Pier Pressure: Customers Call the Shots

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Competitive pressure drives ocean carriers, ports and terminal operators to collaborate to improve efficiency and accommodate customers.

About one year ago, Matson Navigation Company, the steamship line that serves the United States-to-Hawaii trade corridor, conducted a focus group with its large auto manufacturer customers.

"Customers told us that they wanted to shift away from the containerized lift-on/lift-off service we were currently providing, to more roll on/roll off service," recalls Ronald Forest, senior vice president of operations for Matson. "Ro/Ro is faster and requires less handling on both ends, so there's less damage to the vehicles."

Following the meeting, Matson, together with the Port of Oakland and SSA Terminals, went to work to address these customer needs. The steamship line spent more than $90 million to time-charter a Ro/Ro vessel under a multi-year arrangement and added a 700-car garage to the stern of one of its ships. Matson worked with the Port of Oakland and SSA to develop new Ro/Ro berth and terminal space to accommodate the vehicle cargo. The carrier is now working with the port authority and SSA to build a multi-level storage garage to create denser temporary storage.

Matson also created new online IT capabilities that allow manufacturers to track their cars via the web. By logging on to the new system, car companies can monitor what time the cars are received at port, and when they are loaded and unloaded from the ships. Matson currently moves 145,000 automobiles to Hawaii and is working toward moving 100 percent of that volume Ro/Ro.

"As an ocean carrier," says Forest, "we listened to our customers, changed strategy very quickly, invested a large sum of money to satisfy their needs, and worked very closely with the port authority and terminal company to institute the change quickly. We will continue to work together until we move 100 percent of our Oakland automobiles Ro/Ro."

Competitive Pressures

Instances where carriers, ports, and terminal operators collaborate to fulfill customer needs are increasingly common as competitive pressures continue to escalate. Ports recognize the simple truth that their facilities are stationary, but vessels and shippers move their cargo around to different ports if they see an opportunity or are dissatisfied for any reason. Transportation options make such relocations possible.

"The old paradigm of a port range, as defined by a 50-mile radius around a particular port, no longer holds true," says Richard Bank, a partner with Washington, DC law firm Thompson Coburn and veteran maritime industry observer. "After all, what is the U.S. port that handles Far East-origin cargo for Atlanta? Freight can get to Atlanta any number of ways. Should cargo come to Seattle and then double-stack to Atlanta? Or should cargo move via water through the Panama Canal to Jacksonville or Charleston?

"The real point," Bank suggests, "is that shippers influence their carriers to pick the best ports and make sure that the ports they are engaged with have the most efficient handling and productivity."

Customers Have Leverage

What leverage do shippers have? A lot, as it turns out, and this leverage is increasing. "It used to be that the steamship line held the controlling hand in ocean trade," explains Charles Sheldon, managing director of the seaport division for Port of Seattle. "Today, the shipper often calls the shots."

"Shippers can use their influence directly with carriers and ports, or indirectly through third-party logistics service providers (3PLs) and other intermediaries," Bank notes. "If the underlying importer goes to the shipping line directly for service, it's buying into an existing relationship between a given port and carrier. But if the importer uses a 3PL, it has a much larger choice. BAX or UPS, for example, can shop for carrier/port combinations to get the best deal for its customer."

Recognizing this fact, several years ago the Port of Seattle decided that attracting large distribution centers was "key to getting ships to make their first call in Seattle," says Sheldon. "So we started courting big distribution center locations for our port. Today, we have a number of them: Target, Home Depot, Wal-Mart, Michaels.

"We work hard with the shippers, analyzing ocean and trucking transit times, customs facilitation, security, and other issues. We help our shippers get in touch with 3PLs and sometimes help them find land for their distribution facilities. We act as a two-way conduit to help all parties get their work done," he says.

Port-shipper relationships can extend beyond just initial site selection issues. In fact, ports are actively forging closer business ties with shippers. South Carolina State Port Authority is somewhat unique in this regard.

When German automaker BMW decided to locate a new factory near Charleston, it did so in part to take advantage of the port's high container processing productivity.

"Part of our contractual understanding with BMW is that we will work together on a continuous improvement process," says Bernard Groseclose, president and CEO of the South Carolina State Ports Authority (SCSPA). "BMW's people visit our port operations frequently to try to come up with ways to handle their cars better. We share in the cost savings."

One such productivity tool includes an online bar-coding system developed by SCSPA that allows the automaker to track vehicle import and export movements.

Timing is Everything

On the other side of the equation, ports face pressure from the steamship lines to do whatever they can to accelerate the flow of trade. Naturally, carriers only want to call on those ports that offer the most efficient shore-side processing and capabilities. "A ship only makes money when it's at sea," Bank says. "So the issue of how long it takes to unload and load a vessel is paramount. Ports need to be able to offer carriers competitive capabilities with regard to processing efficiency."

Carriers, after all, can technically switch ports of call. "Most of our carrier contracts are for three to five years with options for renewal," Groseclose says. "At the same time, most have some type of clause allowing termination by either party. If we're not satisfying a customer's needs, we're not in a position to force them to stay." Although the decision to switch ports is not one that ocean carriers make lightly, the leverage remains nevertheless.

Ports face another issue with ocean carriers: their ability to handle the larger generation of ships coming on stream over the next decade. The new, larger containerships will carry 8,000-plus TEUs.

"The largest ships we handle today are about 6,000 TEUs," says Art Wong, a spokesperson for the Port of Long Beach, Calif. Today, only a handful of U.S. ports can accommodate even these larger vessels.

Larger ships require not only deeper channels and harbors, but also more efficient pier-side processing to minimize vessel turnaround time. Deployment of these big vessels is expected to have a domino effect on the maritime sector, with incrementally larger ships put into rotation throughout the nation's seaports.

To meet these infrastructure-related competitive pressures, public ports are reinvesting heavily in facilities—to the tune of $1.5 billion a year, according to Kurt Nagle, president of the American Association of Port Authorities (AAPA). The Port of Seattle will spend more than $1 billion over the next 10 years on capital improvements, according to port director Sheldon.

"During recent contract negotiations with an existing alliance of carriers, we spent a good deal of time looking at their facility requirements to handle their long-term growth," Groseclose recalls. "We laid out a phased program for repairing terminals. We removed some warehouse transit sheds, and added two new cranes. We even realigned our container yard to convert what was formerly a wheeled storage area to denser stacked yard storage with rubber-tired gantry cranes."

The Technology Play

At many U.S. ports, land is in short supply. "Real estate is not that fluid," notes Port of Long Beach's Art Wong. "There's a limit as to how much more space we can find on the waterfront. We have enough land to expand for the short term, but we'll run out of physical space in 10 years. We need another solution for the long term."

That solution, in part, is technology.

"For the longest time," says Wong, "terminals relied on clipboards and chalkboards to manage freight. The International Longshore and Warehouse Union (ILWU) signed a labor agreement in 2002, however, allowing terminal operators to deploy technologies that the expiring agreement hadn't allowed."

Today, ports are looking to technology to increase throughput without requiring more space.

Last year, for example, four Long Beach container terminals began using an online system to schedule container pick-up appointments. Called eModal, the system is designed to improve efficiency and reduce congestion at the port's container terminals. The system provides a single point of contact for multiple container terminals, offering detailed container, vessel, and terminal information, a trucker status service, and more.

With eModal, truckers log on to one web site for container status, vessel schedules, terminal locations, truck driver lists and other information. This service eliminates the need to hunt around the web, checking individual terminal or shipping line sites, or calling several terminals to find out container status.

"Truckers can make appointments to pick up their freight rather than arrive at the terminal and wait for a given container to be unstacked," Wong says.

Charleston developed a yard management system to perform similar tasks such as locating a particular container, giving directions to the truck driver to find it, and notifying the yard equipment operator to pull the box.

"Our operator sees on his computer screen that XYZ trucking company is approaching and looking for a particular box that's located in a certain position, in a specific container stack," Groseclose explains. "A lot of the time, the yard man already has the container out and ready to set on the chassis when the trucker drives up."

Improvements like this have helped Charleston reduce trucker turn time by more than half in the last year.

Open for Business

There is one issue that several of the larger U.S. ports face and have not yet resolved: congestion. This issue is particularly troublesome at the ports of Long Beach and Los Angeles. Severe highway congestion is forcing the two ports, the shippers who use them, and neighboring communities to seek alternatives to physical expansion.

"We are looking at plans for adding truck lanes or double decking lanes to our freeways, but those would take 10 years or more to build," Wong says.

The recently completed Alameda Corridor project has eased congestion around the two ports to some degree. One of the largest single investments made in port-related infrastructure recently, the Alameda Corridor is a 20-mile freight rail expressway between the neighboring ports of Los Angeles and Long Beach and the transcontinental rail yards and railroad mainlines near downtown Los Angeles.

Since the start of operations on April 15, 2002, the $2.4-billion corridor has handled an average of 35 train movements per day. The ports project the need for more than 100 train movements per day by 2020. The Corridor can accommodate approximately 150 per day.

The Alameda Corridor is intended primarily to transport cargo arriving at the ports and bound for destinations outside of the five-county Southern California region, or originating outside the region and shipped overseas via the ports (exports). These scenarios account for approximately half of the cargo handled by the ports.

The Corridor has reduced traffic congestion on surface streets by eliminating conflicts at 200 street-level railroad crossings. It cut emissions from idling cars and trucks by 54 percent and increased efficiency of the cargo distribution network to accommodate growing international trade.

These improvements are not enough, many believe. Congestion could be further eased if the container yard gates at Long Beach and Los Angeles operated expanded hours.

"We need to move more port truck traffic into off-hours," Wong says. "Right now, we are only using one-third of the day. Our facilities are used weekdays from 7 a.m. to 5 p.m., but are not utilized much overnight or on weekends. We can easily double and triple our productivity by extending gates hours.

"Overseas," Wong adds, "many ports operate with much less land, yet have higher throughput per acre than we do because they operate more hours."

Throughput for the Port of Long Beach is roughly 4,000 to 5,000 containers per acre, per year now. "We figure we can increase that by 50 percent just by going to a night shift. And we're capable of operating three shifts," Wong says.

"The big companies such as Wal-Mart, Target, and Mattel work their local logistics facilities 24 hours a day, so longer hours aren't a problem for them," he adds.

In fact, Wal-Mart and a number of other companies—retailers, manufacturers and agricultural producers—became so concerned about congestion that they formed The Waterfront Coalition. The group is leading a campaign to extend the hours of terminal gate operations at both the Long Beach and Los Angeles ports.

"An extension of the hours of terminal gate operations remains the most effective solution to this crippling level of congestion," the Coalition says.

While longer gate hours sounds like a natural solution, there are, of course, problems. Gate operators and terminal companies believe the incremental processing volume increase will not be offset by higher operating costs. Smaller companies in particular worry that the increased costs will make late/night service too costly for them and thus put them at a competitive disadvantage.

Some area legislators suggest that the port/terminal operators assess fees on truck cargo utilizing the port during prime business hours. Assemblyman Alan Lowenthal (D-Long Beach) recently introduced a bill that would create an agency to impose fees on the owners of goods being trucked in and out of the ports of Los Angeles and Long Beach.

Naturally, proposals like this make members of the Waterfront Coalition very nervous. The group opposes such fees, arguing they will not solve the problem, and the added costs will only be passed on to consumers in the form of more expensive goods.

Charging peak use fees won't reduce congestion, the Coalition argues: "How a terminal would impose such fees so that they would affect decisions is a mystery, because there is no customer/user relationship between terminals and shippers/truckers, and the decision-making, with respect to drayage, is decentralized among truckers, cargo owners, and other shippers."

Delivering the Goods

In recent years, the dynamic of the ocean supply chain has certainly shifted away from a carrier-centric model to a shipper-centric one. This is an important development for manufacturers, retailers, and anyone else importing or exporting goods from the United States. This leverage applies whether the company is a big-box retailer, in which case it wields its own clout, or a small importer, piggybacking on the negotiating heft of a major 3PL.

"In the final analysis," Bank says, "shippers can bring their cargo into this country via just about any gateway. Therefore, all ports have to be on the leading edge and constantly review and renew their capabilities and technology. This applies to the most sophisticated information technology and container handling equipment, all the way down to the basics, such as gate operating hours."

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