Speeding up flow of cargo through ports only addresses a small part of the problem

Speeding up flow of cargo through ports only addresses a small part of the problem
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The Biden administration’s efforts to extend port operating hours ahead of the holidays are well intentioned. That only addresses a symptom of a larger problem. Demand is exceeding supply in multiple parts of global supply chains, and port operations are only one link. Clearing bottlenecks there will only move the congestion somewhere else in the chain.

The pandemic shifted a lot of demand patterns. During lockdowns we saw huge drops in demand. As the economy reopened, American consumers went on a stimulus-fueled spending binge that have led to an historic surge in imports. That surge, which started with the 2020 peak season, has continued unabated. This has overwhelmed not only ports in Los Angeles/Long Beach (LA/LB), but increasingly ports on both coasts as shippers seek alternatives.

The problem is more than the operating hours of the ports. If you keep the gates to the ports open 24 hours a day, you still have to have a destination that can receive the cargo in the middle of the night. Great, FedEx and UPS are committing to 24-hour operations; they already have 24-hour operations in their sorting and long-haul transport operations. You still need truck drivers who can take cargo to delivery destinations. And while it might sound good, picking up loads at 1:00 am may not be all that attractive if you have to wait until morning before you can drop off your load. Truck drivers get paid to move cargo — waiting is completely unproductive.

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The Port of Los Angeles had already implemented extended hours back in September, yet 30 percent of available pick-up slots for trucks to grab containers were not being used. Factors contributing to this is a severe shortage of truck chassis, a problem plaguing most ports in the country, as well as congestion at distribution centers, and a flood of empty containers.

Why is there a shortage of chassis? Because distribution centers have been clogged and slow to unload cargo, leading to delayed return of chassis and empties. The shortage was aggravated by a U.S. International Trade Commission investigation followed by the imposition of anti-dumping and countervailing duties on truck chassis made by China International Marine Chassis (CIMC), the largest chassis manufacturer in the world. There already was a 10 percent tariff imposed on CIMC in September 2018, and that was increased to 25 percent in May 2019. In May of this year, the Department of Commerce issued a final determination, assessing a dumping rate of 188.05 percent, meaning a combined final duty rate of 221.37 percent. Trucking companies complained that the timing could not have been worse.

Domestic chassis manufacturers argued that record imports by CIMC in 2018 were intended to beat the initial round of tariffs, but that led to a supply overhang far in excess of demand and significant lost sales for them. This likely led to loss of domestic chassis manufacturing capability, something that we are now feeling the effects of.

Intermodal rail, which brings many of those imports inland, has also struggled under the import surge. Big rail carriers like Union Pacific and BNSF have suffered from severe congestion at their inland hubs where they transfer containers to trucks to deliver to big Midwest distribution centers, and it got so bad that it forced one to stop accepting containers from West Coast ports for a while. There were so many containers stacked up that it was taking as much as 30 days to retrieve some of them.

Then there is the problem of congested distribution centers. This is driven primarily by a severe labor shortage. The sector has historically offered unattractive pay and working conditions — and without enough staff to unload the containers, traffic backs up into the ports and rail terminals. Although many companies have raised wages, it’s still tough to recruit enough people to meet the surging demand.

Rush ordering has made things worse. Because the congestion and delays have been with us for more than a year, many importers tried to bring their shipments in early for the holiday season, or use additional sailings offered by the container lines. This has only aggravated the situation. It is a little counterintuitive but bringing in extra or larger ships makes the challenge facing ports disproportionately more difficult. When ships are unloaded, containers are moved to a yard stack, often five or more boxes high, where they await truck pick-up. When you drop off thousands of containers at a time, sorting them and matching them to trucks is already a challenging problem. You need space to stack them, and you want to minimize the number of “rehandles” in which you move them to get access to one stacked underneath. Flood the ports with inbound containers and empties going back to Asia, and you have a nightmare.

The other thing that is a little counterintuitive is that congestion reduces capacity. The Financial Times reported last week that a huge number of ships are waiting to unload outside U.S. and European ports, or pick up cargo in Asian ports. Those ships waiting have removed an estimated 13 percent of global container shipping capacity because they are anchored, not moving goods. It’s a negative spiral — things getting worse makes everything else worse.

Former Treasury Secretary Larry Summers argued earlier this year that there were significant risks with the magnitude of stimulus spending. In the meantime, I have heard shipping industry executives say that the only relief to current supply chain woes will be when Americans pull back on shopping (not stop, maybe take their foot off the gas). There aren’t any short-term solutions to current supply chain woes, only tactical remedies for localized bottlenecks. But as we said, that only means the bottleneck will move elsewhere. Things will get better when demand returns to a more “normal” level. We should think about that as we debate the merits of injecting even more spending into the economy.

Willy C. Shih is the Robert and Jane Cizik professor of management practice at the Harvard Business School. His research focuses on global manufacturing and supply chains. Follow him on Twitter: @WillyShih_atHBS