Why Is the Supply Chain So Messed Up? Let Us Explain…

Manufacturers, suppliers, wholesalers, retailers, consumers (frankly, everyone!) who’s tried to buy anything in the last 18 months agrees—the global supply chain is not running the way it used to. Raw materials, supplies, and finished goods are all taking significantly longer to move, and it’s costing significantly more to move them.

As a result, links in the supply chain are stretching and, very often, breaking. Shipments have been massively delayed. Forecasts are getting thrown out the window. Shortages are very real. Additionally, experts are warning U.S. consumers to prepare for a different kind of Christmas than they’re used to. Even books haven’t emerged unscathed as new shortfalls loom, like the paper shortage that may keep new books from reaching shelves.

If you’ve tried to move goods, supplies, or raw materials recently, you’re probably well aware of the challenges and rising costs. But what exactly lies behind these problems? And why is the solution so elusive? Supply chains are complex, interconnected networks that rely on the other links in the chain to operate effectively. Start with a global pandemic—which put pressure on existing weaknesses—then add in the fact that many companies have been relying on just-in-time principles to manage their supply chains, scale it up globally, and you’ll find yourself where we are now.

Let’s take a closer look at exactly what’s going on.

It All Begins with the Nature of the Supply Chain

If you work in logistics, you probably already understand that supply chains rely on a number of parties working together—suppliers, manufacturers, distributors, retailers, shipping companies, distribution centers, and even internal stakeholders like demand managers and warehouse staff. A supply chain manager has to coordinate all of these parties, as well as the moving parts they set in motion, so that everyone has what they need when they need it in order to keep everything moving forward smoothly. A breakdown in one link of the chain can cascade quickly, wreaking havoc down the line.

In other words, managing a supply chain was never an easy job, even before the global pandemic.

In addition to the pandemic, though, there’s another factor that set the stage for large-scale disruption of the global supply chain. It’s called the “just in time” logistics model. Under the JIT philosophy, supply chain managers keep very few supplies and very little inventory in stock. Instead, they let customer demand drive ordering and production, while keeping their organization just a little ahead of demand. Supplies are ordered as needed, rather than stockpiling and tying up your working capital. Additionally, inventory is kept lean, to avoid significant deadstock and reduce warehousing costs.

While the JIT model has its pros, the global pandemic has revealed that it’s not one built to flex in the face of widespread challenges.

Case in Point

Nike recently had to cut its sales forecast because it relies on production facilities in Vietnam for 51% of its footwear. Vaccines are hard to come by in the country, which resulted in 10 weeks of shut-downs at the factories that supply the apparel company.

As a result:

Nike simply couldn’t get the finished goods it needed to hit their sales targets. Clothing retailers Lululemon, Gap, and Everlane were also affected by similar shutdowns in the country.i

If only a few scattered companies were operating under JIT principles, it might be possible to recover quickly when something like a natural disaster or a global pandemic strikes. However, in a situation where everyone’s operating with very little margin for error, when one link breaks, they all break. The impact cascades, and there’s no one available to save the day with a secret cache they’ve accumulated in their warehouse. However, JIT logistics isn’t to blame for everything that’s happened. In fact, some experts have been predicting these problems long before we had even heard of COVID-19.

Lessons from the Pandemic:

The Future of Just-in-Time Logistics
Investigate the pros and cons of the JIT model of supply chain management—and explore the alternatives.

The Supply Chain Disruption Has Been a Long Time Coming

For the last few years, organizations and experts have raised red flags that all was not well within the U.S. supply chain. One significant note came from a July 2015 Federal Maritime Commission report, which stated that:

“Congestion at ports and other points in the nation’s intermodal system has become a serious risk factor to the relatively robust growth of the American economy and to its competitive position.”ii

Additionally, the Washington Post noted, in 2018, the World Bank dropped the U.S. to #14 in their Logistics Performance Index. The last time the U.S. held a lower spot was in 2010. The U.S. held the #9 slot in 2012 and 2014, dipping one spot to #10 in 2016.iii In other words, even in 2018, the United States lagged behind other GDP world leaders, including China, Japan, Germany, and the U.K.iv

One major weakness experts pointed to was the lack of data sharing between ports and the stakeholders who rely on the facilities. Advocates of data sharing argue that if all parties were willing to share data within a single platform accessible by all, it would be much easier to orchestrate the complex dance that allows ports to operate efficiently.v However, many parties are reluctant, citing concerns over data privacy and business secrets. This was the already-fragile landscape that existed when COVID-19 arrived on the scene.

Then, COVID-19 Put Pressure on Every Link of the Supply Chain

As you can see, maintaining the global supply chain was already a delicate operation, vulnerable to the massive disruption that burst upon the world without warning. Once the COVID-19 pandemic was in its full throes, it created:

Closures & Shutdowns

One of the most obvious effects of the pandemic were closures across industries, due to illnesses and outbreaks. In addition to the Vietnamese factories mentioned earlier, factories across the globe also suspended operations at various points during the pandemic, including key operations in China. In the U.S., the meatpacking industry alone has seen 50,000 cases of COVID-19 and 248 worker deaths.vi These same challenges hit the logistics industry as well. To offer just one example, 700 dockworkers at the Ports of Los Angeles and Long Beach contracted COVID-19 in January 2021.vii

In total, pandemic closures and shutdowns affected a number of links along the supply chain, including suppliers, manufacturers, warehouses, logistics providers, and more, all of which put pressure on the supply chain.

Then came the people problems.

Worker Shortages & Employment Issues

In short, just about every link in the supply chain is experiencing some kind of labor shortage. (For the long version, check out this article on employment issues along the supply chain.)

Additionally, the rules and restrictions put in place around the pandemic have made it incredibly challenging for workers involved in international logistics.

In fact, the International Chamber of Shipping recently underscored this problem with an open letter asking the world’s heads of government and the United Nations Agencies to intercede on the behalf of these workers and:

“Ensure the free movement of transport workers and to end travel bans and other restrictions that have had an enormously detrimental impact on their wellbeing and safety.”
“Remove restrictions hampering the free movement of transport workers, and guarantee and facilitate their free and safe movement.”
“Increase global vaccine supply by all means at our disposal, in order to expedite the recovery of our industries.”viii

Curious how exactly pandemic restrictions have impacted the global supply chain? According to the ICS:

400,000 seafarers were unable to leave their ships, with some working as many as 18 months over their initial contracts.
Some truck drivers have been forced to wait weeks before being able to complete their journeys and return home.ix

In other words, in the face of the pandemic, working conditions for those in international logistics have become increasingly burdensome. As a result, many workers have quit, further tightening the labor market.

Equipment Shortages

However, even when workers have been present to help move global freight forward, equipment shortages have plagued the industry.

First, containers have been in short supply, with factories in China struggling to catch up with demand.x Second, the equipment needed to move containers has been bogged down, especially where chassis are concerned. So even when ports have containers ready to move, they often lack the chassis to load them on for transport. To give you a sense of just how slow things are, the Washington Post reported that, at a crucial railyard in Joliet, Illinois, it previously might have taken 3.5 days for a chassis to leave the facility and return. Today, it’s taking 17 days. As a result, many containers simply sit at ports and railyards because there isn’t a chassis available for loading.xi

One of the factors behind these shortages? A sharp increase in the global volume of freight.

Consumer Demand & Rising Rates

As life around the globe took a 180-degree turn practically overnight, consumer spending patterns changed dramatically. Unable to spend money on services, consumers shifted spending toward goods.xii eCommerce boomed, putting pressure on carriers who suddenly needed to deliver significantly more packages to homes—to the tune of a 37% increase in the U.S. alone.xiii

In other words, consumers were buying more—and they were also buying things that manufacturers didn’t expect. Cereals and other shelf-stable foods flew off the shelves as people stockpiled food in preparation for the worst. In-home hobbies like baking blossomed, causing a flour and dry yeast shortage. Even puzzles and games manufacturers found themselves overwhelmed as sales from board games, card games, and puzzles grew by more than 200%. In fact, the puzzle manufacturer Ravensburger was selling an average of 20 puzzles per minute in 2020.xiv

And remember those JIT principles we mentioned earlier? They rest on a foundation of accurate forecasting. The pandemic threw all of that out the window, leaving many to scramble to order new raw materials and supplies—as well as different types of finished goods—in order to catch up with consumer demand.

This rising demand—and unexpected demand—meant more freight moving around the globe, putting even more pressure on the system. The Port of Los Angeles alone processed a record 10 million TEUs from June 2020-June 2021.xv This unprecedented demand allowed carriers across modes to raise rates:

315% Increase in containerized freight rate from Asia to the U.S. East Coast, as compared to 2020 xvi
$1.59/lb UPS Peak Surcharge for Worldwide Express Service, from 10/17/2021 until further notice xvii
6-12% Increase forecast for 2021 LTL rates from TransportationInsight.com xviii

Additionally, many companies have been advised to place bigger orders and place them earlier to ensure they have the materials, supplies, and goods they need—especially going into the holiday season. This has only tightened capacity by putting more freight into play.

And then there are the shortages.

Material and Supply Shortages

In a way, shortages are an effect of many of the above causes. For example, the book shortage we mentioned earlier finds its roots in employment shortages in paper mills. Additionally, people are simply buying more books xix—a shift in consumer demand.

However, because supply chains are interconnected, each shortage interrupts another part of the supply chain, creating ripple effects down the line. For example, the semiconductor chip shortage that’s hit the headlines recently is also affecting car manufacturers, computer manufacturers, appliance manufacturers, and more. Then those industries, in turn, affect others.

In other words, when it comes to the global supply chain, there’s no such thing as a vacuum. Every challenge, every shortage, every obstacle affects everything else in the network. And, with a global pandemic that’s impacted the very fabric of our lives, we’re talking about a multitude of challenges, shortages, and obstacles that have threatened to break the very fabric of global trade.

The Results of All of This?

The U.S. is now looking at:

A massive backlog outside of U.S. ports, including the Ports of Los Angeles and Long Beach, as well as the Port of New York and New Jersey.xx
A crush of containers stuck in Asia, such that big retailers like Walmart, Home Depot, Target and IKEA have chartered their own vessels to bring goods to the U.S.xxi
Similarly large backups in railyards, as these hubs struggle to keep record amounts of freight moving amidst significant (and controversial!) staffing cuts.xxii
Rising costs and longer transit times for goods, supplies, and raw materials.

All of these are hitting two groups especially hard:

Small companies. Unlike Home Depot, most smaller companies don’t have the budget to hire a charter vessel from China, so they’re stuck waiting for goods marooned in Chinese ports. Additionally, since small businesses ship smaller volumes, they have less bargaining power with logistics providers. Finally, they’re also less able to make up for the cost increases than larger companies, who often have greater cushions to absorb the additional cost.xxiii
Consumers, who have seen the overall cost of goods rise 5.4% from July 2020-July 2021, the largest one-year increase since 2008, according to data from the Bureau of Labor Statistics.xxiv

The Bottom Line

As of October 13, President Biden has gotten involved, with plans for a 90-day sprint to clear the clogs at the Ports of Los Angeles and Long Beach.xxv Although many remain skeptical, even a solution at these two key ports is only one part of the puzzle. Over the next few months, each link of the supply chain will need to resolve its challenges. Only then can all parties move forward together—and function like the interconnected network that the global supply chain needs to be.

If you’re experiencing your own challenges in this environment, our experts can help. Reach out for a complimentary consultation to get started. Together, we’ll take a holistic look at your own supply chain and help you operate effectively amidst today’s challenges.

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