Supply Chain Shutdown, Start Up and Reinvention

“The supply chain” is too neat a name for the global choreography that gets raw

“The supply chain” is too neat a name for the global choreography that gets raw materials to factories, churns out goods of every variety and moves them around the world to consumers — on the double.

And to say it’s broken is too simple.

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Through one lens, and despite all the talk that conjures images of a shut down, the supply chain is plugging away like never before.

According to the Global Port Tracker, produced by the National Retail Federation and Hackett Associates, U.S. ports are on track to process the equivalent of 26 million 20-foot containers, up 18.1 percent over last year. That would be a new annual record, topping the high water mark set last year despite the pandemic.

The supply chain hasn’t stopped — but it’s certainly lost its groove with thousands of smaller disruptions rippling through the system.

COVID-19 has shut factories in Vietnam and Indonesia, containers are piled up in U.S. ports and in short supply in China, ships are waiting at sea for a spot to unload at key ports, workers are thumbing their noses at low paying shipping jobs, microchip shortages are slowing the system, and on and on.

Some of this is a slow reboot, the after-effects of the unprecedented coronavirus lockdowns that essentially shut off large portions of the economy.

And some of it is a system overloaded as it restarts and catches up.

In spite of it all, U.S. retail sales are up 20 percent to $4.3 trillion through August, a massive rebound that came on top of a 1 percent increase a year earlier when the lockdowns took hold.

The trend is similar, if more dramatic, in fashion. Brick-and-mortar apparel and accessories specialty store sales fell 33 percent for the first months of 2020 and bounced back with a 64 percent increase so far this year. Department store sales were down 17 percent for the first nine months of 2020 and came back with a 22 percent rise this year.

The supply chain is not only hobbled by shortages — it’s racing to keep up with the unprecedented spike in consumer spending that has accompanied government stimulus checks and a life lived closer to home.

For a system that’s spent decades optimizing a just-in-time and lean approach, it’s simply too much economic movement.

“Supply chains are very finely calibrated instruments,” said John McQuiston, head of structuring and program management in Wells Fargo’s global receivables and trade finance business. “You don’t hold inventory is rule number one. That’s because it equals cash. The less inventory I have to hold, the less cash I have to spend. These supply chains get finely calibrated by virtue of that dynamic of ‘hold as little as possible.’ Writ large across a macro economy of $19 trillion, that has an effect.

“If you finely calibrate for 2 to 3 percent ups and downs and you go to 15 percent down to 30 percent up, you start getting these vast distortions,” McQuiston said. “It’s not broken, it’s been stretched beyond the tolerance that it was built for. It was never built to have these kinds of gyrations.”

Add to that a shortage of workers with the necessary skills — or the willingness or need to return to work, or take a new job — and even bigger changes could be in the offing.

Now that the supply chain is such an in-your-face problem, surely companies and the very techie next generation is going to be looking for solutions.

“There is a possibility that there is a movement of de-globalization,” McQuiston said. “Maybe I just make it here. Maybe I just make it down the street in the Midlands of the U.K. or in Ohio. There’s going to be pressure on governments to increase immigration to bring in labor. There’s going to be pressure to better educate the homegrown workforce. Eventually, if the port is filled, you have to build a new port for $100 billion, which will take 50 years.

“The global economy is much more innovative than people think,” he said. “It will respond, it’s how quickly it responds and how it moves. That comes down to hundreds of millions of individual decisions.”

So in the long run, there’s a possibility that that coal shortage that’s kept a factory in China dark or that container stacked up in the Port of Long Beach when it should be on the other side of the world leads to something new — maybe a new kind of closer to home manufacturing sector that relies more than ever on automation. Or something else.

“The world has changed,” said President Joe Biden, addressing the supply chain crunch. “Prior to the crisis, we cheered…the focus on lean, efficient supply chains, leaving no buffer or margin for error.

“We need to take a longer view, though, that invests in building greater resilience to withstand the kinds of shocks we’ve seen over and over, year in and year out, whether it’s the pandemic, extreme weather, climate change, cyberattacksmor other disruptions,” he said. “Research tells us that a company can expect to lose over 40 percent of one year’s earnings every 10 years due to supply-chain disruptions.”

In the short run, the log jam needs to break.

To help on that score, Biden rolled out a deal to keep the Port of Los Angeles open round the clock, bringing it into step with its neighbor in Long Beach. Walmart also committed to moving its products from ports to its stores with a 24/7 mind-set, with plans to boost its use of off peak hours by 50 percent.

For now, it seems like it will just take time for the vast global machinery of commerce to fall back into a rhythm.

“We’re projecting that the import volumes will remain strong through the first half of 2022,” said Daniel Hackett, a partner at Hackett Associates, and a force behind the Port Tracker. “Until consumers stop spending, warehouses will have to keep bringing in more cargo and that comes in through the ports. The ports are doing an amazing job.”

There is the chance of a respite with Chinese New Year in February.

“We’re looking at the New Year as a potential period of catch up,” Hackett said.

Normally factories in China shutdown as workers travel home to be with their families. If that happens this time though, the system could get a beat to catch up. (It’s still a big “if” since many factories stayed open this year to avoid the travel and combat COVID-19.)

“Everything is so interconnected, it will just take time,” Hackett said. “There’s no magic wand.”

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