The global supply chain is still struggling - with profound implications for enterprise production plans
- The clogged global supply chain has exposed the fragility of what Thomas Friedman called our 'flat world'. What are the enterprise implications?
The 'flat' world of globalization has become a rollercoaster as businesses recover from the disruptive shutdowns of 2020 in fits and starts. The bumps and potholes are most noticeable in the many snags and delays throughout global supply chains where manufacturing lines, shipping and logistics capacity, transportation flows and distribution processes have yet to achieve the synchronicity that characterized the pre-pandemic era. The process of restarting these complex, JIT, hyper-distributed supply chains of today's enterprise is like resuming a symphony mid-movement without a conductor. The cacophonous uncoordinated clamor is a far cry from the synchronic harmony of a well-rehearsed performance.
The popularizer of the ‘flat world' metaphor, Thomas Friedman, explained the centrality of supply chains to his thesis — now universally accepted — in a 2005 interview (emphasis added):
[Supply chains] are incredible flatteners. For UPS to work, they've got to create systems with customs offices around the world. They've got to design supply chain algorithms so when you take that box to the UPS Store, it gets from that store to its hub and then out. Everything they are doing is taking fat out of the system at every joint.
Later, his interlocutor asked if "the world is a gigantic supply chain," to which Friedman replied, "Absolutely." Unfortunately, the arteries are clogged amidst the all-important lead-up to holiday buying season. 2005's "gigantic supply chain" has mushroomed into a vast, tentacular, unwieldy monster sprawling across continents in which a shortage of $1 chips from Taiwan can stop production of F-150s in Missouri.
The China pipeline needs roto-rooter
Nowhere is the supply chain imbroglio more apparent, alarming and acute than in the container shipping industry, particularly on routes from east Asia to the United States. As cited by Bloomberg, Freightos, an online shipping marketplace, calculates that China-to-US transit times for container ships have increased 78% since September 2019, to more than 71. The delay is caused by a spike in demand as the world's two largest economies restart, consumers and enterprises pick up spending and companies throughout the supply chain restock inventory. The capacity restrictions have caused dramatic hikes in shipping prices.
The Freightos index tracking rates for a standard 40-foot ISO container between the Chinese east coast and US west coast has increased more than 5-fold in the past year, to more than $20,000 per container. While not as pronounced, price hikes for US trucked freight also have spiked, up more than 20% this year and 64% over the past decade. In contrast, the same Federal Reserve measure of transoceanic freight shows a more modest increase, indicating that the shipping logjam is primarily between China and the US. Indeed, the ports of Los Angeles and Long Beach, the largest complex on the west coast, is the choke point for millions of containers.
According to an organization that tracks LA-Long Beach port activity, there are currently 61 container ships offshore at anchor or adrift waiting for dock space. This comes atop a record 92 ships in port. Assuming an average capacity of 20,000 TEU (twenty-foot equivalent units. ISO containers are a standard 8-feet wide, 8.5-9.5 feet high and 20- or 40-feet long), that's more than three million containers at dock or awaiting a berth.
Given the centrality of shipping to every link in the supply chain, the consequences of such bottlenecks for retail sales, inflation and corporate planning are dire. As the chief economist at Fitch Ratings explained (emphasis added),
It has just gone up so rapidly that it is now becoming part of the narrative here of this supply-chain-driven price shock that is proving to be a lot more intense and a lot more durable than we initially thought back in the spring.
Data from the Saint Louis Federal Reserve shows that the aggregate Producer Price Index for manufacturing has increased by 12% since the (pre-pandemic) end of 2019. As the Fitch economist's comment indicates, much of the increase results from constraints across the supply chain, from source commodities, processed materials and components and transportation.
Enterprises need supply chain redundancy
The supply chain crunch has been brewing for months, causing some provident companies to prepare for the holiday shopping season much earlier than normal. Several examples illustrate the lengths to which retailers are going to mitigate supply chain constraints.
- Walmart and Target each directly contracted cargo ships to transport products for the holiday season, while some specialty toy retailers are leasing cargo planes to import products from Asia.
- Both major retailers began building inventories earlier than usual this year, each ending Q2 with 20% more in stock than last year.
- Target is making larger seasonal orders in advance to provide more time for items to be shipped and stocked in stores.
- Grocery chains are buying top-selling holiday staples like turkeys, stuffing mix, gravy, pumpkin and other seasonal canned goods months earlier than usual. They are also expanding their list of suppliers to include brands they haven't previously stocked to ensure they have some inventory in each category.
Indeed, supply chain management is the most critical factor to success in retailing. As Walmart's President and CEO said on its last earnings call,
We are learning very quickly how to use our supply chain assets, including local assets, upstream assets, distribution assets, very dynamically to be able to move product and assemble orders in a way that is most efficient to meet the customer promise. And so these market fulfillment centers will help us not only with local capacity, but they'll help us keep orders consolidated all the way to the point that they move into our last-mile network.
Over-stuffing retail distribution centers only works if there is supply to be had, however. Asian manufacturers have become much less reliable as COVID outbreaks have spread unpredictably across the region. For example, an analyst following Nike says the company "faces at least two months of virtually no unit production at its Vietnamese factories which accounted for 51% of footwear and 30% of apparel units (43% of total units) last year."
While companies like Nike and Apple have diversified their manufacturing outside of China due to geopolitical risks, this year's supply chain bottlenecks and persistent COVID outbreaks demonstrate that moving to other Asian suppliers does not eliminate the risk. An increasing number of companies are planning to reshore some manufacturing facilities to the US. According to a study by Duff and Phelps, the sectors more likely to benefit from restoring are:
- Aerospace products and parts
- Automobiles, bodies, trailers and parts
- Communications equipment
- Medical equipment and supplies
- Semiconductor and electronic components
- Navigational, measuring, electromechanical and control instruments
- Soap and cleaning supplies
- Transportation equipment
According to the Reshoring Initiative, an advocacy group for domestic manufacturing and other production investments, reshoring and foreign direct investment (FDI) job announcements for 2021 are on pace to increase 38% from last year to a new record of more than 220,000 added jobs.
Pandemic-induced supply and demand shocks have demonstrated the fragility of our flat world. Disbursing commodity, component and OEM suppliers across the globe made economic sense when China was eager for foreign investment and capital, however, now that the country's GDP is five-and-half times that of the UK and 70% of the US and it is flexing its economic muscle, the case is much less compelling. Couple China's increasing focus on technological independence and economic dominance with the unpredictable COVID policy responses around the world and relying on a JIT supply chain with a thousand suppliers on four continents leaves companies vulnerable to unplanned and unmitigable disruptions that in the worst case could threaten a company's existence.
While the case for reshoring at least some manufacturing is strong, it faces headwinds from strict, costly regulatory requirements and, surprisingly in the face of still-elevated unemployment levels, a shortage of workers. Indeed, there are now an average of 1.25 job openings for each of the 8.7 million unemployed persons in the US, while a survey found that two-thirds of businesses worldwide can't hire enough workers.
Executives have no time to waste when planning how to make their product supply and manufacturing capacity more resilient to global economic shocks. The stakes couldn't be higher and the impediments more challenging.