From Long Beach to the Mall – Distributing America’s Imports

With millions of ocean-going containers flooding our ports, retailers and other importers are turning to a range of options from ever larger distribution centers to intermodal parks and regional distribution centers to deliver goods to consumers as quickly and efficiently as possible.

By Gary Forger
Senior Vice President, Professional Development
Material Handling Industry of America

Welcome to America. That said, how will all those containerized goods from China and elsewhere be efficiently distributed from ports to the ultimate consumer?

Keep in mind more than 42 million 20-foot equivalent units (TEUs) will arrive this year. The larger container ships bring in more than 8,000 TEUs at a time. To move them out of the port, the intermodal containers can be loaded on thousands of trucks. Or they can be stacked on rail cars, creating a train that would be many miles long. And that’s just one ship at one port.

This is not just a transportation infrastructure issue, however. Retailers and other importers have to figure out the best way to handle all of these goods most effectively in their distribution schemes. Six of the seven largest shippers are retailers, according to the Journal of Commerce. Those six – Wal-Mart, Target, Home Depot, Sears, Lowe’s and Costco – account for roughly 5% of all TEUs arriving in this country.

And it should come as no surprise that many of them have built distribution centers of one million square feet and larger on real estate close to major ports. Third-party logistics providers also occupy large distribution centers (DCs) to process imported goods for companies that would rather outsource the work.

These DCs facilitate at least three handling modes, according to real estate concern Cushman & Wakefield. One is simple crossdocking of goods to regional DCs. A second is transloading. This practice removes goods from TEUs and remixes inventory in 53-foot containers for domestic transport. The third is storage for future shipment, a common practice with seasonal items.

A major issue with the timely movement of goods is traffic growth. And the problem has already arrived. For instance, the number of TEUs handled by the top 10 U.S. ports rose by 9% in 2005. And the rate of growth continues to be high today. Exactly how strong it will be in the future is still a discussion point, but the trend is clear.

Some are projecting annual 10% increases for each of the next 10 years. More conservatively, the National Retail Federation recently cited projections that intermodal freight volumes will only double by 2025. And at the low end of projections is the New York Metropolitan Transportation Council (NYMTC). It calls for just a 50% increase in freight tonnage in its region by the year 2025.

That has put a focus on the congestion that already exists and the strain it is placing on existing infrastructure of roads and rail lines. For instance, the rail industry spent $8.3 billion in 2006 improving lines and facilities to manage growing traffic, according to the Association of American Railroads.

Clearly, the current infrastructure of distribution centers and transportation options is taxed. It’s affected by a mashup of huge volumes, rapid growth, and the need to maintain a steady flow of imported goods to the consumer.

Meanwhile, the reliance on large DCs near ports is limited by the availability of land to build new facilities to accommodate future growth. For instance, Southern California ports are increasingly shipping containers to large DCs in Ontario, which is 50 miles away. There just isn’t much open real estate any closer to the port.

Getting to the next level while trying to manage the current flood of goods won’t be easy. And the players are diverse. They range from government agencies and trade associations to railroads, truckers and retailers.

That is leading to several different approaches being built out simultaneously. Prominent opportunities include the:
• Shift to private and public funding of infrastructure
• Rise of alternative ports
• Expansion of intermodal parks
• Build out of distribution networks
• Emergence of store-ready shipments from China
• Development of a national goods movement policy.

Groups such as the National Retail Federation (NRF) are advocating new funding models. Public funding cannot handle the demand for new investments, explained Erik Autor, NRF’s vice president, international trade counsel. He recommended public/private partnerships for specific projects at this year’s Supply Chain Executive Conference held by AMR Research.

That model is already in play. Consider remote Prince Rupert, British Columbia. In mid-September, the port opened a new terminal to handle half a million TEUs a year. Not a large number, but a start on what is being positioned by private and public groups as an alternative port.

Two leading investors in the $170 million project are CN Rail and Maher Terminals, a family-owned operator of the largest container terminal in New York and New Jersey. Various government agencies also invested in the project.

Maher kicked in $60 million on a bet that retailers and others will be happy to dock their ships 500 miles north of Vancouver to avoid the Long Beach/ Los Angeles congestion. CN Rail invested $25 million to improve the rail infrastructure required to move those TEUs 2,600 miles to middle America.

That same funding model is being used to prepare middle America to handle TEUs. Public and private dollars are being invested in intermodal parks for transfer of containers from rail cars to trucks for delivery to regional distribution centers. Dallas has built a 6,000 acre park. Chicago is already the third largest intermodal center in the world. Kansas City has plans for a 1,000 acre intermodal park of its own. Even Chambersburg, Pa. is getting into the act.

There is also the matter of large DCs dispersed around the country. Key sites include Chicago, Memphis, Atlanta, northern New Jersey and Dallas, according to Cushman & Wakefield. These facilities augment the large facilities at ports and can be serviced by rail and intermodal parks.

They are also part of corporate distribution networks built to get products to consumers as quickly as possible. Some are the result of smaller warehouse consolidation to improve efficiencies. Others are located to minimize travel time, not from the ports, but to stores and other customers.

Chicago Consulting has long published a “10 best warehouse network” list that addresses the issue of DC proximity to customers. For instance, if a company only has one DC, it should be located in Bloomington, Ind. for the shortest possible lead time to customers, just 2.28 days. For a two facility network, locations should be Ashland, Ky. and Palmdale, Calif. for a lead time of 1.48 days. For three locations, Allentown, Pa., Palmdale, Calif. and McKenzie, Tenn. keep lead time to 1.29 days.

Building store-ready shipments in China rather than here is still another option for reducing time to customers once a shipment has arrived in a U.S. port. However, this practice is in the very early stages.

The idea is to perform all shelf-ready services in China. Once in the U.S., the shipment can be routed through a UPS or FedEx sortation center for direct delivery to the store, bypassing DCs altogether. Yet another routing option is to crossdock the shipment through a large port DC or feed it through an intermodal park to a regional DC for crossdocking direct to the store.

There is still one other approach to managing the flow of goods – make it a matter of public policy. It’s known as the national goods movement policy. Early this year, a representative of the American Association of Port Authorities testified on this potential policy to the National Surface Transportation Policy and Revenue Study Commission. In May, Autor of NRF encouraged development of “a national goods movement policy that recognizes the importance of the freight transportation system to U.S. global competitiveness.” NRF is also in favor of identifying and prioritizing projects of national significance.

At this point, it does not appear that such a national policy is anywhere near completion. But the fact that it is being discussed underscores the importance of the key issues. Meanwhile, innovative practices in transportation and distribution will remain the key to efficiently managing the movement of goods from ports to the ultimate customer.

Useful Links:

National Retail Federation
www.nrf.com

New York Metropolitan Transportation Council
www.nymtc.org

Association of American Railroads
www.aar.org

AMR Research
www.amrresearch.com

Cushman & Wakefield
www.cushwake.com

Chicago Consulting
www.chicago-consulting.com

American Association of Port Authorities
www.aapa-ports.org

National Surface Transportation Policy and Revenue Study Commission
www.transportationfortomorrow.org

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