WHAT’S BEHIND THE SUPPLY CHAIN BACKLOG?

The supply chains in the U.S. are clogged with merchandise enroute from foreign manufacturers to domestic distributors and retailers.  The consequences of this include record-breaking shipping rates, long queues of vessels that must wait over a week to reach a berth in U.S. ports, and logjams at railroad yards.  Most of these issues pertain to Chinese shipping to West Coast, U.S. ports where the trade volume is ultra-high.  To see what’s behind it all, we need to look at a variety of reasons and consequences.

High Shipping Rates:  The average cost of shipping a 40-foot-equivalent (standard size) container has increased 400% in one year from 2020 to 2021.  The spot price for the same container has increased six times to about $15,000 for a single shipment from Shanghai to New York.  A late booking for the same container could move the cost up to $20,000.  Decarbonization owing to climate change provides extra fuel costs to the shipping lines, who in turn will need to pass these costs down to the shippers.  For certain products shipping costs are still a minor part of overall product cost, however, and even with the severe increases many shippers say they are still manageable.  Rates have risen sharply, but they may have peaked out as a number of large shipping lines have put caps on their rate structures.  The choice for shippers is usually just to pay the lofty costs and deal with the delays, or discontinue shipping. 

Useful Alternatives Are Scarce:  The ultra-high rates are forcing some companies to get creative when attempting to ship their merchandise.  But often alternative methods such as air freight wind up costing just as much or more in the long run.  Air cargo is restricted by available space and the number of flights impacted by Covid-19 airport restrictions.  Air containers must be loaded and unloaded several times from Shanghai to their destinations in New York, and even more times if the destination was, for example, St. Louis.  In some cases, trucks carrying Chinese made merchandise cross Asia all the way to European ports to sidestep the back log in China’s east coast ports where the routes head primarily to Western U.S. and Canada.  Some huge retailers such as Home Depot and Walmart have sought to charter their own ships.  Rail transport is stepping up especially in Asia.  But trains and trucks can only help so much with the backlog, and can’t help much at all for the merchandise that’s shipped from one continent to another. 

Clogged Port Facilities:   In September as many as eighty-eight container ships were anchored out or in drift mode waiting for a berth in Los Angeles/Long Beach, the largest port facility on the West Coast.  Recently that number has reached as high as one hundred ships.  The queue to reach a berth in the port has gone up to an excess of eight days.  Port procedures in the U.S. further hamper the flow of goods as compliance with Covid-19 restrictions require that the operator’s cabin for the lifting cranes be cleaned and sanitized after each shift.  Truck drivers have complained to Washington Examiner reporters that the crane operators are not picking up the slack causing some truckers to wait three hours to get their loads.  Rail yards in Southern California are further clogged with trains that are waiting for the logistics for containers offloaded from ships to be sorted out and onloaded to trains heading east.  The situation could have been made critical if it weren’t for a major upgrade twenty years ago to rail lines in the Alameda Corridor of Los Angeles to run below the surface streets thereby eliminating the need for gate crossings on busy street corners.  The gate crossings clog the traffic on surface streets between the railyards near the city center and the harbor mandating slower speeds for freight trains.  There is an expansive (but perhaps temporary) shortage of truck drivers.  However, there is no shortage of truck traffic—only long queues for trucks to reach the storage spaces where containers are stacking up.

Capacity Saturation:  When Covid-19 became a pandemic and world economies slowed down, shipping lines idled as much as 11% of overall capacity excluding cruise lines that were for the most part shut down altogether.  The shipping industry is resilient in its ability to develop and furnish greater capacity to meet rising demand.  Not only has the surge in shipping led to a resuscitation of idle capacity, but it has created a record number of orders for more ships bringing in more capacity.  However, the queue is filling up, and most shipyards require from two to three years for delivery. 

Rethinking Inventory Strategy:  The existing trend provides a threat to “just in time” inventory management that has helped supply chains immensely in recent years.  Just as these supply chains were becoming more efficient, now the trend might be for wholesalers and retailers to protect against shortages by building inventories above pre-pandemic levels.  This provides an ever-increasing risk to these companies in that a reduction in wholesale and retail prices of overstocked goods usually results in write-downs of inventory values that lead to losses owing to a suddenly inefficient supply chain.  There is an ever-increasing concern among retailers that the Christmas season—which provides some retailers with up to half their annual revenues—could be impacted by the slowing down supply chain.  This same concern is shared more and more by consumers who are shopping for Christmas two or three months ahead of time.

Conclusions:  The Covid-19 pandemic has enabled us to see that supply chains are relatively easy to shut down, but increasingly difficult to start up again.  Considering the length of time it could take for a product manufactured in China to reach the store shelf in the U.S., it might turn out to be more efficient to have certain low cost goods be manufactured closer to the consumer—such as in Mexico, Central America, or South America.  The queue for ships to enter the Port of Los Angele/Long Beach has been backed up for nearly a year.  The pundits on business news outlets report that the current conditions might last into next June.