Supply chain crunch will likely persist for one to two more years

According to supply chain analyst Brittain Ladd, consumers should get used to emptier aisles at retail, longer times to receive online orders and continue postponing that new car purchase. In short, the global supply chain disruptions won’t be fixed anytime soon.

Ladd, a business consultant to retailers and logistics companies, told Talk Business & Politics the root cause of the ongoing supply chain crisis goes back to 2020 when much of the world shut down because of COVID-19. He said China shuttered its massive manufacturing industry, and much of Europe, Asia and Latin America followed suit.

In early 2021, consumers in the U.S. decided they were ready to get out again and spend some of the money they had been saving throughout 2020.

“They bought everything they could find from cars, appliances to all kinds of stuff helping retailers to empty their warehouses and backrooms,” Ladd said. “China and the rest of the world began to ramp up manufacturing after a long sleep, and suddenly there was a shortage of containers as everyone needed them at once.”

Computer chip makers that drive electronics and automobile production and smart appliances continue to be more than a year behind the demand. Ladd said those containers have never left China because they remain empty. That has prompted Apple and other manufacturers to cut earnings expectations because of lost sales potential.

Ladd said 87 cargo vessels are waiting outside the large California ports of Los Angeles and Long Beach for entry into docking stations. He said the bottlenecked containers carry toys, appliances, bicycles, and furniture Americans purchased online or at their local small business, and pieces and parts sent to U.S. factories for workers to assemble into products.

Ladd said the recent actions by the Biden Administration to try and ease congestion by adding a third shift at the ports is harder to do than it seems.

“Ports have a finite capacity in the number of docks, trains and trucks to move the containers out of the shipping yard,” he said. “They run two shifts now because that is all the labor they can muster. I am not sure where these truck drivers are going to come from, and even if the union workers on the docks take on extra shifts, who is going to haul it away.”

Ladd said the backlog at the ports is the worst in history. In any given year, there might be 3 or 4 vessels waiting to proceed to offload docks. At most, he said the news from the White House on Wednesday (Oct. 13) is a band-aid for a gaping wound.

SHORT-TERM FIX
The Biden Administration met with leaders from Walmart, FedEx and UPS on Wednesday. The companies will expand their efforts to help with ongoing supply chain bottlenecks and shortages resulting from the pandemic. Other companies, including The Home Depot and Target, also joined the effort.

President Joe Biden also met with leaders from the Port of Los Angeles, the Port of Long Beach and the International Longshore and Warehouse Union to discuss logistics issues at the two ports. The White House said that the Port of Los Angeles will join the Port of Long Beach in stepping up its round-the-clock operations, with members of the union willing to work extra shifts to keep operations open nonstop.

“With the holidays coming up, you might be wondering if the gifts you plan to buy will arrive on time,” Biden said, speaking from the White House. “Today, we have an important announcement that will get things you buy to you and the shelves faster.”

Joe Metzger, executive vice president of supply chain operations for Walmart U.S., said the retailer chartered several smaller ships that can move through the less congested ports on the east coast. He said Walmart has also re-routed inland shipments and utilized less conventional transportation methods to avoid rail delays to help get holiday shipments to the U.S.

Metzger said Walmart is hiring 20,000 full-time supply chain positions to help move products through its facilities as quickly as possible. The retail giant also hired more than 3,000 new drivers this year, and there is a push to hire more. Metzger said Walmart is also working to expand delivery capability and route online orders straight from stores in many cases.

“We’ve always been committed to delivering everything customers need for a great holiday, and I’m proud of the hard work our associates are doing to put Walmart in a position to do that again this year,” Metzger said. “We know there is a lot of uncertainty as the pandemic continues and customer needs continue to adjust as we head into the 2021 holiday season, but I’m confident in our efforts. Customers can rest assured we’re doing everything we can to deliver a holiday experience they’ve come to expect and help them get what they need for everyone on their gift list at a Walmart value.”

Ladd said chartering ships is one way Walmart can work around the congestion. He said he made that recommendation to retailers several months ago, and it’s one short-term strategy, but it doesn’t fix the problem or deal with the root cause.

Ladd said with containers costing $20,000 each, costs are rising quickly and likely eroding a chance for profits during the biggest season of the year for retailers. He said some retailers use air freight to move holiday goods, which comes at substantial cost increases. He estimates retailers will see upwards of $252 billion in added holiday shipping and product costs this year over last. SalesForce estimates that the cost will be $223 billion more than in 2020. SalesForce said U.S. companies would likely triple what they typically spend on ocean freight cost in the back half of this year.

Walmart also told the Biden Administration it would increase the night-time hours of workers to allow for 50% more throughput of goods during the next several weeks. The Home Depot will move up to 10% additional containers per week during the new available off-peak hours at the Ports of Long Beach and Los Angeles. Target also said it is moving about 50% of its containers at night and will raise that to 60% in the next 90 days to help ease daytime congestion.

UPS will increase the use of 24/7 operations and enhanced data sharing with the ports, allowing it to move 20% more containers from the ports in the coming days. FedEx is committing to increased night-time hours with changes to trucking and rail use to increase the volume of containers it will move from the ports. Once these changes are in place, the company said it could double the cargo volume it can move out of the ports.

Samsung said it would move almost 60% more containers out of the ports by operating 24/7 through the next 90 days. The Biden Administration said that more than 3,500 additional containers per week would move at night through the end of the year across these six companies.

Matt Shay, CEO of the National Retail Federation, applauded the Biden Administration’s leadership to address the ongoing global supply chain disruption.

“It is critically important that we all come together – business, labor and government – to address the current issue regarding port congestion and the long-term need to create a more reliable supply chain globally and within the United States. NRF has been urging more focus and resources to address supply chain failures for many years, and we look forward to continued efforts that result in sustainable solutions for this growing problem,” Shay said.

ECONOMIC IMPACT
Economists with Wells Fargo Securities said Thursday the “everything shortage” is turning into a fast education on the far-reaching impacts of global trade to everyone from big business owners to ordinary consumers.

They predict the supply chain logjam will push back the timing of some growth they had anticipated later this year and early next year, which will weigh on our forecast for 2022, although most of that growth shows up later in the forecast.

“We now forecast that real GDP will grow 4% in 2022, down from 4.5% last month. Our outlook for 2023 looks for output to grow at an above-trend rate of 3.2% that year, up from 3% previously,” said Jay Bryson, chief economist with Wells Fargo Securities.

He said the shortages and longer wait times are affecting consumer prices. As measured by the PCE deflator, headline inflation rose to 4.3% on a year-over-year basis, with core PCE deflator coming in at 3.6%. These measures reflect the highest headline and core inflation in more than 30 years.

Bryson said there are very few signs of improvement in the supply chain, and energy prices continue to climb higher, pushing the inflation target up for the near term. As spending will eventually shift to services again, inflation should recede toward the end of next year. Still, it’s unlikely to fall meaningfully below the Federal Open Market Committee’s 2% target.

LONGER VIEW
Ladd said he expects to see more mergers, acquisitions and strategic partnerships between retailers and third-party logistics firms in the future. He said the answer is the “think bigger” mantra that Amazon, a former employer, insists upon.

He said retailers that own their supplier chain would have a considerable advantage in the future.

“Amazon is already doing that in England,” he said.

Ladd said it would make sense for Walmart and The Home Depot to join their supply chain divisions through a merger or partnership because they are two of the most significant global imports of goods. He said the new partnership for the GoLocal where Walmart will deliver products from The Home Depot is a great place to build trust levels.

“Why do you think Uber bought Transplace, a huge third-party logistics firm with offices in Dallas and Northwest Arkansas? They understand the importance of controlling their supply chain and being able to sell those services to others in the future, much the way Amazon Web Services sells its services to drive more revenue for the overall company,” Ladd said. “I can see smaller retailers in the future perhaps outsourcing their supply chain and logistics services to a third-party the way some retail suppliers do.”

He said micro fulfillment centers also make a ton of sense for retailers. He expects to see more grocery firms turn to this strategy for grocery and consumer packaged goods fulfillment. Ladd said he is surprised that the apparel industry is not moving in that direction, given they are hamstrung now with most of their manufacturing taking place abroad. He said the one-year timeline for ordering apparel is only likely to get worse as many workers in Vietnam and Latin America still have not returned to their manufacturing jobs.

He said Kohl’s or Gap, for instance, could benefit from a partnership with Amazon or large logistics companies to streamline and simplify their supply chains.

“They have to think big and examine ways to change the way they manage their supply chain radically,” Ladd said.