among North American ports for discretionary cargo, the Los Angeles and Long Beach port authorities paid for the study to get a better understanding of why and how shippers use international gateways.
TTX Co., a railcar cooperative owned by the eight largest railroads in North America, estimated 30 percent of imports that entered Southern California in 2012 were transloaded into 53-foot intermodal containers for transport to places such as Chicago and Memphis, and the transload share will reach 35 percent by 2016.
Further up the coast in Oakland, transload volume is about 25 percent of total imports and in the Pacific Northwest, about 20 percent of imported containers are switched to domestic rail containers before continuing inland, Peter Wolff, TTX’s director of market development, said during a presentation at the Council of Supply Chain Management Professionals’ annual conference in Atlanta last fall.
For the West Coast of the United States and Canada overall, about 4 million TEUs moved inland in domestic-size equipment. Nationwide, there were 17.5 million inbound TEUs last year, according to trade intelligence firm Zepol Corp.
Getting a firm handle on the amount of transload activity is difficult because nobody reports transloading statistics and there is no standard definition for the practice. TTX only focuses on goods transfers that move by rail to their final destination, while others define transloading as any time cargo goes into a 53-foot container or truck trailer and doesn’t rest in a warehouse. Transloading represents a much larger share of imports by the later standard because it includes local and regional truck deliveries.
On the East Coast, reloading typically involves trucks because of the relatively short distances to market. But investors who own the Florida East Coast Railway are developing a large logistics park in Miami where international boxes will be stripped and the contents moved to 53-foot intermodal containers, with some goods undergoing value-added services in between.
TTX, which owns more than 100,000 intermodal railcars, follows logistics trends like transloading to understand the type and amount of equipment to invest in so it has the right balance of 40-foot and 53-foot well cars for use by its shareholders.
The company’s model is based on Port Import Export Reporting Service (PIERS) data that identifies the number of import TEUs and data from IANA showing domestic and international container moves by rail, leavened with feedback from shipping lines, motor carriers and other industry actors. Underlying the model are three core assumptions: that 90 percent of IANA’s Southwest region-data originates in California; 80 percent of California intermodal traffic originates in Southern California; and 90 percent of what originates in Southern California is imported.
In 2011, more than 2.1 million TEUs entering the San Pedro Bay ports were transloaded, with a record 576,000 ocean shipping units reloaded in domestic boxes during the fourth quarter, according to TTX.
Of the 7 million TEUs that arrived in Los Angeles-Long Beach between July 2010 and June 2011, 38 percent moved directly by intermodal rail under the carrier’s bill of lading, according to Cambridge Systematics. Of that amount, 25 percent moved from terminals with on-dock rail and 13 percent was trucked to rail yards in downtown Los Angeles.
Cambridge estimated, based on IANA data, that transload cargo fills 40 percent of the 53-foot containers operating in and out of Southern California, with 27 percent going via intermodal rail and 13 percent by motor carrier. The transload volume is equivalent to 2.9 million TEUs. The consulting firm surmises, based on interviews with major third-party logistics providers, that 900,000 TEUs of imports are transferred to domestic containers and trailers within a 20-mile radius of the ports. Another 1.7 million TEUs of cargo get swapped further out, in the Inland Empire. There, vendor managed warehouses for auto parts, computer hardware and retail goods hold imports and then ship them to customers by intermodal rail as needed. The remaining 300,000 TEUs of cargo shifted to domestic equipment involve products from Mexican export assembly plants that are trucked to the Burlington Northern Santa Fe Railway and Union Pacific rail yards in the Los Angeles area.
Wolff said the Mexican component to transloading is one reason volume has increased. A significant number of parts for televisions, for example, come through the ports of Los Angeles and Long Beach for assembly in Mexico. The finished TVs are brought back to Los Angeles for transport around the country. Inland logistics parks are too far away to take advantage of Mexican maquiladora plants.
Intermodal transloading hit rock bottom in 2006. Wolff attributed the decline to the proliferation of inland logistics parks, which enabled shippers to cut out drayage expenses and ship containers intact because warehouses are located in the same complex as the intermodal rail yard.
That period also pre-dated significant rate hikes by BNSF and UP that subsequently made intermodal transport more expensive. And import levels overall have yet to fully recover from the recession.
Transloading volume in Southern California fluctuates, but the overall trend is one of modest growth the past five years. Importers and 3PLs surveyed by Cambridge said their transload volumes are growing at the pace of import container growth through the San Pedro Bay ports. In each of the past three years, container volume at the twin ports has hovered around 11 million TEUs. Several logistics executives confirmed that transload business has been relatively flat for several years. Transloading should have dropped with the decline in trade caused by the recession, but the fact that it stayed flat means that it grew relative to overall imports. Isbell said transloading became part of retailers’ strategy to squeeze out cost and keep inventories low during and after the economic downturn.
The consulting firm said forecasting what percentage of future imports will be merged into domestic intermodal containers is difficult, but that market growth is most likely to come from midsized shippers adopting the technique for the first time since larger importers have already maximized potential transloading opportunities.
Smaller suppliers don’t have the scale to economically ship goods through multiple ports of entry, so they might consolidate goods in Southern California and parse them out to various distribution centers, or bring in components for sub-assembly before shipping to customers, Wolff said.
Isbell mentioned Dicks Sporting Goods as a second-tier retailer with the necessary size to execute transloading.
Transloading will also increase if import volumes grow for companies already using the process as a supply chain strategy.
A significant increase in fuel costs could also widen the cost gap between intermodal rail and trucking, and make consolidation more attractive, logistics experts say.
One survey participant said transload cost savings in 2010 were 15 percent due to high fuel surcharges assessed at the time by railroads and ocean carriers, compared to 2 percent in 2011.
Major retailers that heavily rely on postponement and transloading include Walmart, Target, and Toys ‘R’ Us.
Those that utilize multiple ports of entry may transload to trucks for regional distribution and send 40-foot boxes intact to inland logistics parks, such as the BNSF Logistics facility in Joliet, Ill.
Cambridge Systematics interviewed a dozen of the largest San Pedro Bay importers, 10 of which merged between 19 and 97 percent of their freight into 53-foot containers or trucks. Almost 34 percent of their freight (628,800 TEUs) that came across the docks was transloaded to rail and 16 percent was transloaded to truck, which was evenly split among destinations within and outside Southern California. The ultimate destination for 84.5 percent of the goods was outside the Los Angeles region.
Importers surveyed listed the number of first-vessel calls, the availability of 53-foot containers, easy access and proximity to marine terminals to pick up boxes, and cost as top criteria for picking ports at which to conduct transloading.
Unloading at the first port of call is important to get goods to destination faster. Transloading doesn’t make sense if goods sit on a vessel several more days until reaching the second or third port on the West Coast when they could be reloaded and on their way before the ship reaches the next port.
There are about 215,600 53-foot intermodal containers in service and anticipated fleet growth should provide sufficient capacity for continued expansion of transloading, Wolff said.
Potential Headwinds. Five of the companies surveyed by Cambridge said they didn’t solely depend on Southern California for transloading and could move operations to other ports on the East or West coasts if business conditions worsened.
Factors that might cause the retailers to switch transload business to another gateway include significant increases in port and customs fees, unionization of local shuttle drivers, shutdowns due to labor disputes, relocation of a logistics provider that results in a longer truck haul from the marine terminal to the new facility and higher transloading costs.
Importers that are doing transloading simply for the transport economics will switch ports quickly if the cost equation becomes less favorable, while those doing it for inventory reasons find it more difficult to relocate to another port, Isbell said.
A cost borne by shippers in Los Angeles and Long Beach, but not other ports, is the daytime traffic mitigation fee to pay for night gates. Shippers that pick up or drop off cargo during daytime hours are charged $61.50 per TEU (double for a 40-foot box) to help pay for the PierPass program. Terminals recently closed the Monday night gate, forcing large shippers that set up night deliveries to use daytime marine terminal gates and pay the PierPass fee to keep cargo volumes moving.
The other retailers said they couldn’t relocate all transloading because it supports their store networks in California, Arizona, Nevada, Utah, Colorado and Texas.
One importer said it planned to reduce transload volume as part of a diversification strategy to limit imports through Los Angeles-Long Beach to 50 percent.
Besides higher overall costs for Los Angeles-Long Beach port users, another threat to transloading is the potential for more companies to relocate production from Asia to the United States, Latin America and the Caribbean in response to rising costs and challenges managing overseas factories. That would reduce the amount of imports coming through West Coast ports.
“Ports are really interested in transloading because it creates the opportunity for a more permanent commitment by the beneficial cargo owner to the port,” Isbell said.
Transloading is the logistics equivalent of Velcro, he said. Shippers make extensive investments in software systems to track cargo transfers between containers and establish deep relationships with third-party logistics providers that do the work for them that would be disruptive to terminate.
A major concern of 3PLs that offer pure transload service is the lack of suitable, affordable land for expansion within 20 miles of the port complex. The planned development of a BNSF intermodal facility on port property will likely force California Cartage, one of the region’s largest transload operators, to relocate. A nearby site recommended as an alternative is smaller than California Cartage’s existing acreage. Proximity to the port is critical for transloading to minimize drayage costs and allow independent owner-operators to make several trips a day. Favorable lease rates are also important to make transloading economically viable. Outsourced logistics providers also need large yards to store several days-worth of marine containers and 53-foot domestic equipment.
Cities in Los Angeles County are reluctant to zone much land for warehousing activity because they believe it doesn’t create the same employment per acre as other industries, according to Cambridge Systematics.
Oakland is a good example of a port working to bring transloading near the dock to attract shippers, the Cambridge report said. The Port of Oakland and the city recently approved a $1 billion public-private development of the former Oakland Army Base adjacent to the port that will include an intermodal yard, warehousing and transloading facilities.
“If the (UP’s Intermodal Container Transfer Facility), as well as the proposed BNSF Southern California International Gateway (SGIG), were opened up to transloaded boxes, then transloading could increase. Because of the shorter drays, there would also be less truck traffic and air pollution in the region. Furthermore, opening up the ICTF and SCIG to transload boxes would be an incentive for transloaders to locate in the South Bay or Gateway Cities areas to begin with. Overall, this would represent a good strategy for the ports, because transloading is less discretionary than inland point intermodal. The tradeoff for shippers, however, is that cargo would be subject to Alameda Corridor use fees, since trains built at the ICTF and SCIG would use the Alameda Corridor,” Cambridge said.
It concurred with TTX that transloading as a percentage of total containerized imports is likely to reach as high as 35 percent during the next seven years, but predicted the share could fall back to 30 percent of imports given local constraints, especially if near-sourcing becomes more common.
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The report recommended the local port authorities help stakeholders find ways to reduce terminal congestion and fees to make the nation’s second-most expensive port complex more competitive.
It also suggested port officials create new transload sites within the heavy-weight zone near the port complex, where many vacant buildings now exist, to minimize the length of truck trips to and from marine terminals and provide land for California Cartage and an outbound grain transloader that will be displaced when the BNSF facility is constructed. And the ports should work to avoid any restrictions placed on the BNSF SCIG that would limit the number of domestic rail containers that can transit through the Alameda Corridor to limit truck hauls to the downtown rail yards.
Increased use of chassis pools would allow companies to stack containers until needed and reduce the need for extra real estate, a 3PL official told Cambridge Systematics.
(Part 2 of this series in the March issue will cover the state of outbound transloading.)