One clog in global assembly line can halt much of world trade

By Chris Woodyard
USA Today

SAN PEDRO, Calif. — While West Coast ports rumbled back to life last week after a 10-day shutdown sparked by a labor dispute, the invisible effects of the dispute are more far-reaching.

Besides costing the U.S. economy up to $2 billion a day and threatening Asia's economies, the shutdown has laid bare the vulnerability of the global assembly line.

During the past several decades, American companies have revolutionized production and cut costs by roaming the world to hunt for cheaper parts or finished goods.

The phenomenon has helped spur huge growth in Asian exports as more U.S. companies shifted manufacturing abroad.

At the same time, many companies embraced lean production methods, including just-in-time inventory designed to minimize costs.

Now, companies have found that 10,500 dockworkers — just one choke-point in a long supply chain — can halt much of the world's global trade.

And that has once again raised the question of whether the benefits of just-in-time inventories outweigh the potential cost, a question that surfaced after the disruptions caused by the Sept. 11 attacks.

"That's the downside of just-in-time," says Richard DeKaser, chief economist for financial services company National City. "It creates heightened risk."

Yet despite its inherent problems, the efficiency and cost gains of the global assembly line are too great to scrap, most experts say.

"It has served well in most circumstances," DeKaser says.

The trade-off is that companies and their customers will be vulnerable to future global assembly line disruptions. It also means that if ports shut down again after an 80-day cooling-off period, companies — from toymakers to automakers to PC makers — could be in the same boat again.

For the global assembly line to work, "there can be no uncertainties, no breakdowns," says Ravi Kumar, professor of information and operations management at the University of Southern California.

Just how crucial is fast delivery of goods?

The New United Motor Manufacturing plant, a Toyota-General Motors joint venture, offers a good example. The plant in Fremont, Calif., normally receives eight ocean cargo containers a day of car parts and 26 a day of truck parts, including engines, transmissions and frames. It closed its truck-making plant because it ran out of parts just four days after the lockout. It reopened the carmaking division last week as airlifted parts started to arrive.

Some 71 percent of companies responding to a U.S. National Association of Manufacturers survey Monday said they had been directly affected by the shutdown. Five percent said they had to shutter or severely curtail production.

President Bush, in intervening to seek the 80-day cooling-off period, noted that "modern inventory techniques and increased integration brought by globalization" mean that the shutdown could hurt large importers and producers and "tens of thousands" of small firms.

One such company is Inventory Trading of Peosta, Iowa, which imports apparel for police and firefighters.

"Something like this comes and punches you in the stomach as hard as it can," says CEO Pat Einarsen. He expects lost sales from the port closures to clip $500,000 out of this year's $3 million in revenue.

Specialization and dispersal

How did it come to this point, where 10,500 dockworkers can hold sway over the U.S. economy?

The answer lies in how the growth in trade, the globalization of economies and the dawn of the Information Age have taken on increased importance compared with a century ago, when a company often controlled most phases of production, from raw materials to finished product. Henry Ford best exemplified the process: At his River Rouge plant near Detroit, iron ore went in one end, Model A cars drove out the other.

Now, it's hard to find even midsize companies that aren't buying or selling something abroad.

Adding to the pain from the dispute:

• Foreign factories. U.S. manufacturers discovered that Asian and Latin American countries could produce many goods cheaper and with quality as good as or better than those produced at home. In the past decade, 750,000 U.S. jobs have gone abroad, about half of all those lost, says Economy.com, a consulting service.

But foreign production means that far-away problems can disrupt the global assembly line. Nvidia, a firm in Santa Clara, Calif., has its 3-D graphic chips made mostly in Taiwan and says it is constantly aware of the world situation. "Everything from typhoons to earthquakes to the Taiwanese economy, there's a lot of stuff to worry about," says spokesman Derek Perez.

• Computerization. Every business with an Internet connection can now find new suppliers and markets abroad, increasing overall exports and imports. Shipments can be tracked from the factory to the front door, making it less scary for even small businesses to engage in global trades.

• Just-in-time inventory. Fed up with high inventory costs, more companies over the past 20 years followed the Japanese in developing systems that allow them to receive parts just days, or in some cases hours, before they are needed — not weeks. In the past 10 years, inventory-to-sales ratios at U.S. companies dropped 10 percent as companies adopt leaner methods, including just-in-time, the Commerce Department says.

While that results in enormous savings, "there is no inventory to cushion the impact of disruption," wrote University of California professor Stephen Cohen, in assessing the impact of a port shutdown.

• Containerized cargo. In the past, dozens of dockworkers took a week to unload a freighter. Now huge overhead cranes snatch all the truck boxes and reload the ship in a matter of hours.

The savings are enormous. Shippers can put every kind of cargo in containers, even low-value cargo like bags of concrete. In 2000, the value of containerized goods amounted to $258 billion of the $309 billion in total West Coast trade, Cohen found.

Cutting costs even further is a new breed of container superships. The Regina Maersk, nearly as long as an aircraft carrier, can carry 6,000 20-foot containers — double what the largest container ship was capable of carrying in 1980.

Risks of containerization

But containerization carries risks, too. With more than 200 container ships waiting to be unloaded off the West Coast, the normal traffic flow has been disrupted so much that it'll take weeks to get empty containers back to Asia to pick up goods.

Asian manufacturers might have to slow production because they no longer have huge warehouses to store goods. Instead, they put goods directly into containers.

American companies have a different problem. Their goods are stuck on ships.

Garment importer John Paul Richards, a company in Calabasas, Calif., has its moderately priced women's wear sewn in China, Korea, Indonesia, Bangladesh and Cambodia. The garments cost about 50 cents each to import on ships. Now, many of the company's holiday deliveries are stuck a mile offshore and it is worried retailers might cancel orders. Between the backlog of unloaded ships and time to get the clothes to stores, "that's three weeks (retailers) can't recapture," says executive vice president Ed Redding.

Problems like his are encouraging some companies to reconsider their import strategies.

"This experience makes me want to hedge my bets, not trust that link in the chain," Inventory Trading's Einarsen says.

He's thinking of bringing more garments in through the East Coast.

"Anything not to have this problem. I can't let a bunch of guys with a gripe, legitimate or non-legitimate, pull down our little company."

(Contributing: USA Today reporters Barbara Hagenbaugh, Michelle Kessler)