It’s the last Monday in June and as we pen this part two Supply Chain Matters advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. Our part one posting of this series addressed our initial perspectives and recommendations regarding Brexit. In this part two advisory, we will address yesterday’s formal opening of an expanded Panama Canal.

Yesterday, after nine years and in excess of $5 billion in investment, the Panama Canal Authority formally opened new locks on both the Pacific and Atlantic Ocean facing entries to accommodate the transit of far larger ships. The first ocean container ship to transit the expanded canal, the renamed Cosco Shipping Panama, operated by Costco Shipping Lines traversed an expanded canal from the Atlantic to the Pacific side.   PanamaCanalExpansion_2_450

The opening of this well-known expanded waterway was completed after nearly two years of delay, and considerable cost overruns. At one point in 2014, a stalemate raised doubts as to whether this huge infrastructure project would ever be completed.  Container vessels with capacity in excess of 12,000 TEU’s are now expected to be able to take advantage of the widened canal with promised faster direct transit times from Asia based ports directly to eastern United States ports, thus avoiding inter-modal movements across the United States. The other opportunity is for east coast based regional shippers to now have a direct transit route to East Asia.

There has been much anticipation as well as speculation regarding the benefits of an expanded Panama Canal. About a year ago, The Boston Consulting Group (BSC) and C.H. Robinson released a joint study-How the Panama Canal Expansion is Redrawing the Logistics Map, and predicted that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. East Coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing Ports of Savannah and Charleston. The study concluded that this container routing shift will permanently alter the competitive balance among U.S. East and West Coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing. The BSC study concluded that time-sensitive cargo may continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings.

Since then, other studies have pointed to new opportunities in logistics and transportation related to direct Asia to U.S. and converse goods transit, including the operation of new inland ports.

However, the one current gating factor is that many of the key U.S. East Coast ports are still working on infrastructure projects that would allow larger vessels to call on such ports. The ports currently best prepared to handle these larger vessels are the Ports of Miami and Savannah. Both the Ports of Baltimore and Charleston have active dredging projects underway while the combined Ports of New York and New Jersey still have significant infrastructure requirements yet to be overcome including a bridge near Bayonne New Jersey.

As we noted in a previous Supply Chain Matters commentary, a current boom in distribution and warehouse development includes large investments in east coast regions. The State of South Carolina is aggressively positioning its logistics and distribution infrastructure to be an economic beneficiary of the new routing. Over six million square feet of warehouse space is under construction in the Greenville- Spartanburg region mostly being attributed to the ability to support direct ocean container movements from Asia to the U.S.  An inland port at nearby Greer South Carolina is connected by rail to the Port of Charleston. From the Greenville- Spartanburg area, trucks can transit goods to the rest of major eastern U.S. cities or to U.S. Midwest manufacturing regions within a day’s drive. Thus, an alternative option opens up for direct transit and distribution of goods.

A lot will depend on active analysis and modeling by logistics and transportation as well as S&OP teams on the various cost and service options related to ocean movements to U.S. West Coast ports with intermodal truck and mail inland vs. direct ocean transit to U.S. East Coast ports with adjacent inland distribution and transit. A factor in modeling will be assumptions on port and infrastructure readiness as well as direct labor environment. Another uncertain factor is the all-important long-term cost of fuel, which is currently still hovering at unprecedented  low levels.

Needless to state, global supply chain logistics and distribution routing has no changed. Active global supply chain network modeling and assessment has become an all-important necessity followed by capability elements for ensuring broader supply chain wide visibility. The expanded Panama Canal now opens a long anticipated new opportunity but comes with differing and changing assumptions.

Be prepared with people, technology and more informed decision-making capabilities.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.