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Finance
Posted: December 9, 2016
Understanding logistics and supply chain for imports - by Rob Nahigian
As the year 2016 winds down, the last four years has experienced a culmination of the way that companies import products from China. That process can be lengthy and expensive. Much of U.S. finished goods are manufactured in China because labor is inexpensive. Labor costs can be $0.60 per hour to $3-4 per day. However products then need to be transported back to the U.S. market. Transportation costs can comprise 50-55% of supply chain overhead. Add inventory and labor and operating costs can comprise 88% of supply chain costs. Getting a product back to the U.S. has to be in volume and cheaply. Less trips from Shanghai (largest port in the world) then the less costs. There are four basic intermodal venues: ship, train, truck and air. Ship is the least costly and air is the most costly. Products are shipped in containers or what is known as TEU’s. An average ship holds 7,000 containers. A Walgreens or CVS might ship 15,000 to 20,000 per year. WalMart might ship 100-200,000 containers to the U.S. To carry more containers, ships have become larger and larger. The largest ship can handle 20,000 TEUs. But large ships need deeper ports and the pilot house needs bridge clearance. Long Beach handles 40% of the U.S. shipped products due to its location, port depth and bridge clearance. Problem: over 55% of the U.S. market lives east of the Mississippi. There is more time and cost to ship east.
Why not use the Panama Canal? It only had 2 canals and could not handle more than 7-8000 TEU ships. It was losing business. Therefore in mid-2000’s a decision was made to invest $5 billion to build a third canal to handle larger ships. But a new problem arose, the east coast ports are as old as the colonialists. Shallow harbors, low car bridge clearance, traffic to unload ships and the lack of accessibility for trucks or rail to transport to the mid-west distribution centers such as Chicago.
Answer: Ports up and down the east coast are spending billions of dollars for the Post-Panamax ships and competing for the shipping business. Miami, Savannah, Charleston, Norfolk, Baltimore, NYC and, yes, Boston are spending billions to dredge ports, raise bridges and prepare infrastructure. The Port of Entry will be selective and there are other problems once ships arrive. Ports can have union strikes, railroad bridges are too low for double stacked rail, trucks cannot clear highway overheads, and airport runways may not be adequate in length for cargo ships. These issues are being mitigated. Rail companies are building new tunnels to transport from the east coast through the Shenandoah Valley. Some airports have the proper runway lengths while others will be avoided. New distribution centers of over 1 million s/f require large acreage that can be found in the Lehigh Valley but perhaps not Cape Cod. Then there is the question of locating close to the population base so that a trucker can drive a 200 mile day and reach the majority of the customer base. Buyers want to order products on-line and have it delivered in 24 hours or less. Amazon wants to get the delivery time down to 2 hours from “click to pick.”
Conclusion: The projected trend was that 35% of imported business would move to the east coast. That is still arguable. The Suez Canal has also played an alternative role to the Panama Canal in 2016. The shift to the east coast however is real. Distribution growth has increased and there is a new trend for a decentralized regional site selection model. Logistics hubs are developed 200 miles from port with access by rail. The newest trend that could throw off this entire model in 2017 is 3D printing which has accelerated in the Northwest Ohio market. Additionally, president-elect Trump is promoting plans to encourage manufacturing companies back to the U.S. thus cutting out the need for intermodal transportation from abroad. JC Cannistraro, LLC is an example of a Boston based firm that decided to relocate its manufacturing base to the Boston Harbor Seaport area rather than flee the state. Products “Made in China” may be a trend of the past.
Rob Nahigian, FRICS, SIOR, CRE, MCR, is principal at Auburndale Realty Co., Newton, Mass.
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