Supply Chain Transformation Blog

Supply Chain Transformation Blog

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Part 1: Beyond the Canal - Considering the Supply Chain Alternatives

Categories : LogisticsSupply Chain

Introduction

In June 2016, the container ship Cosco Shipping Panama entered the second set of locks in the Panama Canal, serving as the first ship to pass through the long-awaited $5.4 billion expansion of the canal system. The macro impacts of the canal expansion have long been clear: Increase the capacity available to transit the canal to improve vessel transit cost from Asia to the Eastern US. Major carriers are now able to transport nearly three times as much cargo on a single vessel while trying to weather one of the largest slumps in shipments in recent memory. In addition to the carriers, major infrastructure projects are underway on both US coasts to either take advantage of this new opportunity or address this new competitive pressure. The board has been set and the pieces are in place, ready for market participants to seek out the realization of the expansion's original promises.

With such a large project at completion, several questions emerge pertaining to the relevance of the canal in your supply chain strategy, in particular:

  1.  How do we make sense of the real impact of these changes, outside of the typical expectations of lower cost and faster transit? What about the secondary and tertiary impacts of this expansion?
  2.  What can manufacturers, shippers, and retailers reasonably expect to happen throughout their supply chain beyond the highlighted headline benefit?
  3.  Are there specific operational impacts on my manufacturing and distribution strategy, regardless of whether or not a product is placed on a containership?

 

The position of this blog series is to seek to understand what the realistic impact is for the supply chain professional, their business, and their customers.  Establishing a point-of-view in this context can inform how products are moving, where capacity demand shifts, and the potential rate impacts across networks, both favorable and unfavorable. In addition to understanding the impact, we have identified potential technology levers that can support a shift in tactical or strategic capabilities associated with this market development.

This two-part blog series will focus on the secondary impacts of the canal opening and promote thought around the enablers and outcomes of those secondary impacts. In this first post we will discuss the enablers of change through examples of investments in supply chain infrastructure. In a future post we will describe how these enablers are changing the trade flow patterns, which are opening up new opportunities and created more flexibility for market participants.

 

Part 1

Overview – Primary vs. Secondary Impacts

The impacts of the canal expansion, like many capital investments, can be both primary and secondary, to the size of each category dependent upon the nature and scope of the project. Infrastructure and equipment is developed to be an enabler that drives resources to a desired outcome. The primary enabler is the canal itself, a $5.4bn project designed to achieve the outcome of a 13,000 TEU capacity, up from the prior Panamax limit of 5,000 TEUs. Other primary enablers are investments towards port expansions, dredging, and bridge expansions. Without these primary enablers there will be no direct outcomes – a container from a post-Panamax ship being offloaded to the Eastern US.

The next-order impacts of the canal expansion can also be observed through a similar thought structure. These secondary enablers are the infrastructure investments required to support this new supply chain structure, in both direct and indirect frames of mind. A container isn’t delivered without a distribution and warehousing network available to efficiently move the product to the customer’s door. The level of infrastructure investment, to be discussed in Part 1 of this series, is both large in size and broad in scope across North America. The secondary outcomes, discussed in Part 2, are the net results of the actions that have taken place before them and the answer to our primary question – What is the real impact and how should we think about it in the context of our supply chain network? We will discuss several ways in which these effects are leading to new options for thinking about how products are transported both to and from your facilities.

 

Enablers: New Infrastructure Investment

A wide variety of market stakeholders are seeking to take advantage of the expected increase in containerized shipments throughout the Eastern US. The momentous achievement of having a post-Panamax container arrive on the dock is achieved through what can be called infrastructure enablers –an investment in resources required to achieve the movement of goods along the supply chain. The primary enablers are the headline investments: ship building, port dredging, bridge raising, and crane construction for the major lines or ports. The secondary enablers are those investments that might be found more at home in a regional business journal. Research indicates that regional economic clusters are focusing on, but not limited to, infrastructure investment in three areas:

  1.  Port-Centric Warehousing,
  2.  Inland Intermodal Ports, and
  3.  Railway Investments

These enablers, discussed below, are key components in the supply chain to ensure that a post-Panamax cost advantage is maintained up to the customer’s door.

The first enabler is the large volume of warehouse construction in the regions nearest to the major east coast ports. While port dredging is still underway for Savannah, warehousing space is being increased to support current and anticipated shipment volume. Savannah currently represents roughly 8% of imported containers to the US and is expected to increase as it sits in an advantageous position to major metro markets. Total warehousing space is expected to increase by 3.6 million square feet once all current projects are complete. Other Southeast regions, like the Carolinas are experiencing similar upticks in volume. Served directly from Charleston, the Upstate SC region currently has over 6 million square feet of warehousing space under construction, according to CBRE, a level of construction formerly reserved for major metro markets. Major manufacturers in the region and large retail distribution hubs have provided support for shippers and distributors seeking to make investments in this region.

The aforementioned warehousing is supported by a second enabler, the increased investment in inland intermodal ports. The Wall Street Journal recently profiled a freight hub in Greer, S.C., designed to serve as the Upstate’s “inland port” and support the quick-transit of goods from Charleston to the Charlotte and Atlanta metropolitan areas. In Georgia, Kia motors is partnering with an inland port at Cordele to transport parts to manufacturing facilities once they arrive via Savannah. The Georgia Port Authority is making a similar investment by building a $19.7 million inland port in Chatsworth, G.A. as part of an initiative to improve transit times from Savannah, reduce strain on regional highways, and serve manufacturers in nearby manufacturing clusters.

The third enabler takes form of the railway operators that are supporting the buildout of infrastructure upgrades to connect the supply chain components. Including the aforementioned inland ports, The National Gateway Initiative is program to support the upgrades necessary for double-stacking of containers from Mid-Atlantic ports to Midwest destinations.

In the next part of this article, we will explore the outcomes from the investment in infrastructure by different market parties. The shift in trade flows is expected to cause an impact for multiple market stakeholders, including: west-coast competitors, mid-west shippers, and east-coast manufacturers, among many others. Finally, looking of the outcomes, we will explore the different levers available to your organization and how to think about addressing these market changes.

About the author

Thomas Sobeck
Thomas Sobeck
Thomas Sobeck is a Senior Consultant with Capgemini Consulting's DCOO Practice. He has experience working with global consumer products, packaging, and financial services organizations. His specialty areas include procurement, supply chain, and manufacturing strategy.