Supply chain is once again front-page news in the general business media. Meanwhile, supply shortages and price inflation are getting the front page in consumer-focused publications and plenty of airtime on televised news. And rightfully so. Many consumers, including myself, become irritated by the sight of empty store shelves where our favorite consumer goods are typically stored. And many people wonder why this keeps occurring. I believe there are many reasons for the current supply shortages and supply chain disruptions. After all, the shortages and disruptions have been persistent over time and widespread across geographies and items.
Extra Demand (think sanitary wipes) Doesn’t Pass the Smell Test
In the Spring of 2020, there were massive shortages of cleaning and disposable products such as sanitary wipes, Purell, and toilet paper. Last year’s shortages were attributed to a sudden spike in demand for some items, along with a change in demand locations (toilet paper for homes instead of schools) that were subsequently aggravated by hoarding. And that made sense. Then there were construction material shortages that were caused by upstream production shortages. That made sense as well. But today simple excess demand or even isolated production shortages doesn’t seem to pass the smell test for cause and effect. Things are different because the shortages are more widespread. Sure, the economy is picking up steam and stimulating demand. And COVID-19 constraints do still remain in some instances. But perhaps more importantly, the increase in demand is occurring after a substantial downturn. I think this is an important factor that is overlooked. The economy is picking up after the severe contraction in labor, productivity, and inventory that occurred during the height of the pandemic. This period was a shock to the economy, broadly affecting supply…and supply chains.
Inventory, Efficiency, and the Extended Supply Chain
Supply chains have become incredibly lean over the last couple decades. High inventory turns and low inventory carrying costs have been a corporate operational goal that have been enabled by efficient supply chains. But the US ratio of total business inventories to sales is hovering at a 25-year low. This shows that aggregate inventories are especially low across the economy. In my opinion, this excessively low inventory level is a result of demand outstripping supply. After all, this aggregate number hides the numerous examples of goods that are fully out of stock and cause lost sales to the merchants. Regardless, the total business inventories ratio for the economy does show at a high level what we as consumers already know – there doesn’t seem to be a lot of excess inventory available. Furthermore, this is the case not just with retailers but also wholesalers and manufacturers. So it stretches back up the supply chain. Furthermore, there are certain items that are chronically unavailable – like new cars. Orders for automobiles are backlogged due to upstream manufacturing supply disruptions, most notably, computer chips for vehicles.
Shortages in the upstream supply chain are not directly impacting consumer goods availability. These effects may take some time to materialize in retail inventory statistics. Afterall, today’s supply chains are complex and multi-national (think shipping distance), requiring inputs from numerous organizations across geographies, glued together by a complex network of logistics service providers. Import and export activity are critical measures of economic activity. Although the US government provides statistics on import and export activity, I find that container shipping activity is a better gauge of shipping that affects the everyday consumer (it minimizes the impact of bulk commodities). According to Descartes Datamyne (see Surviving Peak Season), US imports of twenty foot equivalents (TEUs) increased above the 2.2 million monthly threshold last summer, and have been above that threshold (excluding Feb 2021) since. This indicates a sustained increase of goods imports above previous levels. It may also represent an increased reliance on merchandise imports.
However, even though import volumes are up, there are signs of capacity constraints that are keeping volumes from reaching the level of demand. The Marine Exchange of Southern California has stated on its Twitter page @MXSOCAL ship report a number of records at the Port of LA/Long Beach. For example, on September 24, there was a new record of 157 total ships in port. Of the 157, 95 were container ships including 62 at anchor or in drift areas. This indicates that LA/LB is working at capacity and the west coast in general is likely an import capacity bottleneck. Much of this may be holiday season retail but some is likely to be intermediate goods that may cause downstream delays in the future.
Final Word
So what is one to do in this environment of supply chain disruption and shortages? Well, companies can try securing additional capacity as, even as charters as Costco did. But securing capacity can potentially and subsequently drive rising rates even higher. And trucking costs are also increasing substantially. The Cass Freight Index for Expenditures showed 42 percent year-over-year growth in August (from a combination of rates and volumes). Ultimately as a consumer, I think I am going to try to accept that convenience is going to deteriorate I will have to wait for some goods. Or I can pay extra to have it expedited and contribute to inflation. I guess I will let my patience and finances battle it out on a case-by-case basis.
source: “Why Do I have to Wait?” Supply Chain Disruption Gets Its Day – Logistics Viewpoints
