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West Coast Port Congestion Could Cost Retailers $36.9B in the Next Two Years

When it’s deliver-or-die, supply chains become the lifeblood of a company. To that end, the fashion industry has embraced technology to navigate today’s hyper-complicated supply chain, with myriad solutions shaping the first, middle and last mile. Call it Sourcing 2.0.

The nation may be growing weary of West Coast Port condition updates sans solutions, but the two negotiating parties, the Pacific Maritime Association (PMA) and the International Longshore Warehouse Union (ILWU) have not tired of talks, as discussions have been ongoing since the previous labor contract expired in July.

Now, according to new analysis by global management consulting firm Kurt Salmon, congestion issues at West Coast ports could costs retailers as much as $7 billion this year, and up to $36.9 billion in the next two years.

The PMA, which represents port terminal operators, announced last week that it would suspend the loading and unloading of cargo ships over the weekend and on Monday, which was President’s Day. President Obama directed Secretary of Labor Tom Perez to travel to California in an effort to help the parties end the dispute which has stalled cargo movement for months.

These moves by industry stakeholders and intervening parties have retailers and consumer product companies on high alert, according to Kurt Salmon, and the present conditions are stoking fears of a shutdown, which The National Retail Federation and National Association of Manufacturers estimate could cost the overall economy $2.1 billion per day for 10 days of halted operations.

But whether or not the PMA and the ILWU, which represents the dockworkers, can come to an agreement on the terms of a labor contract, the retail industry will still just be getting started on bearing the brunt.

The ports aren’t structured for managing the combination of large ships and high volume, according the Kurt Salmon analysis, so retailers need to rethink supply chain options now.

“Recent earnings reports make clear that port issues are already causing headwinds for retailers, and they’re bracing for gales,” said Frank Layo, retail supply chain strategist at Kurt Salmon. “Our clients who are able have already begun to shift shipments to East Coast ports, or upgrade them to hit delivery dates. They’re laying out capital to buy and hold extra inventory to carry them through dry periods.”

But these are just short-term solutions, Layo added. “We’re going to see more near-shoring. We may even see more U.S. manufacturing. This congestion is a tipping point for the retail industry, and the issues are not going to go away even after labor negotiations.”

Imports and shipping delays alone could cost retailers up to $3.8 billion this year, according to the firm’s findings. Add to that the costs of rerouting product to alternative ports, increased carrying costs and missed sales opportunities as a result of out of stocks, the cost to retailers could total as much as $7 billion.

“Further combined with likely rate increases due to import growth and congestion across the nation’s ports, 2016 costs could climb to as high as $36.9 billion over last year’s baseline cost,” Kurt Salmon reported in a statement on the analysis. “About 50 percent of international imports come in from the West Coast, and about 33 percent through Los Angeles and Long Beach. The backlog will take months to return to normal, even if L.A. port strike negotiations move quickly.”

According to Kurt Salmon, here’s what retailers can do:

Now: explore air and other West Coast options. Retailers are taking immediate steps to identify alternatives to the Los Angeles and other West Coast ports to keep products moving. In the short term, this might mean an increase in air freight and leveraging ports in Seattle. “Some fast fashion companies, which send smaller shipments via air and have already built that cost into their pricing, have an advantage here,” Layo said.

Near term: eye the East. Over the coming weeks and months, retailers should also be exploring East Coast and Gulf Coast port options and considering infrastructure build outs, partnerships or outsourcing opportunities to hedge exposures to West Coast ports.

Long term: examine sourcing strategy and re-examine American manufacturing options. Retailers should consider a revamp of their sourcing strategy, including supply chain risk mitigation capabilities and advanced scenario planning. Outsourcing and importing made business sense when the costs of labor, goods and transportation were vastly lower, but the industry is close to a tipping point in many product categories.

“We’re fast approaching a new normal in transportation, and consumers are going to feel it in the form of mass out-of-stocks and price increases if retailers don’t act quickly,” Layo said.

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