Much has been made about the waning influence of organized labor in the United States. But try telling that to the thousands of businesses whose supply chains were at the mercy of the two waterfront unions that flexed their muscles in 2012 like they haven't in years.
Those who rely on the International Longshoremen's Association (ILA) to move their goods in and out of 14 East and Gulf Coast ports breathed a sigh of relief Feb. 1 when it was announced the ILA and the U.S. Maritime Alliance, representing ship management at the ports, had reached a tentative six-year contract agreement. The pact, which at press time still was subject to ratification on both sides and to the negotiation of local agreements impacting each port, averted a Feb. 7 work stoppage and keeps the ports open for business.
The master agreement, if it holds, would end a standoff that began late last summer and that twice pushed the ports to the brink of being shut down. The agreement came just five days before the third extension in five months was to expire.
Though cargo had moved unimpeded during the dispute, businesses that rely on dockworkers to handle their freight spent a skittish six months reviewing their contingency playbooks, putting them away when it looked like the logjam would break, only to take them out again when all seemed lost.
Businesses shipping in and out of the nation's largest port complex, the Ports of Los Angeles and Long Beach, weren't as fortunate. In late November, an 800-member clerical workers unit of the International Longshore and Warehouse Union (ILWU) struck the port complex. The ILWU dockworkers honored the strikers, this time shutting down Los Angeles and significantly curtailing operations at Long Beach. Before the walkout ended eight days later, about 40 percent of the nation's import tonnage had been affected, at a cost of roughly $8 billion.
A week earlier, 220 members of the Service Employees International Union (SEIU) walked off their jobs at the Port of Oakland (Calif.). As they would do in the Los Angeles basin, ILWU workers honored the SEIU picket lines, shutting the port's operations for a day.
The battles aren't over. In the Pacific Northwest, ILWU members at six grain-handling terminals at the Port of Portland and the Washington state ports of Puget Sound and Vancouver have been working without a contract since their one-year compact expired Sept. 30. Despite alternating threats of a union strike and a lockout by grain elevator owners, labor remains on the job while management seems bent on imposing a contract with terms the ILWU opposes. Hanging in the balance is the one-fourth of the nation's grain exports that flow through the terminals.
LIMITED OPTIONS FOR RELIEF
If the ILA had struck, companies shipping to and from the ports where the 14,500-member ILA mans the docks would have had little choice but to endure the work stoppage for the duration. According to a report issued Jan. 31—one day before the contract announcement—by London-based consultancy Drewry Supply Chain Advisors, ocean carriers do not view ports on Mexico's East Coast as a viable alternative for large amounts of cargo. Similarly, the ports on Canada's East Coast have their limitations. Few services call at the Port of Halifax, and big containerships cannot sail up the St. Lawrence River to reach the Port of Montreal, Drewry said.
At best, the Canadian and Mexican ports would serve as backups for limited traffic flows, according to the firm.
Trans-Pacific shippers who normally use the Panama Canal to send shipments to the East and Gulf Coasts could reroute their freight over West Coast ports and then move the goods inland by rail or truck. But that is a more costly option and is subject to capacity limitations and dock congestion, especially if the ILWU acts in sympathy with its brethren in the East.
One advantage for West Coast shippers and importers is the close proximity of the Mexican ports of Lazaro Cardenas and Manzanillo. The ports are linked to the U.S. mainland by cross-border rail connections and are considered less geographically remote than their counterparts in the eastern part of the country. "Their capacity may be limited but they could act as a useful safety valve" should U.S. ports get congested, Drewry wrote in its Jan. 31 report.
Since an ILA strike became a possibility, trans-Atlantic shippers began diverting some of their traffic to the West Coast. But such a remedy might have been difficult to implement at this late date, and it would have come at a cost to liner carriers for redirecting their ships, an expense passed on to the cargo owner.
In its report, Drewry said carriers would levy a congestion surcharge of about $1,000 per 40-foot equivalent unit container, or FEU. They may also charge demurrage fees on containers stuck in port beyond a contractually agreed-upon "free" time period, according to the firm. Based on the average weekly throughput of 300,000 20-foot equivalent unit containers, or TEUs, at East and Gulf Coast ports, the surcharges alone would cost cargo owners about $150 million for each week of a strike, Drewry forecast.
Ann Bruno, vice president of global trade for New Freedom, Pa.-based consultancy TBB Supply Chain Guardian, whose firm has worked closely with carriers to develop strike-related contingency plans, said a few days prior to the Feb. 1 announcement that the surcharges could go as high as $2,000 per FEU, in some cases.
Then there are other costs that would be hard to quantify, but which could inflict more substantial and durable pain. For U.S. exporters, they include delayed deliveries, canceled orders, financial penalties, and expiring letters of credit. For importers, it could mean lost production and sales. Both may incur additional expense to pay for expedited shipping via air freight.
It is believed that a strike lasting two weeks would take the supply chain about six weeks to get back to normal.
A YEAR OF LIVING DANGEROUSLY
Even as the ILA and management settle their scores, the uncertainty sown by the 2012-13 labor wars will not be lost on those in the trenches. The question for stakeholders, many of whom stand to be around for the next contract cycles later this decade, is what can be proactively done to minimize future damage, especially after memories of 2012 have faded.
Bruno said companies should take stock of their third-party relationships. "Did they take steps to mitigate your risk?" she said. "Did they make an effort to schedule calls at non-ILA ports? Did they do a good job of negotiating 'bullet mini-landbridge' rates?" (a reference to arrangements with ship lines allowing companies that normally use the Panama Canal to shift their containers to intermodal service at West Coast ports).
Another approach would be for companies to conduct an extensive modeling exercise covering their global supply chains and to view a port as just another node in the network, similar to, say, a distribution center. Jeffrey J. Karrenbauer, president of Insight Inc., a Manassas, Va.-based firm that performs these types of simulations, said companies could simulate a preferred port's being knocked out of commission, and then use the model to gauge if they are overcommitted to any one port, and to estimate the full range of costs incurred to shift to other ports.
A fringe benefit of the exercise, Karrenbauer added, is that "you'll probably discover things about your operations you didn't know before."
The problem, he said, is that while the transportation folks live and breathe the day-to-day action, the upper echelon decision-makers are more focused on broader issues, notably their company's stock price if it is publicly traded. As many at the C-level view it, investing millions of dollars to reconfigure a supply chain as protection against an event that may not happen is less desirable than sweating out a work stoppage and then resuming normal operations, according to Karrenbauer.
"Wall Street doesn't reward risk mitigation," he said.
There may be logic behind the passive attitude, however. Because containerization remains a cost-effective means of transporting goods internationally, many executives in and out of supply chain management don't want to rock the proverbial boat. As they see it, the periodic turmoil is a small price to pay for the benefits of the service, as long as the work stoppage doesn't occur at or around peak season.
Another factor that may favor inaction is the power of the bicoastal labor axis. A steamship line, cargo owner, or intermediary with significant tonnage could seek out a port with nonunion labor but may not find one with the size or resources to meet their needs. In addition, maritime labor may decide to punish a steamship line for seeking a nonunion port by "working to the rule," an action that has the effect of dramatically slowing the cargo loading and unloading process.
"The message that goes out is 'If you call a non-union port, just try to get your freight moved the same way again,'" said a high-level industry executive who asked not to be named.