State of the Supply Chain: Challenges will linger throughout the year, with efforts underway to address inefficiencies – April 2022
By Jennifer Bardoner
With demand continuing to climb, suppliers are having to evolve to keep up, diversifying their own supply chains and investing in technology, equipment and people. And while the global crunch spurred by the pandemic will eventually abate, new threats like the invasion of Ukraine and resultant sanctions against Russia underscore the long-term necessity of such strategies to mitigate risk amid the fragile world order and supply chain inefficiencies that have existed for years.
PROBLEM: PORT CONGESTION
“The supply chains have always been broken, but no one cared,” says Craig Fuller, CEO of FreightWaves, a provider of global supply chain intelligence and news.
The American Society of Civil Engineers’ 2021 Report Card for America’s Infrastructure notes an $8 billion increase in port spending through 2025, but also points to “a funding gap of over $12 billion for waterside infrastructure such as dredging over the next ten years, with additional billions needed for landside infrastructure.” And despite the West Coast holding the complex that houses the Port of Los Angeles and the Port of Long Beach, the country’s two busiest ports year after year, spending on infrastructure improvements has been concentrated on eastern and Gulf ports by an 11:1 ratio, reports LA Port executive director Gene Seroka.
As of midyear last year, data from Cushman & Wakefield shows that the container volume coming into those two LA County ports was comparable to that of the five busiest ports spread across the Gulf and up the East Coast, with LA and Long Beach accounting for 46% of that volume. And that’s after carriers started moving shipments away from the West Coast following months of headlines about the congestion. According to a February 23 article on FreightWaves, “January was the eighth straight month where overall growth at East/Gulf Coast ports exceeded overall growth at the West Coast ports” due to “shippers changing routing decisions to avoid the widely reported West Coast congestion.” And incoming traffic from Asia was expected to increase in late March through the end of April: 40% on the West Coast but 60% on the East Coast.
“If everybody tries to get to one spot at one time, you’re going to have problems, and then it kind of snowballs on you,” says Shaw Industries’ vice president of integrated supply chain, Kevin O’Meara. He cites data that likens all the canceled shipments and skipping of planned stops last year-in many cases the result of logjams primarily in LA and Long Beach as ships waited weeks to unload-to reducing the world’s total ocean freight capacity by 10% to 12%. Meanwhile, he notes, “demand for goods grew dramatically.” According to the Bureau of Economic Analysis’ (BEA) report on personal consumption expenditures (PCE), spending in 2021 increased 12%, after dipping just 2.6% in 2020 as the economy shut down for several months. The BEA’s most recent PCE report shows that spending in January increased $337.2 billion over the preceding month, while disposable personal income grew $19.8 billion. The strain caused by all that spending has been exacerbated by the intermittent closing and reopening of other economies around the world, especially as China wrestles to maintain its zero-Covid policy, taking a major source of the world’s goods on and offline.
“There is no strong expectation of significant improvements [for cargo shippers] until underlying demand wanes,” Judah Levine, head of research at Freightos, said in a FreightWaves article from January. “That doesn’t look like it will be happening any time soon.” The online shipping marketplace and platform’s index on global container freight for the week ending March 18 showed an average container price of $9,488. However, the popular China/East Asia route into the U.S. cost $16,024 for West Coast delivery and $17,359 to the East Coast. Pre-pandemic rates were between $2,000 and $3,000 on average.
Though carriers have placed orders for new equipment in response to the surge in consumer spending, economic and financial analysts with ING report that even those placed within the first half of 2021 won’t come online until next year. So, unless demand subsides, elevated shipping rates and competition for carriers’ limited capacity can be expected to last through the year. “When we looked at the supply chain disruptions of the previous year, we mostly talked about ocean freight as the biggest disruption,” says O’Meara. “That will ebb and flow but will likely go into 2023 given that no increased capacity is coming online.”
Meanwhile, amid Covid regulations and illnesses, docks have struggled to maintain a workforce capable of efficiently processing and moving the incoming cargo. In January, The Wall Street Journal reported that roughly one in ten of the daily workforce at the ports of Los Angeles and Long Beach were unable to work due to Covid-related reasons, leading 13 ships to receive no one to help unload them, “effectively halting operations” on a day when 102 ships were waiting to dock. This points to a longstanding point of contention between the ports’ unionized workforce and operators: the widespread lack of automation. Naturally, the International Longshore and Warehouse Union, which represents West Coast dockworkers, has opposed such moves, trading concessions for increases to wages, which are now between $33.31 per hour for those with up to six months’ experience and $52.03 per hour for the most skilled and tenured port workers.
Following labor disputes that shut down the Port of LA amid union negotiations in 2015, Shaw transitioned its concentration of imports to the Port of Savannah, as well as others along the East Coast. “When I started, we brought everything into LA and trucked it around the country,” O’Meara says. The second-busiest port on the East Coast, the Port of Savannah receives roughly half as much traffic as the Port of LA.
Those West Coast port labor agreements will come up for renegotiation any day now, before expiring on July 1. Gulf and Atlantic port operators’ contracts don’t end until 2024.
All the spending on East Coast ports has provided them with better infrastructure to handle the traffic they receive, O’Meara says, and many sources say the International Longshoremen’s Association, the union which represents East Coast dockworkers, has allowed for more automation. “Our view is that the Southeastern ports are far more efficient than the West Coast ports,” says O’Meara, noting direct-to-truck and direct-to-rail capabilities and “a little ecosphere” of available warehousing nearby. Also, President Joe Biden’s federal infrastructure plan specifically earmarks $8 million to help the Port of Savannah move cargo to container yards farther inland.
The problems at the ports have been compounded by the limited availability of trucks and drivers to help disperse the record levels of inventory coming ashore. More than 70% of the nation’s freight is transported by truck carriers like Xpress Global Systems (XGS). “I think some of the numbers are segment-specific, but we certainly have been up from a volume perspective,” says XGS director of transportation Trey Kenemer. “There are parts of the industry that want to commoditize transportation. You can’t underestimate the importance of talent. It is people that make us successful in this industry.”
Having your own fleet offers more control not only over the dependability of deliveries, but also the quality of the vehicles, which can enhance working conditions for drivers through comfort, reliability and the absence of personal costs associated with contract drivers owning and maintaining their own vehicle. “We’ve seen the growth in private fleets so you can get more consistent service,” O’Meara says. “Labor shortages are having a serious impact on industries and supply chains, and the shortage of truck drivers is certainly affecting service timelines in all industries.”
XGS, which has also bolstered its expedited small-load services, is working to convert its line-haul delivery equipment to its own fleet of vehicles, and O’Meara says Shaw’s final-mile fleet is “almost 100% Shaw trucks.”
Both Shaw and XGS are also investing in technology to help them better map their supply chains. “If you read in the paper today about Covid outbreaks in China or about port backups in New York, I’m confident that we’re working on that three to five days, at minimum, before you read about it in a newspaper,” O’Meara says.
XGS is in the process of implementing transportation and warehouse management systems to not only offer greater flexibility but also more visibility of inventory for both the company and its customers. “If you look at the ‘Amazon effect,’ customers want their freight extremely quickly, they want quality service, they want it damage-free, and they want to have visibility throughout,” says Kenemer. “It requires a lot of technology to provide that.”
Warehouse availability is another key to mitigating all the uncertainty around product availability, lead times and, to some extent, pricing. “Customers, it seems, are looking to position inventory closer to end users and cut down on the cycle time from when a customer orders something to when it is delivered,” Kenemer says. XGS has worked to build out its network through new partnerships, especially as the company enters new markets like the Carolinas through recent acquisitions. It has also transitioned to offer value-added services like carpet cutting and pick-and-pack at its warehouses to help clients expedite orders.
PROBLEM: TRUCK DRIVER SHORTAGE
The American Trucking Associations (ATA) reported a gap of 80,000 drivers based on freight demand at last year’s end and estimated that one million new drivers will need to be recruited over the course of this decade in order to balance projected industry growth with those expected to leave the workforce altogether or trucking in particular. “The driver shortage is real,” Kenemer says. “There’s a battle out there between carriers for professional drivers.”
A chart from the ATA shows a roughly 60/40 split that favors the growing number of new drivers needed due to retirement and industry growth over those leaving the industry for other jobs or due to unforeseen circumstances like failure to maintain their driving record or drug test requirements. However, a November article in Time Magazine notes that more people hold the necessary licensure than work as drivers-more than 357% in California alone-which it largely attributes to working conditions and pay.
“There’s no trucker shortage; there’s a trucker retention problem created by the poor conditions that sprung up in the industry in the wake of 1980s deregulation,” the article states, citing inefficient scheduling, pay structures that don’t account for wait times or delays, and even a lack of safe parking when truckers have reached their federally mandated drive-time limits. “Turnover for truck drivers in fleets with more than $30 million of annual revenue was 92% at the end of 2020, meaning roughly nine out of every ten drivers will no longer be working for that company in a year.” Turnover among less-than-truckload (LTL) fleets, which primarily follow local routes to deliver goods to long-haul truckers, was 14% in the same period, the article goes on to note.
This speaks to something Kenemer says he’s seen: more and more drivers requesting regional routes in order to be closer to and have more time with their families. But, he adds, “Those of us that are asset-based, we are facing a lot of the same challenges. Whether you’re a truckload provider or an LTL provider, the labor market has been and continues to be challenging.” The limited availability has led some carriers to shy away from or charge more for rolled goods-like carpet-in favor of more compact and stackable products, he notes, making industry-specific carriers even more relevant.
The shortage, along with increasing driver pay to help offset it, has impacted costs. According to DAT Freight and Analytics’ March 13 report, freight rates were up 23.7% to 30.7% year-over-year in February, depending on the type of haul. Meanwhile, the national average price of diesel fuel, which is not included in the rates, was up 41.6%, leading to growing fuel surcharges.
Increasing pay is a proven economic tactic for increasing the attractiveness of a profession. The ATA cites data from the Department of Labor that shows driver earnings have recently increased fivefold over historical averages. But many argue this only offsets years of stagnant wages, and the move comes at a time when other blue-collar industries are also having to raise pay in order to compete for what is often the same labor pool. In any case, wages do not necessarily account for inflation.
According to the Bureau of Labor Statistics, long-haul drivers earned a median $47,130 in 2020, with the lowest 10% earning less than $30,660 and the highest 10% earning more than $69,480. The living wage in Mississippi, which has the lowest cost of living in the country, equates to $62,587 annually for a single working adult in a family with two kids (the national average), or $37,585 per adult in families with two working parents, according to MIT’s Living Wage Calculator, which is updated every first quarter.
“It is a struggle to recruit and retain drivers,” Kenemer says. “It’s causing us to become more creative than the industry probably traditionally has been and focus more on the lifestyle goals of folks and how becoming a professional driver can fit into that.”
Russia’s invasion of Ukraine sent geopolitical shockwaves around the world, driving up oil prices and upsetting the delicate supply-chain balance that had been achieved as the Covid-related disruptions over the past two years became familiar.
“I think we started the year much more positive about supply chain pressures easing,” Fuller says. “Not that things would resolve, but there was optimism that we were going to get some relief. Everything in the supply chain is about consistency and dependability. If you know something is going to take five months, you can plan accordingly. The Ukraine crisis rewrote all of that.”
Russia was the world’s number three provider of crude oil and second-largest producer of natural gas in 2020, according to the U.S. Energy Information Administration (EIA), meaning that everything from flooring to roof shingles, not to mention the gas used deliver those products, is interwoven with the sanctions against it and the possibility of widespread war.
The EIA predicts per-barrel prices will spike at $116 in the second quarter of 2022 and then decline through the rest of the year, ending around $80 per barrel.
Such price volatility, along with the rest of the upsets to the supply chain over the past few years, underscore the importance of having a diversified supply base, both at home and abroad. “The rule of supply chain is that you should have more than one source,” Fuller says. “Ideally, you have it from more than one part of the world.”
He sees Mexico as an increasingly attractive partner due to its proximity to domestic consumers, its access to raw materials-especially for hardwood and ceramics-and its political views. “If you’re running a supply chain, you’re not going to want to leave parts of your supply chain to geopolitical risk,” he says. “If I had to guess, these are going to be indefinite issues we’re going to contend with the rest of our lives. It’s not a matter of bouncing back, it’s a new world order we’re having to contend with.”
Copyright 2022 Floor Focus
Related Topics:Shaw Industries Group, Inc.