Leg/Reg
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Port Congestion: Will It Impact Your Sourcing Decisions?

A new report recently published by The Boston Consulting group indicates that increased congestion at US and European ports should prompt companies with international supply chains to reassess their sourcing decisions. The report affirms that congestion could increase transportation, logistics and other expenses enough to offset the lower production costs associated with sourcing overseas.

The report discusses the potential inability of ports in Europe and the US West Coast to handle projected increases in imports and exports. Surface freight from Asia to these locations is growing rapidly but their port and surface transport capacities are not keeping pace, a situation likely to continue given the sensitive political and environmental issues involved with infrastructure expansion. Major ports in the US and Europe are already approaching full capacity and the short-term measures they are taking to increase facility size and/or productivity are expected to have little practical effect. In the US options such as increasing the utilization of smaller ports or constructing new facilities in Canada or Mexico are being considered but could be stifled by resource, financial and business constraints.

The report states that the growing inability of major US and European ports to handle the continued growth in international trade will have significant impacts on the costs associated with global sourcing. These effects are already being experienced as a result of occasional problems like work stoppages and unexpected surges in demand that have resulted in cargo bottlenecks that cost billions and affect members of the supply chain from retailers to manufacturers. Despite their temporary nature, the report states, these problems have prompted significant business process changes, including ordering earlier, carrying larger inventories, extending planning horizons and finding alternative shipping methods. Each of these changes results in direct and indirect costs that can have a major impact on profitability.

With freight volumes increasing faster than ports can handle them and the improbability of sufficient near-term infrastructure improvements, what options do businesses have? The report identifies several ways that companies can lower costs while continuing to source overseas:

• aggressively manage supply chains to further reduce cycle times;

• explore alternatives, such as the increased use of air freight for high-margin products, that may appear costly but may actually lower overall expenditures by reducing hidden costs;

• invest in premiums for substantially enhanced performance by transportation and logistics service providers; and

• invest in improved business management capabilities like accelerated data flows, facilitated portside handling and “track and trace” functionality.

It’s important to call attention to the report’s most noteworthy suggestion which is to “retreat by bringing manufacturing home.” Specifically, the report states that, “companies should be looking closer to home (North American companies to Mexico, Central America, and South America and Western European companies to CEE [Central and Eastern Europe]), where the cost-of-labor penalty (relative to labor rates in China) is more than compensated for by superior supply-chain performance that is significantly less variable and virtually unaffected by port and surface-capacity constraints.” By minimizing the hidden costs associated with longer supply chains, companies can leverage both their competitiveness and profitability.

Will the prospect that higher transportation, logistics and other costs associated with greater trade flows through increasingly congested ports convince companies to realign their manufacturing operations “closer to home”? It will be interesting to see how policy makers respond to providing additional funding for trade-related infrastructure improvements.

Source: WorldTrade Interactive