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Tom Gambino, PE
Rob MacPherson, PE
Brandon Enochs, PE
Chris Cash, PE
Adam Weible, PE
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What's Wrong with the Global Supply Chain?
Chris Cash, PE | Bruce Morris, AIA
You know when you're having one of those days? We've all had them. You burn your tongue on a scorching hot cup of coffee you're trying to gulp on your way to work. You forget that you're supposed to present on a Zoom call in 90 minutes. You've got kids' carpool for soccer tonight and your gas gauge is red. When you get home after soccer, your favorite team—up by nine in the fourth quarter—loses by one on a last-second 59-yard field goal.
That's a bad day.
But if you're working in the world of logistics or supply chains, you're having a bad year. Why?
Like all of us, COVID has dramatically impacted the industry. Initially, consumer demand fell through the floor as people hunkered down in their homes and learned how to make the perfect loaf of sourdough bread. They weren't driving to work, so gas supplies surged and pump prices fell. COVID outbreaks shut down factories, particularly in consumer-centric manufacturing locations like Vietnam, Malaysia, and China. Workers were sent home to work and now, as COVID concerns ease in the US and Western Europe, many workers simply aren't returning for a host of reasons.
But that's just the beginning. There was historic flooding in Zhengzhou, China, one of the busiest hubs for train traffic in the world. There were rail strikes in Germany, hurricanes in the southeastern US, and political unrest in hot spots around the globe.
The result of these shocks to the supply chain system: delays, delays, and more delays. Here are a few reasons why Christmas won't be coming early this year:
Pent-up demand due to our collective hibernation from COVID, combined with the rise of e-retailers like Amazon.
A significant increase in household savings because of low demand when COVID was peaking globally. In April, savings reached 32.2%, a rate not seen since 1975, according to the St. Louis Federal Reserve Bank. By June, however, that number was down to 19%, indicating that people were spending more money.
While COVID cases have dropped dramatically in the US and Western Europe, that's not the case in some of the world's leading manufacturing countries, where manufacturers are continuing to shut down factories to curtail COVID's spread.
Labor shortages burden many industries. Some workers are simply leaving the workforce, others are opting not to return to offices and factories where they may not feel safe, and still others are deciding that there's never been a better time to launch a small business. As a result, there aren't enough dock workers, miners, truck drivers, or warehouse personnel.
Because of the backlog in shipping and transport, warehouse space is at a premium. In the area around the docks in Southern California, Cushman & Wakefield said that 98% of the warehouses are full.
While the global supply chain may not be broken, it's teetering on the edge. Consider just a few examples:
Globally, the auto industry is projected to lose 7.7 million vehicles due to the shortage of computer chips available for cars and trucks, according to industry consultant AlixPartner. That's 10% of the industry's entire production in 2021, resulting in a $210 billion loss. "We are not demand-constrained, we are supply-constrained," Daimler AG CEO Ola Källenius said in early September article in the Wall Street Journal.
In early October, there were almost 500 ships waiting to dock in ports around the world. According to the Wall Street Journal, the time ships wait to dock rose from 14 hours in June to 13 days in September. Even in my neck of the woods, the Port of Savannah recently had 20-25 ships waiting to dock. "This has never happened before," Griff Lynch, executive director of the Georgia Ports Authority, told the WSJ. When ships eventually dock, trucks can't keep up with demand to move goods from ports to people, both here and abroad. The UK, for instance, estimates that it will need 76,000 more truck drivers to address this challenge.
When demand appreciably exceeds supply, guess what happens? Bingo: prices increase. The Consumer Price Index increased 5.3% over last year, meaning the holidays may cost us all a bit more.
It's enough to drive some people to drink, but even that's been impacted by the supply chain mess. The Glasgow Distillery Company in Scotland had to postpone the launch of a new Scotch whisky because the company had serious problems finding bottles, labels, and packing boxes. Even when ready to launch, said a company spokesperson, the cost to transport that luxury item to the US will increase fivefold.
As for the holiday season, Jami Warner, executive director of the American Christmas Tree Association, offers this: "If I can give one piece of advice to consumers right now, it is to find and buy your Christmas tree early," said.
We will, however, get through this over time. As someone who collaborates closely with executives across the global supply chain, I am already seeing a change in how they view the future. Labor, transportation, and logistics remain the foundation of our supply chain. But how those core components are utilized is likely to see significant changes ahead. The COVID pandemic has served as a real catalyst in this regard—the tipping point for the status quo.
As we learned from the outset of the pandemic, political leaders and business executives are casting a strategic eye across the manufacturing horizon to consider once again producing critical products and services within their own borders: inshoring, if you will. Whether it is a vaccine to thwart the next deadly viral outbreak or computer chips that power devices from Fords to Fitbits, elected and non-elected leaders are looking for ways to increase domestic security.
Driving this strategy is the concept of "speed to market." Low-cost manufacturing is a competitive advantage. But if that means, for instance, that you can't get your products on the shelves in time for holiday shopping, that competitive advantage evaporates. Companies like Tesla are considering producing batteries domestically rather than importing them, appreciating that higher production costs can be offset by lower transportation expenses and speed-to-market considerations.
"Large corporations and governments are reviewing their supply chains for crucial goods, with a mind towards security of supply as well as cost," Richard Flax, the Chief Investment Officer at Moneyfarm, told The Guardian. "We would expect to see supply chains in some sectors shorten as a response to COVID, either via reshoring or as companies try to diversify their sources of supply."
Technology will obviously play a key role in this evolution:
Are there ways to replace trucking for transport or augment its presence?
Is in-person shopping a dying practice, to be replaced by people, robots, and drones who send photos of dress options to your phone, sniff the cantaloupe for freshness, and deliver everything you need to your doorstep?
Will enhanced 3D printing serve to shorten the length of our global supply chain?
Government policies are also being reviewed:
Should we relax regulations on time spent behind the wheel of a truck or in the cockpit of an airplane?
Is it time to look at shrinking the number of single-person trucking firms?
Should we invest in building more deep-water ports to offset the dominance of and congestion in Los Angeles and Long Beach?
One thing is certain: Time is of the essence. For companies still in business, they've moved past avoiding bankruptcy and must now learn to adapt to survive and then thrive in this new business environment. As companies try to shorten supply chains and become less import dependent, capital budgets and shareholders will also have to adjust to the new reality. Slow and steady is no longer an option and using COVID as an excuse for poor customer service is wearing thin. Somebody's going to pull an Amazon again and figure out how to get back to the new normal. The companies that do so will be the proverbial lead dogs in this race to a revamped marketplace.
We'd be interested in hearing your thoughts on supply chains and logistics in the current era. Please email ccash@prime-eng.com or bmorris@prime-eng.com.
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