The supply chain chaos is here to stay. Some industry experts do not expect a return to normal until 2023.
I had the pleasure of joining Roy Green on his podcast last weekend to discuss the latest on logistics. A link to the podcast is below.
If you would rather just read what we talked about, below are the questions we covered and my notes:
1: Cause for the multiple sectors internationally supply chain disruptions and was there a missed opportunity to head off what we’re dealing with now and facing going forward?
The recent problems in the global supply chain date back to the trade disruptions that took place between the Trump Administration and China. The global supply chain operates best when supply and demand are predictable and the back and forth with China relating to tariffs created a surge in demand for some goods and a drop off in others. So was that an opportunity to head them off, yeah, sure. But the real stress happened as a result of COVID. When COVID hit, the world essentially shut down production and workers were furloughed. When the fiscal impulse from the government rescue package hit, demand was restored, but the global production machine was not ready. We have been dealing with the consequences of a supply/demand imbalance ever since.
2: Across how many sectors does the supply chain stretch? It began with the shipping of goods. Does it now include all sectors?
The supply chain is very long. It stretches from a manufacturing plant in Vietnam or China, all the way to central North America. In between, goods travel by truck, rail and ship, through ports and inland waterways with stops in numerous warehouses. A bottleneck in any one of these areas has the potential to disrupt the flow of goods. Right now, the most visible concern is the backlog at the ports. As of a day or two ago there were more than 70 cargo ships with an estimated 500,000 containers at anchor waiting to get unloaded. And it’s not just finished goods. The supply chain is critical for all sorts of materials and industrial components used in manufacturing. Everything from semiconductors to specialized parts to raw materials and commodities
.3: The Christmas season is almost here. What do you expect we might face?
I think the most obvious thing is the lack of availability of certain products. With the production cut back that is taking place in China right now due to the electricity rationing, some products are just not going to hit the shelves in time. and for goods that are on their way, who knows when they are going to get through the traffic jam at the ports. If you are a retailer and you are waiting to stock your shelves with product in one of those containers, you are probably very nervous right now.
The good news is that many of the large retailers, the likes of Target or Walmart, have already made adjustments to their logistics and supply chain to make sure they will have most of what they need for the holiday season:
- Target recently said they chartered their own shipping vessels
- Coca Cola switched from container ships to dry bulk ships to import its production materials
Smaller companies are diversifying their suppliers, adding inventory, and even double ordering. I don’t think it is going to be as bad as some predict.
We might also face higher prices for certain goods. Transportation costs and the cost of raw materials have skyrocketed and those higher costs are beginning to get passed on to consumers.
4: Can individual links of the supply chain operate solo, or is it a truly interdependent chain? If so, where do you begin to relieve the stress?
Individual links operate solo, but to make everything work properly and on time, there must be an effective handovers. Think of a 4×100 relay in track. You can have very fast runners, but if they screw up the handoff of the baton at each leg, they are going to have a slow time. That’s what happening now. Ships are sailing, for example, but the unloading times have lengthened, delaying normal functioning.
As for relieving the stress, all areas have to be addressed. You know the saying, a chain is only as strong as its weakest link, and also applies to supply chains.
Ryan Peterson, the CEO of Flexport, a global logistics services company, just put out a great thread on Twitter, addressing this very issue. He chartered a boat last week that took him through the port of Long Beach, one of the busiest ports in the US. in terms of traffic. Surprisingly, he said there was very little activity. In a 3 hour tour, he saw less than a dozen containers get unloaded. Cranes were not operating, there was no hustle and bustle, very little to suggest that the port was working in overdrive to get all the ships unloaded.
Why? There is no place to put the containers. The yards are full, stacked with containers as high as they will go. So why is nobody picking them up? Truckers that go to the port with an empty container cant unload it to pick up a full one. Yards at the trucking companies are full, too. There is literally no place to park containers. To make matters worse, a zoning law restricted the container yards from stacking them more than 2 high. Just yesterday though, the mayor of Long Beach announced a change of zoning in response to this. Going forward, yards can now stack containers 5 high, so hopefully, things like this that can be addressed, will continue to get addressed and things can start moving again.
5: Labor issues, with seafarers, truck drivers and airline workers expressing frustrations. Industry groups like the International Chamber of Shipping warned in an open letter of a “global transport system collapse’ if governments fail to return freedom of movement to transport workers and give them vaccine priority. How significant a component is labor shortage and frustration to the supply chain disruption?
The labor shortage is real. and it’s not just with shipping. There is a shortage of workers in some international ports due to COVID outbreaks, there is a shortage of labor at manufacturing facilities, and in the US, there is a shortage of truck drivers and warehouse workers and even railroad conductors. Target, for example, just announced it was trying to hire 30,000 over the next month or two to specifically work in logistics. On the topic of labor, one thing to keep your eye on is the negotiations between the International Longshore and Warehouse Union (the ILWU) and the Pacific Maritime Association. Their current contract is set to expire in July of 2022. If negotiations do not go well, a strike is certainly possible, which would be a disaster right now. One of the topics up for discussion relates to automation. The union has resisted automation for a lot of activity up to this point to preserve jobs, and any push to further automate operations (which BTW would make the port more productive and more in line with most other international ports) will be met with resistance.
6: You wrote about shipping container woes and that these containers are the backbone of global trade. What’s occurring in this sector?
Shipping containers are critical to global trade. There are an estimated 17 million containers that transport all sorts of materials and finished goods around the world. When consumer demand for goods surged during the lockdown, there initially was a shortage of containers to meet demand. A lot of containers that moved personal protective equipment around the globe were stranded in remote locations. So early on, it was hard to find containers and prices shot up. But containers are pretty easy to make and production ramped up in response to demand. 80% of the world’s containers are made by three companies in China and their production is up more than 60% this year compared to 2021. Prices are up, but mainly because the cost of steel is up. Right now, the problem is not the supply of containers. It’s the circulation of containers. They are just not moving. There are empty containers sitting everywhere. Pre Covid, when the supply chain was operating normally, once a container’s cargo was unloaded, it was sent somewhere to get filled for export. But because the demand for containers was so high in China, a lot of the containers were sent back to port to get more stuff. The cost to ship a container from China to the US West coast jumped from $2,000 to more than $20,000. When you get a 10x jump in price for a particular shipping route, cargo ships will do everything possible to maximize their revenue. They are not going to wait around for empty containers or even full containers.
7: Shipping rates are climbing dramatically. That must affect every other aspect of the supply chain with increases being passed along until they in combination reach the consumer. What do you see here and how quickly can this be addressed and repaired?
Shipping costs have skyrocketed. But to different degrees. The most popular routes, like China to the US, where the demand surge took place, have gone up by a factor of 10. Do you know how much it costs to ship a container from California to China? Take a guess. Just over $1,000. That tells you something about supply and demand and why these ships are returning empty to China.
But there is some relief in sight, but unfortunately, it will take time. New ships are under construction, but they won’t come online until 2023. These ships will add roughly 20% to the existing capacity. BUT, there is something else coming in 2023. That is IMO regulation 13. IMO is the International Maritime Organization, and beginning in 2023, shipping vessels have to meet certain diesel emission standards as part of the industry’s decarbonization efforts. The plan to meet this standard is to run ships at a slower speed. Industry insiders expect the new regulation to slow shipping speeds by 6%. Good for the environment, but bad for supply chain logistics.
8: Truck driver shortage. I have a friend who owns a trucking firm, as well as being a manufacturer who exports to 140 countries. He is in competition to keep his drivers from being poached and is trying to find new ones. How does the truck driver issue get resolved? My friend is also into warehousing in a big way and that’s proving to be an additional challenge.
Trucking is hugely important. And it is an extremely fragmented industry. Roughly 90% of the trucking companies in the US have just 1-5 trucks. And drivers are paid by the mile, not an annual salary or for waiting at the ports. So when there is a massive traffic jam, like the one we are witnessing today, they earn less. A lot less. So much less that many have left the industry and gone to higher-paying jobs. This has left a huge shortage of drivers. And many of the drivers that remain are increasingly moving to the large retailers that operate their own fleets. Walmart has the nation’s third-largest fleet of around 6,500 trucks and is aggressively trying to hire drivers, offering a $12,000 signing bonus in some areas.
9: Where do railroads fit into the picture?
There are bottlenecks in rail as well. I spoke to an importer recently that had his precious cargo sit in a container on a rail car for 12 weeks, waiting to get unloaded. Similar to the ports, the main issue is yard space to store the containers. Trucks simply can’t move containers out fast enough. Railroads are also suffering from a labor shortage. Railroads retrenched quickly when the economy seized up last year, furloughing thousands of workers and taking hundreds of locomotives offline. Workers who were furloughed have been slow to come back and some rail companies are reporting difficulty in hiring conductors. Interestingly, one of the major hurdles in dealing with supply and demand swings was created years ago. It had nothing to do with COVID. It is known as “precision scheduling.” Think of the strategy as equivalent to just-in-time manufacturing.
Let’s not forget another source of uncertainty: weather. Almost all the major railroads, including Union Pacific UNP, CS and BNSF Railway, have lines that run to New Orleans. Hurricane Ida forced the Kansas City Southern rail network to shut its main line in Louisiana. The service disruption could spread across the US rail network as freight cars are rerouted. It typically takes weeks and even months for railroads to fully recover from an extended shutdown of main lines.
10: I hear repeatedly that this situation is short-term and that the supply chain will within a few months be operating smoothly again. Wishful thinking or something else?11: What does all of the supply disruption globally do to investor confidence? Will investors look for safe haven, or have they already?
The big worry is that the supply chain disruption will lead to a slowdown in production and GDP and an increase in prices, ie inflation. That is stagflation, and that is probably the worst outcome for the economy and markets. We are already seeing production cuts in the automotive industry, for example. Chip shortages could cost automakers more than $200 billion in lost sales this year. As long as demand remains elevated and things like regional COVID outbreaks and catastrophic weather keep happening, I don’t expect the current chaos is going away anytime soon. 12:
Need government to step in where possible, like the mayor just did in Long Beach
The industry needs to adopt better technology to keep track of where the goods are at each step of the way along the supply chain to deal with exceptions when they occur
With prices so high, we can expect to see the big independent supply chains of firms like Walmart (Go Local) and Amazon step in and use any surplus capacity to generate revenue
Expect these issues to last into 2023
- Need government to step in where possible, like the mayor just did in Long Beach
- The industry needs to adopt better technology to keep track of where the goods are at each step of the way along the supply chain to deal with exceptions when they occur
- With prices so high, we can expect to see the big independent supply chains of firms like Walmart (Go Local) and Amazon step in and use any surplus capacity to generate revenue
- Expect these issues to l