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Supply Chain Thought Leadership
Category: Insights

What’s Wrong With the Supply Chain? It’s Complicated

Yes, the pandemic was a major culprit, but there may be help on the way.

By Juan Cazorla | August 30, 2021

The confluence of several events over the past year have resulted in disrupted global supply chains. One-off occurrences, such as the Suez Canal entanglement, frayed an already tenuous supply chain complex. The pandemic was the major catalyst, but global trade patterns started changing a few years back with trade tariffs.

What other key factors have a role in current supply chain issues and what can you – the consumer – expect to come? There’s a lot to consider:

  • For importers primarily sourcing from China for years, China was suddenly not the default option. As importers have experimented with sourcing other countries, China still has a comparative advantage when it comes to manufacturing, due primarily to low labor costs.
  • The port system is currently in disarray. Social distancing mandates to prevent the spread of COVID-19 contributed to a direct decline in port worker productivity. With import shipping at an all-time high, many U.S. warehouses and shipping yards are teetering at maximum capacity. These factors also contributed to bottlenecks at port loading docks, causing delays in the unloading of containers. The average container idle time at ports has increased from three to seven days, resulting in lost productivity. Congressional regulations mandating that operators of commercial motor vehicles limit hours driven have also impacted truck driver availability and port productivity.
  • Post-pandemic consumer buying patterns are a factor, as well. The pandemic shifted the e-commerce curve forward by three to five years and many experts believe the shift is permanent. Domestic e-commerce retail sales increased to $861.12 billion in 2020 – up an incredible 44% from 2019. Consumer demand following the pandemic reopening also accelerated; loaded shipping container imports into the Ports of New York and New Jersey in June of this year increased 46.5% more than June 2020.

 

What about trucking?

The trucking industry experienced a notable surge in volumes the past two years. True, many companies enjoy all-time profits. However, the trucking industry continues to grapple with two primary issues: the absence of qualified drivers and truck inventory deficiencies because of chip shortages.

During the advent of COVID, drivers got sick and some just never came back. Some furloughed drivers retired or found new career paths. Driver school enrollment plummeted, so there are fewer trainees entering the industry. The hours-of-service regulations are a factor. Lastly, there is now a national drug testing database for truck driver applicants, whereas previously it was a state-by-state initiative. These factors have limited what used to be an abundant supply of trucker drivers. It’s an issue for both users and providers of transportation services. Higher driver wages are the corollary, and these costs are often passed on – ultimately to consumers.

The chip shortage is impacting the trucking industry, as well as other sectors. If the chip shortage persists and new trucks aren’t coming into the system, that could result in service issues down the road since truck operators generally replace their fleets after 3-4 years to maintain high service levels. The pandemic exposed a weakness in global chip manufacturing, and there will certainly be gradual changes to where we manufacture these key products.

There has been discussion within Congress about the potential consequences of the chip shortage. There’s no immediate solution yet, so what we expect is for impacted industries to push for incentives (such as tax subsidies) to encourage the manufacturing of chips in the U.S.

 

What else is happening in the transportation industry?

We will eventually see driverless trucks for certain routes, but it’s going to take time and money. The technology already exists and is being tested at the manufacturer and transportation provider level, but adoption for over-the-road trucking is many years away. With a looming infrastructure bill, we will initially see an acceleration of the trend towards driverless passenger vans and increased adoption of electric or hydrogen-powered trucks. This is certainly a step in the right direction as environmental, social and governance (ESG) consideration takes center stage.

Opportunities for the use of technology in the trucking sector are vast.

We have seen technology companies enter the transportation landscape that have not historically been in it, offering better tech-enabled solutions. Those include more efficient load-matching software, which can be used in the truck brokerage business and is part of the logistics operations of trucking companies. Some large trucking companies have evolved their business models to be more asset-light and focus on offering solutions leveraging their own proprietary technology. This has made the system more efficient, because when brokers are able to communicate more efficiently with carriers the efficiency of the system increases.

 

What does all this mean for you?

Consumers should expect higher prices as the shortage of new truck drivers and port-related complexities have led to higher transportation costs across the board. Providers of transportation service cannot absorb these costs alone. Ultimately, consumers pay more.

Companies are faced with delays and uncertain deliveries; many have abandoned the former “just-in-time” inventory strategy in favor of a “just-in-case” strategy resulting in increased inventory levels. For example, one multi-national retailer reported it spends $200 million annually to carry an extra 7-14 days of inventory because of unreliable transportation due to port congestion. Often these costs are passed on to consumers in the form of higher prices. While the global supply-chain landscape is tenuous, the silver lining is that this dynamic has the attention of the current administration. The proposed infrastructure spending bill is expected to result in more choices and more efficient port operations. However, change will be gradual.

Companies using transportation services are facing the reality that the balance of power from a pricing perspective is currently with providers of transportation services. As a result, locking down transportation services and minimizing reliance on the spot market are prudent strategies.

Locking in the cost of transportation service with a quality provider will allow companies to more accurately budget expenses in a volatile operating environment. Companies are likely to pay more right now for trucking and other transportation services, but availability and reliability both trump pricing considerations in this environment.

 

Juan Cazorla is head of Regions’ Transportation and Logistics Specialized Industry Group, an industry-focused corporate finance group that serves a wide array of companies and institutions operating in the logistics, maritime, rail, trucking and environmental services sectors.

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