As supply chain and logistics directors grapple with the challenges of managing a growing volume of goods from outsourced manufacturing sites in the Far East and eastern Europe, focus of attention has turned to the weak link in the chain, the ports.
This shift in the balance of goods manufactured domestically to those imported has led to the potential for a strategic shift away from centralised distribution facilities in the UK’s Midlands, for instance, to distribution centres located at the ports – a strategy that has become known as port-centric logistics.
According to research carried out last year by Analytiqa, retailers in the UK are paying excessive demurrage fees, often as a result of the lack of capacity at inland DCs. Some enlightened retailers are now operating a direct to store model that bypasses the DC network, reducing demurrage as well as duplicate handling. In many instances road transport costs can be greatly reduced – aiding green initiatives – relieving road congestion, and simultaneously improving the speed to market of key product lines.
Availability and cost of labour is another major factor. The high concentration of DCs in the Midlands makes competing for labour both difficult and expensive.
Port-centric logistics may be a relatively new buzzword in the UK, but on the continent it has essentially been common practice for many years.
Tom Cawley, lead consultant, supply chain consulting, Analytiqa, says: “On the continent they have always been more open to port-centric logistics… Originally logistics was based at ports [in the UK] but with the development of centralised distribution in the Midlands, ports just became transit points… Now, by going back to port-centric logistics it’s a matter of going back to where labour is cheaper. Companies are paying between 50p and £1 more per hour for labour in the midlands as opposed to near ports.”
One thing seems certain, congestion at the ports is set to rise. Cawley gave some indication of the growth in global container traffic predicted up to 2020, saying that from 84 million container movements in 2005, traffic will grow to 246 million movements by 2020. UK container traffic is expected to increase from the current 5.5 million TEU to an estimated nine million TEU by 2020.
So how will the UK deal with this dramatic growth in container volumes? There is already congestion at the UK’s two largest container ports, Southampton and Felixstowe.
Cawley believes 80 per cent of this increase will be accommodated by two key developments, The Northern Gateway – Teesport’s £300 million project to create a new major deep sea terminal that will be capable of receiving 8,000 TEU vessels, facilitating direct services from the Far East, Africa and Europe – and DP World’s London Gateway project costing £1.5 billion.
Both of these projects will require major dredging operations to accommodate the inexorably expanding capacity of container ships. According to Cawley, the next generation of ships will be 26 containers wide.
The trend for ever-larger container ships (expected soon to reach 14,500 TEUs) means that only certain ports can handle ships approaching this size. This has led to the development of feeder services from larger capacity ports to smaller ports.
But the UK risks being sidestepped as a port of call for these vast ships. The Grand Alliance has announced that the UK will not be a direct call from 2008.
One of northern Europe’s busiest ports is Hamburg, currently dealing with just short of 10,000 TEU a year. It’s expected that Hamburg will be handling 20 million TEU by 2020. According to Bengt van Beuningen, head of communications for Hafen Hamburg, “What we are looking at is developing more distribution facilities away from the ports, as the ports area is already well developed.” The Port of Hamburg has initiatives in place to encourage the development of distribution centres in its hinterland.
Van Beuningen points out that of the total 140 million tonnes arriving at Hafen Hamburg last year only a third was destined for Hamburg and the surrounding area. Two thirds was for transhipment to Scandinavia and other regions.
Container traffic at the Port of Hamburg is growing strongly, increasing by more than a third between 2003 and 2007, up from six million TEU in 2003 to 9.9 million TEU in 2007. These strong growth rates have led to the investment in Eurogate, an inland container terminal network which will be going into operation in January 2009. The inland terminals will become points of consolidation for hinterland transport.
Distribution development is very much a focus of activity for the Port of Amsterdam. “The port has various client groups; we are big in bulk, but are developing logistics. More companies are bringing their logistics to the port, especially as we have the advantage of being near Schiphol Airport,” says Pieter Baeten, marketing manager at Amsterdam.
The rapid expansion of imported goods into Europe from Asia has had a major impact on business. Amsterdam opened its new container port in 2002. In 2007 the transhipment of containers at the port jumped by 26 per cent from 305,995 TEUs in 2006 to 386,236 TEUs in 2007. Key reasons for this growth has been the increasing number of large ships with a capacity of 8,000 TEUs being used by the Grand Alliance and the development of more frequent intermodal services with the port’s hinterland covering Prague, Strasbourg, Duisburg and the Netherlands.
Hitachi Construction Machinery undertakes assembly operations alongside the Port of Amsterdam, taking advantage of its proximity to both the port and Schiphol Airport. “Hitachi brings in parts for their construction equipment and assemble here. It’s more effective for them to bring in the parts and assemble here than assemble in the Far East,” says Baeten.
So where did the term, port-centric logistics, come from? PD Ports, the owner of Teesport in the north of England has used the term extensively in promoting its plans for the port area. “I don’t think anyone can quite claim it – we’ve been in the forefront of developing it,” says Martyn Pellew, group development director at PD Ports.
“The idea and rationale for it was being used in the US. Wal-Mart were using it at Savannah Port, where they were moving warehousing away from inland locations and putting warehousing to the point of landing rather than taking it inland. Stuff coming across the Pacific was going to Long Beach and Seattle, being put on rail and sent to Chicago… now they are breaking bulk at other ports, due to problems with inland transit times and getting berths,” says Pellew.
Tesco recently announced plans to build a 1.2 million sq ft import centre on land at Teesport. Juliette Bishop, Tesco’s corporate affairs manager, says: “We need to increase our storage capacity to deal with the increased levels of imported containerised goods and building a storage facility at the port removed the need to move stock from the port where it is imported, to a storage facility inland. As well as reducing the double handling of imported stock, this will help to reduce the road miles that products travel, which is better for the environment.”
This approach has already proved highly successful for rival Asda. In 2005 Asda decided to invest £20 million in a new 350,000 sq ft import centre at Teesport to allow the company to be more flexible and responsive to customer needs.
This strategy created estimated savings of an additional two million road miles per year by shipping 70 per cent of Asda’s non-food imports directly to Teesport as opposed to transporting them from the south via road when destined for northern consumers.
“The difference with Asda Wal-Mart, with us, – and now Tesco who start on site this week – is they are moving their warehousing operations onto the port to save double handling,” says Pellew. “They are getting the benefit of cheaper land costs and cheaper labour, rather than moving it to the traditional locations in the Midlands where we know land and labour rates are quite high. The concept is having many benefits, reducing the carbon footprint, reducing the fuel for inland legs, reducing cost of land development and labour for running an RDC for importing product.”
Another major supermarket, Sainsbury’s, is taking advantage of port-centric logistics at Felixstowe. The retailer used to take imported containers to an inland RDC but now the containers are unloaded at the port, which is said to save 700,000 road miles for every 5,000 TEUs handled. No empty containers wasting fuel and clogging the roads here.
But what’s the catalyst for port-centric logistics? Pellew believes: “It’s the move of manufacturing to the Far East and in addition, fuel costs and the green lobby – even before the fuel hike of the past 12 months retailers were trying to establish themselves with some green credentials, so they have been trying to reduce inland mileage. The Asda import centre has been open for over two years, saving over two million lorry miles a year. If you are saving lorry miles you are probably saving £1.50 a mile. If you can take the cargo to a reasonable port and reduce the inland leg, instead of doing 200 miles from Felixstowe to Leeds or Southampton up to Manchester, you can save fuel.”
Once the channel at Teesside has been dredged from 10.5m to 14.5m and the deep-sea container terminal has been completed at the end of 2011, the port will be looking for direct calls from the larger ships – 6-8,000 TEU vessels. In the meantime, feeder operations involving the break down of 6,000 TEU vessels at continental ports such as Rotterdam, Le Havre, and Zeebrugge, are a valuable source of income. This flow of smaller feeder vessels (1,000 TEU), bringing containers across from the large north European ports to the UK is important to the northern ports of Grangemouth, Immingham, Hull and Teesport. “That business has grown a lot in the past five years as a result of manufacturing bases moving to east Europe and the Far East,” says Pellew. “There’s a lot more traffic from the deep sea lines, some of whom are transhipping from Al Jazirah to make feeders come up to north west Europe – others are sailing to Rotterdam and then on to feeders.”
NYK Logistics is said to be planning a number of port-centric import centres following strong interest in its first UK site at Thamesport. Although the Thamesport centre was initially developed for electronics manufacturer Samsung, others appear to be keen to adopt the strategy. NYK is looking for several sites in the UK.
With the rocketing price of transport and price deflation in some areas of the consumer electronics sector, logistics can represent up to 18 per cent of the sales value and taking cost out of the supply chain is therefore highly attractive.
The concept, which has already been used elsewhere in NYK’s global network, will allow it to cut costs by about ten per cent on certain operations. Containers arrive at the port and are taken immediately to NYK’s facility where they are de-stuffed and the product held in the warehouse for onward distribution. The container is immediately returned to the shipping line to avoid demurrage charges.
NYK Logistics’ UK CEO, Ian Veitch says: “It means the container can be turned around quickly, which cuts cost. It also takes a leg out of the supply chain, so saves money there. And because the site is in a bonded area taxes aren’t paid on the goods until they leave, so that’s positive for cash flow.”
NYK also runs a similar site near Heathrow airport for fast-moving consumer electronics. Veitch says: “The fashion life of a mobile phone is about six months and the speed with which you can get it on the shelf is therefore absolutely crucial. The centre shortens the supply chain significantly.”
Veitch adds that although port-centric facilities are a relatively new concept for the UK, NYK is putting a stake in the ground, rather than risk being passed by. “The market is going to drive us that way and I can see it becoming quite a large feature of our business, particularly given the connection with NYK Line. Although I’m surprised at the speed at which the market has picked up on the idea.”
Port-centric logistics is clearly gaining a lot of attention in the UK as the dynamics of goods made in the UK to those imported changes. In Europe the term is not so widely seen as something new, but rather a continuation of a strategy that has been in operation for many years. But one thing seems for certain; as container volumes continue to grow and fuel costs, environmental considerations and road congestion play a greater part in our thinking, port-centric logistics is going to become a key strategic consideration.
The port has various client groups; we are big in bulk, but are developing logistics. More companies are bringing their logistics to the port, especially as we have the advantage of being near Schiphol Airport.
They are getting the benefit of cheaper land costs and cheaper labour, rather than moving it to the traditional locations in the Midlands where we know land and labour rates are quite high.