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Designing a Supply Chain to Move Quickly Past the Border

Congestion at U.S. ports and increased global sourcing is prompting supply chain executives to look for creative new solutions. Here are a few options for supply chain innovators and integrators.

by David J. Closs

The substantial growth in global operations by U.S. firms has increased congestion at U.S. borders. Firms are attempting to source components and finished goods from low cost country suppliers which have substantially increased the inbound flow of goods. Figure 1 on the next page illustrates the significant growth in volume over the last 140 years for the United States. The figure vividly illustrates the rapid growth in the dollar volume of goods that enter the United States from Canada and Mexico as well as the East, South and West Coasts.

While it hasn't been quite as dramatic, U.S. firms have also increased their exports as they use their available capacity to satisfy the rest of the world's demand for U.S. made products. Even if there is not a corresponding demand for the volume of U.S. made exports, there is still the need to return the empty shipping containers resulting in some port congestion on its own.

At the same time, there is increasing demand for port security to make sure that terrorists, their weapons, or other contraband cannot get past the border. There is increased pressure to have a higher percentage of the entering shipments checked by Customs and Border Protection to reduce the potential for contraband entering the country. Another initiative in the U.S. House of Representatives (H.R. 4899 - Sail Only if Scanned (SOS) would move the inspection to the originating country. While the passage of such a bill could reduce the congestion at domestic ports, increases in global sourcing and operation will still result in delays due to the constraints of the existing infrastructure.

While there have been increases in port technology and operational productivity at the borders, these initiatives have not increased the potential capacity enough to meet the surge in demand. There are still substantial constraints in the facilities and modal infrastructures that limit the volume that can be processed. While some of these constraints can be overcome with increased technology and infrastructure improvements, the physical constraints and lack of land for expansion limits the potential for facility growth. The result is delays in processing and increased uncertainty in arrival times.

To resolve this growing bottleneck, supply chain executives are investigating a number of creative options. The first, and probably most obvious, is consideration of alternative ports for entry into the United States. Instead of the Ports of Long Beach and Oakland, firms are directing shipments to East Coast ports such as Baltimore, Charleston, or Jacksonville. The Port of New Orleans provided for significant imports, particularly from South America, until it was severely damaged by Katrina. However, these ports are rapidly approaching their capacity levels as well. A related option is the use of ports outside the United States such as Mexico, Vancouver, or Montreal with the ultimate U.S. entry in a city that is not constrained by port facilities. This has alleviated some of the problems but volume is still constrained due to the volume increases.

The second option, which has significant potential, is the bypassing of the port infrastructure bottlenecks through the use of multi-modal transportation and foreign trade zones (FTZ) that are inland from the port facility. While there are probably numerous such initiatives underway, I have become specifically aware of the initiatives in Columbus Ohio, Flint Michigan, and Grand Rapids Michigan over the last six months. In general, the initiatives begin with a pre-existing FTZ which is under-utilized. With the FTZ as the center for supply chain value added operations, the local governments, which often initiate such initiatives to increase the employment base, seek out transport alternatives to effectively move goods from the arrival port to the FTZ. However, since the goods are moving to a FTZ, it is not necessary for the goods to be inspected by Customs before leaving the port area. In addition, the initiatives are often creatively using multi-modal transportation including motor, rail, air, and water. In the case of Columbus, the developers are working with Norfolk Southern to create double-stack train capability from the Port of Baltimore so that unit trains can be moved directly from the port to the FTZ at Columbus Rickenbacker Airport. Once at the FTZ, the product can be stored or refined through a value-added operation prior to being processed by Customs. The result is postponed customization which reduces inventory investment and risk while also increasing flexibility. Once the demand for the product is experienced, the final value-added activities can be completed and the goods placed on the appropriate transport mode to meet specific customer demands. The Flint and Grand Rapids, Michigan facilities are built upon the sites of former automotive plants which have the FTZ status along with substantial multi-modal transportation capabilities.

These regional initiatives illustrate very creative application of a number of logistics principles. First, they identify existing and increasing-flow bottlenecks and identify means to bypass them. Use of existing FTZ reduces the need for Customs (although not necessarily security) at key entry points and thus reduces the congestion where there are growing constraints. Second, postponement of final value-added processing until the product reaches the FTZ reduces inventory risk and increases the manufacturing flexibility. It also reduces the lead time and cost to the final manufacturer as the product can be sourced from a local site without extended international lead times or payment of duties prior to actual product need. Third, the initiatives are designed to take advantage of multi-modal transportation as most are designed to facilitate the interchange between rail, motor, and air. Thus, product can be imported and delivered using whatever mode of transportation is appropriate for the specific product and situation. In addition, the concurrent availability of the combination of modes means that the modal decision can be changed based on the specific delivery requirements without being tied to the receiving and delivery capabilities of an individual mode. Finally, from a broader societal perspective, these initiatives are providing reasonable paying jobs at geographic locations (i.e., the industrial Midwest) where many of the manufacturing jobs are being outsourced from.

While the concept of the FTZ is not new, the combination of a FTZ, multi-modal transportation, and the need to reduce infrastructure congestion has created an opportunity for supply chain integrators and innovators. Such supply chain structural and process innovation opens up many opportunities for supply chain designers. However, effective consideration of such alternatives requires supply chain analysts to really think "outside the box" as the cost, service, and risk trade-offs are much more complex. From the perspective of this supply chain analyst, these offerings open up some very interesting opportunities for global supply chain operators.