Accounting for Transportation Costs

Monday, May 21, 2007 1:31

Moving to China for many manufacturers is a long and involved decision process, and regardless of whether or not the move will be made in-house or through a supplier arrangement, it is important to do a full cost / benefit analysis of such a move.

An area that I have yet to see a lot of coverage (until recently) has been the impact of transit time and transportation costs. It is an area that I have seen many overlook, and it is only at the end of the year that companies figure out that they are losing money on the transportation costs.. there are cases where companies compared FOB prices to their in-house manufacturing costs.

A HUGE MISTAKE

In addition, many firms fail to recognize the impact transit time will have on their operations…especially when something goes wrong or if a big order comes in.

Another POTENTIALLY HUGE MISTAKE.

For anyone who was a supplier to Wal-Mart (or any other retailer) in 1997 or in 2002, this was a point made crystal clear to those who were supplying from China. If the dates don’t ring a bell, in 1997 UPS drivers went on strike and in 2002 Long Beach Dockworkers were locked out as part of heated contract negotiations. In both cases, the potential economic impact that these disruptions was largely unknown by the general public. Once meetings began breaking down, and the folks over at the networks picked up the story, the fact that without UPS or consistent flow of containers, Wal-Mart and others may potentially be severely impacted..

Overseas suppliers were the least prepared… Some firms were forced to move heavy good via air freight, some accepted penalties from retailers, and the lucky ones who planned ahead shipped early at high rates…

Now, many of those firms have plans in place now to recognize, plan for, and mitigate any future disruptions… but since 2002 there have been 1000s of firms who have extended their supply chains for the first time, and have not fully planned the possibilities.

As more and more manufacturing has concentrated on the mainland, the operational risks associate with transportation have also concentrated themselves. From an infrastructural standpoint, China has done and excellent job of planning for an export economy, while others have not. In addition to concentrating the majority of manufacturing for export on the coast, it has done a great jo of building the roads and ports necessary to export all the containers. with ports like Shanghai, Tianjin, Guangzhou as hubs and Qingdao, Ningbo, Shantou, and others in the second tier… China has the port capability to export a massive amount of TEUs.

And although there are now a few reported disputes, the biggest concern at this point is actually the fact that investment in U.S. and E.U. ports have lagged behind the levels needed to keep up(see US Lagging, Following in Transportation Investment @ Transit Sleuth, European Port-Expansion Delays Could Hurt Growth in Asia @ WSJ, or The impact of infrastructure @ 3plwire)

Now that bottlenecks at U.S./ E.U. ports are getting worse, as the risks to the system (read manufacturers and consumers) are going up. Unlike in 2002, when the concentrations of manufacturing in China and the East were at a point where a 10 day strike could be planned for and managed by manufacturers, that is just not possible now.

During the 2002 long beach strike, boats were held offshore the entire time.. boats that held a few thousand containers, and the backlog took weeks to get through. But, at the ports, it is not boats with 2000-3000 containers that are the norm, but boats with capacities of 6000-8000TEU …

Instead of having a lot of seasonal items that pressured the ports in the winter, and offered relief in the summer, trade has been consistently growing, and delays at the port, the rail yard, and DCs are all occurring … without a major event or disruption.

So.. where does that leave manufacturers? Well, start planning now for the next major event (see General Transportation Strike Looming in 2008? @ Zmag), start identifying new ports of entry , and make sure you are on your forwarders newsletter distribution list (see DHL update of Long Beach Strike)

For everyday operations though, work with your forwarders/operators at LBC or other ports to see what delays may be occurring, or may occur as part of seasonal business (Supply Chain Management During the Holidays). At LBC, it may take up to a week to break your container out of the port, but sometimes by working with a forwarder that time can be reduced.. and sometimes by switching forwarders you will find ones that have better relationships within the port.

In my mind, it will be interesting to see how the Mexican ports fare in the coming years.. To date, the biggest problems are proper infrastructure in Mexico, access to the U.S. infrastructure, and high taxes on Chinese goods. But if they were able to tap into a Houston rail, and put together a green lane on those goods, this would be a very attractive option for groups sending goods to the Midwest. Land is more abundant in Mexico, labor is cheaper, and Mexico’s economy would benefit greatly from the revenue generated by the ports.. and as you can see, Mexico has a number of projects underway to meet the demand

Whether it is a bottleneck at a port, or a labor dispute at a port, manufacturers need to continually update their play books so that as conditions change, their goods can still make it to market. With many firms operating at a small level, 1-2 shipments lost could spell big trouble, and with the amount of data out on the net, there is no reason not to know what the future holds, or how to properly plan

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8 Responses to “Accounting for Transportation Costs”

  1. David Adams says:

    May 22nd, 2007 at 6:56 am

    Richard –

    Was the 1997 UPS strike really a show stopper for Wal-Mart China sourcing? 10 years is a long time. They don’t seem to have slowed since then.

    David ‘Di Shui Dong’ Adams

  2. rbrubaker says:

    May 22nd, 2007 at 7:19 am

    David,

    When you headed back to town?

    2002 was definately more relevant on the effect a strike, port closure, etc could have on a supply chain feeding a group like Wal-Mart (perhaps I should have used PWC for UPS example?).

    Note: I am saying Walmart, but one could just as easily use Dell, or Toyota, or any group that is receiving goods on a JIT/ semi-JIT basis.

    What I was trying to show was how supplier could be affected by a transportation stopage.. should their contracts be tied to JIT performance.

    1997 was OBVIOUSLY not a show stopper for Wal-Mart, but it could have been for some of their small suppliers who relied on UPS.

    A few things that I am trying to work through here:
    1) What would be the impace of another LBC strike… or even a Shenzhen one?
    2) What is the ongoing capability of LBC to keep up with China ports
    3) What are the implications in terms of time/ money as continers from China increase beyond LBC capacity
    4) What are the alternatives… Mexico? Canada?

  3. Sourcing or moving manufacturing to China? » Third Party Logistics News - 3plwire says:

    May 22nd, 2007 at 5:27 pm

    […] China has an excellent post on this very topic, an issue we have discussed many times in the past. From ARLTC: For anyone who was a supplier to Wal-Mart (or any other retailer) in 1997 or in 2002, this was a […]

  4. Etienne C. says:

    May 25th, 2007 at 7:41 am

    The direct cost of transportation will highly depend on the value density of the product you source from China. It is not unheard of to have high value added products shipped by plane from China to the West, because the cost saving on the product is solid enough to make the cost of air freight marginal. Of course, for products with low margin and high volume, the story is another one. I think people understand that and are able to estimate the cost (FOB to CIF, land transporation at home). Sometimes they have a hard time to estimate the cost of China land transporation (which is not negligable at all).

    But the most important point, in my opinion, is the leadtime and the dependency on freight capacity availability. 3 to 6 weeks on a container carrier is a long time and this calls any buyer of China products to thoroughly think of its forecasting system, the reliablity of its ordering (how many buyers actually modify their order several times – markings or packaging or other small details). Like in many other areas, buying from China forces you to get very organized and to only count on yourselve to anticipate problems.

  5. rbrubaker says:

    May 25th, 2007 at 8:08 am

    Excellent points Etienne.

    For those in the west, air shipments of high value goods is becoming more common as Intel, Motorola, etc move production inland, and in the future I see groups like P&G, Kodak, and others developing their ground networks in the West on a regional basis (i.e. these goods will be for domestic consumption).

    I recently had a customer who did not fully consider the time or cost of the shipment fully, and while it was not a deal breaker..but it was an eye opener when they realized they forgot to take into account 5000USD in transportation costs for the shipment.

    Have a good weekend

  6. Adron says:

    May 26th, 2007 at 10:46 pm

    Thanks for the trackback. I also noted your comments about Mexico. Mexico has a LOT of input lately from Kansas City Southern (KCS) since KCS owns a large segment of the rail network in Mexico. They’ve been dumping huge amounts of cash into getting that network into better shape for just what you are talking about, and just general increases in throughput.

  7. rbrubaker says:

    June 5th, 2007 at 9:37 am

    Manufacturer has just covered this very topic in their article China sourcing carries delays, disruptions. A write up by BCG, the article is a good read.

  8. BCG Report: Surviving China's Rip Tide says:

    June 28th, 2007 at 2:01 am

    […] up on our post Accounting for Transportation Costs , I was forwarded a recent report by BCG entitled Surviving the China Rip […]