When will supply chains return to normal? And how did things get so bad?
Wondering why everything from cars and refrigerators to books and toys is rare?
Blame the filthy supply chain that connects manufacturers around the world to the manufacturers and assemblers of their components, as well as to the consumers and businesses that buy the end products. The problem emerged shortly after the COVID-19 pandemic hit, and it appears to have only worsened since then.
How did we get into this mess? And why is it not improving? The Times reached out to supply chain experts, and here are their responses.
What exactly is “the supply chain”?
Manufacturers in the United States and the rest of the industrialized world have long outsourced the production of common, inexpensive products to China and other low-wage countries. But starting in the 1970s, companies outsourced the production of a growing number of more sophisticated products, often using multiple subcontractors to produce and then assemble the components.
Here’s how it typically works: A US-based company will design and put the finishing touches on a product, but look to one or more overseas manufacturers for raw materials and components if it significantly reduces the cost of construction and delivery. . For example, according to the American University Auto Index, about half of every Dodge Ram 1500 truck rolled out of an American auto plant last year came from outside the United States and Canada.
Some companies completely forgo having factories in the United States and hire contractors to assemble their products from parts made by subcontractors. With or without a U.S. factory, a business that relies on an extensive supply chain needs a combination of planes, ships, trucks, and warehouses to bring its products together and store inventory.
Global supply chains are particularly prevalent in durable goods (such as cars and appliances), technology products (such as cellphones and computers), clothing, footwear, textiles, furniture and plastic products. And while most of America’s imports come from China, Mexico and Canada are also important links in the supply chain here, as are a number of Asian and European countries.
What caused the problem?
In a nutshell, COVID-19. The pandemic caused a toxic mix of forces that triggered and then exacerbated the stalemate in maritime transport.
The first blow came when many Chinese factories that make parts or assemble products for global manufacturers were shut down by outbreaks of the coronavirus. Similar disruptions quickly spread across the world, affecting both manufacturers and the logistics companies that ship, store and deliver their goods.
After a brief COVID-related recession, however, demand for goods grew rapidly as people switched to shopping online and took on new habits (an increase in home improvement projects, for example, has boosted the demand for household appliances and building materials).
Manufacturers face a “perfect storm” of problems, said Nick Vyas, executive director of the Kendrick Global Supply Chain Institute at the USC Marshall School of Business.
Labor, transportation and logistics costs are on the rise, capacity is reduced due to issues throughout the supply chain, and there is a limited amount of resources at all levels, including number of containers and manufacturing capacity.
“We could maybe protect ourselves against one type of risk or two types of risk, but it’s the fact that all of these challenges are happening at the same time,” said Nicole DeHoratius, assistant professor of operations management at the booth of the University of Chicago. Business school.
The pandemic is not entirely to blame. Robert Handfield, professor of supply chain management at Bank of America at North Carolina State University, said “Warehouse, distribution and truck driver shortages were severe before COVID “.
Delays caused by backlogs have been particularly disruptive for businesses that operate with small inventories and depend on “just-in-time” shipments to fill orders. To avoid this pitfall, some companies order additional supplies and components as a precautionary measure, which puts more strain on the distribution system.
Another factor: Concerns over the spread of COVID-19 and its variants have made it more difficult for trucks to cross borders. A report released on Monday by Moody’s Analytics said that differences in countries’ efforts to control the coronavirus have hampered the movement of transport workers at ports and other cargo hubs, contributing to a problem that will worsen before it s ‘to improve.
And it is not easy to restart factories after they close to stem the outbreaks of coronavirus cases. Raw materials are saved and it can take weeks to restart production, Vyas said.
“The supply chain is a system,” he said. “When you create supply-to-demand shocks and they keep happening, the system doesn’t have enough time to reset and recalibrate. “
Why are freighters waiting to be unloaded at ports?
West Coast ports barely kept up with freight growth before the pandemic and had no capacity to absorb the disruption, said Ayman Omar, associate professor at the Kogod School of Business at the American University. The pandemic has only worsened the situation, including a shortage of trucks to transport freight containers to their destinations.
There were nearly 60 ships waiting near the ports of Los Angeles and Long Beach on Tuesday morning.
Some trucking industry executives blame higher federal unemployment benefits, which ended in September, for the driver shortage. Omar said the benefits may have contributed to the problem in the early months of the pandemic, but the problem now is competition from transport start-ups hungry for market share. Drivers come and go in trucking companies at an alarming rate – turnover was over 90% at large companies in the last quarter of 2020.
Without enough trucks to transport them, containers piled up on the docks, and more continued to pour in – each new ship brings 10,000 to 21,000 containers. And with the ports of Los Angeles and Long Beach unable to cope with the growing number of ships, ships were spending about as much time waiting to anchor and unload – about two weeks – as it would take for a ship to pass through. Pacific, said Robert Khachatryan. , Managing Director of Freight Right Global Logistics at La Crescenta.
Lack of transparency and information sharing compounds the problem, preventing manufacturers and importers who depend on the ports from seeing problems develop in advance and bypassing them, Omar said.
How does this affect me?
The prices are higher for a lot of things. Shortages and high shipping demand have combined to drive freight costs up; the cost of moving a container from China to the west coast of the United States is four times what it was a year ago, and more than 10 times what it was before the pandemic .
Manufacturers passed their higher costs on to consumers, although this did not appear to dampen demand for the goods, Vyas said. The increase affects not only the teak furniture you bought, imported from Indonesia, but also the running shoes and dress shirts you bought from a local retailer.
The goods take longer to arrive. Handfield said he realized this summer he needed a new refrigerator, so he ordered one in August. It is not due until December. Some retailers are urging consumers to buy their Christmas gifts now, when there is still plenty of time to deliver them.
Some objects are more and more difficult to find. While we don’t see as many empty store shelves as we did at the start of the pandemic, shortages are occurring in unexpected places. For example, printers, game consoles, and rental cars are harder to find, all because of the semiconductor drought.
More price inflation is expected. “You have this constant pressure of not having enough resources, high demand,” Vyas said.
How long will it last?
Experts say it will take some time – maybe six months, maybe more than a year – before the supply chain can work its way through the backlog.
“We have these orders coming in, we cannot fulfill them because we are facing these labor shortages,” said DeHoratius. “Unless they stop coming in, that doesn’t give us time to get through. “
Some companies have even tried to hedge their bets by placing multiple orders for the same products at different factories. But it still requires shipping capacity so that the products are stored on time.
How will this be resolved? Some economists argue that the convulsions in the shipping market will cause US manufacturers to move more of their outsourced work from Asia to Mexico. But it is a long term solution. In the short term, experts say repairing the supply chain will require addressing every part of it and not focusing on just one part of the process.
For example, factory workers who work in the manufacturing and processing of raw materials need to be vaccinated to stop epidemics.
Ports need to extend their opening hours so that more containers can be unloaded. The Biden administration announced a move in that direction on Wednesday, saying the Port of Los Angeles would start operating around the clock, similar to measures taken at the Port of Long Beach.
Vyas compared the supply chain to a symphony, in which each piece has to play its place in order for the ensemble to be successful.
“We do this in a silo – one point of contact at a time – rather than as a system,” he said. “You have to balance that. “
This story originally appeared in the Los Angeles Times.