Just how much leaner, cheaper, and faster can the global supply chain get? The answer is that while there are always ways to squeeze out more efficiency, it seems that the ‘last mile,’ or the transportation from the marine terminal to the final destination, is turning out to be one of the longest miles ever for shippers.

The problems associated with this portion of the supply chain aren’t entirely new, nor are they any one party’s fault. Containerized cargo volumes have climbed dramatically, especially from Asia (mostly China) eastbound to the U.S. West Coast. Marine terminals are struggling to deal with the added traffic, as are harbor truckers. Railroads have been hit with myriad difficulties (some of which they brought on themselves). And, longshore labor troubles, while fairly infrequent, are extremely disruptive and damaging when they do occur.

“The root cause here is this whole domino effect,” says Rod Strata, vice president and general manager, transportation and logistics, for Manugistics. “People are going to China because manufacturing costs are lower. But, now with the extended supply chain and more people and more transfers, they’re staring to get a lot more backups, especially with the ports—strikes, delays, container security initiatives, customs.”

The increasing complexity and extension of the global supply chain is a definite factor, he emphasizes. “Even though there was globalization 10, 20, 30 years ago, most of the sourcing was nearby the manufacturer. If you look at the automotive model, they put most of the suppliers nearby the automotive factories, they operated on a just-in-time strategy and it was a pretty simple supply chain. Now, it’s moved further upstream because the suppliers themselves may be sourcing from other regions of the world. There are a lot more tiers, a lot more handoffs, which means a lot more can go wrong.”

This has become the real irony for shippers, many of whom say the idea of operating a JIT supply chain with any degree of predictability during the ‘last mile’ has gone out the window this past year. “Supply chain planning based on port-to-port transit has become very difficult,” remarks Joel McClure, director of international transportation and customs compliance for Restoration Hardware. “We can’t be sure when the shipment is going to reach the destination.”

Previously, there was a high degree of certainty, he says, but over the past few years things have really started to change. The 2004 shipping season, in particular, was one that many shippers would just as soon put behind them.

McClure and others have been adept and staying ahead of the game. A considerable amount of freight has been diverted to other West Coast ports—some temporarily, and some permanently. The ports of Seattle and Tacoma, for instance, both saw a jump in containerized freight from Asia last year, and a lot of it ended up staying, say port executives.

Another alternative favored by shippers is all-water routes from Asia to the U.S. East Coast. And while that’s been more dependable, according to McClure, “space has become an issue.”

Mark Hirzel of Meiko America, a major trucking firm based in Southern California, reports, “We have also seen significant cargo volumes shifted to Seattle, which has now caused some problems there; Oakland, too, has its share of problems. It may be that while Los Angeles-Long Beach is the largest port, it may have lost some of its competitive advantage to its ‘smaller’ West Coast competitors.”

He also believes that the supply chain has become less predictable than it has been, which has led to more “bulk” in the transportation part of the supply chain. According to Hirzel, “The question is, ‘Is this extra bulk in the transportation supply chain a correction from running too lean?’”

Indeed, the extra bulk in the supply chain is taking many different forms. Shippers are being forced to add more cost, more time, and in some cases more inventory to their supply chains. To put it bluntly, just-in-time just isn’t happening for many shippers.

“Even though the sourcing from places like China may be less expensive, the transportation costs are going up,” says Manugistics’ Rod Strata. Costs are in fact going up, whether shippers like it or not. On some level that’s acceptable, considering that even without adjustments for inflation, the cost a transporting a container is cheaper than it was 30 years ago in some trade lanes.

Yet, “Most every drayage is now charging fuel surcharges ranging between 9 percent and 13 percent,” says Mark Hirzel, adding that, “What once used to be a very reliable, ‘I’ll get my cargo within four days of vessel arrival,’ has grown into, ‘I hope to get my cargo within five days, and I’ll hold my breath that the trucker doesn’t call to say that a particular terminal doesn’t have any chassis.’”

Callaway Golf Company has dealt with the added time issue by making adjustments to its supply chain. Bob Penicka, senior vice president, manufacturing, explains, “We do very little truck shipping of raw materials and most of our outbound freight is in the form of UPS daily shipments. However, we have made a major strategic change in that we now air ship all club heads from Asia to avoid the 3-4 week ship times on the water and the possible backlogs in the Southern California ports. Most of our shipments of finished goods to our international subs and distributors still go on the water because air shipping that much bulk is cost prohibitive. We just build the extra lead times into our planning cycles.”

In addition, some shippers have begun to augment inventory levels—another occurrence that contradicts the just-in-time model. “Even though sourcing costs are coming down, inventory costs are now going higher because customers are having to develop safety stock and contingencies,” says Strata. “There’s always going to be a need for a certain level of safety stock and buffers in the supply chain, because shippers want that comfort. What’s happened recently though, is that these buffers have gotten to be a little bit ridiculous.”

Furthermore, some of Manugistics’ customers have begun putting their warehouses in China to help trim costs, explains Strata. “Instead of safety stock being here in the U.S., stock’s in China. It’s still JIT, but it’s being pushed back farther. Instead of having a warehouse in Michigan, for example, you have your supplier in China and you have your distribution there as well. You can get a smoothing effect in your distribution and ultimately in your supply chain by having a warehouse in China.” However, this approach and other novel ways that shippers have devised to confront supply chain challenges means that even more sophisticated forecasting, planning, and visibility tools are needed, says Strata.

“What we’re seeing in the future is providing customers not only the with visibility all the way down the supply chain, but giving them the power to manage it, to be able to say, ‘Okay, I’ve got a shipment that’s stuck in Long Beach because of a strike. How do I plan, what do I have in my supply chain, and what other areas are there suppliers that I can source from? What mode do I use and how can I get it here now?’”

Strata believes that, “What customers need in the future is more well-rounded, holistic supply chain planning. They need to have visibility from supplier to manufacturer, from inland transportation to the port, and don’t forget the added security. The easiest portion is on the water, but then what happens when it gets into the port and there’s a delay in the port? How can shippers recalibrate their supply chain in a more dynamic fashion and avoid just sitting back and saying, ‘Oh, oh. I have to order more.’”

Increased visibility has a few compelling advantages, says Strata. “Larger shippers are starting to give the carriers they work with greater visibility ahead of time, as earlier as when they negotiate rates. The upside is that one, they can go out and secure more favorable rates, and two, they can procure capacity sooner. Shippers need to establish relationships with carriers, and what I mean by relationships is open collaboration. If carriers better understand the shipper’s network and vice versa, the two can work together towards a common goal.”

Other experts recommend putting the supply chain through “what if?” exercises and “stress testing” it to uncover weak links. Sunil Chopra and ManMohan S. Sodhi, authors of Managing Risk to Avoid Supply Chain Breakdown, say these efforts can assist companies in selecting the best mitigation strategy: holding “reserves,” pooling inventory, using redundant suppliers, balancing capacity and inventory, implementing robust backup and recovery systems, adjusting pricing and incentives, bringing or keeping production in-house, and using Continuous Replenishment Programs (CRP), Collaborative Planning, Forecasting and Replenishment (CPFR) and other supply chain initiatives.

What’s ahead for the 2005 shipping season?

The remainder of the year will probably hold more of the same, at least when it comes to the ‘last mile.’ But there are a number of developments in the works.

For starters, there’s been a lot more noise about putting an end to shippers’ abuse of free time at the terminals, which compounds congestion and hampers throughput. The ports of Los Angeles-Long Beach limit the free time an imported container can sit at the marine terminal to five days. Beyond that, shippers are charged a $44 demurrage fee. Yet, shippers routinely push shipping lines to give them 10 to 15 days free time and rarely pay a demurrage fee if it’s assessed. The abuse of free time is certainly not confined to the ports of Los Angeles-Long Beach, and while other ports have different policies concerning imported containers, it’s a nationwide dilemma that’s most likely going to result in concrete action sometime soon.

In the meantime, harbor truckers have begun to flex their muscle and this time they are in a position to exact some genuine leverage. Like the trucking industry in general, harbor trucking companies are finding it more difficult to attract and retain drivers. What once used to be a lucrative living has turned into an expensive waiting game—literally. That’s because drivers are typically paid on the number of turns they can complete, and chronic marine terminal congestion has put a wrench in the works. Earlier this year, harbor drivers from Oakland and Southern California testified at a California legislative hearing that they work 12 hours a day, five days a week to clear $25,000 after expenses. The job doesn’t come with benefits either. Drivers that stay are more cherished now than they’ve been in years. Their employers, meanwhile, are starting to get firm with slow-paying accounts and are also charging premiums for picking up containers for a few notoriously congested terminals. Moreover, harbor trucking companies are steering away from shippers who limit delivery hours or require the driver to remain at the shipper’s dock while the container is unloaded.

A new program at the ports of Los Angeles-Long Beach is also getting some attention. Beginning June 1, the 13 marine terminals in the complex will launch PierPass, and extended gate hours program that will charge shippers a $20 per-TEU fee for containers that move through the terminals during daytime hours. The fee will be refunded, though, if the shipper opts to pickup the container at night or on weekends.

Another solution to ‘last mile’ woes is to use inland container terminals instead of marine terminals for storing arriving containers. Shippers Transport Express in Carson, California, located about five miles from the ports of Los Angeles-Long Beach is one example. The facility receives anywhere from 300 to 500 containers each day, which keeps them from stacking up at the marine terminals. Harbor truckers like the idea because it helps them avoid the congested terminals and gives them a better chance of turning more containers. Marine terminals are more than happy it seems to pay the drayage charge of $50 or more per container because it keeps their prime real estate, i.e. waterfront land, from getting jammed.

The Port Authority of New York and New Jersey is studying the feasibility of using rail shuttles as a means to get imported containers moved out of marine terminals. In this scenario, passenger train lines, which get little use at night, could double as freight lines for moving containers to distribution hubs located near the rail lines.

A potential drawback to the inland container terminal concept is finding sufficient land in the seaport vicinity. Available land is already tight and much of it is close to residential areas, which raises a whole new host of concerns.