The electronics industry has literally spent decades improving its supply chain. It only takes one glitch, however, to disrupt the entire process. The manufacturing industry was reminded of this fact in December as a work slowdown in U.S. ports impacted several key manufacturing indices.
“The West Coast ports slow-down is really affecting deliveries of our Asian purchases,” said one respondent to the Institute for Supply Management’s monthly manufacturing business survey. The ISM’s Purchasing Managers Index (PMI) – which tracks U.S. manufacturing growth on a month-to-month basis -- dropped to 55.5 percent in December; a decrease of 3.2 percentage points from November’s reading of 58.7 percent. Any number above 50 indicates growth while any number below 50 indicates contraction.
The manufacturing industry has nervously been watching recent developments at U.S. West Coast ports. The longshoreman’s union, which represents the dockworkers that offload shipments, is in contract negotiations with the Pacific Maritime Association. The union denies purposely slowing down work.
Two other ISM indices – December’s production and inventory – were also affected by the slowdown. The production index registered 58.8 percent, 5.6 percentage points below the November reading of 64.4 percent. Inventories of raw materials registered 45.5 percent, a decrease of 6 percentage points from the November reading of 51.5 percent. If factories are unable to secure the raw materials they need for manufacturing, production levels fall and inventories decrease.
“West Coast port issues have greatly impacted our incoming materials,” one executive told the ISM. “We are air freighting many parts from Japan and Asia to support production while parts sit at the dock.”
Experts caution against making too much of the December dip. U.S. manufacturing has been growing steadily since 2012, and last year the industry faced similar logistics challenges in the form of heavy snows and icing across much of the country. (See: Supply Chain Shakes Off Winter Fatigue.) The PMI registered several small hiccups toward the end of 2013 but has remained well above the 50 percent threshold for 19 consecutive months.
Oil prices have also affected the PMI, according to Bradley J. Holcomb, chair of the ISM's Manufacturing Business Survey Committee. The new orders index registered 57.3 percent in December, a decrease of 8.7 percentage points from the reading of 66 percent the prior month. Some buyers are holding off purchases in anticipation of oil prices declining even further.
The impact of a strike on the electronics industry is likely to be mixed. A great deal of the actual manufacturing takes place overseas, although many finished goods are transported to the U.S. by sea. Smaller items, such as components, aren't dependent on ocean transport and can easily be adapted to air freight. However, some companies manufacture subassemblies offshore and complete their equipment in the Americas. A port strike could delay the final assembly of electronics equipment that takes place in the U.S. Large or security-sensitive products such as defense and medical equipment are still predominantly manufactured onshore.
Manufacturers are most likely to use alternate ports in the event of a West Coast strike, according to the National Retail System (NRS), a collection of several logistics companies. An NRS survey of U.S. manufacturers found 39 percent of respondents would route shipment through ports in New England, New York and New Jersey. The up and coming port of Savannah, Georgia is the next most popular option with 26 percent, and the Canadian Port of Vancouver is seen as the third best option for a further 23 percent of companies. While all of these ports are likely to see a short-lived boom if the strikes take place, what will be interesting is how much trade will not return after a strike ends and still be routed through these destinations, said the NRS.
The companies surveyed are big importers of goods into the U.S. Fifty-nine percent of the respondents said that their companies imported more than 90 percent of their total inventory and 65 percent had at least 75 percent of their total imports currently routed through the West Coast ports. Should the strike go ahead it could be costly for U.S. businesses and their 3PL partners, according to the NRS.
The survey found a week-long strike will not be too painful for most of its respondents, with 70 percent (of those that expressed a value) having losses of less than $250k. The picture if the strike extends for a month is much more serious with losses over $500k and above being suffered by 50 percent of those who provided an estimate figure.