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Article Excerpt
Some supply chain interruptions happen unexpectedly. Others come with some forewarning. Chopra and Sodhi report most companies develop plans to protect against recurrent, low-impact risks in their supply chains. Many, however, all but ignore high-impact, low-likelihood risks (Chopra and Sodhi 2004). The 2008 West Coast port contract negotiations could proceed smoothly, or they could result in a similar interruption to that experienced in 2002, which extended beyond 100 days and impacted company supply chains and the national economy. Many firms were caught unprepared and suffered economically. This article explores the historical background of the 2002 West Coast port negotiations, quantifies the resulting cost, and looks forward at the important variables and timing of pending 2008 negotiations. It offers suggestions for preemptive actions that may be considered.
HISTORICAL PERSPECTIVE--PARTICIPANTS IN WEST COAST PORT NEGOTIATIONS
In 2002 the labor contract between the International Longshoremen and Warehouse Union (ILWU) and the Pacific Maritime Authority (PMA) came up for negotiation. The negotiations stalled into a work slowdown, which prompted the PMA to impose a lockout of dock workers. The impact of this action resulted in at least a $15.6 billion cost to the economy and created severe interruptions in many supply chains (Martin Associates 2003). The dispute involved the following parties:
Pacific Maritime Authority (PMA)
The Pacific Maritime Authority (PMA) was formed in 1936. The seventy-five-member PMA includes all employers of longshoremen in the twenty-nine cargo ports in the states of Washington, Oregon, and California, including steamship lines, terminal operators, and stevedores (Hall 2004; http://www.pmanet.org).
International Longshore and Warehouse Union (ILWU)
The International Longshore and Warehouse Union (ILWU) is a labor union that primarily represents dock workers on the West Coast of the United States, Hawaii, and Alaska, and in British Columbia, Canada. It also represents hotel workers in Hawaii, cannery workers in Alaska, warehouse workers throughout the West, and bookstore workers in Portland, Oregon. The union was established August 11, 1937 after the 1934 West Coast Longshore strike, a three-month-long strike that culminated in a four-day general strike in San Francisco and the Bay Area. A 1938 National Labor Relations Board decision upheld the concept of the ILWU as a single bargaining unit. The ILWU currently represents over 45,500 workers in the U.S. and 14,000 members in Canada (http://www.ilwu.org).
A Seventy-Year Relationship
Since 1937, the PMA and ILWU have negotiated labor contracts every three to five years, including the 1960 Mechanization and Modernization Agreement, in which the ILWU agreed to technological innovation, especially containerization, in exchange for guarantees of job security. Collective bargaining is conducted on a coastwide basis; one master contract governs labor-management relations in all twenty-nine ports. This arrangement forces employers to shift from an area focus to a regional and coastal approach and eliminates the possibility of competition between the ports on the basis of formal work rules and wage rates. It dramatically reduces the power of steamship lines to play stevedores and workers in one port against those of another. It means that a labor-based disruption to port operations affects all ports simultaneously, thus intensifying the aggregate effects of any disruption (Hartman 1969).
Historically, the relationship between the ILWU and the PMA has not been without conflict. There have been strikes in 1948, 1951, and 1971. In addition, during the 1999 contract negotiations, ILWU members exerted bargaining power by engaging in a work-to-rule slowdown (Mongelluzzo 1999).
West Coast Waterfront Coalition (WCWC)
Between the 1999 contract and the 2002 negotiations, the West Coast Waterfront Coalition (WCWC) was formed. The WCWC is a group representing both major shippers (cargo importers and exporters) and the PMA. For the first time, a formal mechanism existed whereby shippers could be kept informed of developments in the contract negotiations and intervene in them (Hall 2004).
EVENTS LEADING TO THE 2002 NEGOTIATIONS AND LOCKOUT
In 2001, U.S. West Coast ports handled about 253 million tons of cargo worth just over $300 billion, or 42 percent of all U.S. waterborne trade. The six largest container ports on the West Coast--Los Angeles, Long Beach, Oakland, Seattle, Tacoma, and Portland--handled slightly more than half of all the foreign origin or destination containers passing through U.S. ports (Hall 2004). The PMA and ILWU negotiations began in late spring and extended well past the July 1, 2002 expiration date. The PMA sought "technological advances to help relieve congestion; enhance productivity, reliability and security by implementing communications solutions with truckers, eliminating redundant data input, automating the dispatch hall, increasing cargo terminal security and reforming the arbitration system" ("PMA Chief Seeks to Modernize West Coast Waterfronts," 2002). The timeline in Table 1 offers a brief overview of the 2002 negotiations.
Readers should note that the entire negotiation process extended over an eight-and-a-half-month period and involved a cumulative total of ten days of lockout, which cost the U.S. economy billions of dollars (McKenna 2007).
COST OF THE SUPPLY CHAIN DISRUPTION
By the time President Bush invoked the Taft-Hartley Act, over 200 ships were lined up outside of ports waiting to pick up or unload containers. It was estimated at that time that it would take an estimated six to seven weeks to clear the backlog of cargo ("The Lockout Ends," 2002). By the time the contract had been settled, the backlog had grown to over 100 days (McKenna 2007).
Cost to the Firm
The cost of a supply chain disruption can be large. Singhal and Hendricks analyzed the impact of 800 instances of supply chain disruptions big enough to generate news in the financial press prior to 2001 (Singhal and Hendricks 2002; Hendricks and Singhal 2005). In their analysis, a company's share price typically dropped by around 8 percent in the first day or two after the announcement. This is worse than the average stock market reaction to other corporate bad news, such as a delay in the launch of a new product (which triggers an average fall of 5 percent), untoward financial events (an average drop of 3-5 percent), or IT problems (2 percent). And the effects can be long-lasting: In most cases operating income, return-on-sales, and return-on-assets...
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