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Published on JOC.com (http://www.joc.com)

US transloading growth reshaping cargo routing

JOC› Port News › US Ports Port of Los Angeles

Bill Mongelluzzo, Senior Editor | Mar 03, 2017 6:05PM EST

LONG BEACH, California — Increased transloading of merchandise imports from marine containers to domestic containers and trailers at major US seaports — rising from 52 percent of total intermodal volume through Los Angeles-Long Beach to 58 percent in five years — is reshaping containerized supply chains. Data accumulated by industry analysts and industrial real estate experts reveal that this trend is underway, and they project that growth in transloading will continue unabated as a result of the convergence of the big-ship phenomenon and rapid growth in e-commerce fulfillment. The ability of importers to determine the final destination of the merchandise after the
container reaches the US port, rather than two weeks earlier when it is loaded on the vessel in Asia, gives retailers more flexibility in routing. Beneficial cargo owners must further study their supply chains to determine the best routing for their needs.

Ports must invest in the marine terminal infrastructure and tall cranes needed to handle bigger and bigger ships. Industrial real estate developers must scramble to find suitable locations near major ports for transloading activities, and also for locations near urban cores to process last-mile deliveries for e-commerce fulfillment. Seaports will continue to be where the action is in supply chain logistics. “The greatest concentration of this demand is in Southern California,” Rob Leachman, professor at the Institute of Transportation Studies at the University of California, Berkeley, told the 17th Annual TPM Conference this week in Long Beach. “The next greatest concentration is at ports
that serve the other two, three, or four corners,” he said.

There are four to five load-center gateways for the North American container trades. The so-called five-corner strategy of logistics involves the Pacific Northwest, which includes the Northwest Seaport Alliance of Seattle and Tacoma and the British Columbia ports of Vancouver and Prince Rupert, Los Angeles-Long Beach, Houston, the South Atlantic ports of Savannah and Charleston, and the mid- and North Atlantic ports of Norfolk and New York-New Jersey.

In 2015, Los Angeles-Long Beach handled 50.7 percent of US containerized imports from Asia, other West Coast ports handled 12.2 percent, British Columbia had 4.4 percent, the Gulf ports 2.2 percent, South Atlantic ports 13.8 percent, and the Northeast 16.7 percent, Leachman said. Cargo routing for imports from Asia, by far the largest sourcing area for merchandise imports, is affected greatly by cargo value. The highest-value imports such as electronic goods are concentrated in Los Angeles-Long Beach. Importers are willing to pay higher intermodal transportation costs to the interior in order to get high-cost or seasonal merchandise to the eastern half of the country as quickly as possible. Medium and low-cost imports are spread over the five corners to get the product closer to the consuming market at the lowest possible cost.

For example, Leachman found that 63.9 percent of electronics imports and 57.8 percent of auto parts imports enter the country through Southern California, but Los Angeles-Long Beach handles 47.4 percent of the lower-cost consumer goods such as furniture imports. By contrast, East and Gulf Coast ports do best when lower all-in transportation
costs via all-water services from Asia provide access to population centers in their regions. The Northeast, South Atlantic, and Gulf ports combined handle more than 50 percent of the lowest cost containerized merchandise where price, rather than time-to-market, is the determining factor in cargo routing.

In supply chain logistics terms, the tendency of retailers to “push” their containers through seaports to the final destinations is growing less rapidly — or in some cases not at all — than pushing the 40-foot marine containers to large import distribution warehouses, transloading the merchandise into 53-foot domestic containers and trailers, and “pulling” the merchandise to regional distribution centers. Leachman said this trend, coupled with growing e-commerce demand, is driving more freight to the push-pull model. “Push-pull is growing faster than overall imports, and push is growing slower than overall imports or even declining,” he said.

The trend toward more transloading was confirmed by Larry Gross, president of Gross Transportation and a partner at FTR. “Transloading is playing a larger role,” Gross said, but the “intermodal-unfriendly” west-to-east routing of intact containers will probably not be a growth sector in the coming years. For example, in Southern California, which is
the transloading capital of the country, transloading’s share of intermodal freight increased from 52 percent in 2011 to 58 percent in 2016, whereas intact intermodal’s share dropped from 47 percent in 2011 to 42 percent.

The merchandise imports will be carried by ever-larger ships. According to Drewry Shipping Consultants, 78 percent of the new vessel deliveries in 2017 will be vessels with capacities of 10,000 twenty-foot-equivalent units or higher, and more than half will be ships of 14,000 TEUs capacity or greater. The message for the major gateway ports is that they better be able to handle these ships or they will lose market share. Los Angeles-Long Beach has been handling weekly calls of vessels of 10,000 TEUs or greater for the past several years, and this has sent the ports and their terminal
operators into a frenzy of marine terminal upgrades and the purchase of taller ship-to-shore cranes to be able to handle these vessels fully loaded.

Noel Hacegaba, managing director of commercial operations in Long Beach, said infrastructure and equipment comprise only half of the equation. Those big ships generate such a large surge of container discharges and reloads, 10,000 or more container exchanges per vessel call, that improved cargo-handling processes, immediate dray-offs of containers from the terminals, a focus on improved chassis availability, and enhanced data-sharing among all port users is at least as important as infrastructure investment, Hacegaba said.

Terminal efficiency takes on even greater importance with the surge of e-commerce fulfillment and the need for speed that consumers have created in receiving their shipments. Walter Kemmsies, managing director, economist, and chief strategist at Jones Lang LaSalle airports and seaports division, said a “looming conflict” could be in the making as the bigger ships call at fewer ports, take longer to unload, and generate more congestion at the gateways, but consumers want their purchases shipped to them in a day or less. This trend calls for import distribution centers to carry larger inventories so the merchandise can be pushed to intermediary facilities for delivery to consumers.

Kemmsies noted that e-commerce accounts for only 10 percent of retail sales, but about half of the new construction of industrial properties is for e-commerce. The growing demands of e-commerce fulfillment are beginning to affect the logistics strategy that has been present since the 2008 to 2009 economic recession. During the lean times, reducing transportation and inventory-carrying costs were most important. Now, the greatest fear of logistics managers is a “stock out” notification that upsets consumers and can lead to the dismissal of those employees in charge of having the right merchandise on hand when and where it is needed, he said. Therefore, costly investments in carrying additional inventory and building intermediate warehouses on costly land in urban core areas are more important than cost-cutting.

The implications of these trends for developers and users of industrial real estate are changes in the mix of distribution facility sizes, as well as the siting of those facilities, at the major gateways and in secondary and tertiary markets. Leachman said demand for national distribution centers of 500,000 to 1 million square feet in locations that serve
ports will be strong, but so too will be demand for 1-million-plus sq ft e-commerce fulfillment centers and import warehouses. Also emerging rapidly from the growth in ecommerce development is a need for intermediate facilities located between the large import and regional distribution facilities and the urban core. These facilities break down
the shipments to the package level for shipment directly to the consumers’ homes or to retail stores that are increasingly becoming pickup locations for merchandise ordered online.

E-commerce fulfillment in urban areas can be handled at facilities of 100,000 to 200,000 square feet, which are often found at in-fill sites. They can be older warehouses or former manufacturing sites that can be repurposed for e-commerce. This trend has grown so rapidly that in some of the larger, denser urban areas, developers are finding
it increasingly difficult to locate these facilities, said Matt Mullarkey, senior vice president of strategic planning at CenterPoint Properties. The cost of land and labor obviously
increase the closer developers get to the urban core, but the need for timely delivery of merchandise in the last mile makes location more important than those factors, he said.
The confluence of the big-ship phenomenon, the increase in transloading, and the last-mile requirements of e-commerce have retailers and other importers reviewing their supply chain strategies and possibly modifying them, Leachman said. Shippers must consider cost, efficiency, and time to market in order to determine the best path to each
location they serve, he said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

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Published on JOC.com (http://www.joc.com)

Paths to slash LA-LB drayage costs emerge as transloads rise

 JOC› Port News › US Ports Port of Los Angeles

 Bill Mongelluzzo, Senior Editor| Jan 27, 2017 2:56PM EST

To cut down on the costly and polluting drayage of containers and relieve marine terminal congestion in the largest US port complex, retailers and importers can either move their growing import distribution activity closer to the Long Beach-Los Angeles port complex or push for a double-stack rail shuttle from the harbor to a ramp in Inland Empire. Robert Leachman — an engineering professor at the Institute of Transportation Studies at UC Berkeley who has analyzed supply chain costs in Southern California and elsewhere for more than a decade — identifies a significant opportunity for reducing drayage miles generated by supply chains in which imports are de-vanned from marine
containers and later re-shipped to other regions in domestic vehicles. Locating new import warehouses and national distribution centers closer to Los Angeles-Long Beach would mitigate the impact of future growth, and initiating short-haul rail service to the Inland Empire would slash drayage miles to existing transloading facilities.

Neither option will be easy to implement. “There are so many things that would have to work,” said Leachman, who last week released a white paper analyzing current transloading trends in Southern California. Southern California is the transloading capital of the United States and Leachman’s study highlights the fact transloading merchandise imports from 40-foot marine containers to 53-foot domestic containers and shipping them to the eastern half of the country is the fastest-growing segment of the Southern California ports’ business. That’s because the high-value, time-sensitive
imports that dominate the port’s cargo volumes are best suited for the Los Angeles-Long Beach gateway.

The key to further growing those imports is to reduce the costs involved in transporting marine containers to import warehouses and national distribution centers, and the pollution generated by trucks in environmentally conscious Southern California. Leachman identifies two options for reducing truck drayage mileage between the harbor and transloading facilities. He said there are enough underutilized small warehouses in the harbor area that could be razed and replaced by new large warehouses or national distribution centers where imports can be inventoried, reallocated
and re-shipped in domestic containers and trailers. Locating these properties in a built-out region like the Los Angeles basin will not be easy, Leachman concedes, but he believes enough of those sites exist in the harbor area to support thriving transloading activities, primarily for mid-size retailers.

However, if bringing the transloading facilities closer to where the imports originate at marine terminals does not work out, a second option, already under study by the ports, would be to convince BNSF Railway or Union Pacific Railroad they can make money shuttling containers 50 miles east to the Inland Empire, which is the transloading hub of
Southern California. The potential benefits of either option are significant. Leachman calculates there are approximately 6.8 million annual dray trips generated by the transloading and reshipping of imports in Southern California. Rough math indicates that reducing the average dray trip from 50 miles to 10 miles would slash total annual
miles traveled from 340 million to 68 million, with the commensurate reductions in fuel consumption, operational costs, and diesel emissions. Some of the available sites are only about five miles from the harbor.

Leachman’s theory about constructing new transloading facilities closer to the Los Angeles-Long Beach port complex, rather than in the traditional distribution hub in the Inland Empire, is admittedly revolutionary. It would require the cooperation of importers, terminal operators, at least one of the western railroads, industrial real estate developers, and possibly local governments. The rail shuttle concept, by contrast, has been revisited periodically by the ports over the past decade, but the railroads have shown little to no interest in a shuttle because they say it is not commercially viable for them. However, changing shipment patterns make both approaches more alluring.

Leachman’s numbers show that 21.3 percent of the 7.8 million laden import containers the largest US port complex handled in 2015 were destined locally and therefore moved by truck. About 36.5 percent moved intact on intermodal double-stack trains, which was down from 47 percent in 2001. Leachman said 42.2 percent of the imported containers
were transloaded and reshipped from Southern California in domestic containers or trailers, which was up from 32 percent in 2001.

Calculating the transportation costs involved in transloading, compared to shipping containers intact via rail to the population centers in the Midwest and the East Coast, depends upon a variety of factors including rail costs, truck drayage costs, transloading costs at local warehouses, and, significantly, inventory carrying costs for retailers.
Transloaded freight is taking an increasing market share from intact intermodal, he said, because the containerized merchandise shipped through Los Angeles-Long Beach is higher-value freight such as electronics, fashion apparel, and other time-sensitive freight.

Transloading freight from marine containers to domestic 53-foot containers offers various advantages over intact intermodal shipment. The contents of three 40-foot marine containers fit into two domestic containers, cutting down on rail costs. Since the retailer deciding where in the US the merchandise will be shipped makes the decision much later in the transportation move — when the container reaches Southern California, compared to making the destination decision when the container is loaded onto the vessel in Asia — the merchandise is shipped to the US locations where it commands the highest price, he said. Those advantages are balanced against the labor and drayage costs to and at the transloading facilities. Locating transloading facilities in the harbor area could significantly reduce the cost of $500, and higher, that it costs today to dray marine containers to transloading warehouses in the Inland Empire. While
it is virtually impossible in the harbor area to find sites large enough upon which to build the 1-million-square-foot distribution centers popular with the big-box retailers, there are a large number of small warehouses 50,000 to 125,000 square feet, originally built to support inbound logistics for the defense industry, but many are now vacant, he said.

Most of the large national retailers have already invested in 1 million-plus square-foot warehouses in the Inland Empire, so they would not be expected to relocate to much smaller facilities close to the harbor. However, Leachman said, there are numerous midsize retailers who do not own distribution facilities, but rather lease space from
warehouses operated by third-party logistics providers. Those retailers would be prime candidates for close-in facilities that would be repurposed for transloading, Leachman said. If a sufficient number of suitable properties could be identified at these in-fill locations, the transloading scenario could produce commercial value for some retailers,
said Dan Smith, a partner in the Tioga Group. However, experience has shown that locating any operation that generates truck traffic in dense urban areas invariably results in community pushback as well as environmental challenges, Smith said.

Marine terminal operators in Los Angeles-Long Beach would be big fans of Leachman’s plan because they struggle daily with retailers who use up all of their free container storage time, and more, at the docks. John DiBernardo, vice president of SSA Marine, said containers left to dwell for days at marine terminals contribute to congestion, and
“this is the crux of the issue for me as a marine terminal operator.” DiBernardo said the two ports, and their supply-chain optimization groups that meet regularly, “need to take this larger view of the Southern California region.” Possibly even more difficult than finding suitable properties in the harbor area would be convincing the Class I railroads to offer domestic intermodal rail service from the harbor area. Right now only UP has that option because it operates the ICTF five miles from the ports. The ICTF is devoted entirely to international freight and railroads do not like to mix international and domestic intermodal freight at the same facility. A UP spokesperson declined to comment on this issue.

BNSF for years has attempted to secure approval to build its own international rail facility adjacent to the ICTF, but the effort is tied up in litigation, and prospects that the Southern California International Gateway will be built are dim. Leachman’s short-haul rail proposal to transport marine containers to a new ramp that would be built close to the huge concentration of transloading facilities that already exist in the Inland Empire “would be easier to accomplish,” said Ron Sucik, principal at RSE Consulting and former executive who performed transloading studies for TTX Co. in the 1990s and the early 2000s. He added, though, that a formula has yet to be developed by which the railroads can make enough money on short-haul services to cover the crew, transportation and terminal costs that are involved.

BNSF spokesperson Amy Casas said that despite discussions about a rail shuttle to the Inland Empire over the years, the railroad has yet to see a viable business plan. Leachman suggests that he has one. Referring back to the rail transit rates for box cars that were in use in the 1970s, he said railroads married short-haul services to long-haul services as long as they were able to keep the cargo to themselves individually. In the case of a rail shuttle to the Inland Empire, a railroad would carry the containers of particular shippers to a ramp in the Inland Empire, with a guarantee that when the merchandise was transloaded into domestic containers, the same railroad would be guaranteed it would transport those shipments cross-country. The charge for the short-haul move could be billed as a credit toward the total rail cost.

Since the Class I railroads do not like to manage such details but rather prefer to just “hook and haul” complete unit trains, this operation would probably have to be turned over to a third-party firm, Leachman said. If it could be properly arranged, such an operation could be conducted with the support of just one railroad, or both if they are both interested, he said. If the necessary buy-in could be secured from the communities that would be impacted in the Inland Empire, the ports, a railroad or railroads, and the retailers, “it’s a win-win for everybody,” he said. Proponents of a rail shuttle still have a lot of work to do, though, to convince the necessary components of the supply chain to
support the concept. Sucik wonders how the railroads can be convinced they need the short-haul shuttle move of marine containers in order to retain the more lucrative longhaul domestic move. “They’re getting that business already,” he said.

The ports, meanwhile, are open to all options that will improve the efficiency of cargo flow through the Southern California gateway while at the same time reducing transportation costs and diesel emissions. “The ports are looking at the bigger picture, end-to-end supply chain solutions,” said Mike Christensen, senior executive lead for supply chain optimization in Long Beach. While the ports can not dictate solutions for transportation providers and cargo interests, they are sensitive to the challenges their stakeholders face and can bring all of the groups together to work out mutually-agreeable solutions, Christensen said. For example, the railroads are looking to replace revenue that was lost due to the decline in their coal and oil-by-rail cargoes, so generating more intermodal business should be attractive to them. The trucking industry, meanwhile, is dealing with an aging driver workforce and regulatory developments such as a mandate for installation of electronic-logging devices, so generating more but shorter trips might fit into their business plans.

From the ports’ perspective, shifting freight from the highway to rail generates an emissions reduction of about 80 percent, and this is a further incentive to work with port stakeholders to see if options such as locating transloading facilities in the harbor area and promoting a rail shuttle to the Inland Empire can be successful commercially,
Christensen said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

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