Supply Chain Blues
Why are supply chains so messed up?
This is the question that I am asked on a daily basis. The issue is very complex, so I usually quip with a surprising response, “They’ve always had issues, but no one was really paying attention.” Turns out, unless the person works in freight, they are very unsatisfied with this answer. After all, freight and products just seemed to automatically show up before, but that is no longer the case.
Anyone that has been around supply chains knows that there have always been issues and challenges. Weather, economic cycles, capacity, pricing fluctuations, labor strikes, war, terrorism, policy changes, etc. -– have been with us since trade first began and those issues (and others) have always been a part of managing cargo flows. But 2021 is something much bigger entirely. Why is that?
The simple answer is there is a sudden and massive surge of demand that far outweighs the market’s capacity. The global supply chain infrastructure that exists simply can’t handle the volume of products flowing through the economy. The root cause can be blamed on the extraordinary government stimulus that has stimulated demand.
As the money flowed from the government, it ended up in the hands of consumers and businesses that spent it. The transfer of money coincided with a shift in consumer demand from purchasing services to purchasing physical products. This caused the United States to race through trillions of dollars of inventory while domestic and global production was shut down.
Simply stated, production was shut down while the U.S. economy went into demand overdrive. As production came back online, the manufacturing sector responded by fulfilling an unprecedented backlog of orders.
China ramped up manufacturing and products started to flow again. And the volumes were much bigger than before. Every container ship was put to work to move the cargo across the oceans. However, ports were built to handle a certain volume and each port has a finite number of cranes and space to store containers. When the ports became flooded with cargo, they simply didn’t have the capacity to handle it. A lack of labor, trucks, warehouse capacity, and rail infrastructure all started to create significant supply chain challenges in handling the surge of cargo.
Ships have been piling up off the coasts in ever-increasing numbers and this is taking that capacity offline as the ports try to handle it.
And this is not just an issue in the United States. This issue also exists in China. In fact, as I write this, the coastal cities of China have four times as many ships sitting off the coast as the Pacific ports in the United States do.
The oceans are also just one part of the story. To get freight to American consumers, it must go through an intricate system – shifting from port to other modes of transportation. This may include dozens of touchpoints in the domestic freight network, all of which are vulnerable to their own choke points.
Once a cargo shipment reaches the U.S. docks, it may go from truck to rail to truck to distribution center back to truck and dozens of sorting facilities in between before you receive it. Most of the capacity constraints in the domestic market have been labor-related, i.e. not enough workers at the distribution centers or drivers in the trucks. Trucking companies and warehouse operators have tried to respond by jacking up wages, but are finding that it isn’t solving their employment challenges.
Trucking has the most challenging labor picture of all; it simply is a job of last resort for many people. When construction, retail, food service, gig economy, and warehousing are all competing with the trucking industry for labor, it is often the trucking industry that loses.
After all, the lifestyle for an over-the-road driver is unique and difficult. Being forced to stay away from home for three weeks at a time is a major turn-off for many.
Truck driving is hard work and often the only recourse carriers have to attract more drivers is more money. But with alternative employment offering similar pay packages – but not requiring someone to stay away from home for weeks at a time, trucking companies are finding that new would-be drivers are not coming into the market in the numbers needed.
The challenges don’t end there. Warehouses and distribution centers have their own labor issues along with space constraints.
In the industrial sector, the supply chain issues that are causing chaos for retailers are also keeping domestic manufacturers from being able to complete the production of their finished products. The most obvious is in the automotive industry. This has an additional knock-on effect of restricting truck capacity. Even if labor supply wasn’t a major factor in the trucking industry, the carriers wouldn’t be able to get their hands on new trucks to handle the freight supply. Simply said, there aren’t enough trucks and trailers on the road to handle all of the demand.
Will the supply chain issues end soon? Very unlikely.
Even if we solve for current demand on the oceans, at the ports, in the distribution centers, and in the trucking industry, we haven’t begun to discuss what happens when the government ramps up additional domestic spending. While most supply chain professionals would agree that investing in infrastructure is the right thing to do, the worry is that it will continue to compound the imbalances between supply and demand across the supply chain.
As domestic manufacturing ramps up to handle the building of new roads, bridges, and other physical construction projects, this will put a massive onslaught of freight on the market. It will also pull labor out of the trucking industry, which will further exacerbate the driver shortage. Construction jobs will become more valuable, as contractors try to handle the surge of new projects. In turn, this will drive wages higher and increase economic growth.
For transportation providers, the good news is that it appears that we have a long way to go before the market catches up with demand. This could go on for a few years and break the typical three-year boom-and-bust cycle. For shippers and supply chain professionals that pay for capacity, while the work has never been more challenging, the rewards have also never been greater. Managing supply chains is no longer a back-office function, largely ignored and taken for granted. Going forward, business survival will require a highly functioning supply chain run by professionals with the experience and instincts to respond.
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