Retailers and merchandise suppliers breathed a short-lived sigh of relief on February 20 as the dockworkers union and the owners of 29 shipping terminals across all major West Coast container ports reached a tentative deal on a new contract. The labor agreement between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) is the culmination of nine months of tense negotiations and enables normal operations to be resumed.
Even with a return to "normal" operations, it will take a long time to move the cargo backlog created by the dispute and relieve the traffic congestion of ships waiting to dock. Industry analysts estimate this process could take anywhere from six weeks to three months. Although the ILWU and PMA said they expected cargo to keep moving during negotiations, work slowdowns, lockouts and other forms of disruption snarled operations at the West Coast ports.
As for the potentially grave consequences of a full-blown shutdown, consider the numbers:
Goods that pass through these ports represent 12.5 percent of the U.S. economy.1
A study from the National Retail Federation and the National Association of Manufacturers estimated that a work stoppage would have cost $1.9 billion per day for the first five days and $2.5 billion per day it the stalemate reached 20 days.2
Consulting firm Kurt Salmon estimates retailer losses to reach $3.8 billion as a result of port delays.3
All ports negotiate together to prevent small strikes, but this practice increases the risk of a complete shutdown should negotiations break down. After the ports were at a virtual standstill during President's Day weekend, Labor Secretary Thomas Perez and Commerce Secretary Penny Pritzker were dispatched by President Obama to mediate the dispute. Members of the ILWU and the PMA now need to ratify the agreement.
Although most retailers were proactive in minimizing the effect of the strike on the 2014 holiday season, the workarounds put in place are not sustainable for the long-term. Rerouting ships to Gulf and East Coast ports or switching to airplane transport are expensive alternatives and the negative effect on the economy and retail industry has already reared its ugly head. The time required to process shipping containers rose from an average of four days to two weeks.4 Merchandise is stuck at the ports. Revenues are down for many major brands. Shipments from meat, dairy and agriculture exporters have spoiled. Truckers hauled fewer loads and lost money. Jobs have been cut.
The volatility and uncertainty surrounding negotiations has made it difficult to manage and plan retail business strategies. In the apparel sector, inventory management has become a nightmare. There is a growing concern that merchandise will be out of season by the time it arrives in stores. This means retailers have little opportunity to sell many products at full price, while floor designs, window displays and special promotions focused on certain merchandise may be wasted. Carrying costs and out-of-stocks are up.
Although an agreement has been reached, many of the problems causing the worst congestion in a decade at the ports of Los Angeles and Long Beach still need to be solved. There has been a shortage of truck trailers to haul goods. Port terminals designed many years ago are struggling to support today's massive vessels and keep up with the high volume of goods. A lack of consistency in container sorting from multiple shipping lines is making it difficult to quickly move containers out of port.
As a result of these challenges and the near-disaster caused by a prolonged labor dispute, retailers and suppliers are reviewing their strategies for moving products into the hands of customers. They're looking for ways to adapt their supply chain and become less reliant on West Coast ports. Although Gulf and East Coast ports could make shipping longer and more expensive, these alternatives need to be thoroughly explored. Near-shoring and moving manufacturing operations to the U.S. are options that may be more feasible now that the cost savings of overseas manufacturing have dropped significantly. Sourcing strategies need to be reviewed to assess the ability to mitigate risk and improve advance scenario planning.
Although a strike has been averted, the retail industry shouldn't get too excited. The effects of the nine-month battle remain and it will take a long time to recover. In the meantime, retailers, suppliers, shippers and all stakeholders must come together to rethink shipping and supply chain strategies.
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