The four-month slowdown at 29 ports on the U.S. West Coast in late 2014 and early 2015 serves as the most recent reminder of the massive supply chain ramifications of port disruptions due to labor disputes.
The West Coast situation was the result of protracted contract negotiations between the Pacific Maritime Association, which manages all of the ports in Washington, Oregon, and California, and the International Longshore and Warehouse Union (ILWU). The previous five-year contract between the two parties ended on July 1, 2014 and the slowdowns peaked from November 1, 2014 through February 20, 2015.
The Pacific Maritime Association alleged that the union intentionally and significantly reduced productivity, suspending negotiations for long periods. Port management, in turn, barred weekend and holiday operations at certain times during the dispute. Ultimately, the U.S. government had to step in, first by sending a federal mediator and then, in February, by dispatching U.S. Secretary of Labor Thomas E. Perez to the West Coast. Pacific Maritime and the ILWU reached an agreement in principle in late February, with the ILWU ratifying the final contract on May 20, 2015.
A Brief History of Disputes
While more enduring than many port disputes, the recent West Coast standoff is not unique. Potential disruptions loom every five years on the West Coast alone, with occasional slowdowns or stoppages in the interim as well. In 2012, an eight-day strike affected the ports of Los Angeles and Long Beach, as did an 11-day lockout in 2008 and a 10-day strike in 2002. Back in 1971, a strike went on for 134 days.
While significant stoppages at other U.S. ports occur less frequently than on the West Coast, the threat exists for eastern and Gulf coasts too. At the end of 2012, an expected strike in these two regions was averted after preliminary talks on container royalties and other contract issues led to a new agreement.
Port disruptions are certainly not new; they’ve been occurring for decades. A half century ago, the 1965 Delano grape strike by the Agricultural Workers Organizing Committee and the United Farm workers, which spread from the grape fields to the ports, lasted more than five years with a devastating effect on the industry.
The ramifications for the fresh fruit and vegetable industry, with highly perishable and seasonal product, are especially harsh. So what can shippers and receivers do to avoid these situations? Are there contingency plans every supplier should have in place?
Preparing for Problems
We all know hindsight is 20/20, but buyers and sellers of fresh produce were caught off guard and hit hard by the recent crisis at West Coast ports. Many were shipping fruit for occasions like the Chinese New Year, and with much of the West in peak season at the time, this equated to a significant number of containers heading for Asia.
The four-month slowdown at 29 ports on the U.S. West Coast in late 2014 and early 2015 serves as the most recent reminder of the massive supply chain ramifications of port disruptions due to labor disputes.
The West Coast situation was the result of protracted contract negotiations between the Pacific Maritime Association, which manages all of the ports in Washington, Oregon, and California, and the International Longshore and Warehouse Union (ILWU). The previous five-year contract between the two parties ended on July 1, 2014 and the slowdowns peaked from November 1, 2014 through February 20, 2015.
The Pacific Maritime Association alleged that the union intentionally and significantly reduced productivity, suspending negotiations for long periods. Port management, in turn, barred weekend and holiday operations at certain times during the dispute. Ultimately, the U.S. government had to step in, first by sending a federal mediator and then, in February, by dispatching U.S. Secretary of Labor Thomas E. Perez to the West Coast. Pacific Maritime and the ILWU reached an agreement in principle in late February, with the ILWU ratifying the final contract on May 20, 2015.
A Brief History of Disputes
While more enduring than many port disputes, the recent West Coast standoff is not unique. Potential disruptions loom every five years on the West Coast alone, with occasional slowdowns or stoppages in the interim as well. In 2012, an eight-day strike affected the ports of Los Angeles and Long Beach, as did an 11-day lockout in 2008 and a 10-day strike in 2002. Back in 1971, a strike went on for 134 days.
While significant stoppages at other U.S. ports occur less frequently than on the West Coast, the threat exists for eastern and Gulf coasts too. At the end of 2012, an expected strike in these two regions was averted after preliminary talks on container royalties and other contract issues led to a new agreement.
Port disruptions are certainly not new; they’ve been occurring for decades. A half century ago, the 1965 Delano grape strike by the Agricultural Workers Organizing Committee and the United Farm workers, which spread from the grape fields to the ports, lasted more than five years with a devastating effect on the industry.
The ramifications for the fresh fruit and vegetable industry, with highly perishable and seasonal product, are especially harsh. So what can shippers and receivers do to avoid these situations? Are there contingency plans every supplier should have in place?
Preparing for Problems
We all know hindsight is 20/20, but buyers and sellers of fresh produce were caught off guard and hit hard by the recent crisis at West Coast ports. Many were shipping fruit for occasions like the Chinese New Year, and with much of the West in peak season at the time, this equated to a significant number of containers heading for Asia.
But thinking about the types of problems port labor issues can cause now, should help shippers and receivers prepare for future worst case scenarios should a strike or work stoppage occur again.
Keep an eye on expiring contracts
One seemingly simple way to prepare is to monitor key contracts, including expiration dates and ongoing negotiations between unions and associations (see sidebar for more information). Following the progress of talks and concessions can help suppliers be aware of escalating tension, and begin to prepare should discussions fall apart or a strike appear imminent.
“We didn’t know what was ahead when we made the billings and set up the shipments,” says Steve Reinholt, export sales manager at Wenatchee, WA’s Oneonta Trading Corporation and Starr Ranch Growers. “If we knew it would take 56 days to get to China and Hong Kong, we wouldn’t have taken the order—instead, we delivered subpar fruit and it was late.”
Late arrivals, pricing, and lost sales
Shipping delays have a domino effect: late arrivals not only mean less desirable fruit, but affect free-on-board (f.o.b.) pricing, margins, and acceptance rates. Though this is nothing new and a common occurrence even with shorter, domestic shipments, few suppliers had ever dealt with the extreme delays caused by a port strike.
When Reinholt’s shipments finally made it to Asia, much of the fruit had “used up its shelf life sitting in the port”—and the delays were devastating for more sensitive commodities like pears. “The fruit was sold, but later, in a different market and at a lower price,” he concedes. “It’s almost impossible to put a value on it, but the losses were in the millions of dollars.”
For Robert Autenrieth, president of Los Angeles-based Autenrieth Company, it was much the same story. “We lost maybe a third to 40 percent of our income,” he states. “I stand behind our product 100 percent; with these disruptions, I would not and could not guarantee it, so I stopped shipping all together.”
Look for substitute suppliers
On the other side of the trade equation, importers felt the sting of the strike and work stoppage too. Eric Janke, vice president and chief operating officer of DiMare Fresh, Inc., in Dallas, TX notes that the West Coast slowdown resulted in reduced availability for several imported commodities, such as melons and garlic.
To fill orders, distributors and brokers were forced to find domestic sources to augment supply. “You could get the product, but you had to jump through more hoops,” Janke explains. “Procurement processes changed on specialty items, and you had make decisions in hours instead of weeks.” The resulting scramble was good for U.S. growers, but not for distributors and ultimately consumers. “It caused market prices to increase drastically,” he says.
Research alternate shipping options
The West Coast delays also caused more congestion to both East Coast and Gulf ports. DiMare sells more than 1,800 produce items at the Port of Houston, where shipments were backed up two to three weeks, according to Janke. Alternatives included flying in product (raising costs to a prohibitive level for many commodities); using domestic sources (although many customers prefer imports); and renegotiating shipping deals to use other ports (increasing costs).
Oneonta shipped some fruit from alternate ports, such as Houston and Miami, and considered alternatives like truck and rail. Both the latter options required more transloading and the potential to damage product, as well as adding expense. “We can pass some of [the increased cost] to the customer, but not all of it,” Reinholt points out. “It depends on our relationship and the customer’s needs.”
BEYOND U.S. BORDERS: A PORTS & LABOR SNAPSHOT
Strikes and slowdowns in key produce exporting and importing countries can have a significant impact on the global produce industry.
In 2014, a 22-day strike at Chile’s Port of San Antonio delayed fruit exports to the United States. Chile has experienced numerous short strikes across all of its ports in recent years, as a response to labor reform and other issues.
Zach Schulman, president of New York Export Company in Beacon, NY, says two recent strikes in Chile caused produce to sit for prolonged periods. “We had to dump a whole load of plums in the local market, because with a 10-day to two-week delay in transit, they weren’t suitable for shipping.”
Such issues extend across South America and into Asia as well. In June 2015 union workers ended a three-week strike at Peru’s largest port, Callao, after agreeing to improved scheduling and benefits. Workers and customs agents in Brazil’s ports have had a number of strikes over the past several years, as have Hong Kong and Indonesian ports. Hong Kong’s dock strike in 2013 lasted 40 days, while Jakarta’s Tanjung Priok port came to a halt the same year, in both June and December.
New York Export Company uses West Coast ports to ship apples and pears to customers in Central and South America. Last year’s delays “caused a disruption in supply, an inability to live up to our commitments, and extra charges,” confirms Zach Schulman, president. Some loads of fruit sat on the pier, others were in containers but not yet on the pier, and others were shipped overland to Gulf ports. All of this led to additional diesel and trucking costs, most of which could not be passed along to the customer.
Reconsider all the scenarios
No one wants to experience another port imbroglio, but not one wants to be Chicken Little either.
Schulman spells it out: “The real problem is trying to predict it in advance. If you know a contract is up, you can tell the customer you will charge more to ship via the Gulf of Mexico,” he proposes. “But then if there’s no strike and everyone else is shipping direct, you’re not competitive.”
So which is the lesser of two evils? Being prepared or being paranoid? For those who lost millions in spoiled produce, a little paranoia may be a good thing, to prevent the frustration and waste of perfectly saleable perishables.
Brace for a Long Recovery
The impact of a port slowdown or strike does not end once a contract is agreed upon. “The full impact still hasn’t been realized,” Janke says. “It takes a while to bring the supply chain back to reality.”
US. PORT OPERATIONS WEST COAST Management: Pacific Maritime Association Union: International Longshore and Warehouse Union Total Ports: 29 Key Ports: Los Angeles, Long Beach, Oakland, San Francisco, Seattle, Tacoma Contract Expires: June 30, 2019
EAST & GULF COAST Management: U.S. Maritime Alliance Union: International Longshoreman’s Association Total Ports: 7 marine terminal operators (direct employers) and 11 port associations Key Ports: Houston, Jacksonville, Miami, New York-New Jersey, Virginia Contract Expires: September 30, 2018 (extension negotiations ongoing)
In the short term, port operations take time to straighten out. Six months after port managers and the union agreed in principle to a West Coast contract, Autenrieth estimated about 30 percent of shipments were still not going out of Oakland, due to continued troubles with port processes, while San Francisco remained congested as well. “This drastically reduces our ability to ship out,” he says.
Seasonality, too, intensifies the challenge. Countries such as South Africa or Chile can ship year-round, but “California has its time,” explains Autenrieth. “If you miss it, you miss it. You can’t just double up when the ports are back.”
Another critical factor is retail. Since supermarkets have already planned ads and promotions for various commodities during peak season, they must turn to other markets to ensure supply if their usual sources experience delays. Once the supermarket has a good experience with a new supplier, it can be hard for the previous supplier to get the customer back.
The same is true for international sales. Although the Pacific Northwest is a major source for apple and pear shipments to Asia, “Europe got a real leg up last year,” explains Reinholt. Europe’s apple supply was larger than usual, due to the Russian embargo, and more reliable than West Coast shippers. So the slowdown certainly benefited European suppliers, who he believes will be able to keep this new business, to the detriment of U.S. suppliers.
Port problems tend to be a rarity in Europe compared to the United States. In addition, the level of service is good and European rates for ocean freight are often less than in the United States. So when buyers are looking for more stable, lasting relationships, these factors bolster the competitive advantage of European suppliers, especially when U.S. producers are mired in difficulties like a port strike.
Bill Bloxom of F. C. Bloxom Company in Seattle, WA says Chilean apples can displace Washington State apples as well, especially when transportation costs are more reasonable. Some customers even sourced potatoes and onions from Australia and New Zealand during the slowdown, while others in the Caribbean turned to Prince Edward Island, Canada.
“If we can’t be consistent and priced right, we’ll lose to these other markets,” Bloxom states. “Our customers have had a lot of exposure to alternatives; there will be a lot of competition out there.”
PORT SLOWDOWNS AND STRIKES: PRODUCE INDUSTRY IMPACT
For perishables shippers, port disruptions can have a profound impact:
• Increased costs due to overland shipping, extended cold storage, last-minute changes in sourcing and logistics
• Lower prices due to lower quality and/or late shipments (e.g., missed holidays) and the resulting discounts or refunds
• Selling locally instead of shipping stranded commodities, flooding the domestic market
• Squeezed margins due to a combination of lower prices and higher costs
• Lost market share to foreign suppliers (for exporters) and domestic suppliers (for importers), potentially with long-term ramifications
• Inventory concerns, including low inventories for domestic importers and retail customers, and high inventories for exporters
• Lost sales for exporters, importers, growers, and retailers, potentially extending into the future due to poor customer experience
• Spillover effects, including congestion and delays at other ports not directly affected by the slowdown (the East Coast, Gulf of Mexico, Canada), as well as railroads and trucking
• Layoffs and lost hours for workers due to uncertainty and stalled shipments
• Destroyed or rotting commodities, when no alternatives can be found (or if the domestic market becomes too flooded and prices drop too far).
That said, fortunately, Schulman believes “people have short memories.” International trade is still governed by price: “If European apples are $2 more, they’ll come back.”
What Else Can Be Done?
Short-term fixes such as shipping from other ports or finding alternative suppliers can help produce companies get through the worst of a slowdown, albeit with sales losses and reduced margins. In the long term, however, the threat of recurring strikes and slowdowns are a constant concern.
“I’m thinking about alternatives, but what alternatives are there?” asks Autenrieth. He cites one example: exporters could band together and charter vessels to key markets. Such a step would only be possible, however, for firms that plan ahead and are able to assemble the minimum volume required.
On a more macro level, observers note that newer ports in places such as Vietnam, Cambodia, and Singapore are highly automated and vessel operations are streamlined with much smaller crews than in the past. This puts U.S. ports at a disadvantage in terms of speed, service, and efficiency, a situation magnified by threats of slowdowns and stoppages.
Longer-term solutions, according to experts, will need to be industry-driven. The Agriculture Transportation Coalition, for example, has called for a waiver of the PierPass traffic mitigation fee. While the fee is meant to reduce congestion by encouraging truck pickups and deliveries at off hours, the transportation industry believes it has impeded traffic flow, especially during slowdowns.
The federal government may also need to play a bigger role, mandating milestones for contract negotiations, requiring transparency in the negotiating process, or intervening more quickly in the event of a dispute. Another suggested option is to amend the National Labor Relations Act or add ports to the Railway Labor Act to make slowdowns and strikes illegal, requiring mediation of any disputes.
Bloxom, who stresses that both labor and management contributed to the shipping problems on the West Coast, says, “The concern this: how are we going to solve this before the new contract is up in three years, and we have yet another crop to move?”
“It’s important as an industry and as a country that we find some sort of solution,” agrees Reinholt. “It’s a situation where a relatively small group of people can have such a big economic impact. And it’s not just the produce industry—we are a little more time sensitive, but we’re a small part of the total impact.”
