Flexibility Is New King

[ By Lisa Harbatkin ]

CenterPoint's Intermodal Center in Elwood, Illinois.

When it comes to logistics, velocity was king. But after a longshoremen's strike, terrorism, threats of new terrorism, clogged transportation networks, hurricanes, floods, potential plagues, the U.S. Congress and delays no one has yet thought of, flexibility -- to counter "disruption logistics" -- is the new byword.

What's Happening
Asia-North America trade remains the central inbound focus. Until the past few years, nearly half that traffic came in through Southern California. The 2002 Long Beach/Los Angeles longshoremen's strike made retailers and manufacturers re-think that route and their reliance on the California ports.

"Consumer product companies are trying to find alternatives to Los Angeles and Long Beach," said Dr. Leigh Boske, Associate Dean, Professor of Economics, Lyndon B. Johnson School of Public Affairs. "What we're seeing is that beginning in 2006, ocean liners will serve Houston. The East Coast ports will be a growth area for Asian traffic coming through the Panama and Suez Canals to East Coast ports and to Houston."

A growing portion of inbound traffic takes these routes, headed for final distribution to inland destination ports serving interior regional markets. Latin America is also gaining as a source for manufactured goods coming into the U.S., with that traffic likely going up the East Coast.

Suez takes more time from Asia, but the reliability makes up for the extra time. "Reliability is now the number one thing that's important," said Curtis D. Spencer, president, IMS Worldwide Inc. "You can build in the extra time. That's already being done."

Logan Smith, senior vice president for acquisitions at Aeroterm, pointed out that "All supply chains respond in similar ways. The theme is flexibility and the ability to respond quickly to unexpected events. The types of buildings will not change much. It's not so much the type of building that changes as much as awareness of the network."

Spencer added that "There have to be new gateway markets. The importers and the transportation providers have already figured this out. There will be much more going on in non-traditional markets."

Port authorities in these markets, including Savannah, Hampton Bay and Norfolk in Virginia, New York/New Jersey, Houston, Philadelphia and Charleston are ramping up their facilities, competing for their share of these long-term changes in shipping patterns.

Inland ports and shipping centers in cities like Chicago, Kansas City and Dallas are playing central roles in the supply chain. Kansas City, for example, has become a destination for what Spencer called "work-around ports like Lazaro Cardenas in Mexico." (Spencer noted that this can raise Customs and security issues.) But direct rail from Mexico and from the Pacific Northwest to Kansas City is an alternate to the congested Los Angeles-Long Beach route for Asian imports.

As warehouses and transload facilities go up in these areas, California will have irretrievably lost a certain amount of business, said Boske.

New ships are being built in the range of 8,000 to 10,000 TEUs, twice the size of vessels on the high seas right now.

But, he added, much of what comes in at a port tends to stay within the region. "As a rule of thumb, it's easier to locate warehouses near the metro areas they serve," he said. Most of what comes into California will stay in California. So "Los Angeles and Long Beach are still growing, but Gulf and East Coast ports will be growing faster," Boske predicted.

Storm planning is just one factor among many. Warehouse locations, container size, vessel capacity, land transport and offload capabilities are key variables in the equation.

In short, business needs drive the business engine. "The need for flexibility in the supply chain is being driven by advances in manufacturing methods and shifts in distribution as well as by shocks to the system," said Smith.

"You make your business decisions," Daniel Leahy, managing director, NAI Global Logistics and partner in NAI Hiffman, said. "Are you going to change where you put your distribution center locations? You'll consider it, but you're not likely to make drastic changes." Leahy recently worked with Wal-Mart in establishing its 3.4 million-square-foot distribution center at CenterPoint's Intermodal Center in Elwood, Illinois. The company's giant warehouse at Houston is one of more than 100 distribution centers it has at locations around the country.

Hurricanes' Impact
Phil Trabulsi, senior director, Exel Integrated Solutions, Exel, said that "The risk of hurricane damage is somewhere in peoples' calculations, but it's not the primary factor. Companies will put their operations where they need them to support their businesses."

Hurricanes Katrina and Rita raised the weather profile, but they apparently haven't changed the future of port and transportation planning to any great extent. Reports indicate that New Orleans port facilities came through Katrina with far less damage than first feared. Expectations are that it will remain a major inbound and outbound port. Some 70 percent of its traffic comprises imports, with 30 percent going outbound.

Bulk operations such as those that go through New Orleans, Smith said, "should get more real estate attention."

"New Orleans is in a central location there at the mouth of the Mississippi, and companies will continue to view it as central in their decisions on where to locate," Trabulsi said. "New Orleans will be made functional again. You can't shift the outbound volume to roads and rail. It makes sense for certain commodities to move down the Mississippi."

More ocean routes are opening, including greater use of the Suez Canal and the Panama Canal. Shown above is post-hurricanes Port of New Orleans.

Much the same goes for Houston and other Gulf locations.

Weather will certainly be a factor, Leahy remarked, "in how close people will locate to Houston. It's going to be scrutinized. It has to come in at Houston, but are you going to be 15 miles away or 50 miles away? It's part of the equation. It has to make transportation sense."

Realistically, retailers and other shippers "should have multiple sites and some redundancies, some ability to shift from one site to another. All the engineering in the world can't guarantee you won't be affected by a natural disaster," said Trabulsi.

New Orleans Shows Key Role of Business Drivers Experience at the Port of New Orleans following Katrina reflects the overall assessment of logistics experts that business realities, more than weather or other natural damage, drive port needs and development directions. The Port of New Orleans was back up to a third of its normal traffic by the end of October. "The goal is to be at 80 to 100 percent of normal activity in four to six months -- by April or so," port spokesman Chris Bonura said. At the same time, there is a need for reconstruction or rebuilding of some facilities, including warehouses, marine terminals, shipbuilding and repair facilities, a lot of bulk materials handling facilities. The port has facilities in two areas, Bonura explained. Those on the Mississippi, which handle a lot of inbound traffic, came through the storm in relatively good shape. The inner harbor navigational canal sustained considerable damage. "Facilities on the industrial canal will have to be rebuilt or relocated," said Bonura. New Orleans is the only U.S. deepwater port served by six Class One railroads. Combined with Mississippi River traffic, this gives it access to and from virtually anywhere in the country. The port invested over $400 million in new facilities and improvements in the last 10 years. These include improved terminals for containers and other ship-borne materials, with multi-purpose cranes, marshalling yards and a new roadway for truck traffic. There is also a shorter-term need for temporary housing to help get more workers back to the port.

What's Needed
The key words are reliability, redundancy and supply chain flexibility. Ready access to rail and truck on land and to COB (container-on-barge) for short-sea shipping is essential. For some shippers, air plays an important role.

A recent report by IMS Worldwide suggested that developers can help their customers by focusing on the new gateway ports, the need for intermodal rail expansions and on measures that reduce trucking costs and alleviate choke points. Boske directed a study, "Innovative Strategies to Raise Efficiencies along Transportation Corridors and at Multimodal Hubs," prepared for the Congressional Research Service at the Lyndon B. Johnson School, that examined intermodal options and needs.

"Look at the total supply chain integration and look at how these costs affect your tenants' competitive position," said J. Vann Cunningham, assistant vice president for economic development, Burlington Northern Santa Fe Railway (BNSF). "Business drivers will be key. Balance inbound and outbound. Locate on or near rail and direct rail or intermodal."

Exel's Trabulsi said that shippers have a choice of three basic strategies for getting their goods to market. One is the mega-DC (distribution center), with a few huge warehouses at the port of entry. Second are regional import distribution centers (IDCs), which are closer to the retail point of consumption. A third approach is to hold inventory at the point of origin and then configure shipments for delivery to specific destinations. In today's systems, these could include wholesalers, retailers and even the end-user consumer.

Each of these options has different advantages and disadvantages for the shipper and offers different kinds of opportunities for developers.

Developers might like the idea of the mega-DC structures and there is a need for them. However, just as realistically, different-size retailers and manufacturers making and selling different products need facilities that meet their requirements. The key point is that no one approach works for everyone and that commercial and industrial developers must work closely with their customers, logistics and port experts say.

Truck facilities will need more parking for trailers and more container space. "Dock efficiency is more important because you can't keep drivers sitting there," Leahy said. "Developers can make sure there are large speed bays near the dock, ample trailer area and room for maneuvering for containers. You also need to allow flexibility for building expansion."

Rail development is becoming a transportation focus. Driver shortages and time limits on drivers are some of the constraints now on trucking, Leahy said, along with truck capacity and fuel costs.

Shippers have a choice of three basic strategies: the mega-distribution center; regional import distribution centers; and shipments for delivery to specific destinations. Shown above is post-hurricanes Port of New Orleans.

"Understanding how goods will move by rail will create development opportunities near the railheads," Smith said.

Cunningham remarked that developers must understand international and domestic intermodal. "Warehouses should be on major highway transport routes and on major industrial sites that are direct-rail served. They need to understand what a rail service site is -- they need to learn about the local rail needs and facilities. You need to be where there is intermodal traffic."

Spencer pointed out that in Houston, for example, "There will be a lot more need for rail infrastructure improvement. It has not been a load port for containers going north and west. It's been a destination for containers from Long Beach, but with Wal-Mart and others establishing facilities, it has become an origin port for imports to come in and then go out to the rest of the country."

Two Key Trends Affecting U.S. Ports: Congestion, Growth of Trade with China Port congestion and China growth affect everything, according to a panel speaking about global logistics at NAIOP's 2005 Annual Conference, Hollywood, Florida. Moderator Curtis Spencer, president, IMS Worldwide Inc., and panelists Michael Peters, first vice president of ProLogis; Todd Platt, CEO, Hillwood Investment Properties; John T. Meyer, senior vice president, AMB Property Corporation; and John Napper, senior partner, Panattoni Development Company, offered the following observations: Work-arounds. Work-arounds will continue for the Los Angeles and Long Beach, California ports. The rationale is simple: there are already 13 million TEUs flowing through the ports [a TEU is half of a container, so there are between seven million to eight million containers flowing through the ports annually right now] with a current growth rate of 15 percent a year. New gateway ports. New gateway ports are springing up because of congestion, noise, high costs, security and railroad problems. All these delays create almost a week and a half additional turn time on the West Coast. In the logistics world, velocity is king. When velocity starts backing up, the logistics person needs alternatives and needs them fast. Wal-Mart put four million square feet of import distribution centers in Houston, Texas. This is a paradigm shift and a critical turn for real estate developers. You will not see a dedicated Wal-Mart ship steaming into port. Instead, there may be 1,000-1,500 TEUs of cargo for Wal-Mart on the ship, but the ship carries probably 4,000 TEUs or more. Therefore, others must be part of the remaining 3,000 TEUs that make up the cargo of the ship. Because the infrastructure is there and Wal-Mart has made its decision, Houston is now on the map as an import gateway port. "Now,just in time has been slowed down to just-in-case logistics," said the panel. Alternative ocean routes. With big importers aiming for more gateway ports in the U.S., more ocean routes are opening, such as greater use of the Suez Canal and the Panama Canal. Mammoth ships arrive. There is a huge shipbuilding and ship-buying trend underway around the world. To keep costs under control, ships are being built in the range of 8,000 to 10,000 TEU vessels. This is twice the size of the 4,000 and 5,000 TEU vessels on the high seas right now and twice the size of what fits through the Panama Canal. Because ships have a 50-year lifespan, the solution for the shipping companies is to move the smaller ships through the Panama Canal and use the larger vessels for Los Angeles/Long Beach and some East Coast ports.