US Port Strike Threat Highlights Supply Chain Risk

One issue we’ve raise over the year is the ways that the corporate fetish for offshoring and outsourcing greatly increases business risk. Even when savings are realized (and as we’ve discussed, in many cases, the main result is a transfer from factory/lower level workers to managers and executives), they are seldom weighed properly against the increased fragility of the operation, and the resulting exposure to big losses. For instance, extended supply chains entail more communications across the chain, longer production cycles, more shipping, all of which increase the odds of writeoffs via having too much inventory or inventory in the wrong place, and those occasional losses can swamp the savings over time.

Those supply chain risks have come into focus, as the Financial Times reminds us, as the possibility of West Coast port strikes looms. Key sections of the article, which I encourage you to read in full:

Fears of a strike or lockout at the west coast ports that handle more than 40 per cent of all container imports to the US are disrupting businesses’ supply chains, as shippers anticipating a stoppage divert cargo to Canadian ports.

Canada’s largest rail network has already imposed restrictions on handling goods bound for the US after a surge in cargo diverted to the ports of Vancouver and Prince Rupert in British Columbia. Prince Rupert’s container imports for June were 22 per cent up on the same month last year. Canadian National Railway (CN) took the action amid concerns that talks between US port employers and the International Longshore and Warehouse Union over a new contract might end in a strike or lockout. The port workers’ existing contract expired on July 1.

The expiry of a previous six-year contract in 2002 led to a 10-day lockout and serious traffic disruption that ended only when the federal government intervened. The two sides later reached agreement in 2008 with only minor disruption.

Truck drivers at Los Angeles and Long Beach ports – which handle around a third of US container imports – went on strike last week in a separate dispute…

JJ Ruest, CN’s chief marketing officer, told customers on July 8 that delays at terminals in Vancouver and Prince Rupert had become “untenable”. The company would allot space on trains for shipping lines based on their traffic earlier this year and a percentage above that. Any other cargo might not be handled, he warned…

Because it prioritises Canadian traffic, CN’s stance should ensure the company avoids a repetition of the criticism it and Canadian Pacific, its main rival, faced earlier this year over their handling of grain from last year’s record harvest. In March, the Canadian government threatened both railways with significant fines unless they boosted movements…

Anthony Hatch, an independent rail analyst, said that while a work stoppage would affect supply chains, rail companies had grown better since 2002 at handling unusual events. “From a rail perspective, I don’t think it would be as disruptive,” he said…

Port Metro Vancouver confirmed it had seen diversions of US-bound cargo but could not quantify them.

Yves here. Notice the divergence in risk assessment. CN, which is one of the two critical back routes for getting goods into the US, says the terminal delays at the two Canadian ports are “untenable”. So the cheery remarks about the Canadian railroads being able to handle traffic better than in 2002 are moot if the bottleneck is the Vancouver and Port Rupert terminal operations.

Now these concerns will prove to be irrelevant if a strike is averted or proves to be short. But the fact that anticipatory diversions are already straining the alternative delivery routes is not a good sign.

A new article at Project Syndicate (hat tip David L) discusses supply chain risk as a systemic risk. As a result of the crisis, many commentators have been conditioned to think of “systemic risk” as something that produces a sudden, wide-spread seize up. But the bubble aftermath in Japan demonstrates that economic train wrecks aren’t necessarily accompanied by explosions. In the Japanese case, activity ground down over a period of years.

Intriguingly, this article sees the globalization as producing systemic risk through social and political instability, which can then produce economic shocks. However, yours truly is worried about more mundane risks, like the US dependence on China for ascorbic acid, a critically important food preservative (among other uses) and chips.

By Ian Goldin Project Syndicate:

…while globalization has created unprecedented opportunity, it has also unleashed a new form of systemic risk – one that threatens to devastate political institutions and national economies….

Furthermore, increased openness and market integration, driven by rapid technological change, is exacerbating divisions within and among societies. Those who miss the globalization train at the start often are unable to catch up later.

CommentsView/Create comment on this paragraphNowadays, the world’s most pressing challenges – from climate change to cyber-crime – increasingly transcend national borders, making them extremely difficult to address effectively. Worse, they can have a cascading effect, with, say, a pandemic or cyber-attack provoking a financial or political crisis and imposing costs disproportionately on those who can least afford them. The vectors of connectivity – such as the Internet, financial markets, airport hubs, or logistics centers – facilitate “super-spreading” of globalization’s effects, both positive and negative.

This is similar to an issue discussed here often, following Richard Bookstaber: that tightly-coupled systems (where the degree of interconnection is high, so that activities move in chain reactions that are impossible to stop) are vulnerable to catastrophic breakdowns. Yet the objective of economic and business policies over at least the last 30 year as been to increase efficiency, which means removing both the risk buffers (redundancies) and frictions that serve to make systems safer. Highly efficient systems are prone to breakdown. For instance, Formula One cars, optimized for speed, can run only one race.

Our leaders have engineered a system which is highly prone to catastrophic failure. And even better, they’ve come up with pay deals that let them profit in the good times and not give much (if anything) back when the inevitable large-scale problems result. Is it any wonder that they haven’t bothered to take steps to make our business and financial systems safer? Unless those in charge have to eat their bad cooking, nothing will change.

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  1. vlade

    It’s what I call the cheetah syndrome. As you say, highly efficient, but prone to a catastrophic failure. Unfortunately, the failure is seen as a tail event, and hence an externality that can be ignored. Efficiency will get you gains today/tomorrow, who care what can happen once in a decade (especially if someone’s else tail event, which you can’t control, happens?)

    One of the problem with our human wiring is that we’re not used (brain-wiring speaking) to large populations. In a small population, a tail event a) can wipe it b) there’s less chances of tail events they can’t control but someone else can.

    1. H. Alexander Ivey

      vlade, don’t blame our stars. The fault lies within us, specifically within our leaders, many of whom we do NOT have a choice in or a chance of choosing.

      In fact, we could update Upton Sinclair’s: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” to “…when he is not affected by it.”

      1. vlade

        I beg to differ. Smaller communities tend to show better (on average, nothing is idiot/psycho proof) leadership/social cohesion than large ones. Lots of it is to do with a simple fact that everyone knows everyone, but also some of it is to do with the fact that tail risks of individual’s decisions accumulate less.

        You see, it’s similar with diversity, which, in general is assumed to be bad – if all follow the herd, one herd decision make it to go over the cliff. Very true, and hard to dispute.
        But if the over-the-cliff decision is one in a million chance per year, it quite a long time (statiscically) for it to happen.

        If you have a total diversity, where everyone can make over-the-cliff decision (other extreme, usually it’s much smaller part of population that can generate all-population affecting decisions), then all of sudden the herd overall can be much less safe – such a herd of million will almost certainly go over the cliff in a space of a few years.

        It can be compensated in other ways (say that some tail risks cancel each other), but it also becomes less clear as to what’s going to happen. Basically, you may get better rewards, but likely you also get higher/worse risk.

        Taking it back to financial institutions (I don’t know much about supply chains – herding few larger instututions presents much more massive financial risks if something does go wrong. But at least in theory (see disclaimer below), it could be easier to control what happens than if you have lots of small very interconnected firms.

        In practice, those institutions themselves are so complicated internally that distinguising between one complicated entity and 1000 very interconnected sipler entities is almost impossible.

        That said, I still believe that many smaller institutions would be a better solution, as the interconetedness is more transparent (as far as it can be) and more suspectible to external regulation than internal complications (which are much more likely to include idiosyncratic complications, which are not suspectible to regulation).

        1. vlade

          Just to be clear – I do not wish to excuse our leaders, or ourselves for the matter (I’m strongly in the “we get the leaders we deserve” camp). If we are aware of the problem (and we are), we’d be able to work around, or at least try to. But we’d also acknowledge that there are no easy solutions.

  2. Paper Mac

    Even if the US was an autarchy, logistics workers would still have a stranglehold over the economy if they chose to strike en masse- replace port strikes with trucker’s strikes or warehouse workers’ strikes and the effect is going to be pretty similar. This strikes me as one of the few remaining ways the working class can directly, immediately, and painfully impinge on the operations of the corporate state- whether that’s a risk or an opportunity would seem to depend on your point of view.

    1. Working Class Nero

      Yes but the same is true, at least in theory, for food production workers. If they go on strike the nation starves and the crops rot in the fields. But as we saw in the Sixties into the Seventies, with the total defeat of Cesar Chavez’s United Farm Workers of America, the elites have a counter-strategy; namely, to import a desperate and poor reserve labor force to replace the ungrateful uppity native workers when they have the audacity to demand their salaries both allow them to survive and to rise at the rate of productivity increases.

      And so it is with truck drivers. In 1980, thanks to the tireless work of Ted Kennedy, that great champion of American labor, the Motor Carrier Act was passed and signed by Jimmy Carter, that other great champion of the American working man.

      And soon afterwards truck drivers became “independent carriers” and had to pay all kinds of fees, stopped getting salaries, and the native-born truckers were soon replaced by poor immigrants willing to work for almost any low wage. But even these poor immigrants eventually got uppity and now they in turn are being replaced by even poorer and more desperate immigrants – while this continuous stream of human misery into the US is assured by Democrats everywhere.

      And so if this is how the Democrats treat American labor, just think how easy it is to be a rich class-warrior Republican. All the Right has to do is twiddle their thumbs and stand back and let the Democrats destroy the American working class.

      1. Saddam Smith

        Indeed. How power is understood and leveraged is embedded in the culture. The pyramid structure of state and corporation (which are mirror images of each other to my mind) accrues power to the top, power that is aggressive/threatening/deadly force. To fight it with force is to lose even if you win, for the journey is the destination, the means are the ends. An old pyramid replaced with a ‘new’ one cannot bring about sufficiently radical change. The only way to ‘escape’ this system is to construct a better one, as lame as that sounds, as easy as it is to say, etc. Part of that will require battle, fight, aggression, etc., but only at need (so hard to define!) and not as the transition’s defining qualities.

      2. Medici1

        The race to the bottom gets more perilous when truckers can’t afford the safety and brake checks.

    2. ewmayer

      @Paper Mac:

      You didn’t think the push to roboticize as much of fields such as long-haul trucking and food service as possible was only about “efficiency”, did you?

  3. Paul Tioxon

    You can save your breath on establishing the ontological basis for systemic risk in the port to truck/rail multi-modal supply chain. The unions are squeezing ports globally with every kind of job action, slow down, wild cat strike and concerted United Front political support to put the pressure on ports to extract worker benefits. The leadership already knows, the average hauler knows. You really don’t need a weatherman to know which way the wind blows or in this case, Bertalanffy to know General Systems Theory.

    What you do need to know is just how bad the haulers conditions are They are a throwback to Peabody Coal, where you were charged for the candles you used to see, the pick you used to dig, and the food you bought to feed your family from the company store. These present day workers can go home with NEGATIVE PAY CHECKS OWING FOR CHARGES FOR THE EQUIPMENT THEY DRIVE.!!!!


    The Broken Link in America’s Supply Chain

    How the “Independent Contractor” Scheme is creating poverty in America

    Like many U.S. jobs that have deteriorated, port truck driving was once a stable, middle-class, union job. With trucking deregulation 30 years ago, a shadowy network of contract trucking companies that illegally classify their company drivers as “independent contractors” was born. Port trucking wages alone fell 30 percent from 1980, when independent contracting was rare, to 1995 when it was dominant.

    Business consultants encourage the use of independent contractors over employees, routinely stating that a company can reduce costs and increase profits by 30-40 percent by avoiding classifying worker as employees. But with port trucking, the savings are even greater. Using independent contractors allows trucking companies to shift the vast majority of the cost of doing business – truck leases, insurance, fuel, maintenance, etc. – onto the backs of the drivers. Simply put, port driver misclassification defrauds drivers, local economies, and public coffers.

    Today, 82 percent of port truck drivers are misclassified by their employers as independent contractors. The vast majority would be considered employees under common legal definitions. Independent contractor drivers:

    Report average net incomes 18 percent lower than employee drivers.

    Are two-and-a-half times less likely to have health insurance.

    Are nearly three times less likely to have any form of retirement benefits.

    The independent contract scheme has driven down wages for employee drivers. Despite the professional skills and qualifications required to perform the duties of a port truck driver, even employee drivers – who are roughly 18 percent of the industry – do not receive professional wages or benefits. After working 50-60 hours a week, drivers struggle to support their families, and many qualify for government assistance and are forced to use public medical services.

  4. run75441

    Good Morning Yves:

    Quicky correction: drop the first i in ascoribic acid. Oscar Mayer (Purchasing Agent) used ascorbic acid in hot dogs besides salt (also a binder)and Sodium nitrite to slow spoilage and oxidation. Not sure why they did away with it. Ascorbic acid is synthetic vitamin C derived from corn syrup. I would find it interesting there might be an issue if China is the main source of it. OM also uses sodium nitrites and nitrates (fertilizer and explosives component limited to a few hundred parts /million) for preservatives, color (bacon is not red), and flavoring agents.

    Planning for an automotive component warehouse involved carrying certain amounts of inventory to cover the transit time from China, Thailand, Philippines, Malaysia where the product was made. If you figure 21 days on the water (slow boat) 1 week in unloading and in customs and another week in transit by rail. You would carry 3 weeks of inventory on hand. Add to that 5 weeks in transit and probably another 5 weeks of components at the plant. Minimal you are looking at 13 weeks of inventory without counting ordering time from the plants suppliers. Model changeover in automotive requires 20 weeks and longer. Hardly JIT.

    It is rare for us to truck out of the west coast as it was cheaper to move by rail. If we incurred a port shutdown or component delay, we would got to air freight and charter 747s :) for some exorbitant fee (I was told $250,000). As Paul points out, companies are squeezing truckers the same as the rest of labor. Not surprised there. I find it interesting so many of them were Hispanic as there was a big move to block Mexico’s drivers from coming into the US (if these are them). US drivers claimed they were not as good as US drivers and their vehicles were unsafe. The world turns.

    1. ewmayer

      An easy mnemonic – at least for the Latin nerds – is based on the fact that the Latin word for scurvy is scorbutus. Thus the ‘a’ prefix (in the sense of ‘anti’) gives a-scorbic, literally “against scurvy”, which was vitamin C’s road to fame.

      (A similar but more familiar one from the Greek: The modern science of “tomography” consists of making many small X-ray “cuts” or “slices” through an object and then using some fancy mathematical footwork and software to assemble those into a viewable image. Similarly the word “atom” comes from the ‘a’ prefix before tomos, “to cut”, thus “not cuttable”.)

      “Now write it a hundred times, or I’ll cut your balls off.” /pythonmonty

  5. Jim Haygood

    For years I imported goods from Asia via the Port of LA/Long Beach. The system was highly reliable … like clockwork. Occasionally a container would be subjected to more rigorous Customs inspection, adding a few days to the schedule. Once a semi trailer was stolen en route from Kali to the east coast. Both these sources of delay were, of course, domestic, as are dock worker strikes.

    Strikes are potentially a risk in domestic transport as well. They don’t make international cargo any more or less risky than domestic cargo.

  6. Gabriel

    This article says that the truckers’ strike in LA and Long Beach illustrates the systemic risk in long supply chains. True.

    The longer the supply chain, i.e., the more nodes between suppliers’ suppliers and final customers, the greater the risk. Disruptive weather for example is another ever present risk in long supply chains.

    Food supply chains are also getting longer – with more serious consequences for disruption than non-food supply chains. Food supply chains are more vulnerable all along the chain – e.g., contamination, spoilage, sabotage, etc. A lot can happen to food on its way from say Peru or Chile to NY state.

    It would be useful and prudent to look at the question of the length of supply chains from a national security and safety standpoint – are we better off with such long supply chains? There’s less chance of disrupting a food supply chain or contaminating it if it is local.

    We can raise food and manufacture needed items locally. It’s about time that we look at the possibility of greatly shortening food and non-food supply chains. Doing so would also attack off-shoring

  7. Steve Gardner

    Why do so many assume the rulers always win? They win until they lose catastrophically. The ruling class loves to live in your head as invincible.

    1. hunkerdown

      So? The rulers may lose but the ancien regime survives nearly intact. Don’t hate the player, hate the game.

  8. John

    Timely. One factor never mentioned on global trade is the effect of C02. What is known is there is a considerable amount of C02 leeching from shipping since 1990 has gained in acceleration as result of global trade. The Washington consensus gang has sold us down a path of possible no return within the next 10yrs if C02 levels are not brought down to 1990 levels. Game over.

  9. lakewoebegoner

    “However, yours truly is worried about more mundane risks, like the US dependence on China for ascorbic acid, a critically important food preservative (among other uses) and chips.”

    China is the #1 supplier of tomatoes for the world, four times the production of that in the US. If you’ve eaten any processed tomato product (even big-time brand names), you’ve eaten Chinese tomatoes.

    not that there’s necessarily anything wrong with Chinese tomatoes, but one bad drought/fungus, etc, in China and US food prices will rise as well.

  10. cnchal

    Unless those in charge have to eat their bad cooking, nothing will change.

    It seems as if none of the elite need pay for their mistakes.

    Yesterday, the CDC (Centers for Disease Control) was in the spotlight, and the carelessness shown in handling deadly bacteria and viruses is, sledgehammer to the head, stunning. It seems as if the US Federal government, despite all it’s might and money, is led by idiots. When something deadly finally gets out of the lab and kills a few cities worth of people, how are those responsible going to be made to “eat their own cooking”?

    In Gabriel’s comment further up thread is this:
    Food supply chains are also getting longer – with more serious consequences for disruption than non-food supply chains. Food supply chains are more vulnerable all along the chain – e.g., contamination, spoilage, sabotage, etc. A lot can happen to food on its way from say Peru or Chile to NY state.
    How far does that chicken meat travel before you take a bite? Two trips across the Pacific Ocean, and thousands of miles by refrigerated truck and rail. Rational behavior from an economist’s point of view. Insanity from my point of view.

    That chicken should be served at Goldman Sachs and JPM Chase’s next banquet.

  11. Rosario

    A strike would do us wonders. The first of many steps toward the realization that our economy is a fantasy world. At this point nationally debilitating strikes and other similar events (no water in Las Vegas, Phoenix, L.A., etc.) are probably the only effective routes to collective action (whether political or social) for the better, but I’ll take anything at this point. Our ideology deadlock needs something that injures without killing.

  12. Jeremy Grimm

    I’m surprised that no one mentioned Barry Lynn’s book, “End of the Line” with respect to this post. [I saw the book mentioned in response to another post about a week ago.] The fragility of modern supply chains is a major theme in “End of the Line”. I’m surprised that no unions have gone after the supply chains of firms they have disputes with. One well-placed ‘wooden shoe’ can close down an entire “just-in-time” factory. The shoe doesn’t need to be an American shoe, if the unions here developed some affiliations in parts of the supply chain that were outsourced.

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