A Global Operations Game Changer: The 2014 Expansion of the Panama Canal -- Full Text

This ability to dynamically manage the operations of a global enterprise, often involving a complex asset-based ecosystem, is becoming the defining capability that leaders are aspiring to. With new tools for identifying the optimal total landed cost, as well as monitoring methodologies spread along supply lines, these leaders are able to quickly adjust flexible operational components and dynamically manage the business.

The smoke and ash from Iceland’s Eyjafjallajökull volcano forced companies to react to a major shipping disruption. The four-year lead time before the opening of the expanded Panama Canal gives companies the opportunity to plan for this potential disruptor, and should serve as a catalyst for reexamining the distribution network today and building a dynamic supply chain with the flexibility to adapt as the environment changes.

A Plan for the Canal
The expansion of the Panama Canal, set for completion in 2014, will add a third set of expanded locks connecting the Atlantic and Pacific Oceans and greatly enhance the Canal’s ability to serve the operations of global enterprises. The largest container ships on the ocean today, which can carry 12,000 TEUs (twentyfoot equivalent unit containers), cannot transit the Canal’s locks. The largest vessels that can fit through the Canal today carry approximately 5,000 TEUs. Additionally, the time required to move through the Canal will decrease. Faster transit times, combined with the larger shipment size, could provide a new set of options for shippers to consider for goods moving to and from various parts of the Western hemisphere.

The $5.2 billion expansion of the Panama Canal will help to remove this constraint on global commerce for more efficient shipping to and from the East Coasts of the Americas and beyond. The key elements of the expansion include:

• Deepening and widening of both the Pacific and the Atlantic entrances
  
  
• Deepening and widening of the navigational channels through Gatun Lake and Gaillard Cut
  
  
• Construction of a third set of locks which will expand and redefine "PanaMax"
  
  

These changes will also increase the number of ships that can move through the Canal in a day to speed the flow of goods.

A Potential for Change in the Flow of Goods
Larger vessels will provide economies of scale that could change existing trade flows or even create new ones. For example:

• Those companies that import a high volume of manufactured goods from Asia and distribute those goods across the US and Canada may benefit from new access routes and distribution hubs along the East and Gulf coasts.
  
  
• New markets may open for China to source raw materials, such as coal from Columbia and iron ore from Venezuela. These markets do not currently have a cost-effective transportation option.
  
  
• The movement of crude oil in tankers may see changes. Shipping oil to the US from Ecuador may become less expensive than from the current origin of Nigeria. Venezuela may decide to shift its supply from the US to China.
  
  
• The expanded Canal may become a key transit point for new vessels carrying liquefied natural gas vessels from Trinidad to Chile and Peru to Texas.
  
  

• Overland transportation between South American countries is complicated by inadequate rail and highway systems and the Andes Mountains acting as a natural barrier between the two strongest economies, Brazil and Chile, and the country with the strongest growth in the past three years, Peru. Passage around the southern tip of South America is limited in the winter. The expanded Canal may make these routes obsolete. Intermodal competition, which exists across all segments, will be affected, too.
  
  
• US grain exports to Asia move either by barge or rail to Southern Louisiana and on to Asia via a Panama Canal transit or by rail to the US West Coast and then on to Asia. A larger Canal will increase competitive advantage of the move through the Panama Canal.
  
  
• Moving oil from ship to ship via pipeline across the Isthmus of Panama may no longer offer advantages over larger tankers that will be able to transit the Canal.
  
  
• Perishables from western South and Central America may no longer need to be transported on refrigerated (reefer) ships to the US East Coast. With the shorter transit times through the Canal, they can instead be transported in containers.
  
  

Stakeholders and Potential Winners
Carriers will ultimately shape shipping routes, following those that offer the greatest cost advantages, but others do have a stake in the expansion of the Panama Canal.

• The Panama Canal Authority (ACP). This is a major infrastructure project for the ACP, which hopes to see the volume of goods shipping through the Canal rise and generate greater toll revenue.
  
  
• The Republic of Panama. The Canal is a major part of the nation’s gross domestic product and a funding source for the government. The country has built world-class marine terminals at both ends of the Canal, with additional expansions on the planning board to position it as a global shipping hub.
  
  
• US East Coast and Gulf Coast ports. Many of these ports are counting on increased volumes and so have begun to enhance their infrastructures, including terminal expansions and dredging. However, more ships through the Panama Canal may not mean more port visits for two reasons: 1) If global trade volumes remain the same, the number of ships coming to the eastern ports may actually decrease. Fewer large ships are needed to carry the same amount of cargo as smaller ships. 2) Larger ships are not as apt to make multiple port calls. The economics call for quickly leaving port with a new load.
  
  
• Eastern railroads. Unlike ports, railroads will not be affected by which East Coast ports draw the most traffic. They serve all ports. However, since many of the East Coast destinations served by an all-water route require no railroad movement, it is unclear if Canal expansion will increase volume. These railroads are indifferent to Midwest intermodal moves: they can move goods either to or from the western rail gateway or US East Coast ports.
  
  
• US West Coast ports. It is not clear whether or not these ports will face decreased volumes. While the number of intact marine containers may be decreasing, the amount of cargo may not. The true extent of transloaded cargo moving in domestic intermodal may not be fully appreciated.
  
  
• Western railroads. These railroads are facing decreased volumes. After spending billions of dollars to increase transcontinental mainline capacity, they are unlikely to allow large-scale traffic diversion without responding to market forces.
  
  
• US trucking companies. Today, the imbalance of freight going overland to the East Coast forces truckers to backhaul empty trucks. With more volume coming into East Coast ports, truckers will have more options when repositioning their assets. This may improve operating margins for these carriers.
  
  

At Look at Today’s Options
Container routing decisions by carriers are based on intricate calculations involving a complex network of port calls, varying vessel sizes and inland transportation involving rail and truck. The tradeoffs for shipments from Asia to the US East Coast are myriad:

• The fastest transit times from Asia can be achieved by shipping through West Coast ports. However, the costs to move goods inland from the West Coast increase as the final destination moves east.
  
  
• The all-water transit from Asia through the Panama Canal to the East and Gulf Coasts has higher per-unit costs because of the smaller size of the vessels needed to move through the Canal. This route may have lower inland costs but the transit time increases as the final destination moves west.
  
  
• The all-water transit through the Suez Canal has the lowest per-unit costs because there are no vessel size constraints. However, the transit time is longer for goods originating from points east of Singapore.
  
  

A Look at 2014 and Beyond: More Options, More Complexity for Shippers
Over the past 30 years, all-water traffic through the Panama Canal has fluctuated as corporate supply chain managers have considered the various trade-offs of using west or each coast ports. While the vessels are operated by ocean carriers, routing decisions are actually made by the supply chain managers for the shippers. Specific estimates do vary, but east coast ports are anticipating an increase in the number of shipments that are rerouted through the Panama Canal when the expansion is completed. Cities hoping to attract the business include New York, Boston, Norfolk, Charleston, Miami, Jacksonville, Port Everglades, Savannah, New Orleans and Houston.

However, a number of factors in the US have been in a state of flux and may affect routing choices for containers, by far the largest shipping segment. These reflect the complex trade-offs that need to be managed by the shipper's supply chain decision-maker.

• Transit speed and reliability are often confused for one another. Intermodal transit over the US West Coast is faster than allwater service over the US East Coast, although historically, it has exhibited much wider variances in performance.
  
  
• Environmental impact is an increasingly important factor with all transportation providers and consumers. The impact on the environment begins at the sourcing origin and continues to build all the way to the point of sale. Many stakeholders in the Panama Canal expansion advertise their green credentials; however, just how green they are depends on many factors. For example, among transportation providers the differences in fuel used, service speed, and equipment age and quality can all affect the environmental impact.
  
  
• Port capacity will determine where all-water shipments lands along the Eastern and Gulf Coasts. Water depth is not, however, the only issue. Marine terminal design, intermodal connectivity and availability of warehousing will be important considerations. In New York, physical port constraints include an air clearance issue with the Bayonne Bridge.
  
  
• Port regulation is becoming a major issue for the ports of Los Angeles and Long Beach. If local jurisdictions have the ability to apply additional rules or charges to international cargo, then carriers may choose to avoid these ports.
  
  
• Waterfront labor along the US West Coast has been the subject of apocryphal stories, but in recent years leadership changes for both management and labor have had positive effects. Many believe that the US East Coast has a much more volatile situation and will be more prone to labor disruptions in the future.
  
  
• NAFTA gateways in Canada and Mexico seek to become intermodal ports for US cargo. Prince Rupert, British Columbia has proven to be a niche gateway to Chicago and Memphis. Halifax and Montreal serve the Chicago market from the Atlantic side. Mexican ports have failed to demonstrate that they can serve a range of points outside Mexico.
  
  

Capabilities Needed to Work the Opportunities
A dynamic supply chain is a key characteristic of high performance businesses. Building dynamism into the supply chain today will not only prepare importers to take advantage of changing route economics with the Panama Canal expansion, but also to respond to the various challenges that regularly arise in today’s volatile markets: major swings in supply, the entrance of new competitors, shrinking product life cycles, rapid changes in the availability and prices for commodities, currency fluctuations, unfolding political events and disruptive natural disasters.

New technology and resource capabilities will be needed to make the optimal choices not just for routes and ports, but also for the location of future distribution centers and other infrastructure. Sourcing choices may change as well.

Tools will be needed to give freight buyers the ability to determine the true cost of any one route quickly and accurately. Such tools should calculate the total landed cost: the total of all expenses necessary to develop, produce, deliver and sell a product. This information will be valuable throughout the organization. For example, along with identifying ideal routes and destination, these calculations may also reveal that the current low-cost source country may no longer be the best choice for achieving the lowest delivered cost to the customer.

Tools will also be needed to create a dynamic supply chain, which has the people, processes and technology to route, execute, and track the movement of goods movement at the SKU (stock keeping unit) level as they are transloaded from a single ocean container onto multiple domestic containers bound for multiple distribution centers. This has the potential to reduce inventory and storage costs while also creating the ability to quickly deliver product when immediate needs arise, whether the result of unexpected changes in demand or sudden disruptions to supply.

To provide these tools and capabilities, a company’s enterprise resource planning (ERP) system must be seamlessly integrated with other essential technologies:

• A transportation management system that compiles and dynamically routes shipments through the supply chain.
  
  
• Warehouse management systems that manage inventory into and out of the nodes along the supply chain.
  
  
• A global trade management system that tracks inventory from point of acquisition to point of sale. This gives visibility to products all the way down to the SKU level whether on the water, in customs or on the road.
  
  
• Network design tools that can build optimal distribution networks to maximize new trade routes and allow what-if scenario modeling.
  
  

These tools support the ability to analyze costs and benefits of complex scenarios with multiple scenarios and then act on the insights gained with visibility into the location of goods whether on water, at intermodal points or on land.