How Better Procurement Practices Could Have Helped Resolve the West Coast Port Crisis Pierre Mitchell and Thomas Kase - February 20, 2015 1:08 PM | Categories: Analysis, Industry News, Procurement Strategy & Planning | Tags: General News The ongoing logistical logjam at the West Coast ports is still not resolved. West Coast port employers issued their “final” contract offer to union workers, but that doesn’t mean the situation at the ports has improved…yet. US Labor Secretary Tom Perez is in San Francisco to try to spark a settlement among the months-long contract disputes between port operators and workers. He issued a deadline of today for the 2 sides to come to an agreement, or negotiations would be moved to Washington. FREE Download: Why Customizing Your Supply Chain is a Must - A Research Report Both large and small companies are feeling the pain as contract negotiations have led to productivity slowdowns at the ports, stalling imports, exports and deliveries of products throughout the US. Ships sit anchored in the bays, unable to dock. Not only are these companies losing money, and bracing to lose even more, but the impact is felt on a national level. Impacted by the port strikes and other union tactics are truck drivers who won’t be needed to transport goods in the event of a total port shutdown. Drivers (at least some) have been classified as "independent" contractors by their employers, which means they would not be entitled to unemployment benefits if a lockout occurs. In California this past Wednesday, a Teamsters union held a press conference calling attention to this issue, which the California Employment Development Department recently declared was “unlawful,” according to a press release from the union. There is uncertainty on the reach of the issue, but a class action lawsuit in California was recently decided in favor of the claimants (drivers), so the employers are now likely to have to change their employment practices, in addition to back pay and other compensation to the claimants. How could procurement have stepped in to help resolve these issues? Ensure proper contingent labor classification: Obviously, procurement organizations and HR need to make sure their workers are classified properly. Misclassifying them as independent contractors is obviously a no-no. Yet, more than 10,000 truck drivers remain classified as such. The port issues (regarding misclassifications) parallel developments in the staffing industry, including court cases (ref. Microsoft for the case that changed the industry), where 1099 workers have been found to be W2 employees, just with another name – with consequences regarding payroll taxes, benefits, equity incentives, etc. The recent truck driver court case in California was built on the same control issues checklist that separates 1099 from W2 – at least in the eyes of the IRS. The judge in the case pointed out that the drivers had no control over prices/rates, no coordination over time and delivery, even the trucks were forcibly subleased from Pacer (the defending party). Some of the aspects cited by the judge sound tenuous (e.g. lack of control over time, delivery, unloading process), as those need to be locked down in any logistical relationship. But he's the judge, so he's the boss. Help the ports and the shipping companies reduce costs elsewhere: The multiple regional and municipal ports, in addition to the shipping companies who lease from them, always have opportunities to drive down costs and help relieve some of the financial stress created by higher cost labor contracts. For example, group purchasing could be set up across the port owners and the smaller logistics firms to help reduce ancillary costs. Just as unions can band together to aggregate labor supply market power, the aggregation of demand is also a powerful force. Help the firm selectively and responsibly outsource: Obviously, outsourcing is the enemy to the unions, and automation is not welcome (although viewed as an inevitability). Since California is not a right-to-work state, the 1099/W2 distinction can have cascading effects, potentially forcibly unionizing a large group of employees – likely intended by the striking unions. But, independent contractors can be managed in multiple ways.Procurement (and HR and third parties) can help firms understand the various sub-segments of services being performed in a global value chain and identify various business structures and commercial arrangements to manage them. For example, one of the value elements of an MSP (managed service provider) like a 3PL (third party logistics) firm is to serve as an entity that can either be the employer of record or a contractor that can sub-contract out to lower tiers. Take large shippers, many of which have their own logistics subsidiaries that can employ, or contract with small/individual contractors. For example, Red Classic Transportation Services LLC is a 3PL that is owned by Coca-Cola Bottling Co. Consolidated (one of a few bottlers and distributors of Coke) and is very happy to help individual truck drivers become owner operators that they sub-contract their transportation services (output/outcomes based – not input labor based) out to. Obviously, these truckers need more oversight and training (and insurance policy coverage) than Uber drivers, but the idea is generally the same. The same argument goes for the warehousing component. This is what Amazon, Walmart and others do. And, this also gets bad press (and we've written about here), but it at least pushes the problem one tier away in the supply chain, which is fine if you know how to do proper supplier management. The same cautionary tales apply in manufacturing, like the Apple/Flextronics debacle. The bottom line is that procurement needs to help the firm think more broadly about potential value-chain restructuring rather than just negotiating with suppliers once those decisions have been made. Actually, a few procurement groups at large firms do actively support insource/outsource decisions beyond make/buy decisions in manufacturing, but don't obviously broadcast that (i.e., "I'm here to outsource your job so that I can increase the services spend that I manage to add value and justify my existence”). Definitively bring best practices through market intelligence: Top procurement groups know how to negotiate, and the ongoing dispute with the coast ports has been a case study of a lose-lose approach that has been equally lamented by some of the longshoremen as much as management.Being able to “unpack” the issues about, say, health care benefits desired by workers vs. efficiency improvements wanted by management, is key to finding creative solutions to the problem. If the latter can’t be solved, then the invisible hand will move the business elsewhere. With an increasing shortage of highly-skilled supply chain talent, the manufacturers that are winning are offering good salaries and benefits (and in house training) in exchange for a commitment by labor to aggressively up-skill itself and relentlessly improve productivity.If unions fight this, they will force the employers elsewhere (e.g., consider North American automotive manufacturing as an example). The same applies to the West Coast ports. The natural medium- and long-term impacts will be to reduce volumes going through high cost locations (and then we have the upcoming Panama Canal expansion, which will divert most ships to ports on the eastern seaboard – potentially getting competition from a China-financed Nicaraguan Canal), so the writing is on the wall. As much as unions want to extract more than the market can bear, such wins will eventually kill off those jobs. We’re not saying procurement can save this particular situation, but procurement is a “semi permeable” barrier to the supply market, and one if its key roles is to bring such market intelligence (directly and/or through third-parties) about what other firms are doing globally to solve these problems. Such benchmarking can bring some “oh crap” moments to the table and help all parties get a reality check on the level of innovation out in the market. Which leads to our next point… Bring in the robots – the real robots: “Robotics” is a term getting thrown around loosely these days, but in this case, the robots are indeed here, and will be coming to a port near you (or maybe 1 or 2 countries over). As we have written about in the past, more automation is expected – Moore's Law and the cost of robots will rapidly make much manual port labor obsolete. Ironically, the unions will only help accelerate this trend. Companies like Manitowoc are undoubtedly excited over rising port employee costs – their equipment gets a quicker ROI. If you look at some of the ports recently built around the world, and the ones under construction, the productivity benefits can’t be denied. Procurement must always be on the lookout for alternative approaches to a solution, and not just different vendors in a pre-existing space. In other words, it needs to be creative in finding availability of substitutes beyond existing market approaches. We’ve given category managers 10 approaches to radically re-think their spend categories here, but the bottom line is that procurement needs to be a “gate opener” to the supply markets and not just a gatekeeper. We will stay close to this issue as it unfolds, but in the meantime, no matter what your particular crisis, you need to “keep your saw sharp,” and this goes for procurement in its role as tool wielder and a tool sharpener. 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