> > I understand that it's been noted to be in disrepair,
>> but how is it clogged?
>
>Here's a quick article that touches on some of the themes. Google for
>more ...
Financial Times - November 16, 2004
COMMENT & ANALYSIS: The just-in-time supply chain model is unravelling as truckers, port operators and train companies struggle to cope. Investment is rising but the problem will take time to resolve, write Dan Roberts, Christopher Parkes and Jeremy Grant
Though not quite as big as its namesake, the container ship Texas squeezes under the bridge guarding a key entrance point to the US consumer market with only two metres to spare.
The tight fit of this skyscraper-sized behemoth as it slides into the port of Long Beach in California is symptomatic of transport bottlenecks across the US.
Recent shortages of truck drivers, train locomotives and port capacity have been hard to ignore but less attention has been paid to an increasingly frantic response among the companies affected.
The model of just-in-time supply chains that helped power global economic growth through much of the 1990s is unwinding. Inventories are increasing, average shipment sizes are shrinking and flexibility, not cost, is the new watchword.
"The shocks to the supply chain we have seen are driving a fundamental shift," says Richard Metzler, US head of DHL, the courier company. "People are building in a buffer again rather than risk the hand-to-mouth model that companies like [computer maker] Dell used to rely on."
Meanwhile, investment is pouring into the logistics industry like never before. The Texas is one of dozens of new superships capable of carrying more than 8,000 shipping containers in one haul. Production of new rail locomotives and deliveries of trucks have surged, while express couriers are fighting among themselves to schedule more cargo flights.
The catalyst for the surge in transport demand, like so much else in the business world, has been the dramatic growth of imports from China. But the faster-than-expected expansion in Pacific trade has also revealed fundamental weaknesses in the transport infrastructure of the world's biggest economy.
Whether a belated response by port authorities, rail companies and others can stem the damaging rise in logistic and inventory costs depends largely on whether the freight operators can begin co-operating with each other.
The scale of the challenge can be seen most clearly on the dockside at Long Beach which, together with a sister facility in nearby Los Angeles, handles 45 per cent of US container traffic.
This is meant to be the busiest time of year, as retailers rush to fill their shelves in time for Christmas, but retail chain Wal-Mart and other key shippers have pulled forward deliveries to beat the rush - stretching what was a two or three-month peak season into a year-long surge in demand this year. At times it has looked like the Normandy invasion off the Southern California coast as dozens of these seasonal cargo ships have anchored longer than usual waiting to unload. The normal turnround time of two to five days is now stretched to seven to 10 days, although it was worse still in October.
It is tempting to blame poor infrastructure, particularly over-crowded railways and roads, for the delays. But the land side of the port is relatively peaceful. A new rail track running through a deep trench in nearby residential areas is barely operating at a third of its planned capacity.
Instead, the big problems are more to do with logistics, management and out-dated business practices and working methods.
Dockers typically do not work nights or weekends, for example, so all road freight has to move during the busiest times of day for local highways.
The traditional pattern of moving full containers inland and bringing them back to send to Asia is also breaking down in the face of the overwhelming US trade deficit - crowding docksides with thousands of empty containers. In future, port authorities hope to use computers to plan a "virtual container" system to track containers as they move across America.
And, in a twist familiar to those who remember the crippling lockouts of workers by management two years ago over pay and the introduction of new technology, union problems mean there are labour shortages. The last hiring deal was based on maximum traffic growth of 5 per cent a year, but so far Long Beach is up 20 per cent. Longshore workers hired on a casual basis as emergency replacements in August now report daily to a hall where the lucky ones hear their names called out to join different work gangs.
By contrast, permanent union workers, who can earn well over $100,000 a year, are unhappy with some of the new technology that was introduced as part of the agreement after the lockout two years ago. Dockside cameras that read bar codes on containers are not going down too well with a shrinking number of gate clerks, who traditionally patrol the waterfront with clipboards and pencils. mployment problems also lay at the heart of a crisis on the railways which first brought attention to transport bottlenecks in early summer. Union Pacific, the key West Coast operator, did not take sufficient account of new contracts that reduced the retirement age and suffered a loss of skilled engineers at just the wrong moment.
Although the worst appears to be over, this too is a case of short-term problems merely proving the tip of a structural iceberg.
America's railways created an economic corridor to link the east and west coasts and powered industrialisation in the 19th century.
To the surprise of many foreigners, the railways still carry a crucial 16 per cent of freight today, but the gap between the industry's ability to fund infrastructure improvements and the need for upgrades is worryingly wide.
A recent study by the American Association of State Highway and Transportation Officials (Asshto) forecasts that even with modest growth in the US economy, domestic freight tonnage will increase by 57 per cent by 2020 and import-export tonnage by nearly 100 per cent.
The highway system currently carries about 78 per cent of domestic tonnage while the rest is handled by waterways (see sidebar). The system will not be able to soak up the extra demand because it is "increasingly congested and the social, economic and environmental costs of adding new highway capacity are prohibitively high", according to Asshto. That is prompting many states to push for expansion of the rail system as a more cost-effective way of handling an upsurge in freight, especially as fuel accounts for only 9 per cent of rail transport costs, compared with about 40 per cent in lorries.
Yet while demand to use the railways has increased, the length of the track has shrunk from 610,000 km at its peak in 1920 to 277,000 km today through government deregulation in the 1980s.
CSX, Union Pacific, Burlington Northern Santa Fe (BNSF) and Norfolk Southern, the four big US-based rail companies, have made significant investments in new locomotives and staff to cope with a record harvest in the US, demand from China and an expanding US economy.
But longer term, the problem is clear. John Horsley, Asshto's executive director, says: "Given the forecasts of substantial increases in freight over the coming years, it will be a challenge for the freight-rail industry to maintain its share of freight movement and an even greater challenge to increase it."
The railways complain that their cost of capital, put by Asshto at 10 per cent, exceeds their return on investment of 8 per cent, up from 4 per cent in 1980. They say this prevents them from making substantial long-term investments in infrastructure upgrades.
US rail operators own track as well as rolling stock and are publicly-listed companies. Gary Sease, a CSX spokesman, says: "We cannot go to our board of directors and responsibly say we need to increase capital expenditure and double or triple-track our [railway lines]."
One solution being worked on at CSX is using global positioning systems to better judge distances between trains as they are dispatched from yards. "You can increase throughput by spacing trains more intelligently," explains Mr Sease. Ultimately, however, most industry observers are looking to public-private partnerships to help with funding. All eyes are currently on Chicago, which this year announced a $1.6bn plan to upgrade the city's rail hub, through which almost a third of US rail freight passes.
This plan, however, depends on federal government approval of about $950m towards the project. That money has been repeatedly held up by delay in passing the re-authorisation of the Transportation Equity Act for 21st Century (Tea-21), already extended six times since it was originally due for signing in September last year. ne last effort is expected this week in Congress, but Edward Hamberger, president of the Association of American Railroads, says it is an issue that struggles to get on the political radar screen despite its obvious importance.
"The average export in the US has to travel 1,000 miles to get to port; the average export in Europe only a few hundred miles," he says. "It will have an impact not only on the daily lives of commuters stuck in traffic but on the competitiveness of our exporting industries."
A crisis meeting in Atlanta to discuss similar capacity shortages in the trucking industry shows many supply chains are already straining under the load. Danny Garst, head of US logistics for Dutch electronics group Philips, warns: "We're struggling to make on-time deliveries. We've seen increases in missed appointments. There is 30 per cent overbooking in some parts of industry."
Bob Brescia, head of US logistics for Michelin, the French tyre company, says shippers also face higher in-bound container rates due to increasing security costs. "Logistics as a percentage of total costs is growing," he says. Some shippers are even thinking about expanding their private fleets to guarantee reliable deliveries. Michelin says it would consider a joint venture with a freight carrier.
Meanwhile, express delivery operators such as UPS and FedEx report more customers switching to expensive air cargo for their most valuable products because of congestion elsewhere. Nevertheless, Reid Thompson, head of logistics for Solectron, one of the largest contract electronics manufacturers, warns "air capacity out of Asia is also approaching a critical point".
Pressure on the system is exacerbated by a parallel trend towards smaller shipments and away from long, complex supply chains that have proved vulnerable to disruption.
Scott Davis, finance director of UPS, says: "Customers are fine-tuning their distribution towards a direct-to-consumer model sending things in small packages direct from manufacturer to consumer rather than shipping large quantities of goods via freight."
Whatever the cause, capacity constraints are pushing logistics to the top of management agendas around the world. "I have been driving home to senior management that this is an issue that isn't going away and we're going to have to deal with it," says Mr Brescia at Michelin.
Ultimately, market forces will ease some of the pressure as higher freight prices provide the returns to pay for rail investment and more attractive salaries for truckers and dockers, but structural weaknesses may prove more stubborn.
Mr Metzler at DHL concludes: "Over a long period of time, supply and demand in transport have a history of working themselves out, but this is the worst disparity we have ever seen and it won't be easily solved."
Attractions of a slow boat to Chicago
There is one under-utilised, low-cost transport route in the US that stretches from the Gulf of Mexico to the Great Lakes and reaches more than 60 per cent of US consumers along the way: the Mississippi River system.
Today only a fraction of US freight is transported by river. That could change as shippers look for alternatives to overcrowded roads and railways. "We're starting to use the Mississippi as a way of bypassing transport bottlenecks," says Gary LaGrange, president of the port of New Orleans, situated at the mouth of the 2,300-mile river.
Until recently, the only goods carried on the Mississippi were bulk commodities such as grain, coal and oil. But Osprey Line, a Houston-based shipping company, is attempting to attract a wider variety of freight by offering container services between New Orleans, Baton Rouge, Memphis and Chicago, which is linked to the Mississippi by the Illinois-Michigan canal. Rick Couch, Osprey's president, says the company is planning to open another three or four container terminals along the river over the coming months.
The Mississippi system, including tributaries such as the Ohio and Missouri rivers, reaches 17 of the 50 US states, including some of the country's most important agricultural and industrial regions and several large cities. Man-made waterways have extended the network as far as the southern border of Texas, meaning that goods can travel by inland waterway from Pittsburgh to Mexico.
The model for Osprey Line is Europe, where about 40 per cent of inland container freight is transported on rivers. European governments have embraced river transport because it reduces road congestion and pollution, while shippers are attracted by lower costs.
Each Osprey Line service can carry up to 400 containers - the equivalent of 200 truckloads - and the barges use less energy per tonne than trucks. This makes river freight about six times cheaper than road freight.
However river transportation is painfully slow. "You can get something to New Orleans [from Memphis] by truck within eight hours or you can put it on a barge and it will be there in 72 hours," explains Lanny Chalk, terminal manager at Fullen Dock in Memphis. "The cost by truck is $40 a tonne; by barge it's $6 a tonne. So it's a question of how much is that additional speed by road worth?"
Mr Couch says Osprey's river service has found greatest acceptance among ocean-going shippers, including importers of South American coffee. "It is easy for them to transfer containers between ship and barge in port," he says. Domestic shippers, in contrast, are deterred by having to get containers to and from the river.
Another problem is the unreliability of the Mississippi's ageing infrastructure. Most of the river's 215 locks are more than 50 years old and their frequent failures cause long delays. Appeals by river users for government investment have been ignored for years. "Reliability of delivery is more important to shippers than speed so lock failures are a threat to the viability of this business," says Mr Couch.
Chip White, executive director of the Logistics Institute at the Georgia Institute of Technology in Atlanta, says river transport will never be more than a "marginal" part of the US logistics network. He says the Mississippi's most useful role could be returning empty containers to their point of origin, allowing trucks to spend more time fully loaded.
Mr Couch admits there is little chance of the US reaching the same level of river use as Europe. "The US loves its trucks and trains too much," he says. "But even if we get 8 or 9 per cent on to the river, that's a lot of containers."
Andrew Ward