Amid Strike Concerns, Cargo Diversion Becomes a Key Link in 2022 Supply Chain Strategy

On the West Coast, the Port of Los Angeles is trying to attract more shippers as its cargo volumes fall from record highs. Meanwhile, on the East Coast, leadership at the Port Authority of New York and New Jersey claims the port has been the busiest container port in the U.S. for two consecutive months.

"We've held the No. 1 position in the U.S. for 22 consecutive years. One or two months of data doesn't constitute a trend," said Gene Seroka, executive director of the Port of Los Angeles, during a media briefing on Tuesday (Nov. 8). Nevertheless, he revealed that the port has been conducting a roadshow for months, proactively visiting shippers in an effort to win back some cargo.

Although this is not the only factor driving the divergence in freight trends between the East and West Coasts, experts and port leaders agree that the shadow of negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) has prompted shippers to divert more U.S.-bound cargo from the West Coast to the East Coast. Companies also adopted similar strategies with rail freight in the third quarter to hedge against potential freight rail shutdowns, a risk that remains a concern.

"Although both parties—PMA and ILWU—have issued two joint media statements saying there will be no strikes or lockouts, the market still has doubts," Seroka said.

The threat of a strike has been enough to prompt shippers to take action, thereby changing the flow of U.S. cargo. But in the process, shippers have found that diverting cargo—like other supply chain contingency plans—can involve trade-offs, such as longer lead times and increased logistical complexity.

East Coast ports take import share from West Coast

Diversion activity has become more pronounced in recent months, especially after the ILWU and PMA failed to reach a labor agreement by the July 1 deadline, said Glenn Koepke, general manager of network collaboration at FourKites.

According to FourKites tracking data, in October, 62% of its customers' import cargo arrived at East Coast ports and 38% at West Coast ports. This is the highest proportion for the East Coast this year and exceeds the 57% share in October 2021.

Koepke noted that the volatile ocean shipping market triggered by the COVID-19 pandemic—including sharp changes in freight rates and congestion levels—has prompted companies to renegotiate contract rates and capacity more frequently. This gives shippers more flexibility in where cargo arrives.

"If you compare cargo diversion now to four years ago, essentially, the way you procure ocean freight makes diversion more efficient today because historically, this was typically an annual contract," Koepke said. "Now you're seeing quarterly contracts."

At the Port of Savannah, it is unclear how much of its recent import growth is directly attributable to diverted cargo, said Cliff Pyron, chief commercial officer at the Georgia Ports Authority. But in the quarter ending in September, 166 importers were either new customers or saw their trade volumes with Savannah grow by 20% or more.

"Since fiscal year 2001, every time there has been labor action on the West Coast, the Port of Savannah has seen cargo growth in both the short and long term," Pyron said in an email response to Supply Chain Dive. "We have already heard from port customers that they are diverting cargo to the East Coast to hedge against potential strike risks."

Some shippers shifted away from rail in Q3

As cargo moves inland, concerns about labor-related disruptions have not dissipated. With negotiations between rail companies and unions still ongoing, companies have adjusted their supply chains to hedge against potential strikes or lockouts.

Carriers mentioned this shift in recent quarterly earnings calls. Schneider experienced a decline in intermodal volumes in September as customers turned to trucking to avoid rail uncertainty, particularly affecting short-haul operations.

Norfolk Southern executives said the company took a "no-surprises approach" in the third quarter, discussing with customers how to keep cargo moving. The company estimates this approach accounted for about 40% to 50% of the volume decline in the quarter, primarily in the intermodal market.

Rail companies and three unions reached a tentative agreement on September 15 to avoid a freight shutdown, easing some shippers' concerns. Currently, there hasn't been a massive shift of cargo from rail to truck—Chris Caplice, chief scientist at DAT, said in a November 7 email comment that he has not yet noticed changes in trucking trends on relevant lanes due to a potential rail strike.

But the threat of disruption remains this year, with the deadline to avoid a rail strike or lockout now pushed back to December 4.

A rail shutdown would require a much larger supply chain adjustment than simply shifting all volumes to truck. The Association of American Railroads estimates that about 467,000 additional long-haul trucks would be needed daily to move all rail freight. However, the association also noted that barges could potentially absorb some capacity in areas with navigable rivers.

Cargo diversion brings new trade-offs

While diverting cargo can mitigate the impact of labor-related disruptions, it also introduces other potential supply chain drawbacks.

In rail transport, shifting cargo to truck can be an effective solution for automotive companies that rely on rail for outbound shipments, said Julie Gerdeman, CEO of Everstream Analytics. However, customers in the chemical or food processing industries cannot easily do this due to the nature of the products being transported, and shippers must also consider pricing and contractual factors.

As for ocean shipping, rerouting cargo from Asia through the Panama Canal to avoid West Coast risks extends lead times. While retailers with excess inventory may be less concerned about increased transit days, it could be a bigger issue for other industries. Additionally, inflationary pressures that companies are seeking to mitigate exacerbate the challenge.

Therefore, cargo diversion may be a temporary measure, said Dawn Tiura, president and CEO of the procurement industry group: "You'll go back to the lowest total cost option."

A rapid surge in import activity can also strain port operations, raising concerns about congestion for cargo whose lead times have already been extended due to diversion.

When other retailers were scrambling to divert cargo from the West Coast, The Children's Place's inbound supply chain encountered East Coast port congestion in the second quarter, which led to higher inventory levels at the company.

Nevertheless, as the risk of port or rail strikes prompts companies to strengthen contingency plans, FourKites' Koepke expects cargo diversion to become a more routine part of shippers' future strategies.

"What we often hear is that shippers are incorporating it into their planning models, so when they look ahead at operations based on different global or socio-economic events, they consider routing cargo to specific locations," Koepke said.

Sarah Zimmerman contributed to this article.