Dangling on the Cliff: Shippers Roundtable
Starting Monday, read JOC’s 2013 Annual Review and Outlook. Here’s a first look:
Supply Chain and Freight Rate Concerns
After a seesaw year in which international freight rates bounded up and down like a yo-yo, shippers and carriers alike are looking for stability and predictability in their businesses. Carriers on the ocean, land and in the air want sustainable rates that will support their transportation services. Shippers, under pressure to cut costs, want low rates. Will the various elements of the global supply chain find a solution to these conflicting goals in 2013?
Probably not. In fact, with a huge amount of new vessel capacity scheduled for delivery in 2013, the cycle of ocean freight rates could get even more volatile, leading to several peaks and valleys. That’s just one of the challenges manufacturers face in a year starting with a lot of questions.
One of their biggest concerns, of course, is the state of the global economy, which is undergoing a far-from-steady recovery from the Great Recession. Europe has retreated into recession, while the U.S. recovery is stuttering. Consequently, China’s growth is slowing, and the economic policies of its new leadership team have yet to become clear.
Also causing sleepless nights is the changing pattern of sourcing, as rising Chinese labor costs increase the supply chain strains in time and money, pushing more manufacturing closer to destination. At the same time, increasing U.S. regulations on international shipments are raising concerns about the cost of the delays they cause. And the possibility of more stringent hours-of-service rules on the trucking industry suggests the trouble motor carriers already have in finding and retaining the drivers they need to keep deliveries moving will only mount.
As 2012 wound down, The Journal of Commerce discussed these and other global supply chain issues with three global shippers: Patrick Halloran, director of international trade news global trade and logistics for Cardinal Health and former chairman of the GT NEXUX Shipper Council; Steve Harmon, vice president of transportation for consumer goods company Kimberly Clark; and Mark Widner, director of international transportation and customs at Dal-Tile, the flooring manufacturing subsidiary of Mohawk Industries.
“The economy has given us a lot of false hope,” Halloran said. “I think we were waiting for the economy to recover and build (momentum) in 2012, and it never really quite made that.”
With business hopes riding on predictability and stability in the new year, will 2013 be the year they get it?
JOC: We entered 2012 with the same trepidation that marked 2011. The year got off to a fast start before headwinds again sent shockwaves through the freight transportation industry. How will you remember 2012?
Patrick Halloran: Every year starts the same and this year is no different — another challenging year to predict in terms of your budgeting. Are you going to hit your budget? It’s always a crystal ball, so to speak, to see how the supply and demand balance is going to be and what the impact will be on rates and service. In 2012, for example, I guess the surprise was the ability of the trans-Pacific eastbound market to sustain the high spot rate increases that we saw in the latter half of the year. And then, of course, 2012 was capped off by the labor challenges on all U.S. coasts, which will make last year memorable.
Steve Harmon: I’d say that the predicted transportation constraints just didn’t happen. The exception was the second quarter in the Southeast for trucking with seasonal imports and crops coming to market. On the ocean freight side, we felt like it was kind of a year of plenty. There were no constraints or issues for us. We are a net exporter, and ship to all regions of the world.
Mark Widner: For me, 2012 was the year the carriers finally focused on a business model that had profit as a driver, instead of just chasing market share. They were a bit overzealous in it, but I think their constant chasing after GRIs sends a constant message, at least, and they’re working on it.
JOC: What do you think 2013 will look like? Will you conduct your business any differently?
Widner: I don’t think we’ll conduct our business any differently. Our model always has been and will continue to be to build strong and mutually beneficial relationships and partnerships with our core carriers. It’s something that’s served us pretty well so far. We’re pursuing some long-term contracts with some of our core carriers, in the three- to five-year range, for price stability and to keep the business, in a sense, on a steady keel.
JOC: Are most of your annual contracts long-term now?
Widner: No, they’re not. We’re working on them with our primary carrier, and I’m hoping to be able to do something similar with some of our other carriers, as well.
JOC: There’s a tremendous amount of new capacity scheduled to come on line, something like a 9 or 10 percent increase, and yet global demand is forecast at half that or less. In preparing for your negotiations this spring, what is it going to look like?
Widner: I think you’re absolutely right. As I speak with the carriers, the honest ones will admit that they’re building too much capacity. On the other hand, every five years or so there’s an increase in the efficiency of the ships. With the cost of bunker they feel compelled to build the more efficient ships. As a result, you have a lot of older ships out there that they’re unwilling to scrap, or unable to scrap, and we’re stuck with all this excess capacity.
Harmon: For ocean freight, I think rates are going to be flat to lower.
JOC: On both imports and exports?
Widner: I’d agree that I would see rates flat to lower in the coming year from a carrier perspective.
Halloran: That’s an interesting question. The majority of the ships they’re building are very large, which is where you get the efficiency numbers for the Asia-to-Europe trade. How and when and where the current ships cascade, and/or how they idle them will be a large factor in determining rates. But the challenge is: Are they going to be successful in idling? And I guess it’s going to be a matter of where they lose the least amount of money. I’d hate to be the one making that financial analysis. So, if you look at the forecast from the various analytical companies, they’re reluctant to say exactly how much capacity is going to go into what lane. They keep it at a global level, but they’re pretty targeted with their demand forecasts. So, it’s still hard to say whether the rates will go up or down in any specific lane. It’s a matter of where they park the ships, when they park the ships and for what trade lane.
The economy has given us a lot of false hope. I think we were waiting for the economy to recover and build momentum in 2011, then 2012, and it never really quite made it. So, it depends on how quickly that ramps up, which changes the dynamics of everything.
Having said that, if I look into 2013, what will I do differently? Maybe because it’s so fresh in at least my mind working through the (port labor) challenges, one thing I want to do is evaluate our supply chain’s strengths and weaknesses, and what we learned from the experience. A stress of that magnitude showed us where we were really strong, but it also exposed areas that need to improve. So, some key lessons I’m taking away already are that fast access to reliable data, positive carrier relationships and an experienced logistics team are keys to be able to pivot and adapt quickly.
JOC: Are you budgeting big increases in fuel costs, or have you been able to take that cost out of your supply chains?
Widner: I’m not budgeting anything higher than what we saw at the peak of 2012. I’m not anticipating fuel to be any higher than what it was in the past year.
Harmon: We’re budgeting fuel at the same levels as 2012. On other costs, we still see a lot of ways of reducing and eliminating waste in our supply chain to lower costs. We’re going to be all over that one, as we have in the past.
Widner: I would agree with that. As a business model, I don’t think it’s a great idea to chase your carriers for $20 or $50 every time you go out for a bid. I think you’re going to get a lot more bang for your buck if you look internally at your own supply chain and find efficiencies there and a more direct way of doing things.
Halloran: I think fuel demand is a derivative of global economic growth, so perhaps we’re going to see some price increases in fuel, but absent an external shock like the Arab Spring, I don’t see big increases on the horizon.
Widner: I think where we see a lot more volatility for fuel is in the domestic market. It’s a lot more responsive on the domestic trucking market on a cents-per-mile basis than it is on the ocean transportation side.
JOC: Is your relationship with carriers changing? Are you dealing with them on any different basis?
Harmon: From an ocean carrier perspective, I feel like we still have strong partners, but the world kind of changed with the recession. With the cost pressures and volatility they have certainly been under, it feels more transactional than it did pre-recession.
JOC: Transactional, meaning you’re dealing more with the spot market, spot rates?
Harmon: We’re still dealing with our annual (contract) bid, where we’ve leveraged that globally. But in terms of just face-time engagement in some areas, it seems a lot less strategic and more transactional than it has in years past.
Halloran: Overall, we enjoy a solid, long-term relationship built on a lot of trust and straightforwardness that has been forged and tested with the carriers we have. We’ve parted ways with some, but for our core carriers, this relationship has been tested over the years. Sometimes they need us, and we’re there for them, and sometimes they don’t need us, and we’re there for them, as well. So, it’s tested on both sides of the market for us. We enjoy that relationship, and I hope they do as well. We don’t always agree, certainly, but we have a strategic relationship in mind.
Widner: I can see how Steve would feel the relationship with a lot of the carriers is becoming more transactional. I’ve seen that with some carriers, as well. Again, with the core carriers and the partnerships, they stand behind you when you need it, and you stand behind them when they need it; whether it’s the carriers moving capacity around if they need it someplace, or they’re opening up capacity for you, or providing equipment where you need it and last-minute space. I think those high-level and core-carrier relationships do a lot more for the stability of your business than trying to chase rates and capacity on the spot market.
Harmon: On the trucking side, we have retained and really kind of strengthened our core-carrier concept, even during the recession. So, it’s kind of a tale of two cities.
JOC: What do you see for the year ahead in the retail market?
Widner: I don’t think anybody anticipates it’s going to be the opening of a floodgate. From what we’re seeing in the marketplace as far as home building and construction, it’s going to be a steady growth, rather than explosive growth. Europe and how much it’s going to drag down the global economy, I think, is the wild card.
Harmon: Our products are basically things people need every day, so we don’t see as much volatility in terms of impact on our business. That said, it just feels like the economy is a big question mark and, if anything, the first six months of 2013 feel like they’re going to be really flat for retail.
JOC: One of the big lessons from the recession seems to be with inventories. They remain lean. When we get a sustained recovery, will shippers strive to keep it that way?
Widner: We’ve struggled in years past with inventories, like every company has. I think recovery or not, the well-run companies always strive to keep inventories as lean as their business model and required service levels will allow.
Harmon: I could talk about inventories for an hour. I’ll tell you that there was a big change when the recession hit. We quickly reduced inventories to generate cash. We saw our retailers do it. We saw our suppliers do it. Some of that has come back. A lot of companies took their inventories too low to service the business. I have seen some upswing, but inventories are still much lower than pre-recession. I believe this will continue whether there’s an economic recovery or not. Companies are so focused now on working capital and ensuring they don’t get cash-strapped again. So, I see inventories remaining low, and it puts a lot more stress on those of us who manage transportation. Whether it’s domestic or international, because now we do not have buffer inventories. Any delay in movement of goods to market, is a lot more visible and a lot more painful. If you do not manage for on-time deliveries to ensure that your product is on the shelf at the time the shopper or consumer wants to buy, it will impact the bottom line.
JOC: Hurricane Sandy caused tremendous disruption in the Northeast, which steered a lot of ships to Norfolk and Baltimore. More disruption occurred in Los Angeles-Long Beach a month later. Are you factoring things such as that into your supply chains? Do you have enough buffer to cushion against those kinds of disruptions?
Harmon: The thing we try to promote with our internal supply chain partners and our businesses is that you really need to think more about safety stock, especially if you’re manufacturing outside a region where you’re selling. A lot of times, we’ll think about chasing the lowest-cost manufacturing site, but don’t always think about the length of haul, the time it takes to get to market and then making sure we’re protected from a safety stock perspective. When you have long cycle times, more investment in inventories is wise. We promote that from a transportation perspective.
Halloran: Six years ago, we embarked on a Lean Six Sigma program. That was to support a reduction — a right-sizing — of inventory, I should say. So, we’ve been making great strides, supported with sound principles, to make the right decisions on inventory. Having said that, because we’re in health care, if we’re short on inventory, it’s not just a matter of missing a sale — the greater downside is that we could cause problems in the greater health care system. So for us, it’s not just a matter of lost sales; there’s a far larger impact and responsibility that we have to consider. Surgeries could be missed, so we really have to keep an eye on making sure the inventory is lean but able to withstand stress. You’re talking about hurricanes. Well, to support our plant, for example, in the Dominican Republic with raw materials and then the finished goods coming back, we factor in the hurricane season and carry a higher supply of raw materials and then finished goods to account for those things. It’s a tricky combination. We do have to be cost-effective and efficient because we’re under the same pressures as everyone else to make sure we’re very sharp on our costs.
JOC: How much more does sourcing play into this? Are you near-sourcing more than you have in the past to take risks out?
Widner: We manufacture 80 to 85 percent of the product we sell within North America. Given the nature of the product — it’s heavy and it costs a lot to move relative to your margins — what we foreign-source are things we can’t necessarily get here in the U.S.
Halloran: We have a blend of near-sourcing and far-sourcing. I spoke of our Dominican Republic plant. We have facilities in the state of Chihuahua in Mexico, Malta, and then obviously a manufacturing platform in Asia, and, I should add, the U.S. and Puerto Rico. So, it’s a blend.
Harmon: We haven’t seen any real mass movement to near-shoring with the exception of a couple of product lines. Those were things we did get in trouble with because of the length of the supply chain on some critical products.
JOC: Are you facing any container or other equipment shortages on the export side?
Halloran: With some exceptions, we’re really not experiencing problems. Part of that is good communication with advance notice that our demand is critical. And again, we’re supporting the manufacturing facility. We know what our demand is going to be; it’s fairly consistent. So we tell the carriers six weeks out, here’s what it looks like we’re going to need, then we guide that in as it gets closer. We don’t book eight containers and then show up with four. There’s credibility there. The carrier knows what we book, and we’ll communicate with them as it gets closer. More or less, hopefully, they pen in our demand because they know it can be counted on.
JOC: Are you communicating with your carriers through EDI, the GT Nexus cloud platform? Is that one of the ways you’re doing that?
Halloran: I don’t think it’s relevant to the timing of our bookings, but, yes, we do book electronically using the GTN portal. But we do book as far out as the carriers will allow us, not with the intention of getting the containers sooner, but to give them a heads up that, in their planning process, Cardinal Health will need three containers here this week in this place. And they can count on it.
Harmon: We’ve seen a lot of improvement. We did make some changes to our network after we encountered some problems a couple of years ago. But the export market isn’t as robust as it was when we encountered those difficulties, so we haven’t had any problems with delays because of equipment on exports.
Widner: On the import side, there was a period during the summer out of Asia where capacity was a little tight on equipment. But all in all, it did a lot better than in 2011 when the carriers weren’t making enough new equipment to service all the new vessels coming out.
JOC: What will you be doing in the coming year on the environmental front?
Widner: I think that by improving efficiencies in the supply chain, there’s an inherent positive impact on the environment. Less fuel used and fewer miles driven and more direct routing. Our company strives to, and is actually very successful at — implementing award-winning green initiatives in the production process and final product — recycled material and more efficient ways of making the product. We’re constantly striving as a company to find green benefits. Ultimately, anywhere you can find green efficiencies, it’s going to impact your bottom line.
Harmon: We pride ourselves on our sustainability record. We have made announcements about migrating toward some alternative materials that are more sustainable to make our products. On domestic transportation it’s all about intermodal shipping. We’ve been a big proponent of this mode, so we’re putting whatever we can on the train. We’re also taking out miles and looking at our network optimization.
Halloran: We find that doing the right thing from a business point of view also is green — focusing on our packaging, optimizing our container space, using fewer containers and more or intermodal. We had a major expansion to our headquarters in Dublin, Ohio, several years ago, and it is a certified “LEEDS” building. It’s the right thing to do. Our EH&S group also leads companywide efforts on recycling programs and reduction in energy use, among other programs. As a matter of fact, they also monitor our carbon footprint for not only our transportation of cargo, but the flight I’m taking tonight gets registered as my contribution to the carbon footprint, and they monitor, measure and track it.
JOC: Why is that a contribution to your carbon footprint?
Halloran: If you don’t measure it, you can’t improve it, right? It represents the level of detail involved.
JOC: There’s a lot of talk about the decaying infrastructure and inadequate port infrastructure in the U.S. What impact does the state of infrastructure in the U.S. have on your business?
Widner: I think our infrastructure is exemplary in many ways when you compare it to a lot of other countries. But we’re certainly not the leader in progressive infrastructure, and it’s in a state of disrepair. I think it’s something the states and the federal government need to focus on for long-term competitiveness and for green initiatives and efficiencies, as well. When your trucks are idling at the port on a turn for three hours, for example, it’s a waste of resources.
JOC: Mark, you carry a very heavy product. Do you have problems on some roadways and bridges?
Widner: No, we don’t see any problems. If anything, I’d like to see the states make heavyweight corridors and exemptions for heavy international containers more available because, again, the more you can get into a container, the fewer containers you’re shipping. So from an environmental impact, it would be better. From a company cost base, it would be better. The road laws, or the weight limits across the states, are so different, not to mention the higher weight allowances from other countries, that you have to constantly keep up with and vary the weight you put in containers depending on which state you’re going into.
JOC: What about when you’re crossing a number of states to get to a market? That must be a nightmare.
Widner: Yeah, you use just the lowest common denominator. If you go into Florida, you can ship 60,000 pounds. You come into California, and it’s not more than half that sometimes, depending on where you’re going. So, there’s a lot of variation there, and it’s a juggling act. We come into just about every port in the U.S., just about every state, and it can be a challenge.
Halloran: I think sometimes we have a tendency to look at the negatives. If you look at the positives where the U.S. is concerned, I think we have one of the best rail freight systems globally, although not passenger service. Maybe that’s why we’re so efficient at intermodal rail and rail transportation in general for freight. In a country as large as ours, we’re pretty efficient at getting product from the interior to the port, especially if you look at other countries where manufacturing is clustered around a port because of the lack of inland infrastructure.
Harmon: If you look at roads here in North America, even though they’re considered decaying, we’re very much evolved compared to other parts of the world. I think some of the road capacity has been disguised with the downturn of the economy. When and if the economy does rebound, it’s going to put more pressure on our infrastructure. But the railroads have really stepped up and invested in a much better network that’s very friendly to intermodal. That’s one of their growth areas, and I think that’s done a lot in itself to take more trucks off the road.
Widner: The scariest thing for me when I think of infrastructure is the state of bridges in the country. We had the bridge collapse a number of years ago up north (in Minnesota), and I fully anticipate that we’ll have something similar at some time in the future. The states should get on board with examining and building up that infrastructure, as well.
JOC: If it were up to you, how would you pay for infrastructure projects and investment?
Halloran: Maybe I’m naïve, but I would say it depends on who benefits. Any investment, whether it’s public or private, should have a positive standalone ROI. But if the benefit goes to shippers or users, then the ROI should make it a win-win through greater efficiency or other advantages. Are you paying another dollar and getting $1.20 out of it in efficiencies? It’s like any other decision. But in many of these projects, part of the benefit, or all of the benefit, might go to society. And if it does go to society, whether through increased jobs or something similar, then it should be borne by the public at large through general taxes.
Widner: I think it’s only logical that the fuel tax goes up. When you compare it to other countries, it’s way too low. But we also see an increase in toll roads and toll bridges and those fees are paid directly by those that are using the resource. My concern with increasing the gas tax is whether or not the money raised actually goes toward reinforcing the infrastructure and building new construction, and isn’t bled off into some other government budget.
JOC: How would you classify the state of trucking and rail service?
Harmon: Trucking service has actually declined since capacity left the market in 2009. Also, you have the driver situation, turnover is high and there’s a lot of new drivers. There’s not as much reactive capacity out there. So, that’s been something we’ve been working closely with our carriers to improve. In terms of rail, I would again give the railroads kudos, because we’ve seen some improvement with on-time delivery, on intermodal, that has built confidence with both our internal and external supply chain partners to use this mode more. So, trucking, worse. Intermodal rail, better.
JOC: Are you shifting freight from truck to rail?
Harmon: Yes, we’ve been doing that since around 2008, and we continue to look at any opportunity we can to put our over-the-road freight on rail, at least in terms of part of the haul. So, absolutely. It’s one thing that also supports our sustainability initiatives.
Widner: Definitely. We’ve used rail all along. There are some great savings you can get from using rail, but it comes down to a matter of how long you can wait for the inventory. For example, my colleagues on the domestic side have partnerships with other shippers to co-load freight. Our product is very dense. You can put 200,000 pounds of our product in a boxcar and not get more than three feet off the floor of the railcar. But if you can co-load that with lightweight shippers and fill out the capacity, you can cube out that box and save both companies a ton of money, and cut down on the net capacity needed. There’s only so much capacity available in the market, and the more you can share that capacity, the better off you’re going to be for the economy, efficiencies, the environment and the bottom-line dollars for the company. Every dollar saved on transportation goes straight to the bottom line.
Halloran: Like everyone else, we’ve been shifting as much freight as possible from truck to rail. It’s the right thing to do, as we said, from a green perspective, but then also from a business perspective. And now we’re looking at potentially moving over some shorter-haul lanes from truck to rail.
JOC: Have you faced problems related to a shortage of drivers?
Halloran: There’s been a lot of talk about the driver shortages, but it hasn’t been an issue for us and may not be until, like we’ve all talked about, demand increases.
Widner: In talking to truckers, I know a lot of them have trouble recruiting drivers, and they have a lot of turnover depending on how good they are to their drivers. For us, I don’t think we’ve seen problems on an epidemic proportion. It’s spotty here and there depending on capacity in a particular market on a particular day. I think a lot of it comes down to the partnerships you make with your carriers. If you’re a consistent and good partner, they’re going to be a consistent and good partner for you, too.
Harmon: I want to pile on that one a little bit. We are seeing an impact from the shortage of truck drivers and it’s occurring with on-time delivery. The on-time delivery is just not as high as it has been in years past. And as you start to deep-dive on some of the reasons for that, it’s the reactive capacity, and the reactive capacity has to do with the fact that there’s not enough drivers in the seats on given days. The second problem is just trying to train the new people coming in and getting them familiar with what they have to do to be on time. It’s an issue. So we’re starting to see pockets of concern, especially if you’re a long-haul shipper. I believe this is going to be the No. 1 issue we’re going to be facing from a supply chain perspective in the not-too-distant future if the economy does come back.
JOC: Are there any particular areas of the country where it’s worse?
Harmon: The Northeast is a hard area to get into. The Southeast is constrained in the second quarter, around May-June, due to the seasonal freight spikes mentioned earlier.
JOC: Any new regulatory concerns this year?
Harmon: Yes, we’re continuing to keep an eye on the (trucking) hours-of-service changes currently being challenged. If they go through, it will have an impact by further reducing productivity, especially in North America.
JOC: What, if anything, do you hope Washington will accomplish?
Halloran: I’m still smarting from the Los Angeles-Long Beach port disruptions, so I hope Obama actively mentors the ILA-USMX contract negotiations to a successful conclusion.
Harmon: My wish list would be that our government use some judgment, especially on some of the regulatory stuff out there like the hours-of-service. I also look at the lack of standards on import and export compliance. I just hope there is improvement because some of the inefficiencies and productivity hits you take as a shipper just aren’t conducive to helping a weak economy get better. I guess I am a little bit pessimistic that this will not be a priority, given all the other issues our government is facing.
JOC: Does that include security issues?
Harmon: Security doesn’t come to mind. I think it’s just more the documentation, the lack of standards when you do experience an audit of some type. And then just some of the holdups you can run across trying to get your stuff either into or out of the country.
Widner: I would echo a lot of that. I think there’s a vast underestimation in the country of exactly how much damage the labor problems at the ports can cause the recovering economy. And just on an ongoing basis, I think it would be great if we could get U.S. Customs to standardize the process at the various ports and adopt some best practices. We ship through just about every port, and there’s a huge difference between the different ports and how Customs handles, holds and examines, how timely they are in getting cargo in and out the system. I understand Customs needs to be there, but it sometimes adds thousands of dollars to the cost of the shipment, and customs agents either don’t seem to understand that their inefficiencies are causing this (bottleneck and expense), or they just don’t care.
JOC: Have you seen any change in the way Customs does its documentation? Is the problem getting worse, better, or staying the same?
Widner: It hasn’t really changed all that much over the years. You have two or three ports around the country that are easy to deal with. They’re fantastic; they’re in and out, and they’re very efficient. And there are some you can’t even get them on the phone. They don’t care. The shipment will sit in the port for two weeks waiting for an exam, and it’s just ridiculous.
JOC: What are the good ones?
Widner: We have a lot of success in Houston and Florida. I think everybody would put Los Angeles at the top of their list for the worst port to conduct their business through.
JOC: Back to near-sourcing. Are China’s rising manufacturing costs impacting where you’re planning to manufacture your products?
Halloran: As with most global companies, we consistently evaluate and assess our alternatives, and there are pros and cons. What’s the political stability? What is their customs efficiency? Is there bribery? How’s the infrastructure? The one thing that concerns me is that for all the things we just talked about, if you turn the lens on us, on the U.S., and you’re a foreign buyer and you say, OK, how does the U.S. fit in that sense? Labor stability is one thing we look at if we’re looking at a new country. It’s interesting how a foreign buyer would look at us.
And it also ties into the export initiative. Are regulations hurting, or helping us? Is the labor situation stable? Can I get my product out of the country? So, we have to pay attention to that in terms of how we are competitive vis-a-vis other countries supplying the same thing.
Harmon: We refresh our network, and where changes are needed, we make them. That said, I have not seen any wholesale shift from China.
Widner: We get a lot of product out of China, not all of it porcelain or ceramic. We have a joint venture in China that we’re involved with that we get a lot of volume from, as well as some other suppliers. A lot of it is glass and things that we just can’t get here in the U.S. — stone, as well. When we look at a foreign market for production, at this stage, we’re looking at it more as a way to get into the local market, rather than as a source for U.S. products. When we look at needing to fulfill our sales needs, we first look at sourcing in the U.S. A lot it has to do with supply of raw materials, and the cost of getting them into the plants. Natural gas prices, obviously, play a big role in our production process, and it’s very low cost and in plentiful supply here. If you go to China or some other countries, a lot of those natural resources just aren’t available energy-wise. I think we’re probably better off with North American production, unless again we’re looking at using some of these manufacturing bases as a jumping-off point for sales in the local market.
JOC: How do the newly signed free trade agreements with South Korea and Colombia impact your business? Is the Trans-Pacific Partnership on your radar?
Widner: I don’t think the countries involved in the Trans-Pacific Partnership are going to directly impact us. But, in general, if you like NAFTA, you’re going to like any free trade agreement that comes up.
Harmon: We’re trying to sort this out. We have established businesses in South Korea and Colombia, and so to the extent there is any competitive advantage of getting our products to or from, we’ll certainly take advantage of that.
Halloran: I think it’s just like everything else. You go back to your sourcing equation. What are your duty rates or other trade barriers? What’s the power supply? But this does change — the FTAs change part of that sourcing equation, and potentially could offer some new market opportunities.
JOC: There’s been a lot of discussion here about labor. Do you think what we’ve seen this year and especially most recently in Los Angeles-Long Beach is an ominous sign that labor is getting more volatile?
Widner: The OCU (Office Clerical Unit of the ILWU) protest was a good example of what could happen. With as much of the market concentrated in the Northeast and on the East Coast, an ILA strike or lockout could be real damaging to the economy as a whole. And I think it’s actually a little embarrassing that some of the demands and arguments are coming from people making $200,000 and $300,000 a year with guaranteed jobs, when there are so many people in this country who are struggling to find any job.
JOC: Put yourself in January 2014. What are your top concerns?
Harmon: I guess my biggest concerns are related to the economy. We all hope it improves, and to the extent it does, it’s going to put pressure, I think, on all the things we’ve been talking about — infrastructure, driver shortages and inflation. What are we going to do to make sure we can offset these costs and do things more efficiently? And then, secondly, how are we going to make sure we’re able to mitigate any of these potential bottlenecks to ensure we’ve got a good flow of our goods and services to market?
Halloran: If our wishes come true and the economy does pick up, that’ll lead to other problems. But I’d rather have the other problems than perhaps a stale or stagnant economy. So, the stress of more cargo flowing, more people on the roads and heavier demands on our infrastructure, it’s something you need to plan for now, and to make sure that at least the plans are in place to address and spend the money wisely where it’s needed.
Widner: It seems like it’s the same song and dance the last few years. The rate and carrier stability in the market from an ocean perspective is a concern. I know they struggle. They’re up and down, and it’d be nice if they just got to a stable business model and got a control of their capacity. And the spot market, you know, I think carriers only have maybe maximum 15, 20 percent of what they carry under contract, and that doesn’t lend itself a lot to stability in the marketplace.
Patrick also brings up a good point that will relate to labor. A lot of what the employers are looking for in the ports is efficiencies. There is a lot of resistance to those efficiencies, but when the economy does pick up, those efficiencies are going to be extremely important to keeping the engine humming.