Ultimate Resource For Disruptions To Global Supply Chains
China dismissed efforts to shift U.S. supply chains toward alternative sources as unrealistic, hitting back hours after President Joe Biden signed an order to review how America buys strategic goods. Ultimate Resource For Disruptions To Global Supply Chains
Chinese Foreign Ministry spokesman Zhao Lijian made the remarks Thursday in response to a question about the order, which will cover chips along with large-capacity batteries, pharmaceuticals and critical minerals and strategic materials like rare earths. Zhao said such measures “will not help solve domestic problems” and only harm global trade.
“China believes that artificial efforts to shift these chains and to decouple is not realistic,” Zhao told a regular news briefing in Beijing. “We hope the U.S. will earnestly respect market laws and free trade rules and uphold the safety and reliability and stability of global supply chains.”
Biden acknowledged Wednesday that the problem wouldn’t be solved immediately. The issue has taken on urgency with a global chip shortage that’s threatening to harm U.S. growth just as Biden seeks to rebuild an economy battered by the coronavirus. Some automakers are cutting workers’ hours due to the shortfall and unions are raising alarm about the prospect of layoffs.
While the U.S. gets much of its semiconductor supplies from allies like Taiwan and South Korea, Biden’s executive order seeks to end the country’s reliance on China and other adversaries. The order doesn’t directly call out China or any one country. Still, White House officials said an over-reliance on Beijing and other adversaries was a key risk that must be addressed.
Biden’s review could lead to financial incentives, tariffs or changes in procurement policies, among other options, said one of the officials, who spoke on condition of anonymity. The administration plans to consider ways to encourage production of key items in the U.S. or work with allies to manufacture the items, the official added.
Biden’s order directs industry-specific reviews focused on defense, public health and biological preparedness, information-communications technology, transportation, energy and food production. Those assessments, to be completed within one year, will be modeled after reviews the Defense Department uses to regularly evaluate the U.S. defense industrial base.
The Biden team will draw on lessons from the current crisis on chips and the shortage of personal protective equipment that plagued the U.S. last year, one of the officials said. Wednesday’s order is designed to help the U.S. address future crises before they occur, the official said.
The order calls for reviewing supply chains every four years and directs the administration to consult with outside groups, including businesses, academia, unions and state and local governments, according to the White House.
Global Supply Chain Disrupts Illegal Drug Distribution In U.S., DEA Official Says
Pandemic appears to affect flow of meth, cocaine, heroin.
The flow of illegal drugs, including methamphetamines and heroin, has slowed down during the coronavirus-caused lockdowns around the U.S., the nation’s top drug-enforcement official said.
“What we’re really seeing right now are supply-chain disruptions of nearly all illicit drugs,” Uttam Dhillon, acting administrator at the Drug Enforcement Administration, said in an interview.
Significant restrictions to cross-border traffic between the U.S. and Mexico, plus the social-distancing mandates around the U.S., appear to be making it harder to transport and deal illegal drugs inconspicuously, he said. He cautioned that it remains difficult to draw definitive conclusions about how hard the illicit market is getting hit, or how long that effect will last in a public-health crisis without modern precedent.
“You’ve got traffickers who just can’t move as freely as they could before without being quite obvious that they’re moving,” Mr. Dhillon said. The same forces also make it harder to launder cash, he said.
The decline may be temporary if traffickers are stockpiling, and the DEA is preparing to respond to a potential surge, Mr. Dhillon said.
Treatment advocates say sudden supply shortages can be risky, including for opioid users who face a higher risk of fatal overdoses after going through withdrawal and seeing their tolerance decline.
“People who are denied their supply may go to things that are much more dangerous,” said Alex Walley, who directs Boston Medical Center’s addiction medicine fellowship program.
Mr. Dhillon said the trafficking decrease seems most acute on the market for meth, a stimulant that had been flooding into the U.S. from Mexico in higher quantities before the virus. DEA Field divisions including offices in Atlanta, Chicago, Denver, Philadelphia, San Diego and El Paso, Texas, had all reported impacts on meth supplies, he said.
The shortages drive prices higher. “Cocaine and heroin prices have also increased in several areas of the U.S., and we’ve seen fentanyl prices increase in a few domestic locations,” Mr. Dhillon said.
The supply disruptions haven’t hit fentanyl, a potent synthetic opioid, as hard as these other drugs, the acting administrator said.
In Washington, D.C., clients at the harm-reduction nonprofit HIPS say dealers are cutting both heroin and cocaine with fentanyl to stretch thin supplies, said David Sternberg, the clinical-services manager there. This is risky, particularly in a time when social distancing is making it harder for clients to get clean needles, overdose-reversal medication and treatment, and HIPS has heard of fatal overdoses among clients, Mr. Sternberg said.
Treatment advocates say the coronavirus pandemic is more broadly complicating the opioid crisis. One particular challenge, they say, is the need to show up in person to obtain the tightly controlled treatment medication methadone.
Federal authorities including the DEA have relaxed methadone-related rules to try to limit face-to-face interactions, but advocates for people in recovery say these moves continue to be applied unevenly on the ground, and are pushing for more reforms.
Biden Plans Supply Chain Review After Virus Caused Shortages
President Joe Biden will order a government-wide review of critical supply chains, in an effort to reduce U.S. reliance on countries such as China for essential medical supplies and minerals, according to people familiar with the matter.
The administration’s goal is to protect government and private sector supply chains to prevent future shortages and limit other countries’ ability to exert leverage over the U.S., according to an administration official.
Concerns over importing essential materials have mounted amid the coronavirus pandemic as the U.S. has struggled to obtain enough personal protective equipment like masks and hospital gowns from manufacturers overseas.
The administration plans to work with allies to ensure a collective approach, according to the official.
Biden’s executive order is expected to direct a number of agencies to produce reports on sectors defined as critical, said two people who spoke on condition of anonymity to discuss the draft document. Agencies would have one year to write their final reports, while some initial reports would be due in the first half of this year, one of the people said.
It’s not clear when the president will issue the order and whether it directs agencies to take any action once the critical sectors are identified.
The Trump administration had promised a thorough supply chain review after the virus hit the U.S., with the goal of ending the country’s reliance on adversaries.
That study never materialized.
Everywhere You Look, The Global Supply Chain Is A Mess
Winter storms and crammed ports in the U.S. add to disruptions of production and supplies during the pandemic.
Supply chain woes mounted world-wide for makers of everything from cars and clothing to home siding and medical needle containers, as the extreme Texas weather and port backlogs compounded problems for manufacturers already beset by pandemic disruptions.
Toyota Motor Corp., Honda Motor Co. and Samsung Electronics Co. were the latest multinational companies to chime in about setbacks, with the two auto makers saying Wednesday they would halt production at plants in North America. Toyota cited a shortage of petrochemicals, manufacturing of which has been hobbled by last month’s Texas freeze. Honda pointed to a combination of port issues, the semiconductor shortage, pandemic-related problems and the crippling U.S. weather.
Samsung, a smartphone and chip-making giant, said a severe global shortage in semiconductors would hurt its business into the next quarter.
Koh Dong-jin, the co-chief executive officer of Samsung, told investors Wednesday that dealing with the chip supply-demand imbalance had become a priority for staff and that executives were traveling overseas, despite restrictions, to discuss the issue with business partners.
The disruptions underscore how several forces are coming together to squeeze the world’s supply chains, from the pandemic-driven rise in consumer demand for tech goods to a backlog of imports at clogged California ports to U.S. factory outages caused by weather woes. They are creating cost increases and delays for numerous industries, company executives and analysts say, affecting profit margins and the prices that companies and consumers ultimately pay for many goods.
“We’ve been scrambling to get enough raw material,” said Tom Nathanson, chief executive of Summit Plastics Inc., who predicted possible lasting damage to the plastics industry in the form of lost customers.
He said the Mississippi company, which makes plastic sheeting for everything from hospital gowns to packaging, was already contending with supply-demand issues before the Texas cold spell. “The costs have absolutely been passed on,” Mr. Nathanson said. “We, as consumers, are feeling that crunch.”
The disruptions, which come as the U.S. and some other economies are beginning to lurch toward normalcy, show how messy the reopening of business is proving to be a year after pandemic’s onset, and how vulnerable supply chains remain.
The long-term economic impact remains unclear. Federal Reserve Chairman Jerome Powell said at a press conference Wednesday that he expects supply chains to adjust as economic growth accelerates.
“It’s very possible, let’s put it that way, that you will see bottlenecks emerge and then clear over time…. These are not permanent. It’s not like the supply side will be unable to adapt to these things. It will—the market will clear. It just may take some time.”
Last month’s freeze in Texas was the latest plank on the pile. The state is home to the world’s largest petrochemical complex, which turns oil and gas and its byproducts into plastics. The February freeze triggered mass blackouts that shuttered plants, many of which remain offline.
“What we saw with the freeze is we’re one issue, one weather event away from supply-demand tightening operating rates, and so it doesn’t take much to tilt the market,” Howard Ungerleider, the chief financial officer of Dow Inc., said at a conference Tuesday.
Several of Dow’s petrochemical plants in Texas were forced to shut down during the freeze, and Mr. Ungerleider said they would be running at 80% capacity by the end of March.
He said plastic prices in Asia and Europe had already begun increasing due to supply shortfalls in the U.S. He estimated it would take more than six months to correct the supply-and-demand imbalances caused by the February storm.
‘We’ve been scrambling to get enough raw material.’
— Tom Nathanson, whose Mississippi-based company makes plastic sheeting
That assessment could be bad news for tent manufacturer Anchor Industries Inc., whose products are used for outdoor gatherings. The Indiana-based company is now having trouble getting polypropylene fastening straps, a normally cheap and readily available product, so instead has workers manually taping closed cardboard containers, a move that slowed shipments, said Mike McKim, purchasing manager.
“Texas came at just about the absolute worst time,” said Mr. McKim, who said tents are in even more demand due to immigration issues at the border and as event planners anticipate a surge of weddings this summer. “Someone is going to be at the back of the line and not get what they need. We are just hoping it’s not us.”
Samsung, one of the world’s largest chip makers, was forced to idle two chip factories in Austin, Texas, last month. The facilities represent about 28% of Samsung’s total output, according to Citi analysts, and remained shut as of Wednesday.
Toyota cited a petrochemicals shortage for curtailments at its factory in Kentucky, where it builds the Camry and Avalon sedans and the hybrid version of its RAV4 sport-utility vehicle. The shortage would also lead to cuts in production of its Tacoma pickup truck built in Mexico.
Meanwhile, the California ports of Los Angeles and Long Beach, which together handle more than a third of U.S. container imports, remain inundated from an inventory restocking drive that began late last year and has picked up steam in 2021.
Lengthy backlogs that at one point left some 40 vessels anchored offshore waiting for dock space have narrowed, but there were still 17 container ships waiting off the Southern California coast earlier this week. The backups have stretched to other West Coast gateways like the Port of Oakland as importers sought to move goods around the bottlenecks.
“The supply chain problems have been relentless and affecting us directly for the past year,” said Abbie Durkin, the owner of Palmer & Purchase, a women’s clothing and accessories shop in Rye, N.Y. “We’ve had cargo stuck in Los Angeles for months and we are now using airfreight for about a quarter of our volumes to make sure things will come in on time. Our freight cost has doubled and we will have to increase our prices starting in June.”
Port of Los Angeles Executive Director Gene Seroka expects little respite, with another 18 ships set to arrive at the port complex by this weekend.
“Import volume will continue to be strong through the spring and early summer,” Mr. Seroka said Tuesday.
As for semiconductors, they have been in short supply for months after makers of cars, smartphones, PCs, tablets and TVs underestimated expectations during the pandemic, before ramping up orders that caught chip manufacturers unprepared.
General Motors Co., Ford Motor Co. and Nissan Motor Co. have all announced production cuts or temporary plant shutdowns due to the chip shortage. Such factory disruptions—even ones that are short-lived—can show up in earnings results because car companies book revenue when a vehicle is shipped from the plant to the dealer.
Many dealerships are tight on inventory, and that has some car shoppers having to hunt harder for desired models and paying top dollar when they do find them because dealers and brands have pulled back on discounts.
How Corporate America’s Poorly-Designed Supply Chain Was Made Worse By The Pandemic
Corporate America has a way of costing itself big by not adequately preparing for trouble. That lesson has been learned the hard way—again—over the past year.
This time a year ago, Navin Katyal’s phone wouldn’t stop ringing.
The head of Pfizer’s PFE -1.78% North American hospital unit, which sells 165 different medications like antibiotics, analgesics and sedatives for patients on ventilators, was receiving the same message from his thousands of customers as Covid-19 spread: We need more medicine, and we need it now. “Unprecedented demand all at once,” he said to me this week.
To respond properly to the crisis, Pfizer had to crank up production but also determine whose requirements were most urgent. “Just as with products like toilet paper, we had to sort out who was using the drugs and who was stocking up,” he said.
Pfizer is hardly the only company to be forced to figure it out on the fly: The Wall Street Journal reported earlier this week that supply chain woes have mounted world-wide for all sorts of businesses, thanks to the pandemic and other disruptions. The world is learning that a just-in-time inventory system and a short-term focus on maximizing return on investment is no match for a restive Mother Nature.
Mr. Katyal’s unit sells items that carry low profit margins, but no one doubts their importance after the pandemic. The emergency ramp-up of those products was a success: It was able to quadruple normal production rates of nine drugs that were in especially high demand.
But for its customers, it was too late to avoid the damage. No stockpiles of essential medicines or personal protective equipment for medical staff made the early stages of the pandemic deadlier and more disruptive than it otherwise might have been.
If the extra deaths weren’t bad enough, the situation also wreaked financial havoc for hospitals, which further impacted patient care. Suddenly, elective surgeries like hip replacements were too risky to perform for many hospitals, and a key profit center was lost. Medical equipment with seven-figure price tags was mothballed for want of small-ticket items like masks, gloves and gowns.
If only public health disruptions were the only sort that businesses have to worry about. Severe winter weather in Texas last month froze generators’ water intake facilities and knocked out power for days, snarling local economic activity in the process.
Utilities were caught off guard by the weather, even though such extremes aren’t entirely new. In a business world where maximizing return on investment has long been the highest priority, corporate America has a way of costing itself big by not adequately preparing for trouble.
So why do similar mistakes keep playing out? In the case of Texas, strategist Michele Wucker points out that the massive financial losses are distributed among homeowners, renters and businesses that need a reliable grid to function. Those entities didn’t have a say in whether equipment should be winterized.
“Businesses are basically being subsidized for taking unwise risk when the consequences of bad decisions fall mainly on customers and taxpayers,” said Ms. Wucker, author of the new book You Are What You Risk: The New Art and Science of Navigating an Uncertain World.
The end result, she told me this week, is that the benefits of risk taking are privatized, while the consequences of bad decisions can be socialized. The short-termism that Wall Street often demands of CEOs certainly doesn’t help.
While that explanation is clear, its implications are worrying: after all, bad incentives are much more difficult to fix than they are to identify.
As for hospital shortages, things aren’t as simple as executives failing to prepare for trouble, explains Mr. Katyal. After all, they have significant cost pressures of their own.
Bulk contracting can help hospitals use collective buying power to bring down expenses, but that has a downside: A 2019 report from the Food and Drug Administration highlighted a lack of financial incentives to maximize production of certain drugs, coupled with contracts that could reset prices for manufacturers without warning.
“Contracts should ensure that manufacturers earn sustainable…returns on their investment in launching or continuing to market prescription drugs, especially older generic drugs that remain important elements of the medical armamentarium.”
Clearly, there is value in fixing the next societal pressure point before it bursts, not after. At least some management teams are wide awake. For instance, scientists at Genentech and parent company Roche are working to develop new classes of antibiotics to keep up with the growing threat of antibiotic resistance.
“So much of our practice of modern medicine requires good infection control,” explained Genentech vice president and staff scientist Man-Wah Tan; basic dental procedures and routine surgeries could eventually become too dangerous to perform were the problem left unchecked.
Discovering new antibiotics isn’t the only hurdle: Figuring out how to incentivize more development is also a challenge. After all, a new antibiotic that can tackle drug-resistant infection should be used sparingly in order to preserve its useful life, according to John Young, head of global infectious disease research at Roche, making it a challenge to sell.
Away from healthcare, companies like 3M are focused on rebuilding confidence in the return to work and play. After quadrupling production of its N95 respirators last year, 3M now expects increased demand for hygiene monitoring systems for food service areas and a protective film it makes for handrails, among other products, said Chief Technology Officer John Banovetz.
Anticipating what’s coming next has always been a good way for companies to turn a profit. But in less turbulent times, executives have often been rewarded for pinching pennies instead.
Over the past year it’s become clear that pinching too hard can cost them, and their customers, dollars.
Japan Remade Its Supply Chains After Catastrophe. Here’s What It Learned
The 2011 triple whammy of earthquake, tsunami and nuclear meltdown produced resilience and a frugal but effective effort at investing for the future.
As global supply chains buckle under Covid-19 stress, those in Japan remain sturdy, free of inflationary pressures and fitful economic activity. Container shipping costs aren’t spiking and delivery times aren’t delayed. Industrial activity is humming along while manufacturers’ sentiment is at its highest in almost two years.
Overseas orders are recovering. It’s all the product of hard lessons learned — and could teach a thing or two to U.S. President Joe Biden as his administration looks to rebuild American manufacturing capacity.
Japan’s industrial network became more resilient after the tsunami and meltdown catastrophes of 2011, which inflicted more than $200 billion in damage to businesses. Supply chains are now carefully crafted and closely monitored. Capital expenditures are strategically timed. The production processes of most industries have been kept within the country, with only a few offshored.
In the wake of the cataclysms of 2011, firms faced severe shortfalls and struggled to restore operations. Across the board, production fell over 15%; in the transportation equipment sector it fell more than 46%. Government surveys from the time show most companies in the basic materials and processing industries didn’t expect to get close to just-enough-supplies till at least seven to nine months out.
Companies reacted to immediate needs but, instead of throwing cash at the problems, they waited for the dust to settle to assess the imbalances in their supply-demand equations. There weren’t sudden spikes of spending or investments or big promises.
Since then, industrial firms have consistently invested in their future. Capital expenditure as a portion of sales has averaged over 5% in the last decade, touching 5.9% in the last fiscal year. In other so-called industrial headquarter economies, like the U.S. and Germany, the average is more like 3%.
This month, Fanuc Corp., known for its conservative spending, made its largest investment in China to date, putting up 26 billion yen ($240 million) to upgrade a manufacturing plant in the country. Fanuc is one of the world’s largest makers of industrial robot and its machines populate factory floors across world.
The automatons’ bodies are still made in Japan but robotics investment is rising in China where Fanuc makes some parts. The new spending underwrites its future competitiveness.
The tight relationships that Japanese companies have with their suppliers help the corporations make frugal but precise investments. That’s allowed the likes of Toyota Motor Corp. to have a lens into layers of their production and procurements processes — and to spot deficiencies quicker. When gaps emerge, Japan Inc. manages to fill them.
Manufacturers are well-stocked with the material and equipment needed to produce goods. The ratio of that inventory to final products shipped out has averaged about 15% higher in the years following the 2011 disaster than the decade before, according to Capital Economics.
Meanwhile, inventories are higher for key equipment that require longer lead times — these are the machines and products without which companies would be hamstrung. In 2019, inventory-to-sales ratios for general and electrical machinery in the U.S. was 1.8 months to 1.4 months. In Japan, they were at a higher level of 2.2 months and 1.7.
Building production at home doesn’t mean Japan’s companies are shutting out the world. Firms have expanded their supplier networks, including — as Fanuc has done — offshoring to China. Managers with technical know-how that they’ve sent overseas have maintained strong ties with their parent companies. Over a third of the goods needed by Japanese affiliates in China are still procured from corporations in the home country.
As a result, Japan’s participation rate in the global value chain is high and it has moved more towards importing foreign parts to make products with high technological capabilities that are then exported. Relative to other large economies, Japan is less reliant on imported components in crucial sectors like electronics and machinery.
The companies still face the risk of disruption. Renesas Electronics Corp, a major supplier of semiconductor chips, a sector already plagued by global shortages, was hit by a fire at its main manufacturing plant on Mar. 19. The facility is expected to be offline for a month, which will mean a loss of around 17 billion yen. For some machines, Renesas has already determined it doesn’t have alternatives and won’t be able to make certain semiconductors.
But those account for less than 15% of volume. Renesas’ quick and exacting assessment will mean that it will be able to put a good estimate on when it will get production back in train. In addition, the Japanese government along with other companies, is mobilizing to get the company’s plant up and running.
All this is not Beijing-style industrial policy, which is laid out on paper with bold statements. But Japan’s goals are clear: protect the supply chains, at all costs. It’s learned the hard way.
Suez Ship Grounding Makes Case For Big Rail Mergers To Address Future Supply Chain Disruptions
A blockbuster tie-up between Canadian Pacific and Kansas City Southern is a bet that supply-chain breakdowns like the Suez Canal blockage will keep happening.
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It’s no coincidence that the two biggest industrial news events of the week involved a blockbuster North American railroad merger and a 200,000-ton container ship that got wedged into the Suez Canal, halting an estimated $9.6 billion worth of global trade on every day that it’s stuck.
The former is a bet that events like the latter will keep snarling globalized supply chains and boost the appeal of more localized freight routes.
Canadian Pacific Railway Ltd. agreed on Sunday to buy Kansas City Southern for $29 billion including debt to create the first major rail network that runs the gamut of North America. The combined tracks form a “T” that stretches from Kansas City Southern’s legacy routes deep into Mexico across the U.S. Midwest and up along the Canadian border, creating the opportunity to ferry grain, chemicals, energy products, cars and consumer goods seamlessly between the three countries.
If the deal is approved by regulators, the more efficient railroad would be in a stronger position to take market share from the trucking industry. It could also change the freight calculus for companies contemplating moving parts of their supply chains into North America.
“The pandemic has taught us that global extended supply chains involve greater risk than perhaps a lot of industrial companies are willing to tolerate and I do believe that there is a trend in supply-chain strategy to shrink and de-risk those supply chains,” Kansas City Southern Chief Executive Officer Patrick Ottensmeyer said on a call to discuss the deal. “This network is not only going to be in a position to benefit from those trends, but actually help drive those trends.”
He made that comment on Sunday, several days before strong winds battered the Ever Given container ship and caused the vessel to run aground in the Suez Canal. Caterpillar Inc. is among the companies facing shipping delays because of the blockage.
The heavy-machinery maker is anticipating a lag of a week or more in shipments from Asia to its facilities in Europe and may even airlift products if the logjam gets bad enough, a person familiar with the matter told Bloomberg News.
But even before the Suez Canal situation, freight costs were soaring as a stronger-than-expected recovery for everything from home goods to automobiles and now industrial parts disrupted the normal flow of ships between the U.S. and China and created a shortage in available container space in the places where it’s needed.
This time last year, the problem wasn’t a lack of ships to carry goods; it was the pandemic’s regional rolling lockdowns, which resulted in shuttered factories and made the practice of zig-zagging components across borders untenable. Before that, the underlying infrastructure of the globalized supply chain was working just fine but the Trump administration had made the strategy more expensive through tariffs.
This pileup of supply-chain pileups has sparked plenty of panicked alarm — some of it justified, some of it not. Many of these disruptions are short-term in nature. The canal will get unblocked, eventually. The wild, unpredictable swings in demand wrought by the pandemic will settle as the crisis subsides, with freight and factory capacity catching up to orders and balancing out over time, likely by the second half of this year.
“It’s very possible, let’s put it that way, that you will see bottlenecks emerge and then clear over time,” Federal Reserve Chairman Jerome Powell said at a press conference earlier this month. “These are not permanent. It’s not like the supply side will be unable to adapt to these things.” But it’s hard to think of a moment in modern memory when the process of getting parts and goods across oceans and borders has been so fraught with pitfalls. That has consequences.
“Part of the problem is the same strategies that allow companies to cut costs will increase their risk,” David Simchi-Levi, a professor of engineering at the Massachusetts Institute of Technology who focuses on supply-chain management, said in an interview last month.
“It’s not about switching from what they did to something different. It’s about finding the right balance between efficiency and resilience.” Mexico is in that sweet spot.
The country isn’t without political and regulatory risks: during the early months of the pandemic, many American manufacturers complained of a harsher approach to factory lockdowns across the border than in the U.S.
But labor costs are competitive with, if not lower than, those in China and the recently renegotiated North American free trade agreement cleared up the tariff issue. Kansas City Southern gets almost half of its revenue from Mexico.
I’ve been skeptical that reshoring manufacturing work back to North America will be some kind of megatrend, but that’s partly because there’s a misconception around what a reshoring trend really looks like. For select products such as medical gear and semiconductors, domestic factory lines have become a national priority and we can expect high-profile announcements in the vein of Intel Corp.’s pledge this week to spend $20 billion on two new chip factories in Arizona.
But most large industrial manufacturers have for years championed localizing production near the point of consumption. Their focus is likely to be more about making sure their smaller suppliers adopt a similar mindset and have multiple ways of delivering an order. Supply chains also don’t have to be an either China or North America situation.
“I see more companies focusing on a combination of global and local,” Simchi-Levi said. “For certain products, they have a localized strategy and are manufacturing in a specific region, but there are products where it’s important to benefit from economies of scale and you want a globalized manufacturing supply chain with low-cost strategies.”
These potential shifts would be a boon to a railroad that could single-handedly shuffle goods up and down North America. Perhaps that’s why Canadian Pacific was willing to pay so dearly for Kansas City Southern.
The $275-a-share stock-and-cash bid values the railroad at a 23% premium to where the shares settled before the deal announcement — itself a fresh record amid a stock market rally for industrial companies that’s defied both the pandemic and more recent inflation concerns.
Canadian Pacific will first have to persuade regulators to approve the Kansas City Southern deal before it can realize this dream of a U.S.-Canada-Mexico railroad. That’s no small feat. There hasn’t been a successful major North American railroad takeover since Warren Buffett’s Berkshire Hathaway Inc. acquired Burlington Northern Santa Fe for more than $35 billion in 2010. You have to go all the way back to the late 1990s to find a combination of two Class I railroads.
That’s because the Surface Transportation Board — the primary regulatory body for railroads — enacted tougher antitrust rules in 2001 that required companies to prove mergers would bolster competition, improve service for customers and serve a public interest.
Kansas City Southern was exempted from those rules because it’s the smallest of the major railroads. But it’s not clear if that exemption will stick in today’s environment, with the Biden administration signaling a skeptical stance toward the impact of consolidation on the broader economy. Another railroad can also ask for a Kansas City Southern merger to be subject to the higher standards.
Canadian Pacific and Kansas City Southern seem to be preparing for this possibility. They have couched the deal in environmentally friendly terms: railroads throw off significantly less carbon emissions than trucks, so any deal that helps persuade shippers to move freight off of highways and onto tracks is also good for the climate.
The companies are also using a unique voting trust deal structure that allows for the transaction to close on a financial basis for shareholders in the second half of this year — well ahead of the mid-2022 timeline currently expected for antitrust signoff.
The benefit of this arrangement is that it removes the threat of a long antitrust review as a barrier to shareholder approval. It also keeps a more level playing field between Canadian Pacific and other would-be acquirers of Kansas City Southern. Recall that private equity firms Blackstone Group Inc. and Global Infrastructure Partners tried to buy the railroad last year. The regulatory hurdles for such a takeover are much lower.
Ametek Inc. agreed to acquire Abaco Systems Inc., a maker of computers and avionics systems for the aerospace and defense industry, for $1.35 billion. Abaco is the former GE Intelligent Platforms, which was acquired by Veritas Capital in 2015 for an undisclosed sum. It’s the largest deal for the acquisitive Ametek.
The company is one of a handful of M&A compounders in the industrial sector: it boosts its value through high-returning takeovers and then uses those returns to invest in more takeovers. The Abaco deal fits with Ametek’s plan to replicate this model with a larger target and to increase its exposure to growth themes and higher-technology products, Melius Research analyst Rob Wertheimer wrote in a note.
Leonardo SpA canceled the planned initial public offering of its U.S.-based DRS defense electronics unit after failing to get the price it wanted. Leonardo said it would revisit the offering when market conditions were more favorable, but shares of the company sank on the news. Low-cost airline Frontier Group Holdings Inc. looks set to have more luck. The company plans to price its initial public offering at $19 to $21 a share, raising as much as $315 million.
Supply-Chain Software Provider Blue Yonder Weighs IPO
Filing comes as global disruptions bring greater attention, investment to suppliers of logistics-technology tools.
Software company Blue Yonder Holding Inc. is planning to go public, the latest technology provider to look at a public stock offering as pandemic-driven upheaval in supply chains draws more interest to tools that help companies manage the flow of goods.
Blue Yonder said Friday it has confidentially filed paperwork with the Securities and Exchange Commission for a proposed initial public offering. The Scottsdale, Ariz., supply-chain software provider said the number of shares and the price range for the potential offering haven’t been determined.
Blue Yonder is the sponsor of The Logistics Report.
Japanese electronics maker Panasonic Corp. last year took a 20% stake in Blue Yonder, deepening the companies’ relationship as they jointly develop digital technology for managing logistics, retail and manufacturing operations.
Data-research group Gartner Inc. ranked Blue Yonder last year as the world’s third-largest provider in the supply-chain-management software market, based on 2019 revenue, behind SAP SE and Oracle Corp.
The company’s potential IPO comes as investors are pushing millions of dollars into logistics-technology companies that help manage operations including sourcing, shipping and tracking amid a series of supply-chain disruptions around the world.
The attention to such tools grew as companies retooled production at the onset of the coronavirus pandemic and has continued as port congestion, commodities shortages, transport capacity squeezes and other shocks have hit business.
Blue Yonder customers with shipments snared when the Ever Given container ship blocked the Suez Canal last month, for example, used the company’s software to assess inventory levels and help with contingency plans such as air transport to get goods around the bottleneck.
Chicago-based project44, which helps track the flow of goods in transit, is weighing a potential public stock offering in the next 18 to 24 months. Supply-chain software provider E2open went public earlier this year through a deal with a special-purpose acquisition company. The transaction closed in February and the merged company, E2open Parent Holdings Inc., is now trading on the New York Stock Exchange.
Snarled Supply Chain Trips Up Small Businesses
Facing shortages of products from steel tubing to storage drums, business owners look for ways to limit the damage; $8,000 to fly in T-shirts.
An Oklahoma restaurant is paying nearly $200 for a case of gloves that normally costs $40. A medical-device maker in Colorado is tweaking the way it manufactures its products to offset higher plastic costs. A clothing wholesaler in Michigan has hundreds of hoodies it has yet to sell because winter was over by the time they arrived from Bangladesh.
The supply-chain disruptions rippling across the business world are taking a heavy toll on small U.S. companies, which have fewer resources to absorb or push back on price increases and less leverage to pass along the higher costs to customers.
Forty-four percent of small businesses reported temporary shortages or other supply-chain problems in March, according to a survey of roughly 800 companies by Vistage Worldwide Inc., a business advisory firm. A U.S. Census Bureau survey of small businesses, completed in early April, found supply-chain disruptions in wholesale trade, manufacturing and construction, among others.
Multiple forces are driving supply-chain woes, from coronavirus infections among employees and temporary business closures to increased demand as vaccines take hold and restrictions ease. A backlog at California ports, the temporary closure of the Suez Canal and weather-related problems have created additional challenges. Smaller companies typically have less sophisticated purchasing departments than larger corporations.
Nitrile gloves have been particularly hard to come by for Evan Kelamis, owner of Savoy, a Tulsa, Okla., restaurant with 35 employees. Some restaurant suppliers no longer stock the gloves; a case of 1,000 that sold for $40 before the pandemic now fetches as much as $185—if you can even buy them.
Mr. Kelamis says buying from local vendors and stockpiling has helped Savoy navigate shortages of pork, chicken and beef. He worries demand for bacon and other ingredients will jump as more restaurants reopen. “Seventy percent of bacon consumption is in a restaurant setting,” he said. “It’s one of the concerns we are preparing for.”
The current mismatch between supply and demand is a sharp turnabout for some companies. Resin distributor PolySource LLC had plenty to sell a year ago, said Grant John, chief executive of the Independence, Mo.-based company. “This year, you have the opposite,” he said.
PolySource, which sources half its products from North America and the rest from Asia, has created a color-coded guide to wait times for materials and substitute materials to help its 23-person workforce meet customers’ needs.
Prices have jumped for many in-demand materials. “If a steel supplier has even a little supply, they are raising prices knowing it will be difficult for them to replenish their stock,” said Matt Erfman, chief executive of Dakotaland Manufacturing, a Sioux Falls, S.D., contract metal manufacturer with about 150 employees. “It’s almost a straight-upward trajectory.”
Suppliers recently quoted Dakotaland a price of $1.10 a pound for 4-by-3-inch steel tubing that sold for 45 cents a pound last summer, said Mr. Erfman.
Dakotaland’s contracts allow it to pass along increased costs quarterly to major customers, but delays in raising prices have squeezed profit margins. “Hopefully, it washes out when things turn the other way,” Mr. Erfman said. “At this point, we don’t know when that might be.”
Sealstrip Corp., a Gilbertsville, Pa., maker of packaging products, has struggled to find steel storage drums and resins for manufacturing plastic films used in flexible packaging. Larger suppliers have boosted prices; some have invoked force majeure clauses that let them exit contracts due to unforeseen circumstances. Even wooden pallets for shipping are hard to find.
The cost of lumber to build crates and pallets has climbed by 50% to 100%, said Heather Chandler, president of the 40-person company, which sells resealable tape, machinery and other packaging supplies to big consumer-products companies.
“One of the biggest challenges of being a small company is we buy from billion-dollar companies and sell to billion-dollar companies,” making it difficult to fend off price increases or pass them on to customers, she said.
Transportation backlogs add to the headaches. It recently took five days for a pallet of adhesive tape to travel from Sealstrip’s Gilbertsville factory to a customer’s facility, about a two-hour drive away. “Things are sitting in freight depots because they are short on staff,” Ms. Chandler said.
Delays can be particularly troublesome for small businesses selling seasonal goods. B&S Activewear LLC, a Warren, Mich., clothing wholesaler, was still receiving shipments of zip-up hoodies and other winter apparel from Bangladesh in April, roughly two months later than expected.
B&S has tried to speed up delivery by shipping goods via UPS Air Freight, at a cost of $8,000 for 72 boxes of T-shirts, more than 10 times the cost of sending the same items by boat. The year-old company sold most of the apparel at break-even after a prospective customer rejected the goods due to the delay, said Steven Gasparovic, the company’s director of U.S. operations.
Though smaller companies may have less sophisticated purchasing departments, they can sometimes be more agile.
MedSafety Solutions, a Centennial, Colo., maker of medical devices, began re-engineering its processes to reduce costs after supply shortages fueled cost increases of 10% or more for plastics used in the manufacture of needle products. “We are using investment dollars to improve efficiencies,” said Steve van Engen, chief executive of the 14-person company.
Other small companies are boosting inventory. After the 2020 hurricane season, assembly company Automation Systems LLC ordered an extra 20,000 pounds of plastic pellets, normally enough to last the Melrose Park, Ill., company nine months. One month later, prices surged due to the Texas freeze.
“They were jacking prices through the roof,” owner Carl Schanstra said. “I did it as a stability measure.” Mr. Schanstra has also placed blanket orders for steel, foam and other materials as much as 12 months ahead, instead of a more typical lead time of six months. Ordering early allows the 45-person company to lock in supply, but leaves little room to fine-tune orders or address concerns.
Truckers Expect U.S. Supply Chain Crunch To Persist
Freight demand in a surging American economy is growing well ahead of truck availability, pushing up shipping costs.
Freight industry executives expect a squeeze on trucking capacity that has been driving up shipping costs for U.S. companies to persist through the rest of the year, as strong demand in a rebounding American economy collides with a shortfall in truck availability.
“There’s more freight than trucks, or maybe I should say, than drivers,” David Menzel, chief operating officer at freight broker Echo Global Logistics Inc., said in an earnings call Wednesday. “The ports are backlogged, demand is strong, so rates are high. On the other hand, shippers are dealing with high rates, tight capacity and disrupted supply chains.”
Manufacturers and retailers including General Mills Inc., Rubbermaid-owner Newell Brands Inc. and Bed Bath & Beyond Inc. have pointed in recent quarterly earnings reports to rising transport costs and tight capacity as operational hurdles as they seek to restock inventories and meet strong consumer demand.
“We continue to be operating in a very disruptive environment because of container shortages coming from Asia, port congestion, trucking shortages,” Chris Peterson, finance chief and business operations president of Newell, whose portfolio includes Sharpie pens and outdoor brand Coleman, said in a Friday earnings call.
“We do expect it to be a difficult supply operating environment for the rest of the year,” Mr. Peterson said.
Trucking fleets have been stepping up equipment orders and raising driver pay as they compete for labor with industries such as construction. But those efforts still haven’t caught up with demand as the freight market roars back in an expanding economy.
Operators say the shortfall could deepen if cargo volumes remain high without a pause before the busy holiday shipping peak.
“The network itself is just so fragile right now,” Bob Biesterfeld, chief executive of C.H. Robinson Worldwide Inc., the largest freight broker in North America, said in an interview. If there are more disruptions like the severe weather that roiled supply chains in the first quarter, “we could see some pretty chaotic overall truckload freight markets.”
The most recent Cass Information Systems Inc. seasonally adjusted index for U.S. freight demand rose 3.4% from February to March while the separate measure for freight expenditures rose nearly twice as fast, at 6.5%, signaling rapid growth in shipping costs.
Mr. Biesterfeld said constraints include the global semiconductor shortage, which is limiting new truck production. He cited data from transportation data provider ACT Research predicting that net Class-8 trucking capacity would grow by 3% to 3.5% this year, while C.H. Robinson expects truckload volumes to increase by 8% to 12%.
“It’s just been this constant increase in the cost of purchased transportation at a rate that’s really something that we’ve never seen,” Mr. Biesterfeld said. “It’s just been this whipsaw effect to the overall market…We just haven’t been able to find equilibrium.”
The scramble for capacity has been a boon to middlemen like Minneapolis-based C.H. Robinson that connect retailers and manufacturers to thousands of truckers, including small operators and independent drivers.
C.H. Robinson’s overall first-quarter revenue rose 26.3% to $4.8 billion, including a 13.7% gain in its North American Surface Transportation segment. The cost per mile for truckload freight surged 33.5% in the quarter compared with the same period in 2020, accelerating after year-over-year increases of 32.5% and 16.5% in the previous two quarters.
Rival Echo Global reported a 45.3% climb in quarterly revenue to $800.8 million compared with the same period in 2020.
Most big trucking companies so far aren’t suggesting much more capacity is on the way in the coming months.
Green Bay, Wis.-based truckload carrier Schneider National Inc. scaled back a year-end goal of returning its over-the-road fleet to 6,000 trucks after numbers fell last year due to hiring challenges. Chief Executive Mark Rourke said in an earnings call Thursday that capacity constraints and other “alternative opportunities for growth” made 5,500 “a more appropriate target.”
Schneider beat analyst expectations for first-quarter earnings, and logged a 49% increase in revenue in its logistics business unit connecting shippers with third-party truckers.
Freight brokerage also helped drive first-quarter gains at Werner Enterprises Inc., a large Omaha, Neb.-based carrier. The company reported 23% revenue growth in its logistics segment compared with the same period in 2020, while overall revenue rose 4% to $616.4 million.
“We know how tight this market is,” Werner Chief Executive Derek Leathers said in a Wednesday earnings call. “I don’t think that you’re going to see any capacity relief coming in 2021.”
Auto Makers Retreat From 50 Years of ‘Just in Time’ Manufacturing
Pressured by pandemic, the hyperefficient supply-chain model pioneered by Toyota, is under assault.
Toyota Motor Corp. is stockpiling up to four months of some parts. Volkswagen AG is building six factories so it can get its own batteries. And, in shades of Henry Ford, Tesla Inc. is trying to lock up access to raw materials.
The hyperefficient auto supply chain symbolized by the words “just in time” is undergoing its biggest transformation in more than half a century, accelerated by the troubles car makers have suffered during the pandemic. After sudden swings in demand, freak weather and a series of accidents, they are reassessing their basic assumption that they could always get the parts they needed when they needed them.
“The just-in-time model is designed for supply chain efficiencies and economies of scale,” said Ashwani Gupta, Nissan Motor Co.’s chief operating officer. “The repercussions of an unprecedented crisis like Covid highlight the fragility of our supply-chain model.”
Consider Ford Motor Co. and its F-150 pickup, the bestselling vehicle in the U.S. The latest version is crammed with technology including a hybrid gas-electric drive and automatic Tesla-style software updates.
With vaccinations beginning to beat back Covid-19, customers bought around 200,000 F-150s in the first quarter of this year, its best retail start in 13 years. Yet now supply is short. Truck factories were shut down or had limited production for all of April and the slowdown will likely continue through at least mid-May. The hit to pretax profit is as much as $2.5 billion.
The basic idea of just in time is avoiding waste. By having suppliers deliver parts to the assembly line a few hours or days before they go into a vehicle, auto makers don’t pay for what they don’t use. They save on warehouses and the people to manage them.
But as supply chains get more global and car makers increasingly rely on single suppliers, the system has grown brittle. The crises are more frequent.
A freak snowstorm in Texas in mid-February shut down a refinery that feeds production of 85% of resins produced in the U.S. Those resins go into components from car bumpers to steering wheels. They’re some of the least expensive raw materials in a car, but they go into seat foam, and dealers can’t sell a car without seats.
At the end of March, Toyota shut down production at several U.S. plants as a result of the shortage, according to a schedule seen by The Wall Street Journal, hitting production of some of its bestsellers, including the RAV4 sport-utility vehicle.
Some suppliers are flying in resin to the U.S. from Europe, said Sheldon Klein, a lawyer at the firm Butzel Long who advises suppliers. “That’s just economically crushing,” he said. “At best you have very sharp-elbow discussions with your customer about shouldering some of the cost.”
Executives say they don’t want to replace just in time entirely, because the savings are too great. But they are moving to undo it to some degree, focusing on areas of greatest vulnerability. They are seeking to stockpile more critical parts, especially if they are light and relatively inexpensive yet irreplaceable like semiconductors.
Ford’s chief executive, Jim Farley, said he was looking at keeping more inventory.
“Most other industries use safety stock for critical components like chips,” he said at an event hosted by Automotive News. “And many of these companies pay for chips upfront, years and years ahead of the capacity requirements.”
Three decades in the car business hadn’t prepared Mr. Farley for this year. “It’s shocking to me how much I’ve learned about the supply base,” he said.
The shift to electric vehicles is adding pressure on car makers to rethink a half-century of automotive history, because these vehicles make heavy use of parts in the shortest supply, including lithium-ion batteries and semiconductors.
General Motors Co. and partner LG Chem Ltd. are building a $2.3 billion factory in Ohio and scouting a location for a second factory with the aim of producing enough batteries for hundreds of thousands of electric vehicles a year. Volkswagen, with its plans for six joint-venture battery factories, says it will order an additional $14 billion in batteries through 2030.
The companies are taking a page from the playbook of Tesla, which in turn was influenced by Silicon Valley. Tesla built a $5 billion battery factory called the Gigafactory in the Nevada desert with Panasonic Corp.
Of course, securing a direct battery supply doesn’t solve every supply-chain issue. Even the most futuristic EV will still need plastic for floor mats, rubber for tires and leather or cloth for the seats.
Still, Tesla is trying to identify the most strategic materials and procure them on its own, a job that under traditional just-in-time production was left to suppliers. In September it signed a deal that would give it access to lithium from a mine in North Carolina under development.
Tesla chief Elon Musk said last year he wanted to buy nickel directly too. “Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way,” he said.
Mr. Musk’s push into raw materials brings the car industry back a century, to the days when Henry Ford’s assembly line was a forerunner in manufacturing techniques.
In the 1920s, the state of the art at Ford was vertical integration, or control of all the things needed to make a car. Its Rouge River plant in Dearborn, Mich., made not just cars but the steel for the cars, which was forged from the output of Ford’s iron mines.
After Henry Ford died, the company sold off its docks and steel forges. It was more efficient, car makers decided, to leave the business of steel, rubber and shipping to the companies that knew those businesses best. Making a car became more about purchasing the right parts and materials and assembling them.
Toyota pioneered the next step. One day in 1950, Toyota executive Taiichi Ohno visited an American supermarket and marveled how the shelves were restocked as they were emptied, as Jeffrey Liker recounts in his book “The Toyota Way.” Shoppers were kept happy even though the supermarket had only small storerooms. It was the polar opposite of the car industry where warehouses were kept full of sheet metal and tires to ensure the assembly line never shut down.
Supermarkets had little choice, since they couldn’t stockpile bananas for months. Still, Mr. Ohno reasoned, their practices eliminated waste and cut costs. Toyota would only pay for what it needed to produce cars for a day. That meant they could make do with smaller factories and warehouses.
Thus emerged the system later known as just in time. Each day a stream of trucks would pull up to Toyota’s factories and disgorge just enough to cover a day’s worth of production.
It was easier for Toyota to pull off, thanks to the coterie of loyal suppliers known as its keiretsu clustered around its factories.
U.S. competitors were wary at first, but the system proved so efficient that every car maker from Detroit to Wolfsburg adopted a version. Ford set up the Ford Production System to match the one named after Toyota. Top suppliers did too, for their own suppliers lower down the pyramid.
The idea spread through other industries. Apple Inc., McDonald’s Corp. franchises and big box stores like Target Corp. all use some form of just in time to keep inventory low.
A sister idea to just in time was the use of single suppliers for many parts. These suppliers could master the daily dance of deliveries, cut costs through volume and service the global factory networks that the top car makers operate.
Carlos Tavares, the chief executive of Chrysler parent Stellantis, said the company estimated it bought about 400,000 parts for the 100 models in the lineups of Chrsyler, Ram, Fiat, Peugeot and other brands. He said some 95% of those parts come from a single source.
“That’s the norm in the automotive industry,” Mr. Tavares said.
From time to time, events such as the 9/11 terrorist attacks would upend the system, but the industry mostly shrugged its shoulders and carried on because the rewards were too great.
The tide began to turn with the global financial crisis. At least 50 auto suppliers went bankrupt, catching car makers by surprise. When suppliers like Visteon Corp. , a maker of air conditioners, radios and other components, declared bankruptcy, it led to fears that car factories relying on Visteon would also be unable to operate.
A different shock prompted a rethinking of just in time at the company where it started. The 2011 earthquake in northern Japan hit Toyota suppliers including chip maker Renesas Electronics Corp.
Spokeswoman Shino Yamada said that after the quake, the car maker pushed its suppliers to disclose who sells them their components—no mean feat in the auto industry, where suppliers tend to guard their own supply chains in case auto makers use that to push price cuts. Over time, Toyota built a database that it says covers some 400,000 items and reaches as far as 10 layers down.
For certain components, Toyota asked its suppliers to stockpile parts, the antithesis of just in time. The on-hand inventory held by Toyota’s largest supplier, Denso Corp. , rose to around 50 days’ worth of supply in the year ended March 2020, up from 38 days in 2011, according to its financial filings. Denso declined to comment on inventory figures but said it has started keeping emergency stores of parts, especially semiconductors.
Toyota’s efforts have helped it weather this year’s shortages of semiconductors better than many of its rivals, although it wasn’t perfect. The same Renesas factory that got hit a decade ago by the earthquake shut down for a month after a fire in one clean room in March. Despite the help of thousands of employees from Toyota, Nissan and others, the factory won’t fully recover until around July.
Now, just as they once emulated just in time, many car makers are trying to match Toyota’s grasp of its network to catch hidden chokepoints.
“This is where procurement has frankly dropped the ball,” said Bindiya Vakil, chief executive of software maker Resilinc, which helps manufacturers monitor supply-chain shortages. “Time and time again the stuff that brings us to our knees is not the expensive stuff, it’s the tiny stuff that we don’t manage closely.”
The World Economy Is Suddenly Running Low On Everything
‘It is anything but efficient or normal.’ Surging corporate demand is upending global supply chains.
A year ago, as the pandemic ravaged country after country and economies shuddered, consumers were the ones panic-buying. Today, on the rebound, it’s companies furiously trying to stock up.
Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out.
The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.
Copper, iron ore and steel. Corn, coffee, wheat and soybeans. Lumber, semiconductors, plastic and cardboard for packaging. The world is seemingly low on all of it. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said on a call this month.
Clients are “trying to get everything they can because they see high demand,” Jennifer Rumsey, the Columbus, Indiana-based company’s president, said. “They think it’s going to extend into next year.”
The difference between the big crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight. Big or small, few businesses are spared.
Europe’s largest fleet of trucks, Girteka Logistics, says there’s been a struggle to find enough capacity. Monster Beverage Corp. of Corona, California, is dealing with an aluminum can scarcity. Hong Kong’s MOMAX Technology Ltd. is delaying production of a new product because of a dearth of semiconductors.
Further exacerbating the situation is an unusually long and growing list of calamities that have rocked commodities in recent months. A freak accident in the Suez Canal backed up global shipping in March. Drought has wreaked havoc upon agricultural crops.
A deep freeze and mass blackout wiped out energy and petrochemicals operations across the central U.S. in February. Less than two weeks ago, hackers brought down the largest fuel pipeline in the U.S., driving gasoline prices above $3 a gallon for the first time since 2014. Now India’s massive Covid-19 outbreak is threatening its biggest ports.
For anyone who thinks it’s all going to end in a few months, consider the somewhat obscure U.S. economic indicator known as the Logistics Managers’ Index. The gauge is built on a monthly survey of corporate supply chiefs that asks where they see inventory, transportation and warehouse expenses — the three key components of managing supply chains — now and in 12 months.
The current index is at its second-highest level in records dating back to 2016, and the future gauge shows little respite a year from now. The index has proven unnervingly accurate in the past, matching up with actual costs about 90% of the time.
To Zac Rogers, who helps compile the index as an assistant professor at Colorado State University’s College of Business, it’s a paradigm shift. In the past, those three areas were optimized for low costs and reliability.
Today, with e-commerce demand soaring, warehouses have moved from the cheap outskirts of urban areas to prime parking garages downtown or vacant department-store space where deliveries can be made quickly, albeit with pricier real estate, labor and utilities. Once viewed as liabilities before the pandemic, fatter inventories are in vogue. Transport costs, more volatile than the other two, won’t lighten up until demand does.
“Essentially what people are telling us to expect is that it’s going to be hard to get supply up to a place where it matches demand,” Rogers said, “and because of that, we’re going to continue to see some price increases over the next 12 months.”
More well-known barometers are starting to reflect the higher costs for households and companies.
An index of U.S. consumer prices that excludes food and fuel jumped in April from a month earlier by the most since 1982. At the factory gate, the increase in prices charged by American producers was twice as large as economists expected. Unless companies pass that cost along to consumers and boost productivity, it’ll eat into their profit margins.
A growing chorus of observers are warning that inflation is bound to quicken. The threat has been enough to send tremors through world capitals, central banks, factories and supermarkets. The U.S. Federal Reserve is facing new questions about when it will hike rates to stave off inflation — and the perceived political risk already threatens to upset President Joe Biden’s spending plans.
“You bring all of these factors in, and it’s an environment that’s ripe for significant inflation, with limited levers” for monetary authorities to pull, said David Landau, chief product officer at BluJay Solutions, a U.K.-based logistics software and services provider.
Policy makers, however, have laid out a number of reasons why they don’t expect inflationary pressures to get out of hand. Fed Governor Lael Brainard said recently that officials should be “patient through the transitory surge.”
Among the reasons for calm: The big surges lately are partly blamed on skewed comparisons to the steep drops of a year ago, and many companies that have held the line on price hikes for years remain reticent about them now. What’s more, U.S. retail sales stalled in April after a sharp rise in the month earlier, and commodities prices have recently retreated from multi-year highs.
Caught in the crosscurrents is Dennis Wolkin, whose family has run a business making crib mattresses for three generations. Economic expansions are usually good for baby bed sales. But the extra demand means little without the key ingredient: foam padding.
There has been a run on the kind of polyurethane foam Wolkin uses — in part because of the deep freeze across the U.S. South in February, and because of “companies over-ordering and trying to hoard what they can.”
“It’s gotten out of control, especially in the past month,” said Wolkin, vice president of operations at Atlanta-based Colgate Mattress, a 35-employee company that sells products at Target stores and independent retailers. “We’ve never seen anything like this.”
Though polyurethane foam is 50% more expensive than it was before the Covid-19 pandemic, Wolkin would buy twice the amount he needs and look for warehouse space rather than reject orders from new customers. “Every company like us is going to overbuy,” he said.
Even multinational companies with digital supply-management systems and teams of people monitoring them are just trying to cope. Whirlpool Corp. CEO Marc Bitzer told Bloomberg Television this month its supply chain is “pretty much upside down” and the appliance maker is phasing in price increases. Usually Whirlpool and other large manufacturers produce goods based on incoming orders and forecasts for those sales. Now it’s producing based on what parts are available.
“It is anything but efficient or normal, but that is how you have to run it right now,” Bitzer said. “I know there’s talk of a temporary blip, but we do see this elevated for a sustained period.”
The strains stretch all the way back to global output of raw materials and may persist because the capacity to produce more of what’s scarce — with either additional capital or labor — is slow and expensive to ramp up. The price of lumber, copper, iron ore and steel have all surged in recent months as supplies constrict in the face of stronger demand from the U.S. and China, the world’s two largest economies.
Crude oil is also on the rise, as are the prices of industrial materials from plastics to rubber and chemicals. Some of the increases are already making their ways to the store shelf. Reynolds Consumer Products Inc., the maker of the namesake aluminum foil and Hefty trash bags, is planning another round of price increases — its third in 2021 alone.
Food costs are climbing, too. The world’s most consumed edible oil, processed from the fruit of oil palm trees, has jumped by more than 135% in the past year to a record. Soybeans topped $16 a bushel for the first time since 2012. Corn futures hit an eight-year high while wheat futures rose to the highest since 2013.
A United Nations gauge of world food costs climbed for an 11th month in April, extending its gain to the highest in seven years. Prices are in their longest advance in more than a decade amid weather worries and a crop-buying spree in China that’s tightening supplies, threatening faster inflation.
Earlier this month, the Bloomberg Commodity Spot Index touched the highest level since 2011.
A big reason for the rally is a U.S. economy that’s recovering faster than most. The evidence of that is floating off the coast of California, where dozens of container ships are waiting to offload at ports from Oakland to Los Angeles.
Most goods are flooding in from China, where government figures last week showed producer prices climbed by the most since 2017 in April, adding to evidence that cost pressures for that nation’s factories pose another risk if those are passed on to retailers and other customers abroad.
Across the world’s manufacturing hub of East Asia, the blockages are especially acute. The dearth of semiconductors has already spread from the automotive sector to Asia’s highly complex supply chains for smartphones.
John Cheng runs a consumer electronics manufacturer that makes everything from wireless magnetic smartphone chargers to smart home air purifiers. The supply choke has complicated his efforts to develop new products and enter new markets, according to Cheng, the CEO of Hong Kong-based MOMAX, which has about two-thirds of its 300 employees working in a Shenzhen factory. One example: Production of a new power bank for Apple products such as the iPhone, Airpods, iPad and Apple watch has been delayed because of the chip shortage.
Instead of proving to be a short-lived disruption, the semiconductor crunch is threatening the broader electronics sector and may start to squeeze Asia’s high-performing export economies, according to Vincent Tsui of Gavekal Research. It’s “not simply the result of a few temporary glitches,” Tsui wrote in a note. “They are more structural in nature, and they affect a whole range of industries, not just automobile production.”
In an indication of just how serious the chips crunch is, South Korea plans to spend roughly $450 billion to build the world’s biggest chipmaking base over the next decade.
Meanwhile, running full tilt between factories and consumers are the ships, trucks and trains that move parts along a global production process and finished goods to market. Container vessels are running at capacity, pushing ocean cargo rates to record highs and clogging up ports. So much so that Columbia Sportswear Co.’s merchandise shipments were delayed for three weeks and the retailer expects its fall product lineup will arrive late as well.
Executives at A.P. Moller-Maersk A/S, the world’s No. 1 container carrier, say they see only a gradual decline in seaborne freight rates for the rest of the year. And even then, they don’t expect a return to the ultra-cheap ocean cargo service of the past decade. More capacity is coming in the form of new ships on order, but they take two or three years to build.
HSBC trade economist Shanella Rajanayagam estimates that the surge in container rates over the past year could raise producer prices in the euro zone by as much as 2 percent.
Rail and trucking rates are elevated, too. The Cass Freight Index measure of expenditures reached a record in April — its fourth in five months. Spot prices for truckload service are on track to rise 70% in the second quarter from a year earlier, and are set to be up about 30% this year compared with 2020, Todd Fowler, a KeyBanc Capital Markets analyst, said in a May 10 note.
“We expect pricing to remain elevated given lean inventories, seasonal demand and improving economic activity, all of which is underpinned by capacity constraints from truck production limitations and driver availability challenges,” Fowler said.
“Most modes of freight transportation have pricing power. Supply-demand imbalances should help keep rates high, albeit they should moderate for current unsustainable levels as supply chains improve. This is stressing networks, creating bottlenecks in the supply chains and capacity constraints.”
–Lee Klaskow, senior analyst
For London-based packaging company DS Smith Plc, challenges are coming from multiple sides. During the pandemic, customers rushed to online purchases, raising demand for its ePack boxes and other shipping materials by 700%. Then came the doubling of its supply costs to 200 euros ($243) a ton for the recycled fiber it uses to make its products.
“That’s a significant cost” for a company that buys 4 to 5 million tons of used fiber annually, said Miles Roberts, DS Smith’s group chief executive, who doesn’t see the lockdown-inspired web purchasing as a temporary trend. “The e-commerce that has increased is here to stay.”
At Colgate Mattress, Wolkin used to be able to order foam on Mondays and have it delivered on Thursdays. Now, his suppliers can’t promise anything. What’s clear is he can’t sustain the higher input costs forever and still maintain quality. “This is kind of a long-term issue,” Wolkin said.
“Inflation is coming — at some point, you’ve got to pass this along.”
Good Luck Finding A Cheap Rental Car This Summer
Supply and demand are out of whack and that means higher prices for holidaymakers.
Thinking of booking a European holiday this summer? If virus testing, vaccination rules and border restrictions seem difficult, wait until you try to find a rental car.
As countries reopen following the pandemic, disrupted supply chains have created shortages of a host of products and services, fanning fears about consumer price inflation. Rental cars are a case in point.
They’re now in such short supply that if everyone opts for a foreign beach vacation this year, they’ll end up paying a fat premium for a vehicle — if they can find one at all. The market leader on this side of the Atlantic, Europcar Mobility Group, says leisure pricing could be “quite healthy” this year. Translation: Prices are going up.
While holidaymakers’ budget misery means happiness for the recovering rental giants, this situation is almost certainly temporary. Pricing will return to normal at some point.
The price mechanics are pretty straightforward. When the pandemic started, rental-car companies’ revenues collapsed and they offloaded vehicles to protect their balance sheets. Europcar and Hertz Global Holdings Inc. filed for creditor protection in order to restructure their debts. Most big operators have about a third fewer vehicles than they did a year ago and some international fleets have shrunk even more.
These companies are accustomed to adjusting their fleets to match demand. They usually start buying more cars around this time of year to cater to the summer surge in the northern hemisphere.
However, getting hold of new vehicles has become far more difficult because of the semiconductor shortage affecting the auto industry. Some carmakers are prioritizing deliveries to retail customers rather than rental-fleet buyers because they make more money that way. After a year of setbacks, the rental firms are also wary of adding back too many cars and getting stuck with too much capacity again.
People booking trips at short notice are also making it difficult for the rental industry to get the supply-demand balance right. Europcar says customers are reserving just three days in advance on average, so there’s little visibility on future demand. When the company places a vehicle order, it usually takes about three months before the cars are delivered. It’s that lag time that spells potential misery for holidaymakers.
While there are already reports of soaring rental prices in Majorca, where Germans have been able to travel to since March, in most parts of Europe cross-border travel is only now starting up again. For a glimpse of what might happen, though, just look at the U.S., where vaccinations took off more quickly and the rental car price apocalypse is already in full swing. Vacationers in Hawaii have reportedly resorted to renting cheaper U-Haul trucks.
The industry turnaround has been so dramatic that Hertz’s shareholders will receive a payout when the company exits Chapter 11 — unusual in these types of situation. Avis Budget Group Inc.’s shares have surged 10-fold since last year’s low, and its domestic profitability is at a record level for this time of year.
Rental firms are trying to catch up by buying second-hand vehicles or holding on to their existing fleets for longer (their vehicles haven’t been driven much in the past year, so this doesn’t necessarily mean compromising on quality).
Expanding the range of vehicle suppliers is another option. Last summer Corsica took delivery of dozens of electric rental vehicles produced by little-known Chinese manufacturer Aiways.
The question for investors is whether a profit recovery can be sustained. While the pandemic forced these companies to tackle bloated costs, and a handful of brands controls the vast majority of the market, price wars are a perennial risk once car supply is no longer constrained.
The advice for customers is simple: Book as early as you can (some price-comparison sites offer free cancellation), check availability before you purchase flights or consider a taxi. If not, be prepared for a long line at the rental counter.
Food Supply Chains Are Stretched As Americans Head Back To Restaurants
Shortages of key ingredients and labor are troubling suppliers as refrigerated transportation costs also surge.
Americans are returning to restaurants, bars and other dining places as Covid-19 restrictions come down, adding new strains in food supply chains.
Suppliers and logistics providers say distributors are facing shortages of everyday products like chicken parts, as well as difficulty in finding workers and surging transportation costs as companies effectively try to reverse the big changes in food services that came as coronavirus lockdowns spread across the U.S. last year.
“Over the last six weeks, we have seen the market come roaring back faster than anybody would have anticipated,” said Mark Allen, chief executive of the International Foodservice Distributors Association. “The start up has been, in many ways, as difficult as the shutdown…Everybody is trying to turn it on immediately and the capacity might not be there.”
Kerry Byrne, president of Total Quality Logistics LLC, a Cincinnati-based freight broker with a large portfolio of business serving food-processing companies and distributors, said shortages of raw materials are leading to erratic deliveries of items that usually arrive on predictable schedules.
“That disrupts entire supply chains. Everything is stressed,” he said.
The food sector is seeing a version of what supply-chain experts call the bullwhip effect, where companies that have pulled back their operations seek to rapidly scale up on signs of improving demand, leaving suppliers scrambling to keep up.
Food suppliers allocated more capacity to retail customers like grocery chains during the pandemic, Mr. Allen said, leaving distributors short of some products as restaurants and institutional food-service operations open back up.
Demand has changed too. Restaurants that remained open slimmed down their menus during the pandemic and shifted from fresh ingredients for salad bars and buffets to using more prepackaged foods for takeout and delivery operations. Manufacturers cut down on product range, offering fewer varieties of breaded chicken tenderloins, for example, while meat processors reduced production output to meet Covid-19 safety standards.
One regional burrito chain that normally received three shipments of boneless, skinless chicken thighs a week is now “lucky if they get two, and their supplier was out of chicken thighs for three weeks,” Mr. Byrne said.
The shortfalls are turning promotional efforts into a high-wire act for retailers and restaurants. “Companies are putting things on sale or restaurant chains are offering promotions on special items but then they’re not sure they can get the shipments they need to meet the demand,” Mr. Byrne said. “I’ve never seen anything like it, and there are no indications it’s going to let up anytime soon.”
Restaurants, hotels and institutional food-service operations are coping with big price swings on staple ingredients and erratic availability, according to food and beverage consulting firm JPG Resources LLC.
The cost of pepperoni jumped 60% over the past five weeks for one independent pizzeria in Indiana, JPG Managing Director Glenn Pappalardo said. A deli in the state is only getting about 40% of the chicken it has ordered from suppliers, he said, while flour and tofu are out of stock about half the time.
In the past few weeks, menu mainstays like frankfurters and french fries have been in short supply, said Suzanne Rajczi, chief executive of Hudson, N.Y.-based Ginsberg’s Foods Inc., which serves independent restaurant operators in the Hudson Valley and upstate New York.
Her sales team is steering customers to products the company does have in stock—a 6 oz. chicken breast instead of a 4 oz. breast, for example. “We’re trying to buy as much high-volume inventory as we think we can sell,” Ms. Rajczi said, “but we’re still beholden to those manufacturers that are hampered by their production capacity.”
Broader supply-chain upheaval is also hitting food distributors, delaying shipments of overseas products like tuna and olives and holding up delivery of corrugated cardboard and other packaging materials, she said. “We can make salad dressing but we can’t make the bottles to sell the salad dressing.”
The disruptions and changes in delivery patterns are driving up transportation costs because the specialized refrigerated truck trailers needed to transport food are in such high demand or out of position.
The average price on the U.S. spot market for refrigerated truck transport reached $3.09 a mile in early May, up 20.7% from the average rate in February, according to DAT Solutions LLC, which runs a load board connecting trucks to shippers. It was the first time the company had seen the rate surpass $3.
Supply-chain executives say the lack of available workers may be the biggest strain on the sector since the impact cascades from the production facilities to trucking to distribution centers.
“People cannot get the labor back, whether that’s working in the warehouse or somebody with a commercial driver’s license,” Mr. Allen said.
Why Is the Supply Chain Still So Snarled? We Explain, With A Hot Tub
Utah manufacturer Bullfrog Spas depends on a complicated network to bring materials from across continents and oceans. The pandemic put it out of whack.
The global supply chain is an intricate ballet of container ships, airplanes, trucks and trains. The coronavirus pandemic threw it out of whack. This is why you often can’t buy the goods you want.
Hot-tub maker Bullfrog Spas saw demand soar as homebound consumers upgraded their backyards. Yet its supply chain spans thousands of miles across continents and oceans. On a typical day, its Herriman, Utah, factory takes delivery of 40,000 gallons of chemicals, 400 sheets of plastic and up to 60,000 additional components.
“We have the best-case scenario on the demand side and the worst-case on the supply-chain side,” said Bullfrog CEO Jerry Pasley.
Covid-19 infections caused by the Delta variant are adding fresh uncertainty. Supply bottlenecks, especially at ports, continue to delay products of all kinds.
Bullfrog’s M9 spa is one of its most elaborate models. This shows how the company muddled through to get it shipped—most of the time.
This is the M9 model hot tub made by Bullfrog Spas, which has continued operations during the pandemic.
In Utah, its 500 workers assemble around 1,850 parts to make this model. It can take up to six months for a customer to get a hot tub, up from a few weeks before the pandemic. Parts come from seven countries and 14 states, and travel a cumulative 887,776 miles to make one hot tub, the company estimates.
Parts come from as close as a town 80 miles from the company’s Herriman, Utah, assembly site, and from as far as Asia. Some must travel the Panama Canal.
The hot tub’s top shell starts as a flat acrylic sheet from Kentucky. It is combined with another layer of a different type of plastic in Nevada, before getting molded into shape in Utah. Urethane, a common industrial chemical that is sprayed on for rigidity, comes from Georgia.
In February, the winter storm in and around Texas shut down much of the country’s chemical industry, cutting the supply of raw materials used in the Georgia factory to make urethane. Bullfrog employees spent days calling around on behalf of its Georgia supplier, trying to find available tanker-trucks or excess inventory of the chemicals it needed.
Without full supplies of the ingredient, Bullfrog, which wasn’t hit by the storm itself, was forced to cut its production by 75% in March and didn’t resume full capacity until two months later.
A frame system holds up the shell of the hot tub. Individual beams are made by shaping a type of plastic using pressure and heat in Nampa, Idaho. They are driven on trucks to Bullfrog a couple of times a week. During the pandemic, trucking capacity has been in short supply because many trucking companies shut down permanently during the early stages of the pandemic, leading to a capacity crunch when shipping volumes rebounded later in the year.
The company used to get many of its electric motors from Italy, but increasingly gets them from China due to long-term outsourcing trends and decisions by its suppliers. The motors are then assembled into water pumps in Tijuana, Mexico, and trucked to Utah. The pandemic has snarled both container shipping and trucking. Bullfrog and its suppliers now have meetings as much as daily—compared to monthly before the pandemic—to figure out how to get things through.
Material for the exterior cabinets, which wrap around the outside of the hot tub, is made near Shanghai, China, moved across the Pacific on container ships and imported through the ports of Long Beach or Oakland in California, and then trucked to Utah. Port slowdowns in China have stalled the exit of goods, and in California, shortages of staff and equipment have held up unloading. More recently, the crush of catch-up and pre-holiday orders has overwhelmed shippers, and warehouse space is more expensive and harder to come by.
Early this year, a ship carrying the cabinet pieces was held up off the West Coast waiting for a slot to unload—often dozens of ships at a time had to wait for port space. To prevent a plant shutdown, Bullfrog paid to transport cabinet materials from China by plane to the airport in Salt Lake City. When the container-ship parts finally unloaded, Bullfrog had to rent extra warehouse space to house them, adding even more costs.
Touch screens to control temperature are imported from China and Taiwan and assembled in Mexico. A global semiconductor shortage, caused by canceled orders early in the pandemic followed by a surge of orders that caught makers unprepared, as well as a fire at a key Japanese producer, means Bullfrog has almost no excess inventory of the screens. One morning earlier this year, the Herriman plant received just enough electronics to prevent a shutdown that afternoon.
The hot tub’s seat backs, which direct water, start out at one of its closest suppliers. They arrive twice a week from a company 90 minutes away in Logan, Utah. The supplier has had to maintain much higher raw material inventories to keep production running in case of disruptions from chemical shortages.
Water-spraying jets are made in Guangzhou, China, and then imported to the supplier’s warehouse in Cleveland, Tenn., through the Panama Canal and Eastern ports. The canal’s operations have been smoother during the pandemic compared to the Suez Canal, where a container ship ran aground in March and blocked a major segment of global shipping for days. And Eastern ports, which take in less trade from Asia, have been less congested than those on the West Coast.
The finished hot tubs are placed on trucks or trains to be delivered to retailer warehouses and then customers’ homes. Train lines, which are intricately connected to port complexes, have also been struggling with the glut of recent imports, with overwhelmed terminals becoming distribution bottlenecks. The space crunch has led to final-leg delivery delays for customers. Bullfrog’s CEO said it’s the new reality of manufacturing. “The consumer is now programmed that, ‘If I want something, I’m going to have to get it on order,’” Mr. Pasley said.
MetLife’s Matus Says U.S. Economy Needs Supply Chain Fix For Economy To Boom
Two key parts of the economy, the supply chain and the school system, need to be fixed for the U.S. to reach its full post-pandemic potential, says MetLife’s Drew Matus.
“Part of the reason GDP is underperforming is because of the supply-chain issue,” Matus, chief market strategist at MetLife Investment Management, said Thursday in an interview on Bloomberg TV’s Surveillance show. “We need to see the supply chains begin to function well again.”
The pandemic continues to keep many people working from home, constraining production of everything from semiconductors to golf clubs. The resulting shortages are hindering growth, Matus said.
“If you don’t have the product, you can’t sell it,” he said. “So it doesn’t show up in GDP.”
Matus affirmed MetLife’s forecast for annual GDP growth of 5.5%. He spoke hours before the Commerce Department reported inflation-adjusted gross domestic product in the second quarter increased at a 6.6% annualized rate, compared with an initially reported 6.5% and a Bloomberg survey median estimate of 6.7% for the quarter.
A successful reopening of schools also will help determine how fast the economy grows, Matus said. The shift to online learning during the pandemic has kept some parents with young children at home, and crimped sales at businesses linked to the education system.
“The restart of schools is going to be important to the labor market,” he said. “That will improve the labor market situation and the overall health of the economy.”
Conversely, “if schools can’t open and stay open, then we are going to have issues with pulling back potentially millions of workers associated with that, who are having other issues that require schools to be open for them to go to work,” Matus said.
The World’s Shippers Are Earning The Most Money Since 2008
The global shipping industry is getting its biggest payday since 2008 as the combination of booming demand for goods and a global supply chain that’s collapsing under the weight of Covid-19 drives freight prices ever higher.
Whether it’s giant container ships stacked high with of 40-foot steel boxes, bulk carriers whose cavernous holds house thousands of tons of coal, or specialized vessels designed to pack in cars and trucks, earnings are soaring for ships of almost every type.
With the merchant fleet hauling about 80% of world trade, the surge reaches into every corner of the economy. The boom back in 2008 brought with it a huge wave of new vessel orders, but the rally was quickly undone by a demand collapse when a financial crisis triggered the deepest global recession in decades.
This boom’s causes are twofold — an economic reopening after Covid that has spurred surging demand for goods and raw materials. Alongside that, the virus continues to cause disruption in global supply chains, choking up ports and delaying vessels, all of which is limiting how many are available to haul goods across oceans. That’s left the majority of the shipping sector with bumper earnings in recent months.
The bonanza is centered around container shipping — where rates are spiraling ever higher to new records, but it is by no means limited to it. The shipping industry is posting its strongest daily earnings since 2008, according to Clarkson Research Services Ltd., part of the world’s biggest shipbroker. The only laggards are the oil and gas tanker markets, where more bearish forces are at play.
“I’m not really sure the perfect storm covers it — this is just spectacular,” said Peter Sand, chief shipping analyst at trade group Bimco. “It’s a perfect spillover of a red-hot container shipping market to some of the other sectors.”
Container shipping remains the star. It now costs $14,287 to haul a 40-foot steel box from China to Europe. That’s up more than 500% on a year earlier and is pushing up the cost of transport everything from toys to bicycles to coffee.
Those gains are already showing in the earnings of A.P. Moller-Maersk A/S, the world’s largest container line, which hiked its estimated profits this year by almost $5 billion last month.
In a sign of just how profitable the industry has become, CMA CGM SA — the world’s third largest carrier — said it is freezing its spot rates to preserve long-term client relationships. In other words, the company is turning away profit.
While the demand for retail goods is lifting container markets, a recovering global economy is also churning through more raw materials — boosting the revenues of bulk ships that carry industrial commodities. In that sector, earnings recently hit an 11-year high and are showing little sign of abating down the line with consumption expected to remain firm for the rest of the year.
“Strong demand for natural resources combined with Covid-related logistical disruptions” are supporting spot and future freight rates, Ted Petrone, vice chairman at Navios Maritime Holdings, which owns a fleet of bulk carriers, said on an earnings call last week. “Supply and demand fundamentals going forward remain extremely positive.”
Such is the extreme strength across shipping that some bulk carriers have even turned to carrying containers on their decks. Golden Ocean Group Ltd. is among the companies that said it’s looking at the idea. While it could spur additional profits in an already windfall year for owners, its not without its risks as bulk carriers aren’t designed to carry the giant boxes.
“It tells a story about the special situation we are in,” in the container market, Golden Ocean’s chief executive officer Ulrik Andersen said earlier this month.
While for many shipping sectors Covid has brought a boom, for oil tankers it has meant loss-making trades for much of 2021 and owners effectively subsidizing the shipment of crude oil.
With OPEC+ still keeping a chunk of supply offline there are too many ships and too few cargoes, keeping earnings depressed. That has burned one of the hottest trades in the sector at the start of the year — bullish oil tankers positions on the hope of a summer surge in oil demand.
Still, with on land oil inventories declining, analysts continue to anticipate a rebound. Rates could begin to move higher in October as stockpiles dwindle and demand for tankers grows, Pareto Securities analysts including Eirik Haavaldsen wrote in a note to clients.
But for now, the tanker market remains the only blot for an industry where freight capacity ever tightening. The ClarkSea index, which tracks daily earnings across a diverse range of shipping sectors has already posted its longest run of monthly gains on record.
Those bumper earnings are also being seen in more esoteric markets too. Car carriers now cost the most to hire since 2008. Rates for general cargo ships with heavy equipment are also surging, adding to a boom that is being led by container and bulk shipping.
“The charter rates reported in containers are crazy and it’s the same for dry bulk,” said Alexandra Alatari, a shipping analyst at Arrow Shipbroking Group. “The fundamentals are so strong they support rates that would be the peak of any other year.”
Shipping Options Dry Up As Businesses Try To Rebuild From Pandemic
The top six container operators control nearly three-fourths of all ship space, giving cargo owners fewer options; ‘Our hands are tied’.
A wave of shipping consolidation over the past five years is adding to the supply-chain woes caused by Covid-19 outbreaks, further delaying the movement of cargo across the oceans.
A handful of big shipping players control the majority of containers via giant vessels, leaving the world with fewer routes, fewer smaller ships and fewer ports that could keep the flow of goods moving when the pandemic disrupted operations, according to cargo owners and freight forwarders, who secure ship space to move cargo.
The top six container operators control more than 70% of all container capacity, according to maritime data provider Alphaliner. As businesses try to restock after the lifting of the Covid-19 restrictions, they are paying at least four times more to move their products compared with last year and face long delivery delays, industry executives say.
“A few years ago we would get a half-dozen competitive freight offers from shipping companies within a couple of hours,” said Mark Murray, owner of DeSales Trading Co., a North Carolina-based importer of rubber threads and elastic bands. “Now it’s a couple of days to get an offer from one of the big boys, you have to pay crazy freight rates and your shipment is months late. Our hands are tied.”
The shipping industry consolidated between 2016 and 2018, when a string of deals valued at around $14 billion cut the number of global boxship operators by about half. The deal making was part of shipowners’ efforts to cope with difficult conditions in the aftermath of the 2008 financial crisis, when freight rates barely covered fuel costs and ships operated at deep losses.
Among other factors driving the consolidation were a surge in Asian manufacturing and demands by cargo owners to keep transport costs under control.
The big liners have also formed three global alliances that share ships, cargo and port calls. Some smaller operators have joined in giving those groups control over the vast majority of available capacity.
The result was a streamlined system in which fewer, but bigger, ships called in at specific ports in Asia and then sailed to Europe or the U.S., carrying cargo that would go straight onto shelves or production lines. The new model cut waste from the system, limiting unused space on ships and reducing warehousing expenses for importers.
Covid-19 highlighted the fragility of the new supply-chain model in times of stress. Outbreaks over the summer at big export hubs like Yantian and Ningbo in China idled ships for weeks as they waited for terminals to reopen. After they sailed, they got stuck again at congested Western ports that couldn’t handle the cargo deluge.
Unlike in the pre-consolidation era, when shippers could call on a range of small- and medium-size operators to help them manage through disruptions, cargo owners say they have largely had to choose between long waits and crippling costs.
Mr. Murray of DeSales said a shipment from Malaysia that was supposed to leave June 26 got bumped back to July 7. Then a Covid-19 outbreak delayed sailing to early September with an estimated arrival date in early October.
DeSales paid $9,500 to book the container, up from around $3,000 before the pandemic, Mr. Murray said. It got the price after negotiating with a number of freight forwarders, who had originally asked to be paid around $19,000.
The big liner operators say the issue isn’t that capacity is being controlled by a few big players. They say Covid-19 outbreaks at global transport hubs have exposed capacity shortcomings on shore, where there isn’t enough manpower, trains, trucks and warehouses to move the cargo inland.
“In the U.S. West Coast the terminals can’t absorb more capacity,” said Lars Mikael Jensen, head of global ocean network at Denmark-based A.P. Moller-Maersk AMKBY -1.69% A/S, the world’s biggest boxship operator. “There are sufficient ships if we could get into Los Angeles and then sail off the next day. But now we can waste weeks waiting.”
Forty or more loaded ships have been waiting at anchor off the coast of Los Angeles on any given day in recent weeks, according to the Marine Exchange of Southern California. Before the pandemic, a single ship at anchor was unusual.
The capacity crunch has led some shippers to hire their own vessels. Walmart Inc., the world’s biggest retailer, said in August that it chartered its own ships to move Asian imports, following a similar move by Home Depot Inc. in June.
Athens-based Capital Maritime Group, which operates 108 vessels of all types, had a client charter a small, 2,000-container ship to move furniture and sports clothing from China to Liverpool, England, said Evangelos Marinakis, Capital Maritime’s chairman.
“Using such small vessels for long voyages is unprecedented and a testament to the crazy demand out there,” Mr. Marinakis said. “We are in talks to charter more such ships across the Pacific.”
Shipbrokers said small vessels chartered for point-to-point voyages now earn around $150,000 a day, multiple times more than levels before the pandemic, when such sailings were rare because of the high cost.
Mr. Marinakis, who mostly operates tankers, said he has spent more than $1.2 billion over the past year to order 16 boxships with capacities ranging from 1,800 to 13,000 containers.
“I wish I had more of them,” he said. “We are not done with Covid, and I expect supply chains will continue to be rattled for another year and a half. There is a lot of money to be made.”
Shipping consulting firm Drewry said in July that it expects the industry to generate more than $80 billion in profits in 2021, compared with $25 billion last year, fueled by elevated freight rates.
Nils Haupt, a spokesman for German liner Hapag-Lloyd AG HLAG 1.22% , said the industry needs an additional 20% capacity to deal with the crunch.
“We are being yelled at by customers,” he said. “They complain about the freight rates and the delays. It’s not a good thing for customer relations and we are trying all the time to add capacity.”
French container shipping line CMA CGM SA said Thursday it would suspend any further freight rate increases until next February. “The group is prioritizing its long-term relationship with customers in the face of an unprecedented situation in the shipping industry,” CMA CGM said.
Freight forwarders said the capacity reign by so few players leaves cargo owners with few options. They said daily rates from China to the Mediterranean are now around $7,000, compared with up to $1,000 before the pandemic.
“Half the options we get offer no ship space for weeks, and there is a race to get space on the other half,” said Vicky Zervou, a sales manager at Athens-based freight forwarder Aritrans SA. “We spend weeks trying to book a single container.”
Freight Rates In U.S. Jump By Most In More Than 15 Years
The cost of shipping freight in the U.S. continued to rise in August as equipment and labor capacity constraints persisted.
A measure of freight rates jumped 26.6% from a year earlier, the sharpest increase since February 2006, based on the latest figures from Cass Information Systems. The gain followed a 23.8% increase in July and marked the third straight month of acceleration.
The volume of shipments by road and rail increased 12.2% from a year earlier, the smallest annual gain since March. At the same time, the group’s gauge of the amount spent on shipping freight surged 42.2% from August 2020.
While limited by intermodal capacity and a tight labor market, shipping volumes remain elevated. The Cass shipments index is at its second-highest point since 2018.
Commodity Shipping Rates Post Biggest Daily Gain In A Decade
In an already banner year for shipping, commodity carriers just saw their biggest daily gain in a decade.
Average rates for giant Capesize bulk carriers — which can carry products like coal, iron ore and grains — jumped by $6,700 a day on Monday, the most since 2010, as owners continue to benefit from strong demand for raw materials. The rally extended Tuesday, pushing the daily rate to almost $53,700, the highest level in 11 years, Baltic Exchange data show.
Commodity shipping companies have benefited from global economic stimulus measures boosting industrial activity as economies reopen after the pandemic. In addition, a slowdown at ports — due to recent stormy weather in Asia and China’s restrictions to limit the spread of Covid-19 — has crimped the supply of vessels.
“Economic stimulus and infrastructure spending have boosted the demand for dry bulk commodities,” said Randy Giveans, a shipping equity research analyst at Jefferies LLC. “We expect rates to remain robust during the fourth quarter,” as iron ore production ramps up, coal shipments increase in preparation for winter, and fleet growth slows, he added.
‘Just Get Me A Box’: Inside The Brutal Realities Of Supply Chain Hell
Logistics managers are battling the pandemic, a labor shortage, and huge demand to get goods to your front door.
It’s mid-August, and logistics manager RoxAnne Thomas’s phone won’t stop pinging. Her faucets, sinks, and toilets are waylaid near Shanghai, snagged in Vancouver, and buried under a pile of shipping containers in a rail yard outside Chicago.
As U.S. transportation manager for Gerber Plumbing Fixtures LLC, a unit of Taiwan’s Globe Union Industrial Corp. that’s based in Woodridge, Ill., Thomas is trying to overcome the biggest shock wave to unsettle global trade since the dawn of container shipping almost seven decades ago.
The pandemic has thrown the vital but usually humdrum world of logistics into a tailspin, spurring shortages of everything: masks and vaccine vials, semiconductors, plastic polymers, bicycles, and even baseball bobbleheads.
For Thomas it’s complicated the shipment of about 10,000 20-foot containers of bathroom equipment she brings into the U.S. each year from China and Mexico, but it has also revealed a bigger, structural challenge.
The system underpinning globalization—production on one side of the planet, connected to consumers on the other by trucks, ships, planes, cranes, and forklifts—is too rigid to absorb today’s rolling tremors from Covid-19, or to recover quickly from the jolts to consumer demand or the labor force.
It’s avoided a complete collapse only through a combination of human ingenuity, painfully long hours, and, as Thomas describes a recent success, strategy, mixed with a stroke of luck.
What’s also apparent from her vantage point is that supply uncertainties, disruptions, and inflationary forces are here for the foreseeable future, perhaps into 2023. But how things play out this month, one of two peak seasons each year for goods, will be crucial in determining how long these shortages last and which companies are able to adapt.
“Every step of the process, there’s still backlog,” said Thomas, 41, in one of several interviews from late July through August. “The beginning of the supply chain in China—I don’t think that’s going to get better for a year.” And the outlook more broadly? “A year and a half before things are truly back to normal.”
Although the pandemic has shuttered factories and shaken supplies of raw materials, Thomas’s chief challenge is freight, and it starts with what used to be cheap, plentiful commodities: shipping containers. About 25 million are in use globally, shuttling goods around the world on some 6,000 ships.
Companies such as Denmark’s A.P. Moller-Maersk A/S or China’s Cosco Shipping Holdings Co. own or operate these vessels, with the 10 top companies controlling 85% of global capacity.
“Now I’m saying, ‘Just get me a box’”
Container rates and availability are usually built into annual contracts between shippers and the carriers, and these deals normally have strict requirements, such as only nonstop service between ports or a minimum of two sailings a week.
But little by little over the past 18 months, Thomas has had to let those demands go and instead brawl for ship space in the spot market, where the daily rates quoted by carriers and freight agents have soared.
“Now I’m saying, ‘Just get me a box,’ ” she says. “We’re constantly fighting this battle between how much is too much to spend and how many containers can that actually get me, and it literally seems to change week to week.”
Wholesalers and commercial plumbers are the main buyers of Gerber’s bathroom fixtures. The company’s biggest domestic competitors are American Standard, Kohler, Mansfield Plumbing Products, and Toto USA.
Two years ago, a 40-foot container cost less than $2,000 to transport goods from Asia to the U.S. Today the service fetches as much as $25,000 if an importer pays a premium for on-time delivery, which is a luxury.
That’s translated into big money for container carriers, with the industry on track to post $100 billion in net profit this year, up from about $15 billion in 2020, says John McCown, an industry veteran and founder of Blue Alpha Capital.
With the scales so tipped against them, many shippers of cargo are balking, hoping rates go down or praying that they won’t run out of things. That’s provided openings for Thomas to stretch her budget when possible and snap up the few containers that become available.
“There are companies that just don’t have the finances to withstand this, and they have contracted space that they’re just not using anymore,” she says. One of Gerber’s freight forwarders, Flexport Inc. in San Francisco, recently offered a chance to get 50 extra boxes out of Qingdao, China. Even at elevated rates, Thomas jumped at the chance.
The snarls don’t end when Thomas’s containers land on a dock in North America. They next need to travel by truck or train to Gerber’s distribution centers in California, Illinois, New Jersey, Texas, and Canada.
Those journeys got more complicated this summer when western Canadian wildfires slowed rail operations, and when Union Pacific Corp., a rail haulage company, stopped containers moving inland from West Coast ports so it could clear a logjam of the boxes outside Chicago as the influx of goods overwhelmed the system.
A couple of containers filled with Gerber products were stuck in the gridlock for 10 weeks after a truck driver Thomas sent to the location couldn’t dig them out, she says. So even though the railroad’s temporary embargo was aimed at easing congestion, it probably pushed the delays back to the ports.
Indeed the number of ships anchored outside the twin ports of Los Angeles and Long Beach more than doubled to 45 from late July to a month later.
“Even if we went to Maersk and said, ‘Just let us have the container. We’ll unload it in Los Angeles, and we’ll give it right back to you,’ it just doesn’t work that way.
It’s not that simple,” Thomas says. Apple Inc., Walmart Inc., and other companies have deployed armies of supply chain professionals and leading technology to navigate the past 18 months, but the vast majority of people doing these jobs are like Thomas—they wear multiple hats, have only a handful of support staff, and went from office obscurity to holding one of the most important positions at their company almost overnight.
Thomas started this job at Gerber four years ago, after working as both a client of logistics services and at a large trucking company. Transport is a family preoccupation: Her mother, uncle, and grandfather all worked for the railroad, and dinner table chatter would often turn to routes and capacity.
But Thomas recently completed a master’s in supply chain management at Michigan State University, one of the nation’s leading schools in the field, to give herself an extra edge.
Top logistics positions at large global companies can pay $300,000 to $400,000, but the median salary for those with an Association for Supply Chain Management (ASCM) certification is about $90,000, with starting pay closer to $60,000.
Unfilled positions are reaching a 20-year high, and in the U.S. alone, more than 600,000 job openings are projected over the next decade, according to the Chicago-based trade group.
It’s easy to see why. About 860,000 inbound containers arrived into the LA and Long Beach ports on average each month this year, 24% more than the typical monthly volume in the five years leading up to the pandemic.
Some of that increase is the result of panic orders from companies nervous about running out of parts or products, but the acceleration of online shopping also has an impact. “For logistics professionals this incredible e-commerce spike required a whole new level of alignment and synchronization,” says Abe Eshkenazi, chief executive officer of ASCM.
Among her concerns, Thomas must keep sight of whether such strong spending will be sustained, particularly when orders might not arrive for several months. New-home construction has been solid this year, and Gerber’s shipments have reached record highs.
But to help manage the demand from customers, Gerber is allowing them to order only a certain percentage above their normal purchases.
“The fear is we’re ordering all this stuff for demand, and the demand is going to fizzle out before the product gets here,” Thomas says. With summer winding down, the big test of the global trading system’s resilience might still be ahead.
Every October a weeklong national holiday in China marks the unofficial deadline to get shipments out of the world’s second-largest economy in time to reach the U.S. and Europe for the holiday shopping season. With lines of ships outside ports at their longest since the pandemic began, the pressure to meet that cutoff is stronger than ever.
Christmas Tree Sellers Hit By Supply-Chain Disruptions
High shipping costs, delivery delays have artificial-tree merchants raising list prices and warning of shortfalls in holiday decorations.
Supply-chain disruptions will make decking the halls more expensive than ever for consumers looking for artificial trees this Christmas.
Some U.S. retailers are raising prices by 20% to 25% to keep pace with skyrocketing shipping costs and they are warning that certain trees could sell out early because deliveries from overseas producers have been hit by the congestion that has tied up distribution networks from ports in China to freight yards in Chicago.
Balsam Hill, a Redwood City, Calif., company that sells medium- to high-end trees online and in stores, is raising prices by 20% on average, with list prices for some of its trees pushing close to and beyond the $1,000 level it charges for its premium trees.
“We’ve never raised prices anywhere close to that in our history and will make way less money,” said Mac Harman, the firm’s chief executive.
The company’s 7 ½-foot tall Brewer Spruce with clear LED lights is listed at $999 this year, up from $899 last Christmas. Its 4½-foot tall Grand Canyon Cedar tree with clear fairy lights will list at $499, up from $300 last season, as soon as it is in stock.
Mr. Harman said he expects the company’s U.S. inbound shipping costs will quadruple this year compared with 2020, reaching $45 million to $50 million on projected sales of $200 million to $250 million.
Mr. Harman expects to run low on many holiday items, such as ornaments, toppers and lights, because of shipping delays. His firm is currently struggling with fall items, such as autumnal wreaths and Halloween decorations. This time last year, the company had about 40,000 fall items in stock. As of the first week of September, it had fewer than 1,500 items, Mr. Harman said.
Retailers that import holiday items such as trees are heavily exposed to supply chain disruptions, not only because the goods have a limited sales window with the end of the holidays. A tree that arrives too late must be heavily discounted or stored for a year. Rising container shipping rates hit artificial Christmas trees hard because only so many will fit into a container, so the cost per tree rises quickly when ocean prices go up.
The average price world-wide to ship a 40-foot container has more than quadrupled from a year ago, to just over $10,000, according to a global pricing index by London-based Drewry Shipping Consultants Ltd.
Artificial-tree importers said they are paying $20,000 per container or more on shipping’s spot market and are still struggling to find enough boxes to fill inventories in time for the holiday season.
“It’s become almost a full-time job trying to find the best price you can get and getting the space,” said Nathan Gordon, president of Christmas Central, a mainly online seller of holiday goods based in Buffalo, N.Y. Mr. Gordon said some days he pays $22,000 per container, up from $3,500 last year.
The artificial Christmas tree market is a $1 billion to $2 billion industry, according to the American Christmas Tree Association. The group, which represents sellers of artificial trees, estimates that 85% of American homes had a fake tree last Christmas, up from 46% in 1992.
Artificial trees were popularized in Germany 150 years ago, where they were made of dyed goose feathers. Today, they are mostly made from plastics, can cost anywhere from less than $100 apiece to more than $1,000 and can come already outfitted with lights and decorations.
“They can be reused year after year, and are sustainable, safe, convenient, and cost-effective,” said Jami Warner, executive director of the American Christmas Tree Association.
Tree vendors reported tight supplies of live trees last year, partly the result of light plantings since the 2008 financial crisis of saplings that can take up to a decade to grow to market size. But the National Christmas Tree Association, which represents tree growers, says live trees should be available this year. “We’ve never run out of Christmas trees,” said Tim O’Connor, the association’s executive director.
The window for importing seasonal products is short for many retailers. Big-box retailers usually begin shipping trees from Asia in June or July so that they are in stores by Oct. 1, said Dean Tracy, a former director of international logistics for Lowe’s Cos. who runs a North Carolina-based logistics and sustainability consulting firm, Global Integrated Services.
“If it’s sitting on the West Coast on a ship at anchor or still in the Far East there’s a good chance Christmas is going to come late,” Mr. Tracy said.
Bottlenecks at seaports as well as congestion at rail terminals, warehouses and distribution networks has extended the time it takes to get goods from China and other Asian export points to markets in the U.S.
There were 56 container ships anchored off the ports of Los Angeles and Long Beach, the major U.S. import gateways, waiting for berth space on Tuesday morning and the wait times for some vessels had stretched beyond two weeks, according to the Marine Exchange of Southern California.
Executives at Lowe’s and Big Lots Inc. have said in recent weeks that they pulled forward holiday imports to mitigate the impact of supply-chain delays. “I think we feel really nicely positioned,” Lowe’s Chief Financial Officer, David Denton, told a Goldman Sachs global retailing conference on Sept. 9.
U.S. imports of artificial trees were up 45% in July compared with the same month last year, when the flow of goods was heavily disrupted by the Covid-19 pandemic, according to trade analysts Panjiva, while overall Christmas-related imports were down almost 25%.
The National Tree Company, which mostly sells online via retailers such as Amazon.com Inc. and Wayfair Inc., imported almost half of its artificial trees before the end of June, said Chief Executive Chris Butler.
Mr. Butler said that despite the company’s efforts and willingness to pay higher shipping rates, it expects to import 10% fewer trees than planned this year. “Every day we are fighting to get containers,” he said.
The privately held Cranford, N.J.-based company is raising prices for trees, wreaths and other holiday items by 25% to account for its higher costs. It is also selling to other U.S. retailers who found they couldn’t source enough trees in time for the holidays.
“The message to customers is buy now and get what you need for Christmas,” Mr. Butler said. “There are definitely going to be shortages and prices are going to be higher.”
Rising Shipping Costs Are Companies’ Latest Inflation Riddle
From Michelin tires to Pampers diapers, transportation expenses are working their way through global supply chains.
Transportation costs—typically a fraction of a finished product’s price—are emerging as another supply-chain hurdle, overwhelming some companies already paying more for raw materials and labor.
The fabric and crafts retailer Jo-Ann Stores LLC said it has spent 10 times more than its historical cost in some cases to move products from one point to another.
“Sometimes the ocean freight now is actually more expensive than the cost of the product,” Chief Executive Officer Wade Miquelon said in a recent interview. The company hasn’t raised any base prices and is hoping the extra supply-chain expenses are temporary. “I think they probably are, but does transient mean six months or 24 months?” he said.
The Covid-19 pandemic has driven a long-lasting surge in transportation costs, putting pressure on many businesses already confronting higher wages and raw-material prices. Some CEOs are saying they expect elevated freight costs stretching into 2023.
The cost of transporting goods is a component in every step in a company’s supply chain. Everything from iron ore, steel, parts and finished products has to move as raw materials are processed in global manufacturing. The cost of shipping containers across the ocean is higher, truck drivers are in short supply, and gasoline is more expensive than many expected earlier this year.
“We are not counting on material improvements in 2022, especially in the first portion of the year,” Michael Witynski, CEO of the discount retailer Dollar Tree Inc., DLTR 0.04% said last month. He noted that experts expect ocean-shipping capacity to normalize no later than in 2023.
Spot container shipping rates from Asia to the U.S. West Coast were five times higher last week compared with the same time last year, according to the Freightos Baltic Index. Those rates are more than 14 times higher than during the same time in 2019.
“It has just gone up so rapidly that it is now becoming part of the narrative here of this supply-chain-driven price shock that is proving to be a lot more intense and a lot more durable than we initially thought back in the spring,” said Brian Coulton, chief economist at Fitch Ratings.
Mondelez International Inc. said last week that global inflation was higher than expected, citing commodity and transportation costs. Molson Coors Beverage Co. said most of its cost inflation came from transportation increases. On Monday, 3M Co. said it is seeing “a lot of pressure” on logistics costs.
The French tire maker Michelin has spent tens of millions of dollars in extra costs to move natural rubber from the tropics to its production facilities to meet customer demand.
A dual shortage of truck drivers and shipping containers has raised the price of moving the company’s products, which for months were even shipped by air. The company is only recently cutting down on its use of more-expensive airfreight and said its supply-chain teams are constantly juggling shipping and transportation companies to keep things moving.
“That’s why we had to raise prices for tires,” Michelin Chief Executive Florent Menegaux said in a recent interview.
Procter & Gamble Co. has announced several price increases for products including Pampers diapers this year, but executives have cautioned that the speed and scope of freight and commodity-cost increases are too great to offset initially. The company is projecting $1.9 billion in added after-tax costs in its current fiscal year, which ends in June 2022.
“The demand for trucks continues to increase at each step of the chain down to delivery to homes,” Jon Moeller, the incoming CEO at the company, said at a June investor conference. “Diesel fuel costs are up more than 25% versus April 2020.”
Dollar Tree warned investors last month that freight-market conditions continued to deteriorate and that costs would be “significantly higher than originally projected.” The company had previously expected its regular freight carriers would meet 85% of their contractual commitments, with the remainder sent at market rates.
“However, we now project that our regular carriers will fulfill only 60% to 65% of their commitments, and the spot-market rates will be much higher than previously estimated,” Mr. Witynski said in late August.
Dollar Tree said the problems stem from equipment shortages, backlogs, port blockages, labor scarcity and Covid-19-related complications. A charter ship was recently denied entry to China because a crew member tested positive for Covid-19, forcing a two-month delay as the ship backtracked to replace its crew.
In response, the company is using more domestic suppliers for goods, making seasonal purchases a month earlier than usual, being flexible with arrival and departure ports, and using dedicated space on chartered cargo ships, including one for a three-year term.
After a decade of consolidation among ocean shipping lines, a handful of companies dominate key routes. That means there are generally fewer vessels sailing between ports, leaving cargo owners paying a premium to find space. Both Walmart Inc. and Home Depot Inc. have decided to charter their own boats this year to move goods.
The extra costs and adjustments that have companies warning investors and working to preserve their profit margins are prompting some economists to shrug. The rebounding economy, they said, came with a surge in demand for goods, which caused a short-term supply crunch that will work itself out with time as higher prices quell demand.
“There is no more transitory price than transportation because the capacity can expand and shrink,” said Steven Blitz, chief U.S. economist at TS Lombard.
Trains can get longer, more ships can be built, and truck drivers can be hired to meet the demand to move things, but it just takes some time to happen. Like many economists, Mr. Blitz expects that inflation pressures will fade.
Inflation could also cool if the economy does the same. The spread of Covid-19’s Delta variant has businesses and consumers adjusting to renewed mask mandates, travel restrictions, event cancellations and delayed office reopenings. Consumers are pulling back on purchases, and employers have slowed hiring.
“I think the inflationary pressures are being juiced by the surge in transportation costs,” said Mark Zandi, chief economist at Moody’s Analytics. Using rough estimates, he said that consumer prices have risen 5.3% in the past year and that transportation costs contributed about 10% of that rise.
“If everyone’s having to pay more to ship to the next producer down the chain, when you get to the end user, that’s a fair chunk of change,” he said.
J.M. Smucker Co. SJM 0.25% recently flagged transportation costs as a major reason for a drop in profitability, along with higher commodity costs. Chief Financial Officer Tucker Marshall said in late August that transportation costs were a challenge in the last fiscal year that continued into the current year.
“As you bring material in, as you produce and you ship material out, the entire network right now is impacted from a transportation standpoint,” Mr. Marshall said. “And it is material.”
Covid-19 Lockdowns In Asia Deepen Commodity Supply-Chain Pain
Palm-oil plantations and coffee farms struggle with labor shortages and transportation curbs as cases surge.
The recent surge in Covid-19 cases in Southeast Asia has throttled ports and locked down plantations and processors, sparking extended disruptions of raw materials such as palm oil, coffee and tin.
Restrictions in Malaysia, the world’s second-largest producer of palm oil, have prevented migrant laborers from traveling to plantations, raising prices of the ubiquitous edible oil used to make candy bars, shampoo and biofuel.
Lockdowns in Vietnam, the world’s No. 2 coffee exporter by volume, have delayed the processing and export of coffee beans, adding to production concerns caused by poor weather in Brazil.
The global tin supply has been hit by Covid-19-related interruptions at a smelter in Malaysia, contributing to higher prices for the industrial metal, which is used to connect computer chips to circuit boards in electronics.
Prices for each of these commodities have risen to multiyear highs in recent months, adding costs that are being passed on to consumers.
“These supply shocks reverberate globally because Vietnam and Malaysia hold large market share of key commodities,” said Trinh Nguyen, a senior economist at Natixis.
Businesses including Unilever PLC, the consumer-goods company, and J.M. Smucker Co. , which includes Folgers coffee, have said increasing prices of raw materials are contributing to cost pressures.
“The price of palm oil, a key ingredient for our skin cleansing products, is now 70% higher than its long-term average, with increased demand and lower harvest yields driving up the price,” Graeme Pitkethly, Unilever’s chief financial officer, said in July. He added that the company had already raised prices for some products.
One reason for the elevated price of palm oil is a surge in Covid-19 cases in Malaysia. The Southeast Asian country has recently been recording around 19,000 new cases and 400 deaths a day in its worst outbreak since the pandemic began.
Travel restrictions in place since March last year have made it difficult for workers to reach plantations, leading to a steadily declining number of laborers. The palm-oil sector relies on migrants from Indonesia, which is the world’s largest producer of the commodity, as well as Bangladesh and India.
Rigid internal-movement curbs put in place in recent months in response to rising cases have added to the challenges facing palm-oil companies, as have outbreaks on plantations, causing shutdowns.
Sime Darby Plantation 5285 -1.55% Bhd. said its labor shortfall in Malaysia has worsened to about a fifth of its total needs, meaning around 6,000 unwanted vacancies compared with 2,000 in March 2020.
The company said it produced about 6% of Malaysia’s crude palm oil last year. The labor shortfall and lower rainfall contributed to a 5% drop in its production of palm oil in Malaysia in the first half of the year, the company said.
The company said it has invested in new mechanization and automation to reduce its reliance on manual labor.
FGV Holdings Bhd., which said it produces around 15% of the country’s crude palm oil, said it has faced challenges in producing expected volumes because of the recent surge in Covid-19 cases in Malaysia. The company said infections on company estates and milling operations led to mandatory lockdowns.
The overall effect has been a 13.6% decline in Malaysia’s palm-oil exports over the first eight months of 2021 compared with the same period last year, according to data from the Malaysian Palm Oil Council, an industry group.
“You don’t have enough workers going around to harvest the fruits,” said Ivy Ng, regional head of agribusiness research at CGS-CIMB Securities in Malaysia.
As the government plans to reopen the economy late this year, Ms. Ng predicts regulations on foreign workers will be relaxed by early next year, which would help palm-oil plantations boost their labor forces.
Covid-19 travel restrictions in Asia are also hitting coffee. Beginning in July, an outbreak in Vietnam prompted the government to introduce curbs on movement that have interfered with shipments. Vietnam is the world’s largest exporter of the bitter-tasting robusta beans used in instant coffee and espresso blends.
“Vietnamese exporters are having difficulty transporting goods, including robusta green coffee and King Coffee products, to the ports for shipping around the world,” said Le Hoang Diep Thao, chief executive of TNI King Coffee and vice president of the Vietnam Coffee and Cocoa Association.
Vietnam’s coffee exports from January through Aug. 15 fell 8.2% from the same period last year. “Local and foreign traders are extremely worried,” Ms. Le said, adding that the coffee association was lobbying Vietnam’s government to loosen restrictions to avoid delivery delays.
Large coffee companies often use both robusta and its aromatic cousin, arabica, in their mixes and brews. Prices of both types have risen sharply this year, mainly driven by drought and frost in Brazil, the world’s largest coffee exporter. Vietnam’s production troubles over the past several months are contributing to higher prices.
Western coffee companies said higher prices will filter down to consumers. “Coffee costs have gone up,” Smucker Chief Financial Officer Tucker Marshall said on an August earnings call, adding, “We will take additional pricing actions and measures to ensure that we recover the inflationary impact.”
Michael Orr, spokesman at JDE Peet’s NV, said the Dutch coffee company has over the past year “seen a sharp rise in ingredient, freight and other costs, which will require us to take appropriate measures. Historically, significant fluctuations in green coffee prices have been reflected in the market and we expect that precedent to continue.”
Tin prices rose in recent months after Malaysia Smelting Corp. Bhd., one of the world’s largest producers of refined tin, reduced smelter staff and halted operations for stretches over the past several months to comply with government regulations to limit the spread of Covid-19.
Malaysia’s tin exports decreased 29% in June from a year earlier. A representative for the company said tin production had yet to return to normal, but added that it expected to restore operations to pre-pandemic levels gradually as Malaysia’s government reopens the economy.
“Tin prices continue to trend upwards, lifted by continued demand for tin solder in consumer electronics, and supply disruptions due to lockdowns in tin-producing countries around the world,” the company said in a financial report last month.
In World’s Hottest Economy, Chileans Wait 13 Months For New Cars
In downtown Santiago, the epicenter of what is likely the world’s hottest economy, Carol Castillo is meeting lots and lots of angry people.
Castillo is a saleswoman at a Chevrolet dealership in the city, where demand for cars is so red hot from cash-flush Chileans that wait lists stretch on for months. Customers don’t take this too well, Castillo says.
Shock leads to frustration and at times to outbursts, especially from those looking to buy a Silverado. The current estimated delivery date for a diesel version of the popular pickup: October of 2022.
“Everybody wants their car right now,” Castillo said. It was a Wednesday morning, typically a quiet time for the dealership. And yet as Castillo looked across the showroom, every single table was filled with would-be buyers.
The shortages aren’t uniquely Chilean, of course — global supply-chain problems are spurring wait times for cars in many countries — but they’re particularly acute here. Locals are on a buying spree of epic proportions. Cars, refrigerators and electronics are all flying off the shelves.
Growth, according to the central bank, will zoom to as high as 11.5% this year, which would not only make it the fastest among major economies but also a record in Chile. That’s no small feat in a country that sustained one of the greatest economic expansions of modern times in the 1980s and 1990s, after dictator Augusto Pinochet’s “Chicago Boys” unleashed a wave of free-market reforms.
Ironically, one of the strongest drivers of growth now comes from partially dismantling a key economic pillar from that era by allowing early withdrawals from the private pension funds established under Pinochet. That’s injected $49 billion into the economy. Also helping are the government’s pandemic-era cash handouts, another product of the country’s move away from the strictest versions of Chicago Boys capitalism.
“The money came in and then people started to buy cars like crazy,” Castillo observes.
Chile’s coronavirus vaccination rate, near 75%, is the highest in all the Americas, providing yet another lift to the economy as infections decline.
All that leaves central bank officials to predict the fastest economic growth in records going back to 1961, according to prognostications that were revised earlier this month. That forecast is at the top end of estimates for 102 major economies tracked by Bloomberg, which show China expanding by 8.4% and Brazil just 5.2%.
Indeed, signs of a roaring economy are everywhere in Chile. Car sales soared 97% in August from a year ago, nearing the highest for any month on record. Credit and debit card transactions hit a record in August, indicating robust consumer spending. Sales of durable goods surged 130% in the second quarter from a year earlier.
“We’ve seen a strong recovery in confidence among both households and companies,” said Andres Perez, the chief economist for Chile and Colombia at Banco Itau. “It reflects, on one hand, significant improvements in the health situation, and also an environment with ample stimulus and liquidity.”
Perez, who was previously head of international finance at Chile’s Finance Ministry, expects gross domestic product to expand about 10% this year after a 5.8% fall in 2020. Even as the growth rate slows next year, a strong labor market will support consumer spending, he said.
The signs pointing to a roaring economy are causing some concern among analysts who fret that it could overheat and send inflation soaring.
Central bank President Mario Marcel has told lawmakers several times in the past month that another round of penalty-free early pension withdrawals — a proposal lawmakers are considering — would set off a chain of harmful consequences, including faster price increases, higher financing costs and risks to the financial system.
Andres Balbontin, assistant commercial manager at Salfa, a national chain of dealerships that includes the Chevrolet location in downtown Santiago, said the boom isn’t over. Chile’s recovering economy fueled by stimulus cash will keep sales strong through at least next year.
“There’s tons of money in the streets,” he said.
Castillo, the car saleswoman, has been swamped setting up test drives and haggling over prices, and wary of having to disappoint customers perplexed by the wait for new models. Still, there are moments when she finds her work incredibly gratifying.
The patron that she most vividly remembers from the past few months was a working-class man in his late 30s. He had struggled to save for years, and he was finally able to cobble together enough money to buy his own vehicle.
“He got so emotional that he cried,” she said. “He was finally able to purchase his first car.”
Why Container Ships Can’t Sail Around The California Ports Bottleneck
The armada of vessels waiting offshore keeps growing, and experts say there are few viable alternatives to the country’s main gateway for Asian imports.
There appears to be no sailing around the breathtaking backup of container ships off the jammed ports of Los Angeles and Long Beach.
Newly arriving vessels are adding to a record-breaking flotilla waiting to unload cargo that on Sunday reached 73 ships, according to the Marine Exchange of Southern California, nearly double the number a month ago and expanding a fleet that has become a stark sign of the disruptions and delays roiling global supply chains.
Before the pandemic, it was unusual for more than one ship to wait for a berth.
Big vessels are continuing to join the bottleneck, experts say, because shipping lines and their cargo customers have few options for resetting countless supply chains moving goods into the U.S. that have been constructed over decades around the critical San Pedro Bay gateway now staggered by the overflowing demand for imports.
Although some ships have headed to other import gateways, and a handful of shippers have chartered smaller vessels to move goods through other ports, the diversion is minor compared with the hundreds of thousands of containers idled in the waters off Southern California.
“Everything is aligned to L.A.,” said Nathan Strang, senior trade lane manager for ocean operations at Flexport Inc., a San Francisco-based freight forwarder.
The congestion this year has been caused by a surge in imports as consumer demand in the U.S. has shifted away from services to goods and home improvements and retailers have rushed to restock inventories that were depleted last year in the early months of the pandemic.
The neighboring California ports are the principal seaborne gateway to the U.S. thanks to the growth of containerization over the past 60 years and an explosion in goods trade, particularly U.S. trade with China.
Last year, the two ports handled the equivalent of 8.8 million loaded import containers, more than double the 3.9 million loaded boxes that arrived at the nation’s next busiest port at New York and New Jersey.
The California ports are in easy range of China and the factories that churn out big volumes of electronics, apparel and an array of other consumer goods. They have enough land to house dozens of cranes capable of emptying large ships as well as sprawling terminals to store boxes.
For the retailers that are among the major importers at Los Angeles and Long Beach, the ports offer quick reach to one of the largest population centers in the country.
That means they can split arriving goods between a large local consumer base and rail links that offer steady, direct transport to the rest of the U.S. through inland hubs, with most of the boxes heading through Chicago.
Despite some shortages, the availability of trucking equipment, warehouse space and labor is also far greater than at other ports.
Shipping executives say other West Coast ports, like Oakland or Seattle, simply aren’t large enough to handle the hundreds of thousands of containers that Los Angeles and Long Beach unload, store and move by truck or rail each week.
“It would just take a very small portion of L.A./Long Beach to overwhelm those ports,” said Craig Grossgart, senior vice president of global ocean for Seko Logistics, an Itasca, Ill.-based freight forwarder.
Executives say demand is so high that shippers are willing to take almost any route into the country to replenish inventories in time for the holidays.
“We are using every available port that is out there,” said Sri Laxmana, the vice president of global ocean products at C.H. Robinson Worldwide Inc., the largest freight broker in North America.
Some shippers have shifted freight to U.S. Gulf and East Coast ports, but that alternative also comes at a cost since it adds weeks to transit times from Asia and the longer routes are more expensive than shipping into the West Coast.
“Shipping into the East Coast was the great secret for those of us advising early in the crisis,” said Bjorn Vang Jensen, vice president of global supply chain at Denmark-based marine data company Sea-Intelligence ApS. “But the secret got out and now those ports are just as screwed as other ports are because everyone wants to go there.”
In recent weeks, the Port of Savannah has had 20 or more ships at anchor waiting for a berth. Griff Lynch, executive director of the Georgia Ports Authority, said he expected the congestion would last for at least a couple of more weeks as shipping’s peak season continues.
“This has never happened before,” he said.
Companies that mitigated risk by shipping through alternative ports have found themselves snarled by the Southern California congestion in other ways, too.
Malouf Cos., a Logan, Utah-based furniture retailer that started shipping some of its goods through Port Houston a few years ago, now is struggling to source containers because hundreds of thousands of the boxes are floating on ships waiting to unload at Los Angeles and Long Beach.
Jordan Haws, Malouf’s director of supply chain, said the firm has about 55% of the inventory it would have if it was fully stocked.
“It’s a vicious cycle that we are stuck in, and until that port can get on top of things, I don’t see things stabilizing throughout the trans-Pacific trade,” he said.
Hot Toys Risk Being Sold Out By Black Friday On Supply Woes
The most popular toys for kids this holiday season, from nostalgic favorites to cheap items popularized by TikTok, may sell out much sooner as a result of global supply-chain hangups.
A lack of workers in China, container shortages and bottlenecks getting containers onto ships are all contributing to shortages, toy industry experts say. That may make it harder, or pricier, for parents to do their holiday shopping.
Supplies are almost certain to be thin by Black Friday, the busy shopping day after the U.S. Thanksgiving holiday. Among the items expected to be hot this year are Tamagotchi virtual pets, a “learning robot” from Mattel Inc.’s Fisher-Price and a play kitchen bearing the logo for the children’s cartoon Blue’s Clues, according to lists compiled by industry publications Toy Insider and Toys, Tots, Pets & More.
“Things are just stuck at ports, and they’re taking another couple of weeks,” said Marissa Silva, editor-in-chief of the Toy Insider.
Besides coping with supply chain hangups, the toy industry is also dealing with extraordinary demand. Sales grew 15% in the first half of 2021 to $22.5 billion from a year earlier, according to researcher NPD. That’s on top of surging growth last year, when parents with kids stuck inside during the pandemic turned to at-home entertainment.
Large companies, such as Hasbro Inc., have had to secure contracts with new ports and vessels to bring in shipments from China, where about half of its products are made, Chief Executive Officer Brian Goldner has said on earnings calls. The company also manufactures toys in Vietnam, India and Ireland, among other places. The difficulties led Hasbro to raise prices this quarter.
Small companies have had to reject some orders from retailers due to shipping difficulties, Silva said. While there’s little risk of bare shelves, parents may find less to choose from, according to Ed Desmond, a spokesman for the Toy Association, a trade group.
“There’s no certainty that if your child or the children in America are looking for a particular toy, that it will be around,” Desmond said at a press conference at the Port of Los Angeles last week.
Other popular items identified by Toy Insider in a hot 20 holiday list that came out Wednesday include a Disney-branded, princess-themed “celebration castle,” stuffed plush food toys called Squishmallows and a “magic cauldron” from Moose Toys where kids can perform a “spell” to make a surprise toy come out.
Social media has particularly helped fuel toy popularity, with one item — a silicon sheet that resembles bubble wrap — gaining popularity in TikTok videos rather than through traditional advertising.
Supply-Chain Contracts Get Revamped After Covid-19 Disruptions
Companies are looking for more specific terms and indexed pricing to account for the delays, soaring costs in supply chains.
Pandemic-driven strains in supply chains are triggering changes in contract terms between suppliers and their manufacturing and retail customers as companies try to address the risks and added costs brought on by persistent delays and disruptions.
Procurement experts say that when drafting new contracts and renewing existing ones, companies increasingly are seeking to add provisions that cover the impact of pandemics or epidemics and accelerating inflation. The moves come as commodity costs and shipping prices have soared far faster during the past two years than considered in traditional contract terms.
A fourfold increase in container shipping rates has made ocean freight for some shippers more expensive than the products they are shipping.
“These are costs that were not contemplated by the parties at the time they entered into the contract,” said Vanessa Miller, a Detroit-based partner at law firm Foley & Lardner LLP specializing in supply-chain contracting. “So the question is, which party should now bear the risk of these increased costs?” she said.
International supply-chain contracts generally carry broad parameters on delivery and cost terms, and many include standard language developed by the International Chamber of Commerce known as Incoterms, short for international commercial terms. The Chamber describes Incoterms as “the world’s essential terms of trade for the sale of goods.”
Since the pandemic, supply chains have been buffeted by factors including extensive congestion at ports and other transportation nodes, delaying deliveries by months, as well as soaring costs for industrial raw materials such as iron ore and lumber.
Experts say these changes have overwhelmed the guideposts in many contracts. That has led to conflicts between suppliers and buyers over how to account for rising costs and delivery shortfalls.
Some of the new contracting focus is on language related to force majeure, the legal provision that allows suppliers to be excused from contract terms due to unforeseen circumstances. Experts say buyers are seeking more specific definitions of what suppliers can and must do when disruptions hit, beyond boilerplate escape clauses.
“Customers today are saying, ‘That doesn’t help me at all. I don’t want a supplier who’s excused. I want a supplier who’s ready and is able to perform despite the force majeure event,’” said Brad Peterson, a partner in Mayer Brown LLP’s Chicago office who co-leads the law firm’s supply-chain and distribution practice. “Meanwhile, the suppliers are seeing Covid-19 and the supply chain shocks as nowhere near over,” he said.
Before the pandemic, force majeure provisions were treated as “cut-and-paste” contracting language, Ms. Miller said. “It was just in the miscellaneous provisions at the very end. No one really paid much attention to it,” she said. “Now there’s a lot more focus.”
Globally, force majeure declarations tripled in 2020 from 2019 levels, according to Everstream Analytics, a supply-chain risk management company.
Some suppliers also are looking to include what the contracting experts call dynamic pricing, or the ability to adjust prices if costs shift outside a certain range during the time covered by a contract. That might mean using an index as a base for the prices of raw materials or services such as shipping.
“In my entire lifetime, we’ve been out of practice for using inflation clauses, and now we’re getting back to it,” said Sarah Rathke, a 45-year-old partner at Squire Patton Boggs in Cleveland who specializes in supply-chain disputes.
The Return Of Empty Shelves And Panic Buying
Supply chain issues are leaving supermarket shelves empty. Shoppers might yet make things worse.
Walk around a supermarket in the U.S. or Europe and you will see some empty shelves once more. This isn’t due to people panic-buying toilet paper, as they did early on in the pandemic; rather it’s because supply chains are clogged at almost every stage between Asian factories and grocery stock rooms.
But rising prices and patchy availability mean it’s only a matter of time before shoppers start purchasing in bulk again — this time to avoid future sticker shock.
Supply lines are struggling as producers such as Vietnam, responsible for making everything from sneakers to coffee, are hurt by Covid restrictions. Surging virus cases and consumer demand are leading to congested ports.
Shipping containers are in the wrong place. Sea freight costs are up tenfold. If goods do arrive at the destined ports, there are too few truck drivers to transport them to retailers. Shortages of workers to harvest and prepare foods are also adding to the pressures.
Some sectors are bearing the brunt worse than others. Beverages, for example, have been hurt by a shortage of packaging including aluminum cans. In Britain, a lack of C02 amid spiraling energy costs has also put supplies of carbonated soft drinks at risk.
In some areas, issues have been compounded by elevated demand. Coffee and tea are hot commodities as many Americans continue to work remotely. Why visit Starbucks Corp. when you can still be a barista at home?
Don’t Drink Up
Beverages have been hit particularly hard by recent supply chain struggles.
Meanwhile, in-person learning has fueled a rush for school supplies, including those that go in lunchboxes. Following a year quaintly characterized by home-baking and the return of family dinners, parents are now in a frantic state because of a run on Kraft Heinz Co.’s pre-packaged Lunchables. Kraft Heinz said the almost-charcuterie-board-like snack packs are experiencing double-digit growth for the first time in five years.
Pet food is another challenging area. Purina maker Nestle SA has already ramped up capacity. Some grocers are reporting a struggle to find enough dog treats and cat biscuits to meet the demand from all those new pandemic pets.
Retailers have been reengineering their supply chains to avoid the pinch points. Some, including Walmart Inc. and Target Corp., have been chartering their own ships. Amid a shortage of drivers, some British supermarkets are using their own trucks for deliveries that previously would have been carried out by suppliers.
But more adjustments will be needed. Stores may have to cut back on the varieties of goods to reduce complexity, meaning fewer product choices for consumers. Grocers need to plan for the worst. With the system so fragile now, what would happen with further spikes in prices, demand and panic-buying?
In the U.S., special offers are already being reined in, and some everyday prices are beginning to rise, according to data provider IRI. Energy drinks, eggs, meat and soft drinks are all getting more expensive, IRI’s Consumer Packaged Goods Inflation Tracker shows.
When prices go up, consumers tend to get proactive and change their habits. Shoppers first switch out of pricier products to cheaper ones. That means ditching big brands for more competitive private labels. Substituting meat in meals for more affordable pasta, rice or potatoes becomes a common way to save money.
Then comes the buying in bulk and crowdsourcing. With food costs expected to rise further, consumers may choose to load up on products such as pet food while they can. It wouldn’t be surprising to see people get together with friends to buy giant packs of toilet paper or minced meat. Splitting bulk buys gives them a better deal without tying up as much cash in the cupboard.
With social media sites like Facebook awash with money-saving groups and TikTok influencers offering budgeting tips, consumers are likely to get more creative than clipping coupons.
While a little inflation is generally good for supermarkets as it elevates the overall value of sales, the danger comes when it exceeds manageable levels and consumers trade down to cheaper items.
Even more pernicious is when people flock to the hard discounters, such as Aldi and Lidl, which have already conquered Europe and are now expanding across the U. S. Many customers stayed away from these smaller supermarkets during Covid, when they switched back to doing a weekly shop at a big-box store.
Up until now, grocers haven’t had a bad pandemic. That may be about to change.
Investors Bet Environmental Fears Will Crunch Commodity Supply, Lifting Prices
Wagers on environmentally driven supply shortages are pushing up everything from natural gas to aluminum, increasing costs for consumers and businesses.
Investors are ramping up wagers that a global push to lower carbon emissions will hamper commodity production, pushing up prices for everything from natural gas to aluminum.
With producers such as Exxon Mobil Corp. and Chevron Corp. under pressure from investors to minimize environmental damage, many are limiting spending on new output. The caution comes after years of declining investments in production that were driven by lackluster commodity prices and a focus on returning money to shareholders, analysts say.
Spending on oil and gas exploration and production is now forecast to edge higher in the coming years but stay below 2019 levels and about 40% to 50% under a 2014 record, figures from consulting firm Rystad Energy show.
Even with prices for metals like copper also at their highest levels in years, annual spending by mining companies is projected to remain about 30% or more below a 2012 peak each of the next five years, according to data compiled by investment bank Jefferies.
Bets on supply disruptions and recovering demand are already increasing raw-materials costs for consumers and companies and fueling investor anxiety about climbing inflation.
While the short-term outlook for demand is murky due to the spreading Delta variant of the coronavirus and turmoil engulfing heavily indebted property developer China Evergrande Group, some analysts still expect limited supply to support commodity prices.
Following recent price gains, an index of commodities is now on pace for its largest annual percentage advance on record in data going back three decades, according to FactSet. This year’s climb in oil has consumers paying some of the highest prices in years for gasoline, pushing the average U.S. price of a regular gallon to about $3.20, data from price tracker GasBuddy show.
Brent crude, the global gauge of oil prices, added 1.4% to $77.25 a barrel on Thursday, hitting its highest level in almost three years.
Natural gas, used as a power-generation fuel to cool homes in the summer and heat them in the winter, recently hit 7½-year highs above $5 a million British thermal units. Prices could shoot even higher if cold temperatures in the coming months lift demand, investors say. Shortages of natural gas and wind power have sent European power prices to records.
The trend extends to industrial metals that are needed to manufacture electric cars and houses. Copper prices hit all-time highs in May, in part due to supply disruptions and project delays caused by environmental concerns everywhere from Minnesota to Alaska. In recent weeks, aluminum has soared, buoyed by limits on how much power aluminum smelters in China can consume.
While environmental concerns aren’t new for companies that consume large amounts of power and water and often contribute to local pollution, commodity investors say the global scope of the recent push is unprecedented.
Some argue that commodities are moving into a cycle defined by erratic supply and volatile prices as the capacity to boost production dwindles.
For some commodities, “you’re legitimately on the precipice of not having enough,” said Rory Johnston, a former bank economist who now writes a newsletter about raw materials. “It’s fragile and increasingly difficult to forecast the outcomes.”
As it gets tougher for large companies to develop new sources of commodity supply, some firms are investing millions in recycling old materials and green production methods.
Some analysts also expect private companies and nations that face less environmental scrutiny such as the Organization of the Petroleum Exporting Countries and allies to boost supplies and capitalize on higher prices, giving them more influence in these markets.
A climate-focused activist investor’s successful campaign to win board seats at Exxon with a tiny stake in the company earlier this year was a shot across the bow to all commodity producers, forcing them to accelerate their climate goals, investors say. Chevron has prepared for a similar investor challenge, The Wall Street Journal reported earlier this month.
Many companies are also wary of lifting spending on output after past supply increases sank commodity prices, an added force that is keeping many producers cautious.
“Even if they decide to spend the money now, it will take some time for the spending to actually come in,” said Darwei Kung, head of commodities and portfolio manager at DWS Group.
One reason some investors are particularly bullish on metals like copper, aluminum and lithium—a key component of the rechargeable batteries that power electric cars—is that demand for these materials from green-energy projects is expected to surge even as environmental concerns limit supply.
U.S. officials have said they want to increase domestic production of critical materials such as lithium, but projects in California, Nevada and North Carolina face local opposition and lengthy permitting processes. Lithium prices have surged in recent months.
Greater environmental pressure in the U.S. could keep the country reliant on dominant overseas players like China for many minerals, analysts say. Another result could be that the already-pricey climate fight gets even more expensive or takes longer, they say.
“There are so many unintended consequences with all these developments,” said Adam Rozencwajg, managing partner at natural-resources investing firm Goehring & Rozencwajg Associates, which has been betting on higher commodity prices through shares of producers. “Things are moving so fast.”
China has even released stockpiles of oil and industrial metals in recent months to cool the recent price rally.
Still, some investors are skeptical that those and other sources will fill longer-term supply gaps, in part because there are now few parts of the world that are free from environmental pressure.
“It now matters everywhere,” said Chris LaFemina, a metals and mining analyst at Jefferies who expects constrained supply to help lift prices. “Most of the limiting factors on supply are now related to environmental issues.”
Paper Shortage Hits American Retailers When They Need It Most
Companies placing catalog orders are getting turned away at commercial printers, threatening the critical holiday season.
Skyrocketing demand for boxes and packing materials during the pandemic has slashed paper production across North America, and it couldn’t have come at a worse time for retail companies.
“We’re starting to hear, ‘We’re out of paper,’” said Polly Wong, president of San Francisco-based direct-marketing firm Belardi Wong, noting that some of her clients already missed their fall advertising campaigns due to issues at the printers.
Wong estimates that 100 million catalogs will not be printed or reach U.S. homes in time for the year’s biggest spending season as a result. “It kind of put our industry up in a panic.”
With some mills converting to cardboard to meet the spike in e-commerce deliveries and others shutting down altogether, more than 2.5 million metric tons of North American printing and writing paper capacity—or nearly one-fifth of 2019 levels—has come offline since the start of last year. That’s according to Kevin Mason, managing director for ERA Forest Products Research, a financial research company that specializes in paper and forest products.
Normally, printers would look abroad for supply but soaring logistics costs and other markets’ own booming packaging demand have limited that option. U.S. imports of paper and paperboard by volume fell 9.7% last year. Now supplies of certain grades are so tight that some commercial printers can’t get the paper they want “at any price,” Mason said.
The catalog woes of retailers are just the latest pandemic-fueled disruption slamming the sector. Toilet paper and paper towels—prized commodities at the start of the lockdowns—are again in short supply in some locations, with a handful of grocers reinstating purchase limits to crack down on hoarding.
Book publishers are also reporting challenges getting the paper and transportation they need to roll out new titles. Demand for paper products was already running high with the retail industry expecting its biggest back-to-school shopping season in at least five years after a year of virtual learning.
Supply chain issues have roiled overseas markets as well. Supermarkets in the U.K. have faced sporadic shortages of everyday items, like toilet paper, in the run-up to and the wake of Brexit. London-based packaging maker DS Smith Plc, which operates nine paper mills in Europe and two in North America, cited “significant increases to the price of paper” during its earnings call earlier this month.
“The paper market, as a market overall, is extremely tight. We’ve seen numerous price increases going through on paper. I wouldn’t be surprised if there were further increases because it is so tight,” Chief Executive Officer Miles Roberts said on the call, noting that the company has been able to get material due to its “deep long-term relationships.”
The North American paper crunch is more an issue of mill capacity and tight labor than rising raw-material costs. Lumber futures—which touched a record $1,733.50 per thousand board feet in May, helping drive up the cost of everything from toilet paper to wood flooring—have since fallen back near normal, closing at $638.80 on Thursday.
In terms of the strained capacity in the U.S., “we’ve never seen it before,” said Mark Groff, vice president of sales for the eastern region at Nahan, a Minnesota-based catalog printing company with clients that include Patagonia and Warby Parker.
“It’s affecting all of the printers in our business, which is affecting our clients.” The average price of paper has gone up as much as 16% this summer, he said. Nahan expects the tightness to persist through 2023.
The shortage is hitting companies like Pennsylvania-based firepit company Breeo, which put out its first print catalog ever in May after the pandemic spurred a sales boom the year prior. The campaign was successful, so the marketing team started to discuss printing a splashy holiday catalog.
But the paper shortage helped quash that plan; it’s going to send postcards instead, said Alex Smoker, the company’s marketing director.
The recent squeeze marks a major shift for a sector upended in recent decades by the internet. Although mail-order catalogs used to be a mainstay of American shopping—consumers could once buy entire houses from the Sears catalog—demand for paper has been declining in an increasingly digitized world, spurring many paper mills to shift course.
In fact, direct-mail marketing declined so much between 2008 and 2015 that the Direct Marketing Association changed its name to the Data & Marketing Association in 2017 before it was acquired by another trade group.
But print has been slowly making a comeback. In 2018, even internet giant Amazon.com Inc. added a physical toy catalog to grab business after the bankruptcy of Toys “R” Us.
The trend only gained speed during the coronavirus pandemic. With more people spending time at home, retailers mailing physical catalogs have found a captive audience.
At the same time, soaring online advertising costs combined with Apple Inc.’s new advertising tracking rules, which reduce companies’ ability to reach their targeted audience, have pushed more retailers back to print. Although paper catalogs were once seen as clutter, much of that marketing has since moved to email inboxes, making a physical mailing almost a novelty.
Screen fatigue drives down the success rate of online advertising, and in the past year, “we’ve all been overwhelmed with more digital stuff,” said Jonathan Zhang, associate professor of marketing at Colorado State University. “Part of the allure of having a magazine or print material is that it cuts through the clutter.”
From Nairobi To Ningbo: See The Supply Shocks Spanning Globe
Visit Maryland, the proud crab capital of the U.S., and sandwiches made from the meat of Chesapeake blues cost more than triple the normal price, if they’re available at all.
In Bucharest, Romania, a family waits about six months for a new Hyundai Elantra because of the auto industry’s global microchip shortages.
A parent in Nairobi, Kenya, struggles to find antibiotics for a child’s ear infection after consulting 10 local pharmacists. One of them checked with the central warehouse. None there either.
From high-class problems to difficulties finding life’s necessities, the pandemic has convulsed global supply chains on such a scale that few industries, socio-economic classes or regions are immune. Most experts see at least another six months before any return to normal.
The blame lies in several places, but Covid-19 has essentially robbed the global economy of its rhythm. From deck hands on fishing boats to short-order cooks, cheap labor has become scarce as workers fall ill or stay away from work out of fear for their health — relying on government safety nets in the meantime.
The stockpiling of raw materials has caused shortages and delays that create yet more disruption downstream, forcing factories to slow production of finished goods. When products are ready to ship, it’s a struggle to move them smoothly or cheaply across borders and oceans.
For consumers, the turmoil has revealed the vast distances that goods actually travel to arrive on their doorsteps. For companies that spent decades building worldwide production networks, the debate is intensifying: move manufacturing closer to consumers or watch less-sprawled competitors prosper even more in this environment.
“We’ve actually been a beneficiary through this recent cycle because we are a proximity manufacturer with not a lot of instances of very long supply chains,” said Richard Tobin, president of Dover Corp., a Downers Grove, Illinois-based maker of industrial equipment and components, at an investor conference this month.
“What’s happened over the last six months is probably making reshoring a real, real thing.”
But shortening supply chains takes years and massive investments. Minimizing threats like disease outbreaks or natural disasters is the more likely path than eliminating them. “De-risking is the name of the game at the moment, but it’s also not that easy,” said Florian Neuhaus, a partner with McKinsey & Co. in Munich.
So as the supply lines of the global economy fail to keep up with demand, the Big Crunch seen in 2021 might be around as long as the virus throws economies off kilter. Here’s a look at how widely the ripple effects are being felt, based on the observations of Bloomberg reporters around the world:
Shop Early, Wear Sneakers
At a Houston Ikea store in early September, some customers arrived before the doors opened at 10 a.m. and hustled to purchase a Sniglar crib, a popular item for expectant families and one that had long been out of stock at that location.
A notice had gone out to customers that there were seven available. When the doors opened, one man saw another sprint by in the direction of the baby aisle, prompting a mini footrace. Within minutes, four were snatched up and a line had formed to grab the remaining three.
Expect Creative Solutions
In Sydney, Australia’s most populous city, internet shopping and the delta outbreak have put huge strain on supplies over weeks of lockdown. That means more items than normal are out of stock and wait times for home delivery slots are longer.
When their essentials do arrive, some shoppers have been surprised to find their groceries from supermarket giant Woolworths delivered not by the its fleet of trucks, but chauffeured from the store to their door by taxi, a masked cab driver ferrying their bags of milk, bread and other essentials to their front door.
On Aug. 21, a consumer in Singapore put in a routine Amazon.com order for items that would have to ship from the U.S. Typically these packages take about a week to arrive, and are sometimes consolidated into one package rather than scattered across boxes. While a few items arrived separately with only a slight delay, the order for a three-pack of Carhartt low-cut men’s socks finally arrived a month after the order — four times the normal wait.
Prepare To Pay Up
Linen House, a Cape Town, South Africa-based linen wholesaler, has seen the flow of goods from suppliers in Asia being repeatedly delayed, causing it to miss delivery deadlines and wreaking havoc with its cash flow.
Container rates have shot up by as much as fivefold because of the disruptions that the pandemic is causing at ports around the world. Space on containers has been hard to secure and at one point, the company had a shipment of finished goods delayed for six weeks trying to leave India, said Adrienne Sodar, the company’s joint managing director.
Diversify Your Suppliers
In Mexico, the production facility of the Icelandic medical supply company Össur struggled to get access to the ethylene-vinyl acetate needed to make prosthetic feet. Resin for plastic products had been scarce since last year, and they had scrambled to find alternative sources. A year ago, they were dipping into inventory, and had to cut back on their production of neck, knee and elbow braces.
But it was the extended lack of ethylene-vinyl acetate that made them unable to meet prosthetic-foot demand this year. By September, according to Eduardo Salcedo, global operations director of Össur de Mexico, they were at 80-85% of their normal production capacity.
Temper Your Expectations
Near Frankfurt, a customer bought a Skoda Octavia family car in June, with a trailer-hitch-mounted bike rack the only missing feature. After promising to install one for 990 euros ($1,160), the dealer later called to say Skoda hitches were sold out but would arrive again in July. A few days later he called to say delivery had been delayed until November.
The only option was installing equipment from a third-party supplier, but that product wasn’t compatible with Skoda software that drives safety features like sensors on the bumpers, and the technical tweaks needed aren’t possible for months. So another trailer hitch was installed — but many of the car’s safety features remain disabled, possibly until Christmas.
Cargo Piles Up As California Ports Jostle Over How To Resolve Delays
U.S. shipping operations remain clogged as ports, truckers and warehouses can’t find enough workers or agree on 24/7 operations.
Nike Inc. doesn’t have enough sneakers to sell for the holidays. Costco Wholesale Corp. is reimposing limits on paper towel purchases. Prices for artificial Christmas trees have jumped 25% this season.
Despite mounting shipping delays and cargo backlogs, the busiest U.S. port complex shuts its gates for hours on most days and remains closed on Sundays. Meanwhile, major ports in Asia and Europe have operated round-the-clock for years.
“With the current work schedule you have two big ports operating at 60%-70% of their capacity,” said Uffe Ostergaard, president of the North America region for German boxship operator Hapag-Lloyd AG . “That’s a huge operational disadvantage.”
The American supply chain has so far failed to adapt to the crush of imports as businesses rush to restock pandemic-depleted inventories. Tens of thousands of containers are stuck at the ports of Los Angeles and Long Beach, Calif., the two West Coast gateways that move more than a quarter of all American imports. More than 60 ships are lined up to dock, with waiting times stretching to three weeks.
Participants in each link in the U.S. chain—shipping lines, port workers, truckers, warehouse operators, railways and retailers—blame others for the imbalances and disagree on whether 24/7 operations will help them catch up. All of them are struggling with a shortage of workers.
The ports of Los Angeles and Long Beach are managed separately and operate 13 private container terminals. Long Beach officials said last week they would try operating 24 hours a day from Monday to Thursday. Gene Seroka, executive director of the larger Port of Los Angeles, said his port will step more cautiously, keeping existing hours while waiting for truckers and warehouse operators to extend their hours.
“It has been nearly impossible to get everyone on the same page towards 24/7 operations,” Mr. Seroka said.
Truck drivers often don’t show up at scheduled appointments to pick up boxes at the inundated container yards to make space for the next load to come in, say shipping and port executives. Truckers blame terminal congestion, saying delays at one appointment can cause them to miss the next, and that shipping lines aren’t doing enough to clear out the towers of empty containers taking up space at the docks.
Before any changes this coming week, the longshore routine at the ports involve two shifts: 8 a.m. to 4 p.m. and 6 p.m. to 3 a.m. An overnight shift of five hours is available, but it is up to 50% more expensive and rarely used, say liner and terminal operators who foot the bill. Cargo pickups on Saturday are also rare, being charged as premium shifts, and there is no work on Sundays.
The International Longshore and Warehouse Union, which represents the dockworkers, said its members would work a third shift or on weekends, but the pileup of containers must first be fetched out of the port, so there is space to unload more from ships.
“Congestion won’t be fixed until everyone steps up and does their part,” said Frank Ponce De Leon, a coast committeeman at the ILWU. “The terminal operators have been underutilizing their option to hire us for the third shift,” he said.
Federal safety regulations limit most commercial truck drivers to 11 hours of driving time in a 14-hour workday. Port truckers often prefer to start early in the morning so they can maximize the number of loads they move a day, said Tom Boyle, chief executive of Quik Pick Express LLC, a trucking and warehousing provider based in Carson, Calif., not far from the port complex.
Night shifts are less popular. Drivers who pick up loads late at night don’t always have a place to put them. Truckers might have to park a box in a drop yard, and then deliver it later when the destination warehouse is open.
“The biggest issue it probably comes down to is labor,” said Mr. Boyle, who said his company, like other fleets, is constantly looking for drivers.
A shortage of labor is also causing significant delays in loading up freight trains, which move up to 30% of all containers to big distribution hubs like Chicago.
Union Pacific Corp. , one of two main railroads moving freight from the West Coast into the country, is primarily seeing delays, or dwell, when it picks up cargo from ports and hands it off to trucks at destinations, Chief Executive Lance Fritz said in a recent interview. “Where we see dwell is on either end,” he said.
Nike executives said Thursday that the amount of time it takes to move a cargo container from Asian factories to North America is now about 80 days, or twice as long as it was before the pandemic. Moving items such as paper towels or furniture within the U.S. is also a challenge, with Costco executives saying it can be difficult to find trucks or drivers on short notice.
“If you work a gate 24/7 it will improve your velocity” only if all participants are involved, said Wim Lagaay, chief executive of APM Terminals North America, which operates a terminal in Los Angeles. “Up to 30% of overall truck appointments are not met because there are not enough trucks, drivers or chassis.”
Port truckers say some appointment slots go unused because of the lack of equipment, such as the chassis needed to haul containers, or because of restrictions on what drivers can do during that appointment, including returning empty containers.
“There is too much congestion from empty containers on terminals,” said Matt Schrap, chief executive of the Harbor Trucking Association, which represents carriers at the ports of Los Angeles and Long Beach. The shipping lines aren’t moving the boxes out, “which is preventing us from returning empties that we are storing in our yards,” he said.
With such long delays, some cargo owners are no longer arranging to pick up their boxes. Mr. Seroka, the Los Angeles port director, said they use the containers as mobile storage units because it is cheaper to leave them at a port than to rent warehouse space.
“Even if [warehouses] were open 24/7, there is simply no space,” said Jason Tolliver, an executive at real-estate firm Cushman & Wakefield PLC. About 98% of warehouses in Southern California’s logistics-heavy Inland Empire region are fully occupied, and the entire Western U.S. has a 3.6% vacancy rate.
With scarce warehouse capacity, many truckers leave the boxes outside the facilities along with the chassis. Liner operators say that it normally takes three days to return the chassis to the port, but it now takes eight.
Los Angeles and Long Beach face different challenges than export or transshipment piers in Asia and Europe. Other ports haven’t dealt with such high import volumes over the past year by so many operators while the inland part of the supply chain has stayed largely unchanged.
Overall container volumes at the Port of Los Angeles have grown 30% so far this year over 2020, but Mr. Seroka said trucking capacity has increased by only 8%. The warehouse development is equally challenging, he said, as there is an estimated minimum 25% less storage space than needed.
‘It’s impossible to effectively move such volumes if we don’t move to 24/7 operations across the supply chain.’
— Mario Cordero, executive director at the Port of Long Beach
“It’s impossible to effectively move such volumes if we don’t move to 24/7 operations across the supply chain,” said Mario Cordero, executive director at the Port of Long Beach. “They do it in other parts of the world.”
Updated: A U.S. Retail Index Is Near All-Time Highs Despite Supply Chain Woes-2021
California Port’s 24-Hour Operation Is Going Unused
Trucking companies say the Port of Long Beach pilot program aimed at easing ship congestion carries burdensome requirements.
A pilot program offering 24-hour container operations at the Port of Long Beach hasn’t attracted any truckers more than two weeks since the extended hours began, highlighting challenges facing Southern California seaports as dozens of ships back up off the coast.
Total Terminals International LLC, among the largest terminals at Long Beach, began Sept. 13 to allow truckers to pick up containers between 3 and 7 a.m. Monday to Thursday.
“So far we have had zero deliveries,” TTI Chief Executive Bill Peratt said.
Mr. Peratt said TTI is talking to local trucking companies to see if the terminal can attract drivers to pick up and drop off boxes.
”We want to gather information, make adjustments and see if we can change behaviors,” he said.
The extended hours are among efforts at the neighboring Los Angeles and Long Beach ports to cope with a flood of imports this year that has swamped the critical U.S. trade gateway and snarled inland supply chains. The backups have led to a record number of container ships idling offshore for up to three weeks for berth space, an armada that peaked at 73 ships on Sept. 19 and counted 64 vessels on Wednesday, according to the Marine Exchange of Southern California.
The bottleneck is part of the broad congestion tying up global supply chains as pandemic-driven slowdowns at ports and a rush by Western retailers and manufacturers to replenish inventories overruns freight distribution networks.
The congestion at the California ports, which together handle more than a third of U.S. seaborne imports, is exacerbating soaring costs and shipping delays for U.S. manufacturers and retailers. Containers at the ports waited, on average, 5.4 days to be picked up from the docks by truck in August, according to the Pacific Merchant Shipping Association, a trade group, up from an average 2.5 days before the pandemic.
Most terminals are closed at least several hours a day during the week, with more limited operations on Saturdays and Sundays. The shift to 24-hour operations at one of the Long Beach port’s six terminals was encouraged by the Biden administration as part of its goal of reducing bottlenecks across the supply chain, including at inland railroad terminals and warehouses.
The Port of Los Angeles is maintaining its existing hours. Executive Director Gene Seroka said trucking and warehouse operations so far don’t match up with 24-hour operations and that his port is focused instead on eliminating slack in current operations.
Mario Cordero, the executive director of the Port of Long Beach and a proponent of 24-hour operations, said the port has asked major retailers to direct truckers to use overnight gates, but it will take time to set up new work patterns. “We need their buy-in so they can direct their drayage companies to move this cargo,” he said.
Jonathan Gold, vice president for supply chain at the National Retail Federation, said retailers have concerns about the program’s restrictions as well as a nationwide shortage of the truck chassis that are used to transport sea containers.
‘If you can’t push cargo out the gate, you can’t pull it off the vessel.’
— Total Terminals International CEO Bill Peratt
Drayage companies, which specialize in hauling cargo by truck from ports to local yards and distribution facilities, say the overnight system is burdensome.
Truckers can only make an appointment to pick up a container if they are able to drop off a specific type of container and chassis during the same run. Getting everything to match up can be difficult, said Matt Schrap, chief executive of the Harbor Trucking Association.
”I commend TTI for what they are trying to do,” said Mr. Schrap, who represents hundreds of West Coast motor carriers. ”But if you can’t get the appointment in the first place because it doesn’t line up, then it doesn’t make a difference.”
TTI’s Mr. Peratt noted the terminal accepts containers from seven ocean carriers but that truckers are limited by the types of chassis they are able to drop off.
He said the terminal is exploring ways to make the program more productive because being able to move more containers off the docks allows the terminal to unload ships more quickly. “If you can’t push cargo out the gate, you can’t pull it off the vessel,” he said.
Christmas At Risk As Supply Chain ‘Disaster’ Only Gets Worse
Stock prices of retailers are near all-time highs. Global trade is a mess, and peak shipping has just begun.
It’s the beginning of October, just the start of what the retail world simply calls “peak.” But the industry is already in various forms of panic that usually don’t take hold until the weeks before Christmas.
Early in the year, the hope was that the bottlenecks that gummed up the global supply chain in 2020 would be mostly cleared by now. They’ve actually only gotten worse — much worse — and evidence is mounting that the holiday season is at risk.
Across Europe, retailers such as apparel chain H&M can’t meet demand because of delivery delays. In the U.S., Nike cut its sales forecast after Covid-19 triggered factory closures in Vietnam that wiped out months of production. And Bed Bath & Beyond’s stock plunged amid shipping woes, with Chief Executive Officer Mark Tritton warning that disruptions would last well into next year. “There is pressure across the board, and you will hear about that from others.”
Covid outbreaks have idled port terminals. There still aren’t enough cargo containers, causing prices to spike 10-fold from a year ago. Labor shortages have stalled trucking and pushed U.S. job openings to all-time highs. And that was before UPS, Walmart and others embark on hiring hundreds of thousands of seasonal workers to take on the peak of peak.
“I’ve been doing this for 43 years and never seen it this bad,” said Isaac Larian, founder and CEO of MGA Entertainment, one of the world’s largest toymakers. “Everything that can go wrong is going wrong at the same time.”
Now comes the rush of goods into the U.S. for Santa’s sleigh, which will only exacerbate all of this. It’s going to be a daunting holiday season — one that investors appear to be shrugging off despite analysts raising concerns that margins will likely take a hit.
The S&P Retail Select Industry Index, which encompasses 108 U.S. companies including Amazon, Macy’s and Best Buy, is up about 40% this year and almost doubled since the start of 2020. Its combined market cap is $3.3 trillion, just a sliver below a record high from earlier this year.
That jubilance clashes with what’s happening behind the scenes. Retailers have resorted to buying goods made a couple years ago to make sure they at least secure some inventory, according to Steve Azarbad, co-founder and chief investment officer of the hedge fund Maglan Capital, which invests in retailers and distressed companies. In normal times, these items would be liquidated at closeout stores or in foreign markets, but not now.
“Retailers are having a really hard time filling their shelves,” Azarbad said. “I talk to a lot of suppliers, and they’re telling me ‘I just can’t fill all the orders I’m getting.’”
A U.S. Retail Index Is Near All-Time Highs Despite Supply Chain Woes
On the supplier side, Jay Foreman’s been making toys with manufacturing partners in China for more than three decades, and he’s never seen anything like this. His mid-sized toy company, Basic Fun, is on pace for its best year ever — possibly reaching $170 million in sales. There is no shortage of demand, with parents loading up on gifts as the pandemic drags on.
But a dearth of cargo containers has left thousands of the company’s Lite Brites and TinkerToys waiting to be shipped. At just one factory in Shenzhen, there’s roughly $8 million worth of finished goods that could fill 140 containers.
“I got Tonka trucks in the south and Care Bears in the north,” Foreman, the company’s CEO, said of logistical troubles in China. “We’ll blow last year’s numbers away, but the problem is we don’t know if we’ll get the last four months of the year shipped. The supply chain is a disaster, and it’s only getting worse.”
MGA’s Larian is willing to pay more than $20,000 per shipping container — up from about $2,000 a year ago — and counts his blessings that he runs a private company that doesn’t have to answer to shareholders.
He’s having trouble simply getting goods off cargo ships in the port of Los Angeles. MGA recently had more than 600 containers, filled with toys like its top-selling L.O.L. Surprise dolls, waiting to be unloaded for more than six weeks.
“There will be a shortage of toys this fall,” Larian said. “It’s going to be a tough year for retailers.”
Inventories at U.S. retailers are way below historical levels.
When the pandemic knocked the global economy down in early 2020, factories slowed output or closed. Turns out, that was the easy part. Re-starting has been much more difficult. The supply chain has been choked by so many events, such as the Suez Canal blockage, and market dynamics like labor shortages and the spike in transportation costs that it feels like there’s been one “black swan” event after another, according to Lee Klaskow, a logistics analyst for Bloomberg Intelligence.
“The supply chain has never had the opportunity to get back to normal,” Klaskow said.
One of the better scenarios for the fourth quarter is that big retailers drastically increase spending on logistics — including resorting to using costlier air freight or chartering entire cargo ships — but still maintain their sales targets.
That will likely mean they’ll see a hit to profit margins, but it could also lead to taking market share from smaller competitors who can’t match their deep pockets.
“We feel better than most that we’ll get our product here for holiday,” said Michael Mathias, chief financial officer for apparel chain American Eagle Outfitters. The retailer has spent more on air freight to secure goods for Christmas. “There will be some players out here who might not even get their product.”
Ken Hicks, chief executive officer of Academy Sports and Outdoors, is counting on that advantage to boost results. The chain, based in Katy, Texas, has been using its scale to prep for this peak season for months. That’s included importing goods sooner, moving shipments away from the overwhelmed west coast to ports like Galveston, Texas, and booking cargo capacity earlier in the year.
But even with all those mitigation efforts and the scale of a company that generated $4 billion in sales last fiscal year, Hicks said inventory levels were only “adequate.” There’s enough items to meet its sales goals, but he estimated the retailer is about 10% below where he’d like it to be.
During the peak of the pandemic last year, the chain simply couldn’t source items like bicycles, exercise equipment and fishing rods. Now it can, just not as much as it wants. For example, each store would ideally have seven treadmills in stock, but it’s actually about half that, he said.
Consumers lose because their options are limited
Making smart decisions on shipping and supply chain was enough for Janine Stichter, an analyst for Jeffries, to recently upgrade shoemaker Steve Madden to a “buy” after having a “hold” on it since starting coverage at the beginning of 2018.
The company has shifted about half its production to Mexico and Brazil, reducing exposure to Asian markets, such as Vietnam. Making goods closer to the U.S. has made its lead times twice as fast as competitors, she said.
“Supply chain issues are getting continually worse,” Stichter said. For the rest of the year, “the key success factor will be the ability to supply product on time, or relatively on time.”
Meanwhile, Bank of America last week downgraded department-store chain Kohl’s from the equivalent of a buy rating to a sell and cut its target price on the shares by about a third because of mounting logistical costs.
The bigger, more systemic risk — one that could hurt every retailer — is that American spend less than expected because there isn’t enough inventory. The available goods may also not be all that enticing.
The boom in shipping prices has forced manufacturers to make hard decisions about what to transport. Hicks, the Academy Sports CEO, predicted that shoppers “will have to settle more because they just won’t have as good of a selection.”
Shipping big items and goods with lower value don’t make as much economic sense right now. iPhones are small and pricey, making them an ideal good to ship or air freight amid spiking transport costs. But the same case can’t be made for low-end furniture or big stuffed animals.
At Basic Fun in Boca Raton, Florida, Foreman is exporting a lot more Mash’ems because $135,000 worth of the small, squishy collectibles can fit on a single container. He’s moving far fewer Tonka trucks because they are bulky and take up more space, limiting the dollar value that can go in a container to just $36,000.
At Whom Home in Los Angeles, CEO Jon Bass said he had to remove about 70% of the company’s products — totaling thousands of items including wall decor and furniture — from the websites of retail partners such as Walmart and Wayfair because the company can’t source them. Or in some cases, surging costs for materials and transportation made an item pricer than a retailer was willing to pay.
“Consumers lose because their options are limited,” said Bass, who has been manufacturing goods for three decades. “It’s not a normal time in the business world. There is no stability.”
Rising costs in the supply chain, such as cotton prices hitting a 9-year high, and labor are also likely to boost what consumers pay, which could dampen spending.
Or it might cause a bigger shift from hard goods to experiences and services — a trend already in place this year as Americans get back to traveling and eating out. The industry also expects much fewer promotions than usual because inventories are tight, which will turn off bargain hunters.
Add that consumer expectations are sky high, thanks to the ease and speed of e-commerce, and the retail industry is primed to severely disappoint the masses. If last holiday season was dubbed “shipageddon,” what will this year be called? It’s easy to see a boom in gift cards out of frustration as Americans tire of out-of-stocks and logistic mishaps.
“There is a certain amount of underappreciating for the risk” to the results of retailers, said Jennifer Bartashus, an analyst for Bloomberg Intelligence whose coverage includes mass merchants. “Supply chain affects everybody. Meeting customer expectations in an environment where everything is up in the air is nearly impossible.”
Some investors are wising up. Short interest in the SPDR S&P Retail exchange-traded fund, which mimics the S&P Retail Select Industry Index that’s surged this year, recently hit the highest level since late 2019.
But the retail industry has seen this coming. Large firms with the financial wherewithal have been storing goods in their own warehouses or renting space to make sure they can start filling shelves over the next few weeks. It’s another example of how “scale will be the pivotal differentiator” this holiday season, Bartashus said.
There’s also a push to get Americans to shop sooner for the holidays. One effort is trying to create a new shopping event in early October that will include retailers such as Guess? hosting livestream events on their websites. However, this seems like a gargantuan task considering e-commerce has trained the masses that purchases arrive in a few days like clockwork. Retailers have also traditionally saved some big promotions for the week before Christmas to drive a late spending push.
“Consumers might see news about port backups, but that won’t hit home until they try to buy the toy of the year and can’t get it,” Bartashus said. “That’s when they’ll hit crisis mode.”
Many retailers are already there.
’Tis the Season For Price Increases And Missing Stock
Massive supply-chain disruptions are already disrupting the holiday season. Yes, you’re behind, and it’s only October.
Let’s see. We have shortages of CO2, warehouse space, clowns, gasoline, semiconductor chips, cotton and wind, among other things. That means everything from food to clothing to energy is going to get more expensive.
Lots of these shortages (perhaps not the wind) boil down to supply-chain interruptions, such as shortages of much-needed warehouse workers and truck drivers to deliver all the things we want.
The good news is that there is a light at the end of the tunnel. Andrea Felsted reports that British retailer Next Plc’s CEO has seen steady improvements in the supply chain “as shipping backlogs clear and factories return to more normal levels of operation. Prices for shipping journeys in the future were already beginning to fall.”
The bad news is Thanksgiving and Christmas may already be ruined (or mighty expensive), and we’re barely into pumpkin spice latte season. Too early to be thinking about Christmas? Too bad: Our advice to you is to start buying and ordering things now before they get too expensive or disappear from the shelves.
So What Festive Staples Are In Trouble?
The centerpiece of your holiday feast is at risk. Thanks to a toxic combination of higher feed prices, a CO2 shortage and lack of workers, there may not be so many turkeys available this year, and those that are there will be pricier.
If you’re planning on eating a turkey this year, you may want to get a move on as some people have already procured theirs. One British turkey farmer said orders were three weeks ahead of where they were last year.
Crop Prices Are Rising, Meaning Farm Animals Are Getting More Expensive To Feed
Artificial Christmas trees are in an even worse position. Soaring shipping costs could see the price of fake plastic trees shoot up as much as 20% to 25%. The average artificial tree cost $104 in 2019, according to the American Christmas Tree Association. This year it’s likely to be more like $131.
Importers are paying as much as $20,000 per container, according to the Wall Street Journal, and are struggling to find enough of them. It highlights the exposure to disruption holiday items face: Delayed items have to be heavily discounted or put in storage for a year (which might be a problem with the lack of warehouse space).
Real Christmas trees won’t go up as much, but shoppers should expect to pay 5% to 8% more this year. Inflated prices for pallets, netting, Christmas tree stands and fertilizer — as well as the shortage of truck drivers — are all making business tougher for growers.
It may not get easier. Christmas tree prices in Oregon, the U.S.’s leading grower, have already nearly doubled since 2015, largely due to droughts and wildfires destroying acres of crops. The Oregonian reports that one grower lost 90% of his Christmas tree crop to this year’s heat wave.
Will there be gifts to put under the tree? Yes, but get buying. It used to take 40 days for a pair of sneakers to make their way from Asia across the world; that travel time has now doubled to 80 days because of a triple-whammy of container-ship congestion, virus-related shutdowns in Vietnam and that ubiquitous shortage of truck drivers.
That’s going to be cutting it fine for the holiday season, writes Tara Lachapelle. Retailers everywhere are suffering, with some resorting to chartering their own ships. The upshot is yet even more price increases. A Salesforce forecast predicts that gifts could be as much as 20% more expensive compared to last year.
A more expensive holiday season is just a kick in the teeth during a winter where many may struggle to afford to even stay warm. But that’s a whole other supply-chain crisis.
Why It’s Easier To Find Expensive Appliances Than Cheaper Ones
Whirlpool, GM and other companies are prioritizing higher-price products as they try to offset supply-chain snarls.
Anthony Coughlin’s appliance shop has little trouble filling orders for high-tech washing machines or designer ovens. More difficult: satisfying customers on the hunt for bare-bones, low-budget machines.
“There was a day when a customer could walk in the door and buy a secondary piece or a landlord special and have 100 options to choose from,” said Mr. Coughlin, a co-owner of All Shore Appliance in Port Washington, N.Y. “Now it’s more along the lines of, we explain to the customer what we have.”
As the global supply-chain crisis snarls production and bloats manufacturing and shipping costs, companies that make products from lawn mowers to barbecue grills are prioritizing higher-priced models, in some cases making cheaper alternatives harder or impossible to find, company executives, retailers and analysts say.
Some are pushing upscale products in an effort to make up for added labor, shipping and manufacturing costs. Whirlpool Corp., maker of washing machines, KitchenAid mixers and other home appliances, said in July it would shift toward higher-price products as part of a plan to help cover rising costs.
Auto makers and other companies, faced with strapped suppliers, are directing limited parts to their highest-margin products.
“A combination of inflation and scarcity is pushing manufacturers toward higher-priced goods,” said David Garfield, head of the consumer-products practice at consulting firm AlixPartners. “If a manufacturer can’t get enough parts to make all the product they’d like, they may make more of a premium product to protect their profitability.”
The shift to upscale products comes in addition to other steps companies are taking to recoup costs and get as many products as possible to consumers. Across industries, manufacturers of products from toilet paper to televisions are raising prices, winnowing product assortment and imposing purchase limits on retailers.
Supply-chain bottlenecks, worsening as the pandemic persists, have led to extensive congestion at ports as well as soaring costs for transportation and raw materials. Meanwhile, manufacturers, retailers and consumers are getting hit by higher inflation, expected to last well into next year.
A cheap outdoor grill, for instance, might be tougher to track down. Weber Inc. generally builds its less expensive models in China, while the company’s U.S. operations supply the bulk of the company’s product line, which tends to come with higher price tags, Chief Executive Chris Scherzinger said in an interview.
Because port slowdowns in China have delayed the shipment of goods from the country, products made there are less readily available than U.S.-built options, he said.
Mr. Scherzinger said, however, the bigger factor driving stronger sales of more premium options is that consumers are favoring pricier grills as they spend more time at home and outdoors amid the pandemic. “Whatever we can’t offset through productivity, we have the ability to go to the market and offset that with price,” he said.
The U.S. Labor Department’s consumer-price index rose 5.3% in August from a year earlier on an unadjusted basis. The CPI measures what consumers pay for goods and services, including groceries, clothes, restaurant meals, recreation and vehicles.
Mr. Garfield, of AlixPartners, said it’s difficult to tease out how much of that increase is attributable to companies pairing back on lower-priced options and what’s due to price hikes. On calls with Wall Street analysts, several company executives have listed improved “mix,” a shift to more premium products, as part of their strategy to deal with increased costs.
U.S. auto makers are faced with anemic inventory after a two-month shutdown of car factories in spring 2020 to curb the spread of Covid-19 was followed this year by a computer-chip shortage that has hobbled global vehicle production. Car companies have sacrificed less-popular, less-profitable models to focus on pricier vehicles with more features.
General Motors Co., for instance, stopped making the Chevrolet Malibu midsize sedan for more than six months, but has kept all shifts running at a factory that makes its most expensive SUVs.
The average new vehicle in September sold for a record $42,800, up nearly 19% from a year earlier, according to research firm J.D. Power.
Televisions are among items for which cheaper models are becoming scarcer, said Mike Abt, co-president of Chicago appliance seller Abt Electronics. He said the price he pays for appliances is rising and he expects that to continue next year. For the first time he can remember, the price of televisions has actually increased—they typically get cheaper every year.
Mr. Abt said the range of product variations available to him have been cut, by up to 50% in some cases, as factories work to boost production. Manufacturers also have focused on higher-end appliances at the expense of cheaper models.
“They figured they would make less [variations], and more of them,” he said. “It tended to be a little bit more deluxe too: middle to middle-high, less low-priced.”
Lawn mower maker Toro Co. has been narrowing the range of products it makes in response to parts shortages. Rick Rodier, who oversees the company’s construction businesses that make tools to help dig ditches and lay underground pipes, said the limited availability of components means that Toro has to decide which products it makes and which ones it doesn’t. Executives are basing the decision on volumes, profitability and larger strategic goals.
“If we only have so much of this or so much of that, we want to make sure components are allocated to the most popular lines or the lines that are most strategic for us,” Mr. Rodier said. “Let’s make sure we are building the right stuff at the right time.”
How LA Traffic Became A Global Headache
Bottlenecks up and down the supply chain have containers piling up at California ports. The solutions will be slow and difficult.
The world of logistics and manufacturing is in a state of disarray. A record number of ships are stuck outside Los Angeles and Long Beach, Calif. Shortages of everything from vessels to truck drivers and raw materials abound. With freight rates soaring, the ocean-shipping industry is beginning to look like a cartel. In short, the days of quick, cheap deliveries will soon become a distant memory.
Some of the problems stem from Covid-19, no doubt. Staggered shutdowns and reopenings along the global supply chain have created bottlenecks and mismatches. The cost of shipping a 40-foot box on the Shanghai-to-Los Angeles route is so much higher than going the opposite direction that companies are willing to send containers back empty — in other words, it’s more lucrative to get in another eastbound trip than wait for containers to get filled.
Meanwhile, journey times by sea have doubled because of the backlog, causing alternatives like air freight to get more expensive. Sea freight spot prices are expected to rise and congestion to worsen.
Even if pre-pandemic levels of activity resume with rising vaccination rates, the road ahead will not be smooth. The disruptions over the past year-and-a-half have exposed the enduring challenges facing the logistics and manufacturing sectors and the divided nature of global trade.
For starters, demand isn’t where supply is. In the U.S., consumers and businesses are sucking in goods, while inventories in industries from textiles to machinery are running low. Yet there isn’t much scope for American factories to produce more.
Manufacturing capacity utilization was already at 76.7% in August, higher than the average between 2015 and 2019 and just slightly below the highest level of the past two decades (79.4% in January 2006), according to Oxford Economics.
Foreign goods account for 15% of domestic manufacturing gross output, and in certain subsectors, the dependence is even larger. On top of that, shortages of trucks, drivers, shipping vessels and other types of manpower needed along the supply chain are only adding to the backlog.
Then there’s the supply side. In Asia, many countries – notably China – are still stuck in a vicious cycle of lockdowns, unprepared and unwilling to live with the endemic nature of Covid-19. A power shortage on the mainland is threatening manufacturing and industrial production activity – especially for non-essential, everyday goods like toys and textiles that American consumers want but aren’t priorities for Beijing.
The heaps of shipments stuck at ports in the U.S. also bode ill for China’s small and medium-size manufacturers running on tight balance sheets. As one home-appliance maker told state-affiliated media, “We had to stop taking new orders because we do not want to risk defaulting if the goods cannot be delivered on time, which, given the current situation, is very likely to happen.”
One solution is more shipping vessels and containers. But while orders are up, those take years to build. Moving supply closer to demand is another big ask: Business investment in the U.S. has been weak. Even as companies start to invest, those efforts will bear little fruit by next year.
As the last half-decade has shown, moving factories closer, or onshoring, and supply chain recalibration don’t happen overnight — or ever, in some cases. And while two of the biggest shipping lines have capped some rates, the longer-term contract rates remain elevated and are rising. For now, there isn’t an immediate, one size-fits-all way to solve the blockages.
The upshot is that the discrepancies across supply chains will lead to rising prices and costs, particularly in developed markets where demand originates. As JPMorgan Chase & Co. analysts noted, “It appears that the [developed markets] via either thinner margins or higher retail prices, eventually will have to bear the brunt of the cost increases,” noting that it’s unclear whether this will hit demand.
Meanwhile, the differences in freight rates means that shippers could start prioritizing certain routes because they’re more profitable. Such diversions would only make things worse.
The once-banal world of trade and logistics is now anything but. If you haven’t already started, probably best to put in those holiday shopping orders now.
Oatly CEO Bets Brand Strength Can Overcome Supply Woes
The fast-growing company has seen its share price sink about 50% since a high in June. Now it needs to show it has grown up.
Few brands have stormed the food industry like Oatly, but a string of supply stumbles means it now needs to show it can meet rising expectations.
The Swedish oat milk producer took off after a full launch in the U.S. in 2017. Unlike other milk alternatives, Oatly achieves dairy’s creaminess without the usual cloying sweetness of offerings made with soy or almonds. That sparked rapid growth slowed only by the company’s inability to keep up with demand, including selling out at Starbucks.
To fix that, Oatly Group raised more than $1.4 billion in an initial public offering in May to help build multiple production plants around the world. Those new facilities can’t come soon enough because the company is still only filling about 70% of its orders. That’s weighed on its stock, which is now trading below its IPO price. And it has a lot more to prove, with analysts expecting sales to surge 85% to $1.3 billion next year.
As the company expands, it’s continuing to focus on sustainability, both for its core dairy replacement product and the infrastructure needed to make it. Chief Executive Officer Toni Petersson says the brand’s popularity is largely from this commitment to the environment, but all those out-of-stocks and a flood of competition may be taking a toll.
Bloomberg recently spoke with Petersson about sustainability, why the Oatly brand is strong enough to overcome shortages and how Wall Street will eventually come around.
Let’s start with your sustainability goals, like reducing water withdrawal by half and sourcing 100% renewable energy by 2029. What steps are you taking to get there?
That is continuously happening as we’re bringing more capacity onboard and building factories, which are more modern. We did reduce water usage about 60% last year in the two new plants. In Europe, we use electric cars and trucks, something we’ll bring to the U.S.
Leading a shift to a plant-based diet is a big part of your sustainability platform. How much bigger can this market get?
We know across our five key markets [the U.S., U.K., Germany, Sweden and Asia], that 35% to 40% of the population are purchasing plant-based milks. We also know that 60% to 70% of the current users across the key markets joined only two years ago.
There is a massive exploration happening here. A lot of people who care about sustainability still haven’t tested our products. This is a new phenomenon. It’s hard to predict, but something big is going on in society today.
So how do you convince consumers that Oatly is the brand for them, especially since so many likely tried competitors while you were sold out?
Not all oat milks are created equal. We know our consumers care about the emotional connection to the brand and the sustainability credential. We know we’re better than our competitors in driving that.
Are you relying on the brand too much, though?
We never could have done this without world-class products. If we look at Sweden, our home market, we had a supply shortage in Europe, too. During that period, we know from the biggest retailers that 30% of our consumers moved back all the way to dairy. They didn’t pick a competitive oat milk brand or soy milk.
When we’re on shelf again, people are coming back to us.
Why was Oatly so poorly prepared for the Starbucks launch?
The shortage is related to the incredible success of the launch — it’s beyond what we — anybody — thought. We’re delivering twice the forecast. It just speaks about the strength of this collaboration and the demand that is out there for our products.
Once all that new capacity is online, how much more will you be able to produce?
Because of the massive acceleration of demand, is it going to be enough? We don’t think so. I think we’ll have to add more capacity to the plants to be able to reach demand. We have to be very mindful in how we expand, and how we grow.
So with demand still so high, why has Oatly’s stock declined about 50% since hitting a high in June?
It’s not something we can focus on as management. We’re a new company. We’re a different animal. The commercial strategy is very different. The branding is very different. I think the market is going to get to know us more. Every quarter, they’re gonna learn more about us and our company.
MIT’s ‘Beer Game’ Shows Humans Are Weakest Link In Supply Chains
MBA students are taught to suppress their panic-buying impulses in order to come out on top.
Prospects that the world’s snarled supply chains may become less tangled were dealt a setback last month when a couple of MIT students bought 10,000 cases of beer.
The purchase order wasn’t real. It was part of a role-playing exercise called the Beer Game that’s something of a rite of passage for first-year MBA students at the prestigious Sloan School of Management. Created in the 1960s, it models the supply-and-demand dynamics among a brewery, distributor, wholesaler, and retailer.
At the Sept. 24 game, held at a Marriott in Cambridge, Mass., Team Bemba got nervous, made the big buy, and amassed $213,000 in make-believe carrying costs.
The real-life takeaway: The urge to hoard, which has fueled panic buying of everything from flour to microchips, was alive and well in this crop of budding corporate managers. “The pandemic revealed flaws that were latent all along our globalized supply chains,” said management professor John Sterman, addressing the 125 assembled students before the game got under way.
“It’s urgent that we figure out how to improve them so we are prepared for the next shocks, whether another pandemic, civil unrest, climate change—or all of the above.”
When the game wrapped after three hours, all 15 of the MIT teams had logged higher-than-average costs. So Sterman shifted the discussion to understanding how such a select group could “all do so badly. And not just badly, but really badly.”
Sterman, who has been running students through the Beer Game for four decades and has written papers about it, compares it to the flight simulators used to train airline pilots.
The pandemic has driven home the importance of putting would-be corporate managers through comparable exercises to determine how they’ll react under pressure. “In an aircraft, or a firm, failure is too costly,” Sterman says. “Simulation is then the best, and sometimes only, way we can learn for ourselves how to manage complex systems.”
The Beer Game is designed to teach players about the bullwhip effect, a systems theory developed around the work of Jay Forrester, a computer engineer who joined Sloan’s faculty in the late 1950s. In the simulation, an unexpectedly large order for beer typically sets off a wave of panic orders and inventory building, with the effects amplifying along the supply chain back to the factory.
All sorts of bullwhip effects are observable in the global economy right now—ships backed up at U.S. and Chinese ports, Britons lining up for gas, carmakers idling production lines in response to a scarcity of chips. “Fear of running out is causing every company to over-order—like the toilet paper shortage, but at epic scale,” Tesla Inc.’s Elon Musk tweeted in June about semiconductors.
More recently, American retailers have indicated they’re stocking up as much as possible based on expectations that consumer demand will stay strong for the foreseeable future. “We’re ordering as much as we can and getting it in earlier, and I think as evidenced by most recent sales results, we’re doing OK with this,” said Richard Galanti, executive vice president and chief financial officer of Costco Wholesale Corp., on a Sept. 23 earnings call.
As director of Schwarz Asia Pacific Sourcing Ltd., a unit of one of the world’s biggest supermarket operators, Bjoern Lindner buys fixtures and fittings such as shelves, shopping carts, and lighting, and ships them to Europe.
“I have no clear predictability on when our goods can be shipped, so the obstacle is transportation from the factory to my warehouse in Germany because there are a lot of uncertainties in between,” he says.
Testrite Group, a Taiwanese trading company that helps American big-box retailers source home goods from more than 4,000 suppliers in markets including China, India, and Southeast Asia, is having to triple inventory levels, especially at U.S. warehouses, because of shipping disruptions.
“Traditionally with inventory, the lower the better. But the world is different now,” says Bruce Shen, a spokesman for the company. “An inventory rush like this was very rare before.”
Sterman believes that focusing on Covid-related anomalies as the main source of supply chain strains underplays the cascading effect of bad decisions. “It’s not because of the pandemic. It’s because of the way human beings reacted to the fear that the pandemic induced,” he says. “That’s missing in the supply chain discussion these days.”
That diagnosis resonated with Michelle Diab, a student who took part in the September Beer Game. “The amygdala surges into powerful overdrive with frantic orders for hundreds of units of inventory, high levels of frustration, and blaming the customer,” she says, referring to the zone of the brain associated with fight-or-flight and other survival behaviors.
“I was left wondering how it is possible that any organization is capable of any good if this is our human disposition when under threat.”
One of the lessons from the Beer Game is that trust and collaboration are integral to the smooth functioning of supply chains. These can break down when there are production bottlenecks or other types of stresses.
For instance, a wholesaler that suspects a usually dependable supplier may prioritize orders from bigger clients is more likely to place duplicate orders with several factories—even if it risks damaging valuable relationships and winding up with too much stock.
Mike Swartz, who played a wholesaler on the winning team, MmmmmmmBeer, says he focused on tracking orders from the retailer and anticipating its needs without sending any bogus signals in the form of an oversize order. The key, he says, was “trusting our teammates and keeping a cool head.”
BOTTOM LINE – A role-playing game devised by researchers at MIT illustrates the workings of the bullwhip effect, a dynamic that has worsened supply chain disruptions amid the pandemic.
Crews Are Abandoned On Ships In Record Numbers Without Pay, Food Or A Way Home
Failing companies ditch vessels too expensive to repair or too difficult to sell, leaving behind cargo-ship castaways trapped in ports or offshore
CONSTANTA, Romania—An engineer stuck on a cargo ship abandoned in a Black Sea port has waited four years to get paid and go home.
Off the coast of Somalia, a crew awaiting pay languishes on a pirate-trawled stretch of the Indian Ocean while their ship slowly takes on water. Another 14 seafarers, stuck on a cargo ship off the coast of Iran, have run out of food and fuel. Some contemplated suicide.
“We cannot survive here,” said an engineer aboard the MV Aizdihar, abandoned off the Iranian port city of Bandar Abbas. “Please help us.” He spoke via video earlier this year, his face drawn.
The $14 trillion shipping industry, responsible for 90% of world trade, has left in its wake what appears to be a record number of cargo-ship castaways. Abandonment cases are counted when shipowners fail to pay crews two or more months in wages or don’t cover the cost to send crew members home, according to the International Maritime Organization, a United Nations agency.
Last year, the number of such cases reported to the agency more than doubled to 85 from 40 in 2019. This year is on track to be worse.
More than 1,000 seafarers are currently abandoned on container ships and bulk carriers, according to estimates by the International Transport Workers’ Federation, a labor union.
The true toll is likely higher because many crew members are reluctant to speak out for fear of being blacklisted, according to interviews with seafarers on abandoned vessels, shipowners, agents, maritime organizations and union officials.
Mohamed Arrachedi, the union’s Middle East coordinator, said he wakes up to dozens of WhatsApp messages from distraught sailors around the world: “It’s a global humanitarian crisis.”
In the United Arab Emirates, one shipping company abandoned seven container ships in recent months, leaving behind dozens of crew members, each owed a year’s wages. A five-man crew marooned next to a Dubai tourist resort, living off little more than rice for 10 months, recently ended a four-year ordeal.
Last year, a mostly Egyptian crew was abandoned in Sudan. The ship was then sold and manned by a mostly Sudanese crew who also were abandoned in Egypt. Three of them are still aboard, floating off the Suez Canal in their ninth month without pay.
The surge in cases prompted three of the world’s largest seafaring nations—China, Indonesia and the Philippines—to propose in August the establishment of a seafarers’ mutual emergency fund to help abandoned crews.
Trade disruptions caused by the pandemic and the nature of the competitive, lightly regulated global shipping industry has helped drive the increase in the number of stranded sailors.
Industry consolidation has yielded a half dozen shipping firms that ferry a majority of the world’s containers, reaping record profits from ocean freight’s best-ever quarter in the final three months of 2020, according to New York-based investment manager, Blue Alpha Capital.
These firms have driven out competitors helming smaller, more rundown ships. Struggling companies are often one delay or cancellation away from foundering. When debts pile up, or the cost of repairs becomes too high, some firms choose to abandon a ship or sell it for scrap.
Completing a sale can take years in normal times. Pandemic-era travel restrictions have made it even harder, creating barriers for buyers, bankers, inspectors or court officials to visit ships ahead of transactions.
When shipping companies run out of money, crew members often end up with nothing, except a derelict ship to squat on.
Some governments require sailors to remain aboard as guarantors until shipowners pay port authorities for berth fees and other charges.
More often, sailors refuse to disembark, convinced they will never recoup months or years of lost wages if they leave. Seafarers stuck on board generally borrow money from friends and family to feed themselves and crewmates.
Many say they will stay put until the ship is sold for scrap, which can take years, rather than go home empty-handed.
Under the Maritime Labour Convention, a U.N.-backed treaty in effect since 2013, cargo-ship owners are required to hold insurance to care for abandoned crews. Many Middle Eastern nations didn’t sign the treaty and don’t enforce its rules, allowing their coastlines to become graveyards for dumped ships.
In Egypt’s Suez anchorage, at the mouth of one of the world’s busiest shipping lanes, several sailors have been trapped aboard a vessel for years.
Vehbi Kara, the 56 year-old Turkish captain of the MV Kenan Mete, was detained for a year in Suez while Egyptian authorities and the ship’s owner tussled over unpaid debts. He was repatriated in July. Nearby, Syrian sailor Mohammad Aisha spent four years abandoned on the MV Aman before he was allowed to disembark in April.
The crew of the Ever Given, which clogged the canal for six days in March were held for four months aboard the cargo ship, until its owners reached a multimillion-dollar compensation deal with Egyptian authorities for its release.
‘It’s A Prison’
At the core of the problem is the opaque manner the shipping industry polices itself. Shipowners hold primary responsibility for the welfare and well-being of seafarers, according to the IMO, but they face few consequences across much of the world’s oceans for abandoning one vessel after the next.
In 2016, the mostly Syrian crew of the cargo ship Lady Didem was abandoned after not being paid for a year. The seven sailors spent four months docked in Greece, borrowing from their captain, Wessam Alhamoud, to buy food and water. The men sent WhatsApp messages to the ship’s Turkish manager, Mustafa Demirel. The ship was sold the following year. After getting paid, the crew left.
Mr. Demirel said the crew were troublesome employees who didn’t go along with his arrangements, under which he would have paid them once they left the vessel. He blamed sanctions on Syria’s banking system, but declined to explain further.
Last year, another crew aboard a vessel managed by Mr. Demirel—the MV Ali Bey—was abandoned in Romania after inspectors and shipping agents at the Constanta port noticed that they didn’t hold proper contracts and that some hadn’t been paid in more than a year.
Since then, four crew members have remained on board to await their pay, relying at times on a small propane camp stove for heat, as well as intermittent electricity. The crew has twice agreed on a payment plan with the owner, they said, but most of the money never arrived.
The dispute has gone to a Romanian court, which is considering whether to transfer the case to Panama, where the ship is registered. The crew fear that giving up to head home could cost them nearly $200,000 in claimed wages.
To pass the time, crew members play cards and throw chicken bones to stray dogs near the berth. They sit on the steps of a nearby duty-free shop to stare past the port’s metal fence to watch the coming and goings of pedestrians. Mostly, they sleep, lying in bed deep into the afternoon.
“We’re living inside iron chains. It’s a prison,” said Capt. Abullah Dahha, who showed WhatsApp messages pestering Mr. Demirel, the ship manager. “He wants to break us.”
The crew should leave the ship and let a court settle the dispute, Mr. Demirel said.
The countries where ships are registered, called flag states, are meant to ensure shipowners look after seafarers and their vessels. Yet many don’t, said David Hammond, founder of the U.K.-based Human Rights at Sea advocacy group. Countries are mandated to verify that ships flying their flags pay seafarers on time, provide provisions and repatriate them at the end of contracts.
‘We become friends with the stray dogs,’ said Abdeen Ahmad, who sometimes feeds them. He and other seafarers rely on volunteers to bring food and supplies.
“The flag state hot-potato exercise helps people offload the problem—it’s no one’s responsibility,” Mr. Hammond said.
In 2013, the Russian-owned MV Rhosus, carrying 2,750 tons of deadly ammonium nitrate, arrived at Beirut’s port and was abandoned for not being seaworthy. Its owner declared bankruptcy and disappeared, leaving the ship’s crew without food or supplies.
After a year, the sailors were evacuated, and Lebanese authorities brought the chemicals ashore. In August last year, the stores of ammonium nitrate exploded, killing more than 200 people and causing billions of dollars in damage that devastated Lebanon’s capital and economy.
The U.N. Security Council met in June to discuss another ship that officials worried would cause a similar explosion.
Off the coast of Yemen, one of the world’s largest oil supertankers, laden with 1.1 million barrels of crude, sits decaying in a war zone. An errant rocket or the ship’s corroding steel hull could trigger an explosion and massive spill.
Such a disaster would disrupt food deliveries to a country on the cusp of famine and block shipping lanes to ports on the Red Sea.
Riasat Ali, a 52 year-old second engineer from the Pakistani city of Faisalabad, boarded the MT Iba in July 2017 under a 12-month contract he hoped would pay for his son’s university studies. Mr. Ali was still on the 5,000-ton Panama-flagged ship four years later.
Shortly after he boarded, the crew was abandoned by its owner, Alco Shipping, which couldn’t service its debts. Mr. Ali and the three other crewmen—from India and Myanmar—spent the next 32 months trapped 12 miles off the shore of the United Arab Emirates. They ate their way through rations until the barest essentials remained.
“Breakfast, lunch and dinner, all we ate was rice,” Mr. Ali said. “We didn’t even have sugar or salt.”
Facing starvation, the sailors turned to a charity—the U.K-based Mission to Seafarers—to deliver food and water. “We lived like slaves, begging for food,” said Vinay Kumar, an engineer from India.
In January, violent storms broke two of the MT Iba’s anchors, and for 12 terrifying hours the boat listed at 45 degrees. “I was on the bridge with the chief engineer, both of us too frightened to talk to each other,” Mr. Ali said. “We were trying to lay down but the angle made us vomit.”
The ship drifted for nearly 20 miles before running aground opposite the Umm Al Quwain beach, a popular weekend getaway spot among people in Dubai, especially for kitesurfing.
Mr. Ali and his shipmates were allowed to leave the ship in February, after it was sold to another Dubai-based company, which agreed to pay 70% of the crew’s $230,000 in unpaid wages.
The sallow-eyed sailors, clad in torn T-shirts, descended the ship’s ladder and swam to shore to collect their checks. “We didn’t get what we deserved,” Mr. Ali said, “but we had to get home to our families.
Will Supply Snarls Force Capital Spending?
The third-quarter earnings season should clarify whether industrial companies plan to expand manufacturing capacity.
One way to gauge just how transitory the current supply-chain challenges are is to look at the degree to which companies are spending to add more capacity.
The third-quarter industrial earnings season kicks off next week with factory-floor distributor Fastenal Co. The theme will undoubtedly be logistical logjams and parts shortages, which have become materially worse since the last time manufacturers reported results en masse over the summer.
Data-center equipment maker Vertiv Holdings Co., electrical giant Eaton Corp. and lock manufacturer Allegion Plc are among those that have already warned Wall Street that their sales will be weaker than previously expected because of insufficient supplies. Paint-maker Sherwin-Williams Co. cut its guidance not once but twice in the span of only a few weeks as it gave up hope for an improvement in logistics markets and raw-material costs this year.
“The sheer amount of money we’re spending on flying parts around the world isn’t great,” Tesla Inc. Chief Executive Officer Elon Musk said at the electric carmaker’s annual meeting this week.
CEOs insist revenue hasn’t been forfeited but rather delayed until 2022 or 2023. Whether that’s truly the case depends on how long these supply-chain snarls last. There’s no guarantee of an absolute level of demand for any given economic cycle, and there isn’t “a ‘lost and found’ department for industrial revenues,” Barclays Plc analyst Julian Mitchell wrote in a report this week.
There are myriad reasons for the current gridlock but two main solutions: buy less stuff or build more factories and container ships. The world’s transportation and supply-chain infrastructure was designed to support a certain pace of economic growth; when demand is three times that level, the system simply can’t keep up. One end or the other has to give.
If manufacturing CEOs are right that customers won’t slow purchases anytime soon, then it’s a bit weird that there hasn’t been more in the way of capital spending increases. Few, if any, major multi-industrial companies increased their spending plans in the second quarter, even as many indicated their current capacity is booked up for the next several years.
In an August note, Melius Research analyst Scott Davis attributed this discrepancy to the difficulty companies are having finding materials and labor: They want and need to expand, but they can’t, or it’s too expensive.
Indeed, 3M Co. Chief Financial Officer Monish Patolawala said in September that the Post-it maker’s capital expenditures would most likely be on the low end of its forecast for $1.8 billion to $2 billion this year because of a lack of materials.
“We won’t hesitate to invest where we see the growth opportunities, and we do see growth opportunities,” Patolawala said. “You’ll hear more from us as we go into 2022 on that front.”
It’s a bit of a catch-22: If companies don’t add capacity to ease the supply-chain crunch, they risk missing out on demand. But they can’t add more capacity because of the supply-chain crunch. And because it can take months or even years to set up new manufacturing capabilities, companies risk building factories for a market that no longer needs them.
To Spend Or Not To Spend?
The Business Roundtable publishes a survey-based index of CEO plans for capital spending. Plans for investment have increased but CEOs cited labor shortages and concerns about tax changes as the biggest impediments.
The supply-chain headaches may be reaching the point where companies have no choice. There have been more than a dozen high-profile spending announcements for semiconductor and electric vehicle plants from the likes of Ford Motor Co., Intel Corp. and Samsung Electronics Co. Sherwin-Williams, meanwhile, is aiming to set up 50 million additional gallons of architectural paint production capacity in the next two quarters.
The company also announced late last month that it’s buying Specialty Polymers Inc. — a maker of coatings ingredients — to help diversify its supply-chain away from the hurricane-prone Gulf region in North America.
Specialty Polymers generated $112 million in revenue last year and has production facilities in Oregon and South Carolina. In mid-September, plastic-container maker Berry Global Group Inc. announced a more than $110 million investment to expand its food-service manufacturing capabilities in North America.
Perhaps the official start of the third-quarter earnings season will bring more announcements of capital outlays. But there’s also a bigger question of whether industrial companies are truly interested in investing in fresh hardware manufacturing capabilities. The largest manufacturing behemoths have primarily been spending their money on software takeovers.
Such deals have accounted for almost 10% of all M&A volume by U.S. industrial acquirers so far this year, an allocation that’s second only to 2020, according to data compiled by Bloomberg. And that’s before accounting for this week’s news that Emerson Electric Co. is in talks to merge its software assets with Aspen Technology Inc.
Either way, the continued supply-chain bottlenecks and niggling questions about the strength of underlying demand make capital expenditures a key watch item.
A Walmart-Home Depot Merger Makes Shiploads of Sense
The retail giants could combine their significant power to attack supply-chain problems.
Should Walmart Inc. merge with Home Depot Inc.? There may be a container ship worth of reasons for them to consider it.
Walmart and Home Depot are among U.S. retailers that have grown so frustrated with the limited space on container ships and rising cost of ocean shipping that they’ve begun chartering their own vessels to speed the journey from factories on one side of the world to consumers on the other.
Costco Wholesale Corp. also resorted to this option recently rather than risk having key items out of stock heading into the holidays.
The reasons for the global freight congestion are numerous and complex, but one critical moment came in March when a mega-freighter ran aground in the Suez Canal, a crucial waterway for global trade. Unable to handle the heightened demand for goods, the system remains backed up — even on land, where there’s a dearth of truck drivers.
Shipping has become so expensive in the process that Bed Bath & Beyond Inc.’s executives said last week that they experienced a 360 basis point surge in freight costs, which was well above the already steep increase they had budgeted for last quarter.
Cutting down on costs to bolster profitability is one of the chief reasons companies pursue mergers and acquisitions, and so it’s quite possible that sustained supply-chain bottlenecks will spur some previously unfathomable unions.
The idea for Walmart and Home Depot to combine comes from Brittain Ladd, an industry analyst with supply-chain solutions company Kuecker Pulse Integration and a longtime consultant to the retail industry. That’s just one possible deal permutation, although the case is convincing.
Walmart is the top U.S. importer of goods by container ship, followed by Target Corp. and then Home Depot, according to the Journal of Commerce’s annual ranking. “Imagine their combined ability to collaborate on procurement,” Ladd said in a phone interview.
Not only could they negotiate better rates, but they could even acquire their own ships and sell excess capacity to other businesses by forming a logistics unit. This is a bit like the vertical integration Amazon.com Inc. has started assembling.
“Supply chains have always had an element of risk to them because supply chains in most cases are truly global,” Ladd said. “But what we’re also seeing today are supply chains that are in many ways too lean and paying for it. This is one of the best reasons for very large retailers and other companies to say, ‘We need to start thinking big in our M&A and use it to reimagine our supply chains.’”
The strategic rationale for a Walmart-Home Depot deal extends beyond that, though. Walmart stores could use a refresh, and as groceries increasingly drive Walmart’s revenue, Home Depot could become the overarching label or overseer of non-grocery items.
Ladd envisions a Home Depot-branded do-it-yourself section at Walmart, a bit like Target is doing with Ulta Beauty Inc. for makeup. “The Walmart of 1970 doesn’t look that much different from the Walmart of 2021,” he said.
“This is a way to jazz up their brand.” Greater visibility and control over inventory would allow them to modernize with dynamic pricing — i.e., getting rid of static paper stickers and adapting prices quickly to stoke demand and offer spot promotions, he said.
Or perhaps they could expand into a new adjacent product category such as a private-label furniture line to compete online with Wayfair Inc., which has carved out its own supply-chain advantage.
There are obstacles: For one, their size — Walmart and Home Depot are valued at more than $340 billion each. And antitrust regulators may take issue with the idea. But it illustrates a concept that could apply to other sets of retailers. The broader brick-and-mortar retail industry isn’t known for being very active, or very successful, in big strategic M&A. Even Amazon’s once-feared purchase of Whole Foods Market didn’t accomplish much of note.
An alternative to a full-blown merger is to just strike an alliance, as European grocers Carrefour SA and Tesco Plc did, pooling their buying power to gain more negotiating power with suppliers and manufacturers. Still, it was a temporary arrangement that the companies decided to end this year.
For huge retailers, there’s an added incentive now to assert greater control over their supply chains, and takeovers could be the way to do it. If Walmart wants to think outside the cargo box, Home Depot is an option.
How To Move More Goods Through America’s Clogged Infrastructure? Robot Trains
Self-driving trains could be greener, carry more stuff, and help unclog America’s congested supply chains. And making them a reality will likely be far easier than perfecting autonomous vehicles.
Anyone who has spent Christmas morning sending a choo choo around the tree knows the primary hazards to trains are toys wandering onto the track, and taking turns at high speed—both of which are also more or less the primary hazards to trains in real life. So, you might ask, how hard can it be to make trains fully autonomous?
Or maybe you’re wondering why we should even care about trains and how they operate—what is this, the 1800s?—so let’s back up a bit. If you think America is solely dependent on trucks to move freight, you might be suffering from tunnel vision: Trains account for a third of the ton-miles—that is, a ton of weight carried a mile—that freight travels in the U.S. every year.
That’s almost as much as is carried by trucks. The U.S. has the most extensive rail network of any country on earth by miles of track—yes, even bigger than China’s—and it’s currently facing some of the same snarls and congestion as seemingly every other part of the country’s supply chains, on account of unprecedented activity at ports and record demand at some rail hubs.
Trains might seem like a mature technology with little room for improvement or expansion, since adding new rail lines is prohibitively expensive, as battles over the cost of the expansion of Amtrak service have shown.
But researchers who study the matter say that making them fully autonomous could improve their safety and also significantly increase the amount of freight that can be carried on America’s rail network, by making more efficient use of it.
As the U.S. struggles with truck driver shortages and companies scratch their heads over how to meet their goals for slashing carbon emissions, trains—which are four to five times as efficient in energy used per mile as trucks—could be a two century-old technology whose time has come again.
I’ve written about the limitations impeding grand ambitions for self-driving cars. But trains have qualities that let them steer around those problems. Most important, trains are on tracks, which means an artificial intelligence train engineer doesn’t have to worry about issues affecting drivers of cars or trucks—no tailgating, lane changes, left turns against traffic, and so on.
“We think that trains are going to reach full autonomy faster than vehicles,” says Maxim A. Dulebenets, an assistant professor of civil engineering at Florida A&M University who recently published a broad review of the literature on autonomous trains.
One Reason: hundreds of passenger trains are operating autonomously in the world already, as part of city metro systems.
The first fully-autonomous subway train made its debut in Kobe, Japan in 1981, and the technology has proliferated ever since, spreading from Paris to New Delhi, and São Paulo to Vancouver. The world’s first fully autonomous freight train, which crosses the Australian outback, was put into regular service in 2019 by the mining company Rio Tinto.
In January 2020, China commenced operation of a fully autonomous “bullet” train between Beijing and 2022 Winter Olympics host city Zhangjiakou.
A number of other trials of both passenger and freight autonomous trains are under way. Trials of a German-Dutch autonomous freight train serving the port of Rotterdam began this month. France’s national rail company is currently testing a train that could begin carrying passengers as early as 2023. In the U.S., an autonomous freight train system built by New York Air Brake was tested in the Colorado desert in 2019.
A future of autonomous trains could mean putting a lot more freight onto America’s existing rail network without adding new lines, says Nalin Jain, group president of digital electronics at Wabtec, a Pittsburgh-based train-manufacturing company that traces its roots back more than 150 years.
Existing and future technology allows trains to be longer, to run with less distance between them, and to be broken down and reconstituted at ports and rail yards in a more efficient fashion, he adds.
A European Union-funded study published in 2020 found that moving to newer systems for managing trains could increase the capacity of existing rail networks by up to 44%. An internal study by Wabtec indicates in the U.S. the increase could be even higher, up to 50%.
An increase of that magnitude in the ton-miles carried by America’s rail network would be the equivalent of moving approximately one million fully loaded Boeing 747-10 passenger jet planes from coast to coast every year.
Despite the head of steam engineers have built up, automatic train drivers aren’t ready to be rolled out just anywhere, cautions Dr. Dulebenets. Most autonomous trains are built on new and dedicated tracks they do not have to share with other, human-controlled trains.
These newer systems tend not to include hazards like highway crossings, where the vast majority of accidents involving trains and motor vehicles happen in the U.S. every year.
Making autonomous trains that run on shared, open rail networks is much harder than accomplishing the same thing on closed metro rail systems, says Jean-François Beaudoin, president of digital and integrated systems at French locomotive manufacturer Alstom.
Doing so requires that these trains be given “eyes and ears,” as he calls them—sensors that can look ahead on the track for unexpected obstacles.
The complexity of the U.S. rail network, where many lines are shared between multiple private rail companies, means automating our system could be daunting—a process that “could take decades,” says Dr. Dulebenets.
Making autonomous trains play nice with human-driven ones is akin to the challenges of partial self-driving technology, where humans and AI must be meshed in ways that don’t lead to confusion for either.
In terms of safety, says Mr. Beaudoin, “We are much more demanding with machines than with humans, because we have much more compassion for a human who makes a mistake than a machine that makes one.” An automated metro system must be designed to make one mistake for every million a human engineer would make, he adds.
Another potentially huge issue is cybersecurity. Trains can weigh between 4,000 and 20,000 tons, may carry hazardous materials, and can take miles to stop, so making them remote-controllable means putting that much mass at risk of takeover by hackers, if the systems for directing them aren’t absolutely secure.
Yet another challenge to autonomous trains is legal—who is responsible when, inevitably, an accident happens? As with autonomous cars, the challenge here is that even if an automated system is safer than a human-driven one, when it fails, it can shift who is responsible for an accident.
A longstanding hypothetical in philosophy on the ethics of decision making—the so-called trolley problem—can become all too literal once AI is fully in control of a train.
Challenges aside, in some ways America’s trains are already surprisingly automated, notes Eric Gebhardt, chief technology officer of Wabtec. Federal law has required as of December 2020 that all U.S. trains be equipped with a Positive Train Control system, which are kind of like automatic emergency braking systems in cars.
The system prevents trains from colliding with other trains, going too fast on curves, or blowing through railroad switches set incorrectly.
As has happened in other kinds of transportation infrastructure, like ports, the move to autonomous systems in trains is coinciding with other upgrades. The logic: if you’re going to buy a new train or make significant upgrades to a rail system, you might as well make all the available and cost-effective upgrades at once.
The next step in train automation is moving away from the current “fixed block” systems used to maintain a safe distance between trains, in which rail lines are divided into blocks of fixed length in which only one train at a time is allowed to reside, says Mr. Gebhardt.
A “moving block” system, on the other hand, allows trains to follow closer to one another because the safety buffer ahead of and behind the train moves with it. Switching to a moving block system requires maintaining constant communication between trains and a central dispatch system, however. Several customers are already testing such a system, adds Mr. Gebhardt.
The EU study that found rail-network capacity could increase by half with the application of new technologies assumed these trains use a moving block system, powered by trains’ onboard computers. Such a system would communicate with the train ahead, knowing its weight, the weather, what it’s doing and when it will brake.
But one advantage of rail networks is that they’re already bristling with signals and sensors, so some of the “intelligence” required to control a train can be built into and alongside the track itself, and decisions about the speed of trains can be made by a system that’s remote.
In Australia, the world’s first, and still only, full-time autonomous freight train incorporates both onboard and systemwide sensors and processing, says a Rio Tinto spokesman. The train itself has cameras, radar, and a collision detection system, and the line it runs on is also equipped with CCTV cameras at all public rail crossings.
Rio Tinto calls their automated train “the world’s largest robot,” and it seems a fair description. The challenges to creating and deploying automated trains across the globe are the same ones robots face in every other field, says Dr. Dulebenets.
From acceptance by the public and communication between them and drivers of other vehicles, to finding new roles for the workers they might displace from their current roles, the main barriers to the adoption of autonomous trains is us.
Biggest U.S. Retailers Charter Private Cargo Ships To Sail Around Port Delays
Home Depot, Costco and Walmart resort to private charters in push to stock shelves for holiday shoppers.
Global supply-chain delays are so severe that some of the biggest U.S. retailers have resorted to an extreme—and expensive—tactic to try to stock shelves this holiday season: They are chartering their own cargo ships to import goods.
Port delays, Covid-19 outbreaks and worker shortages have snarled the flow of products between Asia and North America, threatening the supplies of everything from holiday decorations and toys to appliances and furniture. It is taking roughly 80 days to transport goods across the Pacific, or twice as long as before the pandemic, retail and shipping executives said.
Walmart Inc., Home Depot Inc., Costco COST 6.58% Wholesale Corp. and Target Corp. —some of the biggest U.S. retailers by revenue—are among the companies that are paying for their own chartered ships as part of wider plans to mitigate the disruptions, a costly and unattainable option for most companies. Some of the chains are passing along these added costs by raising prices for shoppers.
The chartered ships are smaller than those that companies like Maersk operate and move just a small slice of total imports, the executives said. Ships that can hold around 1,000 containers are on average nearly twice as expensive as the cost of moving cargo on a typical 20,000-container vessel, according to freight forwarders.
But the charters provide the big retailers with a way to work around bottlenecks at ports such as Los Angeles, by rerouting cargo to less congested docks such as Portland, Ore., Oakland, Calif., or the East Coast. It also could help retailers ensure that key products such as electronics and décor arrive for the holiday season.
Shipbrokers said small vessels chartered for point-to-point voyages now earn around $140,000 a day, multiple times more than levels before the pandemic, when such sailings were rare because of the high cost. “They at least know that the inventory will arrive in time for the Christmas rush,” said Vicky Zervou, a sales manager at Athens-based freight forwarder Aritrans SA.
In May, Home Depot executives were looking for new ways to bring in goods in a timely fashion when they struck on the idea of chartering their own ship, something the company had never before done. “It was almost started I think as a joke,” said Sarah Galica, vice president of transportation at Home Depot. “Let’s just charter a ship.”
Products coming in on chartered ships make up a small percentage of Home Depot’s overall import volume, she said, but the shift allows the company to have more control over when products arrive in stores and give priority to the most in-demand products. For Home Depot, the charters are moving plumbing supplies, power tools, holiday décor, heaters and other items.
Richard Galanti, Costco’s chief financial officer, said the retailer has chartered three ships, each capable of carrying around 1,000 containers, to bring goods between Asia and North America.
Each vessel will be making up to 10 deliveries for Costco over the next year. Those ships will account for under 20% of the warehouse retailer’s import volume from Asia next year, he said.
The charters are more expensive than shipping through Costco’s typical carriers, Mr. Galanti said, but give “us some amount of our total that we control.” For example, he said it provides the ability to bring a ship to a new port if it faces port congestion and can’t unload its wares. Costco also wants to give priority to seasonal merchandise that has to sell at a specific time of year, he said.
Walmart, the country’s largest retailer with more than $500 billion in annual revenue, has chartered its own ships before this year, having used the strategy during the Los Angeles port strikes in 2012.
The ships give Walmart visibility on arrival times and freight pricing, a spokesman said. Because of port congestion in Los Angeles, Houston and Savannah, Ga., some chartered ships are being rerouted to smaller, less busy ports, such as Mobile, Ala., the spokesman said. In recent weeks, Walmart also sent its own employees to the congested ports to help facilitate landings, he said.
Chartering ships is a tactic that is out of financial reach for small retailers, giving large companies a potential advantage in the coming months.
Podzly LLC, a small Papillion, Neb., party-supply retailer that sells online, has about half the inventory it would like because of shipping delays, eating into revenue, said founder Jeremy Podliska. The company is paying about 55% more for products it does receive compared with 2019, he said, often broken into small quantities that arrive piecemeal. Chartering a dedicated ship or airplane is “just not an option for us” as a small company, Mr. Podliska said.
Two years ago the company sold a 12-pack of sombrero party hats for around $32, Mr. Podliska said. Today, the same pack is sold for $52, he said, and the price will likely go up more as he sells through new inventory that arrives with higher shipping costs. He hopes shoppers will stomach the increases, he said.
“My guess is there is some limit to how much you can charge for a sombrero,” he said.
Meanwhile, delays at major U.S. ports continue to escalate. More than 60 boxships were waiting to pull into the ports of Los Angeles and Long Beach recently, according to the Marine Exchange of Southern California, up from around 25 a month earlier. Backups are spreading to East Coast ports as well.
At Dollar Tree Inc., regular shipping carriers are fulfilling around 60% of their contracted commitments with the discount retailer, Chief Executive Michael Witynski said in September.
‘My guess is there is some limit to how much you can charge for a sombrero.’
— Jeremy Podliska, founder of Podzly, a party-supply retailer
The 16,000-store company is securing dedicated space on chartered vessels for the first time, Mr. Witynski said, including one large vessel contracted for three years. Dollar Tree aims to add more charters this year, he said, as well as source more products domestically and internationally that don’t rely on trans-Pacific routes. It also is adding higher-priced products to its stores, as transport and other costs rise.
Freight forwarders said Covid-19 disruptions still haunt the big ports and the big ships that use them. They said it is common for a big boxship carrying empty containers from Europe to be held for a week outside Shanghai, while the crew is tested for the virus.
Capital Maritime Group, which operates 108 vessels of all types, had a client charter a 2,000-container ship to move furniture and sports clothing from China to Liverpool, England, said Evangelos Marinakis, the Athens-based company’s chairman.
“‘Using small boxships for transoceanic point-to-point sailings is something we’ve never seen before,” Mr. Marinakis said, adding that small boxships offer strong profits to the company. In addition to retailers, large companies that supply stores, like Coca-Cola Co., are also chartering boats to get around disruptions.
Moving a container across the Pacific on a chartered ship costs nearly twice as much as shipping via major cargo liners, which stood at $16,750 per 40-foot container last week, up from about $5,000 at the same time last year, according to the Freightos Baltic Index.
Freight rates remain elevated “but they have leveled off and we don’t expect another spike,” said Jonathan Roach, a container shipping analyst at London-based Braemar ACM Shipbroking. “The supply chains are still rattled, but come next year, it may not make sense for the Targets and Dollar Trees to keep using private charters.”
Biden’s China Tariff Plan Fails To Provide Enough Relief, Businesses Say
Companies lacking cost-effective alternatives to Chinese imports complain that the new trade policy isn’t as helpful as they had expected.
U.S. businesses are panning the Biden administration’s new China trade policy, saying it fails to provide the tariff relief they expected for importers who lack cost-effective alternatives to Chinese products.
The complaints are coming from companies that rely on Chinese electronic components and other parts to manufacture goods, from retailers that import shoes and skirts from China, and from people including Michael Mojica, who owns a camping-gear company in Englewood, Colo.
Mr. Mojica’s Outdoor Element LLC sells carabiners, panhandles and other equipment that he designs and has manufactured in China. He said his profits have been cut sharply by having to pay the 25% import tariffs, forcing him to dip into his retirement savings to handle the bills.
“Tariffs are just burdens on Americans’ backs,” he said. “It’s either small businesses paying it, which I am right now, or passing it to consumers so they are paying it.”
The tariffs were imposed by the Trump administration, which gradually expanded the levies to cover most imports from China.
The Biden administration has kept the tariffs in place and, following a long-awaited review, U.S. Trade Representative Katherine Tai said last week that the levies will continue for now.
For importers, the news was mixed. On the positive side, Ms. Tai said her office would again allow companies to appeal for exemptions from tariffs, a process that had mostly expired by the end of last year.
The Office of the U.S. Trade Representative said it would consider granting exclusion waivers on 549 product categories, a fraction of the more than 2,200 items that were eligible for tariff relief earlier in the Trump years. Their beneficiaries were mostly smaller businesses, according to trade experts.
Mr. Mojica, for example, said a tariff waiver his company initially received for some products expired in March 2020 and wasn’t included in the new list of products eligible for extensions.
Industry groups had hoped the Biden administration would expand the waiver program.
“It’s disappointing that the administration didn’t go much further,” said Stephen Lamar, chief executive of the American Apparel and Footwear Association. “There are a number of other exclusions that are not on the table anymore.”
China is by far the most important manufacturing hub for the U.S. apparel industry, which relies nearly entirely on imported products. China accounted for 36.6% of apparel imports by volume in 2020, more than twice the shipment from Vietnam, the No. 2 supplier, according to the association. Nearly two-thirds of imported footwear came from China.
Manufacturers, meanwhile, buy a variety of metals, chemicals, semiconductors and other products from China to make goods in U.S. factories.
“Manufacturers would like to see more opportunities to seek tariff relief and not just for those expired and extended exclusions,” said Ken Monahan, vice president of international economic affairs at the National Association of Manufacturers.
In outlining the China trade policy last week, Ms. Tai said her office would keep open the possibility for additional exclusions. The Office of the U.S. Trade Representative didn’t provide comment on the complaints from importers.
Ms. Tai has emphasized what she calls a “worker-centric” trade policy, aimed at putting the interests of U.S. workers first.
Ted Murphy, a trade lawyer at Sidley Austin LLP, said it is surprising that the USTR didn’t set up a new tariff program to reflect that priority. “It’s striking that they are focusing on exclusions that in essence the Trump administration approved twice,” Mr. Murphy said. “One would think they might want to apply a more ‘worker-centric’ lens to this.”
The U.S. and China began late last week to re-engage on trade issues with a virtual meeting between Ms. Tai and Chinese Vice Premier Liu He. During that meeting the Chinese side pressed again for the U.S. to lift the tariffs.
The tariff-exclusion process came under criticism during the Trump administration. Since the process was first being implemented in 2018, the USTR was inundated with requests.
Companies described the process as cumbersome and opaque. Many said they were unsure what information the USTR really wanted to evaluate or the best way to file. One company filed more than 10,000 individual requests. Many companies were left in limbo for months as they awaited decisions.
When those decisions came, companies said they had no idea why some requests were granted and others weren’t.
The process eventually sparked an investigation from the U.S. government’s watchdog agency, the Government Accountability Office. In a July report, the GAO faulted the USTR, saying that the agency didn’t fully document its procedures and that it performed many steps in the exclusion review inconsistently.
The GAO said of about 53,000 exclusion applications submitted between 2018 and 2020, 46,000 requests were denied.
Some companies have identified examples in which the tariffs have inadvertently helped Chinese companies at the expense of their U.S. competitors, such as when there is a levy on an item that a U.S. company uses in its supply chain, but no tariff on the finished goods made by a Chinese company.
The USTR said it would evaluate requests for waivers during a 50-day comment period starting Tuesday, focusing on whether the particular product remains available only from China and whether the tariffs cause severe economic harm to U.S. interests, including small businesses, jobs, manufacturing output and critical supply chains.
Reinstated exclusions will be applied retroactively to the start of the comment period.
Apple Set To Cut iPhone Production Goals Due To Chip Crunch
Apple Inc. is likely to slash its projected iPhone 13 production targets for 2021 by as many as 10 million units as prolonged chip shortages hit its flagship product, according to people with knowledge of the matter.
The company had expected to produce 90 million new iPhone models in the last three months of the year, but it’s now telling manufacturing partners that the total will be lower because Broadcom Inc. and Texas Instruments Inc. are struggling to deliver enough components, said the people, who asked not to be identified because the situation is private.
The technology giant is one of the world’s largest chip buyers and sets the annual rhythm for the electronics supply chain. But even with strong buying power, Apple is grappling with the same supply disruptions that have wreaked havoc on industries around the world. Major chipmakers have warned that demand will continue to outpace supply throughout next year and potentially beyond.
Apple gets display parts from Texas Instruments, while Broadcom is its longtime supplier of wireless components. One TI chip in short supply for the latest iPhones is related to powering the OLED display. Apple also is facing component shortages from other suppliers.
Apple and TI representatives declined to comment. Broadcom didn’t respond to a request for comment.
Apple shares slipped as much as 1.6% to $139.27 in late trading after Bloomberg reported on the news. The stock was up 6.6% this year through Tuesday’s close. Broadcom and TI also dipped in after-hours trading.
The shortages have already weighed on Apple’s ability to ship new models to customers. The iPhone 13 Pro and iPhone 13 Pro Max went on sale in September, but orders won’t be delivered from Apple’s website for about a month.
And the new devices are listed as “currently unavailable” for pickup at several of the company’s retail stores. Apple’s carrier partners are also seeing similar shipment delays.
Current orders are slated to ship around mid-November, so Apple could still get the new iPhones to consumers in time for the crucial holiday season.
The year-end quarter is expected to be Apple’s biggest sales blitz yet, generating about $120 billion in revenue. That would be up about 7% from a year earlier — and more money than Apple made in an entire year a decade ago.
Apple’s woes show that even the king of the tech world isn’t immune from global shortages made worse by the pandemic. In addition to facing tight iPhone availability, the company has struggled to make enough of the Apple Watch Series 7 and other products.
Earlier this year, Apple warned that it would face supply constraints of the iPhone and iPad during the quarter that ended in September. The Cupertino, California-based company cited the global chip shortages at the time. That period included about a week and a half of iPhone 13 revenue.
Broadcom doesn’t have major factories of its own and relies on contract chipmakers like Taiwan Semiconductor Manufacturing Co. to build its products. Texas Instruments makes some chips in-house, but also relies on outside manufacturing. That means they’re part of an increasingly challenging fight to secure production capacity at TSMC and other foundries.
Apple is a TSMC client itself — in fact, it’s the company’s largest. Apple uses the manufacturer to make its A-series processors, but they don’t appear to be under threat of shortages for now.
There are signs the chip crunch is getting worse. Lead times in the industry — the gap between putting in a semiconductor order and taking delivery — rose for the ninth month in a row to an average of 21.7 weeks in September, according to Susquehanna Financial Group.
To help untangle supply chain snarls, the U.S. Department of Commerce is asking global chipmakers to respond to a set of questionnaires by Nov. 8, but that effort is facing resistance from lawmakers and executives in Taiwan and South Korea.
U.S. Commerce Secretary Gina Raimondo tweeted earlier this week about a proposed $52 billion plan to support chip manufacturing in the U.S. Japanese Prime Minister Fumio Kishida also said he will work on establishing a chip production base in his country.
Separately, a protracted energy crisis in China may add to the iPhone maker’s headaches. Apple supplier TPK Holding Co. said last week that subsidiaries in the southeastern Chinese province of Fujian are modifying their production schedule due to local government power restrictions. That comes less than two weeks after iPhone assembler Pegatron Corp. adopted energy-saving measures amid government-imposed power curbs.
Biden Seeks To Spearhead New Attack On Supply-Chain Delays
President Joe Biden will turn his focus to supply-chain transportation bottlenecks on Wednesday, as the congested Port of Los Angeles will announce a 24 hours a day, seven days a week effort to confront the squeeze on goods.
A meeting at the White House will convene corporate executives, labor leaders as well as port officials, and Biden plans to highlight their efforts to ease distribution backlogs and respond to product demands that have grown during the coronavirus pandemic, two administration officials said on the condition of anonymity to preview the day’s events.
The 24/7 shift by the Port of Los Angeles follows a move last month by the nearby Port of Long Beach to a similar schedule.
FedEx Corp., United Parcel Service Inc. and Walmart Inc. are also pledging to move to 24/7 operations, the official added, while Target. Corp., Samsung Electronics Co. and Home Depot Inc. are taking steps to start addressing the backlog in distribution.
The White House said that among those six companies, a total of 3,500 additional containers a week would be moving at night through the end of the year.
“Large companies are announcing they will use expanded hours to move more cargo off the docks, so ships can come to shore faster,” the White House said. “Unlike leading ports around the world, U.S. ports have failed to realize the full possibility offered by operation on nights and weekends.”
Analysts see supply-chain problems as a drag on economic growth as well as their projections for the coming months, while consumers regard them as a sign of, perhaps, deeper problems with the economy.
Though the Biden administration is feeling the economic blowback from supply-chain congestion, its power to manage it is limited since all the links in the chain are in private hands.
In recent efforts to improve distribution, it has tried to play an honest-broker role in coordinating commitments made across the private sector and in working with labor unions, the official said. It is urging entities along the supply chain to engage in a 90-day dash to the end of the year to eliminate supply jams that can be speedily addressed, the official added.
The administration hopes that the moves being rolled out on Wednesday will motivate other companies to take similar steps, the official said, and will next set its sights on working with the trucking and freight industries.
The chief executives of the companies making new pledges on Wednesday are set to attend a virtual meeting with Biden, as are the executive directors of the Port of Los Angeles and the Port of Long Beach.
Leaders from key unions — the Teamsters, the AFL-CIO’s Transportation Trades Department, and the International Longshore and Warehouse Union — and trade associations — the U.S. Chamber of Commerce, the National Retail Federation and the American Association of Railroads, among others — are also expected to attend.
The White House has been working for months to address near-term supply chain problems, establishing a wide-ranging review with a February executive order and forming a Supply Chain Disruptions Task Force in June.
Supply chain snags are ubiquitous for every major industry across the U.S., affecting everything from smartphones to tractors to couches. There are a range of problems, including a lack of domestic production capacity, a shortage of trucks, a dearth of workers, overbooked ocean freight and, in some cases, decaying infrastructure.
The situation is so dire that companies are internally forecasting hangups will last through most of 2022, which could slow hiring, dampen profits and hamper economic growth.
For instance, the global chip shortage prompted Caterpillar earlier this year to warn investors that the company might not meet demand. The shortfalls led Detroit automakers to become more resigned to sales dropping after striking an optimistic tone in the first half of the year.
Apple, one of the largest technology companies in the world, is likely to slash its iPhone 13 production targets by as many as 10 million units for 2021, Bloomberg News reported Tuesday.
The International Monetary Fund on Tuesday lowered its global and U.S. growth forecasts for this year, charting a slower than anticipated economic recovery. Its 2021 estimate for the U.S. fell a full percentage point to 6%, citing supply constraints as a key factor, though it also hiked its 2022 projection for the U.S. from 4.9% to 5.2%.
L.A. Port To Operate Around The Clock To Ease Cargo Logjams
Nation’s busiest container port set to operate 24/7 to ship goods to stores ahead of holiday season.
One of the country’s busiest ports will operate around the clock in an effort to ease cargo bottlenecks that have led to shortages and higher consumer costs, a change announced by the White House as it seeks to alleviate supply-chain issues ahead of the holidays.
By going to 24/7, the Port of Los Angeles will join the neighboring Port of Long Beach, Calif., which started doing a similar thing last month. Major ports in Asia and Europe have operated around the clock for years.
Expanded operations at the Port of Los Angeles would nearly double the hours that cargo can move, according to the White House. It said the extra shifts have been agreed to by the International Longshore and Warehouse Union, which represents dock workers.
The Port of Long Beach struggled to increase cargo flows after it extended its opening hours, with truckers complaining that restrictions put on them for picking up and dropping off containers were too onerous. Shortages of truck drivers and warehouse workers have also posed problems across supply chains. It remains unclear how many of the terminals in Los Angeles will operate 24/7 and when those operations will begin.
Port of Los Angeles Executive Director Gene Seroka said details of the overnight hours are still being worked out with companies in the supply chain.
“Today’s announcement has the potential to be a game changer,” President Biden said. “I say potential because all of these goods won’t move by themselves. For the positive impact to be felt all across the country, and by all of you at home, we need major retailers who order the goods and the freight movers who take the goods from ships to factories and to stores to step up as well.”
The American supply chain has struggled to adapt to a crush of imports as consumers shifted from services to home goods, including electronics, and as businesses rush to restock pandemic-depleted inventories.
Hundreds of thousands of containers are stuck at the Los Angeles and Long Beach ports, the West Coast gateways that move more than a quarter of all American imports. Dozens of ships are anchored off the coast, with waiting times stretching to three weeks.
The supply-chain snarl is leading to higher prices and helping drive inflation, which accelerated slightly in September, posing another challenge for Mr. Biden, whose policy agenda is tied up in negotiations in Congress.
The administration has been confronted with an array of supply-chain problems, affecting everything from lumber to semiconductors, and it has been seeking ways to partner with private industry to ease the backlog.
Walmart Inc., FedEx Corp. and United Parcel Service Inc. are among the companies that have stepped up operations at the ports, according to the White House, with the expectation that other companies will adopt the same cycle.
Commitments from six companies would allow 3,500 additional containers a week to move at night through the end of the year, the White House said.
Through the first eight months of this year, the neighboring ports of Los Angeles and Long Beach handled more than 13.6 million containers, measured in 20-foot equivalent units, a shipping industry trade measure. That included the equivalent of 893,098 loaded inbound containers in August, or more than 200,000 each week, according to figures from the ports.
To get around the delays, some retailers like Walmart, Home Depot Inc. and Costco Wholesale Corp. are paying for their own chartered ships as part of wider plans to mitigate the disruptions.
Mr. Biden met virtually on Wednesday afternoon with directors of the ports, union officials, chief executives, including those from Target Corp. and Samsung Electronics Co. , as well as trucking and rail associations.
“This is a good first step, although it is quite astonishing, and a measure of how severe this is, that it apparently takes the personal involvement of the president of the United States to get this obvious measure implemented,” said Bjorn Vang Jensen, vice president of global supply chain at Denmark-based marine data company Sea-Intelligence ApS.
“It is also encouraging to see that President Biden is meeting with representatives of both importers as well as the trucking and rail communities,” he added. “Without the full engagement of all these supply chain constituents, you could keep the port open round the clock for nothing, as containers would just continue to pile up in the yard.”
There has been disagreement over 24/7 operations and finger pointing among key players in the supply chain, which includes port workers, truckers, warehouse operators, railways and retailers.
The Southern California ports are generally open weekdays from 8 a.m. to 5 p.m. and from 6 p.m. to 3 a.m. They are open for limited hours on Saturdays and are usually closed on Sundays.
When the Port of Long Beach initially expanded its hours to 24 hours a day, four days a week, it failed to attract more trucks, with trucking companies saying the process was burdensome. Port of Long Beach deputy executive director Noel Hacegaba said the program was tweaked in recent weeks to be less restrictive and that some truckers have started to use the early morning hours.
Some terminal operators say there is no point extending hours when many of their regular pickup slots go unused by truckers.
“We are open 90 hours a week now with 60% utilization,” said Sal Ferrigno, vice president of SSA Terminals, which operates three terminals at Long Beach.
Truckers say they are hamstrung by shortages of the equipment needed to move containers and by warehouses that are full or open during limited hours.
John McLaurin, president of the Pacific Merchant Shipping Association, which represents ocean carriers and terminal operators, said the White House plan only addressed one part of the supply chain.
“Marine terminal gates are open, and most are providing extended hours but are not being utilized,” he said in a statement. “The problem is that trucks are not using the extended hours due to a shortage of drivers, warehouses are full and also suffer from a lack of personnel, chassis that carry containers are not being returned, causing equipment shortages. It is a system of systems all dependent upon each other.”
Sanne Manders, chief operating officer of San Francisco-based freight forwarder Flexport Inc., said extended port hours should help reduce the stacks of containers that are gumming up terminals at Los Angeles and Long Beach.
Mr. Manders said truckers are pulling out half as many containers from the ports each day as they did during the summer, according to Flexport truck data, because congestion at terminals is severe. He said truckers can work more efficiently if they are given access to terminals overnight and on weekends.
”It helps, but there’s no silver bullet,” Mr. Manders said. “There are a lot of things broken right now as a result of the tsunami of freight and a lot of things need to line up to get out of this.”
Treasury Secretary Janet Yellen, in an interview with “CBS Evening News” on Tuesday, acknowledged there would be some shortages in the coming months.
“But there is an ample supply of goods,” she said. “And I think there’s no reason for consumers to panic about the absence of goods that they’re gonna want to acquire at Christmas.”
How Supply Chains Broke, Sparking Global Shortages
The pandemic threw the vital but usually humdrum world of logistics into a tailspin, creating shortages of masks and vaccine vials, semiconductors, plastic polymers and bicycles. The shipping system underpinning globalization — production on one side of the planet, connected to consumers on the other — proved too rigid to absorb the rolling tremors from Covid-19, or to recover quickly from the jolts to consumer demand and the labor force.
That triggered supply-chain disruptions, idled factories and unleashed inflationary forces. The chief challenge was moving freight, and it started with a sudden shortage of shipping containers.
1. Why Do Containers Matter So Much?
There are about 25 million standardized shipping containers plying the seas on about 6,000 ships in a fragile network designed to stay in sync with port capacity, railroad lines and trucking networks. It’s a system that has lifted millions of people out of poverty and created a generation of discount-minded shoppers.
In normal times, it works so well that it has led to the widespread adoption of more efficient just-in-time inventory management. However, the Covid-19 crisis led to unpredictable demand for goods and on-again-off-again lockdowns that idled port terminals.
The disruption left handlers of the ubiquitous 40-foot (12.2-meter) boxes struggling to manage traffic, causing shortages of containers where and when they were needed most. By October 2021, ocean cargo rates had spiked ten-fold from a year earlier, sparking worries about the year-end holiday shopping season and disruption stretching into 2022.
2. How Did The System Break Down?
As the world emerged from the pandemic, China recovered faster than other countries, so more containers were raced there as manufacturers tried to catch up. But when they arrived in U.S. ports such as Los Angeles, delays related to Covid-19 clogged one of trade’s main thoroughfares, just as stores tried to meet suddenly soaring demand. Backlogs at truck yards and railroad hubs were compounded by dockworkers calling in sick and shortages of truck drivers.
By early 2021, the disruptions had spread to other regions, including Europe. The crisis was worsened by the freak grounding of a giant vessel in the Suez Canal in March, blocking the route in both directions for about a week. Delays are more than just a headache for importers waiting for their goods — they sap capacity from the system, which keeps rates elevated.
3. Why Couldn’t The Shipping Industry Adapt?
Concentration in the shipping industry is being blamed for dulling some of the competitive spirit that could have provided adjustments to swiftly changing demand. In 2017, about a dozen container lines that control 80% of the global market formed three main alliances to share ships, cooperate on routes and limit excess capacity, an arrangement that has been likened to an oligopoly.
Big companies typically lock in their shipping costs with long-term contracts. But in the pandemic, manufacturers reeling from shortages of key components and higher raw material costs have been forced into bidding wars to get space on vessels.
That’s prompted exporters to raise prices or cancel shipments altogether. Some of the carriers — a mix of publicly traded, privately held and government-backed firms mostly based in Asia and Europe — have enjoyed some of their highest-ever profits, including the world’s largest container line, Copenhagen-based A.P. Moller-Maersk A/S. Analysts estimate that the industry may see a windfall of more than $100 billion in 2021.
4. What Can Be Done?
U.S. and European regulators have raised questions about constrained competition. President Joe Biden, in a July 2021 executive order aimed at a number of industries, asked the U.S. Federal Maritime Commission to “ensure vigorous enforcement against shippers charging American exporters exorbitant charges.”
The agency was already probing the practice of carriers returning containers to Asia empty rather than waiting for them to be filled with American exports because the eastbound route was so profitable. National authorities can influence a narrow range of industry practices.
The Port of Los Angeles — which together with the nearby Long Beach port make up the busiest U.S. container hub — announced that it is moving to begin 24-hour, seven-day-a-week operation after discussions with the Biden administration and labor unions. However, the global nature of the container trade means it’s beyond the reach of national regulators, who are unlikely to be able to do much to control prices.
5. When Will It Get Sorted Out?
That’s not clear. Most analysts assumed rates would start to plateau by mid-2021, but they kept climbing before starting to dip in October. The cost of sending a container on the busy route from China to the U.S. West Coast was $11,000 as of Oct. 7, compared with an average of less than $2,000 in the decade before the pandemic.
A survey of purchasing managers in the U.S. by the Institute for Supply Management showed that shipping challenges had contributed to an increase in the average lead time for production materials in September to 92 days, the highest in data going back to 1987.
The Supply-Chain Questions You Were Afraid To Ask
Where’s the pizza you ordered while (if you’re smart) you’re online doing early holiday shopping? You’re gonna be hungry longer than you hoped.
Just when you thought the supply chain couldn’t get any more broken, it breaks again. More companies are complaining about supply-chain disruptions that are leading to shortages of everything from Ikea mattresses and fish sticks to school bus drivers and Patrón tequila.
If you thought it was a crisis already, then you’re really not going to like this development: We’re even short of pizza drivers. Tara Lachapelle explains: “In mid-July, Domino’s also began taking much longer to get its orders out to customers. National average delivery times ‘abruptly and surprisingly spiked 30%’ and haven’t improved since then.” Carry-out wait times didn’t increase, which points to a lack of pizza deliverers.
What might be worse than even the pizza crisis is the fact that there is no single reason behind these pervasive shortages, and therefore no straightforward fix. Tyler Cowen says the even worse news is that no one really knows when the situation will improve, which is terrible news for my Veggie Deluxe pizza habit.
Take transportation, for example. Tyler notes that “a robust trade in durable goods has placed great strain on containers, ships and port operations around the world. The price of containers has skyrocketed, and can be more than 10 times higher than it was just two years ago.” Then consider the fact that port activity and related local transportation is labor-intensive. Whoops, aren’t we short on labor?
The cluster headache leads to charts like this, illustrating the record number of boats waiting to offload at Los Angeles and Long Beach ports. Your cat’s “Squid Game” Halloween costume and the LOL Surprise doll you planned to give your niece for Christmas are probably stuck on one of those boats.
In fact, shipping right now is a whole heap of crazy. Anjani Trivedi writes: “The cost of shipping a 40-foot box on the Shanghai-to-Los Angeles route is so much higher than going the opposite direction that companies are willing to send containers back empty. … Meanwhile, journey times by sea have doubled because of the backlog, causing alternatives like air freight to get more expensive.”
It’s gotten so bad that Amazon.com Inc. is actually doing some second-hand shopping. It’s looking for used cargo versions of long-range Boeing Co. and Airbus SE planes, which would allow the company to import stuff directly from China and skip the traffic.
There’s a good reason we use ships to ship stuff rather than planes, though: They can carry SO much more. Take Ever Given, for example. When it’s not hanging out in the Suez Canal, it’s capable of shipping about 20,000 twenty-foot equivalent units, with a net tonnage of 99,155. The world’s biggest container ship, the Ever Ace, can ship 23,992 TEUs.
In comparison, the world’s biggest-ever cargo plane can only carry a measly 250 tons. It’d need to make about 397 journeys (not including the return journeys to reload) to ship everything Ever Given could in one go, costing a bundle in fuel costs and taking way more time.
So, sweet consumer, what should you do with this troubling information? Well, for starters, you might want to lower your Black Friday expectations. Andrea Felsted says: “This holiday season, stores won’t be competing on price — the battleground will be availability.”
Retailers might also want to scale back the bargains to avoid a flood of online orders. “A surge in deal-hunting on laptops and mobiles would put enormous strain on warehouses and delivery networks, even before factoring in labor shortages,” explains Andrea.
I’ve said it before and I’ll say it again: You’re going to want to start your Christmas shopping sooner to ease the pressure on retailers and avoid potential price hikes down the line. If you don’t do it, it looks like everyone else will.
U.S. Factory Output Falls In Fresh Supply-Chain Warning
Production at U.S. factories fell by the most in seven months in September, in part reflecting a sharp pullback in the manufacturing of motor vehicles as well as broader backlogged supply chains and materials shortages.
The 0.7% decrease for manufacturers followed a revised 0.4% decline in August, Federal Reserve data showed Monday. Total industrial production, which also includes mining and utility output, fell 1.3% last month.
The median estimate in a Bloomberg survey of economists called for a 0.1% monthly increase in both factory production and industrial output. Stocks fell and Treasury yields were up after market open.
Resilient demand among firms and consumers has kept production elevated, but it’s also contributed to order backlogs as manufacturers struggle to source materials and skilled labor. The weaker-than-expected September print indicates that producers continue to be held back by snarled supply chains.
The figures also reflect ongoing production challenges following Hurricane Ida, which contributed 0.3 percentage point to the drop in manufacturing, the Fed said.
The report showed motor vehicles and parts output fell 7.2% last month, the sharpest drop since April, after a 3.2% decrease in August, as a global shortage of semiconductors continues to weigh on production.
Automakers including Toyota Motor Corp. have slashed production outlooks for the coming months, citing the parts shortage as a limiting factor. S&P Global Ratings also lowered its U.S. auto sales forecast for this year and expects a “bumpy road” in 2022.
Excluding motor vehicles, production of durable goods rose 0.5%, reflecting gains in the manufacturing of primary metals, electrical equipment and furniture, the Fed said. Nondurable manufacturing, which includes chemicals and paper products, fell 1% last month, the most since February.
Manufacturing job openings are near a record high, and for the products factories can source, prices have soared. Recent data from the Labor Department showed a price gauge of processed goods for intermediate demand, which include materials and components used in manufacturing and construction, are up almost 24% from 12 months ago.
Supply-Chain Crisis Is Bad for IPhones, Great for Gift Cards
The once-derided present has come a long way. It’s now what many Americans want most of all under the tree.
Americans love gift cards. For younger generations, they’ve become their favorite gift.
Which is good, because they’re about to get lots of them.
In an economy hamstrung by all types of global supply-chain snarls, mounting product shortages — even Apple is reportedly slashing production — are making giving gift cards a fail-safe way to ensure there are presents under the Christmas tree. Shoppers plan to boost spending on them by 27% this holiday season to about $270 per person, according to a survey by payment service Blackhawk Network. Those gains will push cards to about 40% of their total gift purchases.
“This holiday season is going to be huge” for gift cards, said Saumil Mehta, general manager for Square Inc.’s point-of-sale division. They aren’t “as free-form as just handing someone a wad of cash. But it’s not so specific either. It kind of comfortably sits in the middle.”
If this gift card boom does materialize, recipients are likely to welcome it. The gift card has come a long way this century, morphing from an almost thoughtless offering from that distant relative or corporate boss to what many Americans, especially younger ones, want most of all.
“It’s kind of crass to give someone $20,” said Jonathan Zhang, a marketing professor at Colorado State University. “It’s a lot more elegant to write a holiday card and include a gift card.”
For the giver, gift cards also remove the anxiety of picking out an item for a friend or family member from the endless aisles of the internet. About 75% of millennials prefer to receive gift cards over physical presents, according to Blackhawk.
Take Mollie Fierston, who at 24 borders the millennial and Generation Z cohorts. She used to make out detailed lists for her parents, but now she’d rather receive a gift card and shop for herself.
“Trends move so fast,” she said recently while perusing clothes at a Zara location in Manhattan. Younger Americans are “just hard to shop for.”
The global prepaid card industry surpassed $2 trillion last year thanks to gains in gift cards, according to estimates by Global Industry Analysts. With that accelerated growth, the market should hit $4.1 trillion by 2027, about 50% higher than the firm’s pre-pandemic estimate.
Retailers are also playing a role, increasingly using gift cards to attract new customers and push shopping past December into the lulls of January and February, according to Zhang, the marketing professor. Gift cards create a sales lift, too, because shoppers often spend more than the card is worth. And if they don’t redeem all of the value, that’s good for a retailer’s bottom line, he said.
On average, consumers spend 40% more than the value of a gift card, said Theresa McEndree, Blackhawk’s global head of marketing.
“You’re really creating a virtuous loop from a revenue perspective,” McEndree said.
Gift cards were first adopted by department stores in the 1930s and experienced a surge when retailers transitioned to plastic vouchers in the 1990s. Nowadays, more than half of U.S. retailers offer them, Zhang said.
Starbucks Corp. has had immense success with gift cards. In the two decades since it began selling them, the chain has released more than 1,100 designs, from cards made of recycled coffee bags to ones adorned with real Swarovski crystals. Gift cards account for about half of the company’s in-store transactions in the U.S. and Canada, with roughly $4.8 billion loaded on them in the past two quarters in the region.
Other companies have expanded beyond the traditional card. Barnes & Noble Inc. is offering them inside a physical copy of the classic short story “The Gift of the Magi” as supply-chain issues threaten to keep some best-sellers off shelves this holiday season. This combination of tradition and flexibility appeals to young shoppers, said Chief Merchandising Officer Jackie De Leo. Some publishers are even moving book releases to after the holidays to take advantage, she said.
“We can see that the week after Christmas our young adult and middle-aged sales go up tremendously,” De Leo said. Publishers increasingly want to “capitalize on the gift card.”
Santa Claus Is Coming—But He’ll Skip Some Stores
Americans have big shopping lists but face emptier shelves and less help this shopping season amid supply-chain and hiring woes.
“It came without ribbons. It came without tags. It came without packages, boxes or bags.”
Christmas came to Whoville, despite the Grinch’s efforts to steal it, and it will come to the U.S. this year, despite all the supply-chain and staffing problems the pandemic has brought on. Those boxes and bags will cost more, though, helping the best-positioned retailers avoid markdowns and offset spiraling costs.
Americans will grit their teeth and pay up and, when they can’t find just the right physical item, they will opt for more virtual ones—digital games, gift cards and subscriptions.
In terms of dollars spent, it will be a holiday season to remember. For companies that can’t provide consumers with what they want, though, it will be the season that might have been.
When it comes to stocking physical shelves everything, it seems, is in short supply. Goods made overseas are slow to ship, slow to arrive, and then left to sit on the dock for days waiting to be moved from port.
Nike said last month that it is taking roughly twice as much time to move products from Asia to North America as usual, for example. The delays don’t end there either, with trucking companies struggling to hire enough drivers to keep goods moving.
Retailers have labor concerns, too. As of the end of August, there were 1.3 million unfilled job openings in the sector, according to the Labor Department, compared with 901,000 in August of 2019. Since then, a number of retailers have announced ambitious hiring plans for the holiday shopping season.
Both Amazon.com and Walmart have said they would like to hire 150,000 seasonal workers, for example. Stores unwilling or unable to pay up for labor face the prospect of struggling to serve customers during the most profitable time of the year.
Still, it is hardly as if nothing is making it into ports and onto store shelves. More shipping containers arrived at the four busiest American container ports in July and August than during the same months of 2020 and 2019.
Commerce Department figures show the value of inventories at general merchandise retailers, a group that includes giants such as Walmart and Target, as well as department stores, came to a seasonally adjusted $87.2 billion in August compared with $76.3 last August and $82 billion in August 2019.
Keeping things on store shelves when demand for wares is strong is another matter: The ratio of inventory to sales at retailers of all stripes is significantly lower than it was before the pandemic.
That’s because people are heading into the holidays with plenty of available money to spend: Rising incomes, government relief checks and reduced spending early in the pandemic have left people with more to spend. Federal Reserve figures show that, as of the end of the second quarter, Americans of all incomes held more cash and cash equivalents than a year earlier or prior to the pandemic.
Falling Covid cases, the expected vaccine eligibility for younger children and the wide availability of jobs could make it a season of cheer for shoppers.
Many of those shoppers are aware of supply-chain constraints and have begun shopping for gifts earlier than usual. A survey from The NPD Group showed that 51% of U.S. consumers plan to start their 2021 holiday shopping before Thanksgiving Day, up slightly from last year.
Retailers are nudging shoppers to do so: Amazon started offering “Black Friday-worthy deals” on Oct. 4 and Target started its holiday deals event on Oct. 10. Best Buy and Kohl’s have also already begun their holiday sales events.
Best-placed to benefit from shoppers’ eagerness to spend are the companies with the means and scale to work around some of the shipping snags to keep their shelves well-stocked. Walmart, Home Depot, Costco and Target are among those paying for their own chartered ships, for example, which should allow them to bring holiday-specific products most likely to fly off the shelves.
Meanwhile, retailers selling higher-value goods such as electronics and luxury items will be able to shell out more for air freight compared to dollar stores that sell cheaper items. Sellers with non-traditional sourcing models, such as Etsy, will still face transportation delays but could have an edge over traditional retail because those products are made in many people’s homes or warehouses, not concentrated in a few factories abroad.
One wild card is whether consumers will spend heavily on material gifts—as they did last holiday season—when vaccinations are allowing people to eat out and travel again.
A survey conducted by Accenture showed that roughly 43% of consumers plan to redirect their holiday-season spending to gifts that don’t come in physical packages such as travel, dining out, concerts and salon treatments. Moreover, consumers who are unable to locate what they want on shop shelves might opt for non-physical alternatives.
A shopper who can’t find the latest game console might opt for a gift card from GameStop or Steam to download video games instead, for example. More people may also opt for gift cards for restaurants—including large chains like Darden Restaurants —or even websites that offer experiences like StubHub or Groupon.
Those that can’t find the yoga pants or gym gear they want for their friends may choose to get fitness subscriptions for them instead on Peloton or ClassPass.
Americans will spend plenty of money this Christmas, but not every retailer is going to get a pony.
Biden Could Use National Guard To Help With Supply Chain Bottlenecks
President says he will consider such a deployment if logistics problems persist.
President Biden said he would consider deploying the National Guard to assist with supply-chain bottlenecks that have led to shortages and higher consumer costs, if his administration is unable to ease the problem.
“The answer is yes, if we can’t move—increase the number of truckers, which we’re in the process of doing,” Mr. Biden said during a CNN town hall on Thursday when asked about deploying the National Guard.
White House press secretary Jen Psaki on Friday played down the possibility, saying that while a president has authority to make such an order, deployment at a state level is up to governors. “We’re not actively asking them to do that and we’re not actively pursuing the use of the National Guard on a federal level,” she said.
Bill Sullivan, executive vice president for advocacy with the American Trucking Associations, a trade group, said National Guard members who have commercial driver’s licenses are likely already driving commercially.
“And the freight network is private, so which company’s products would the National Guard haul?” Mr. Sullivan said in a statement. “While we understand why elected officials are looking at all possible authorities to help, deploying the Guard to haul freight isn’t feasible and would only further complicate the current situation.”
Republicans have increasingly criticized Mr. Biden over the supply chain bottlenecks, raising concerns that Christmas gifts will be delayed and asserting that the president isn’t doing enough.
The U.S. supply chain has struggled to adapt to a crush of imports, as consumers shifted from services to home goods, including electronics, and as businesses rush to restock pandemic-depleted inventories.
Hundreds of thousands of containers got stuck at the Los Angeles and Long Beach ports, the West Coast gateways that move more than a quarter of all U.S. imports. Waiting times stretched to three weeks. Shortages of truck drivers and warehouse workers have also posed problems across supply chains.
“What you’ve got to do is, you’ve got to get these ships in and unloaded,” Mr. Biden said.
Mr. Biden declined to provide a timetable for when he could deploy the National Guard, if he decides to do so.
“First of all, I want to get the ports up and running and get the railroads and the rail heads and the trucks in port ready to move,” he said.
Shippers Find New Supply-Chain Hurdles At Alternate Ports
Shortages of trucking, rail and warehouse capacity at alternative gateways cause headaches for importers seeking to avoid the logjam at the Southern California ports.
When Flexport Inc. learned in the past month that an ocean carrier planned to shift cargo from the congested operations at the Port of Los Angeles to little Port Hueneme some 80 miles up the California coast, the freight forwarder found that trucking companies weren’t ready to go along with the changing direction of the imports.
“We talked to trucking carriers throughout the market in L.A. and Oakland and the sense was that they could not support the volume if it moved through Port Hueneme,” said Jason Parker, the company’s head of trucking.
The San Francisco-based company shifted gears, pulling 200 containers from the ocean booking and instead routing many of them to Los Angeles despite a likely longer wait there to offload goods.
“The two-week delay coming to Los Angeles versus the Hueneme routing was going to cause less headache for the customers,” Mr. Parker said.
The choice highlighted how shippers looking to avoid bottlenecks at major gateways by diverting goods through alternate ports face tough tradeoffs and new questions. How do they get furniture, clothing, toys and other items to stores and warehouses that are far from their established supply lines and have modest transport connections to other parts of the country?
Smaller ports don’t have dozens of ships stacked up off the coast waiting for berth space, as do Los Angeles and the neighboring Port of Long Beach, Calif. The sites have drawn long looks from shippers and freight forwarders, and even brought them chartered ships from the growing number of retailers who are hiring vessels to get around the backups to get goods in stores for the holidays.
But most don’t have enough dock workers to unload cargo or a steady supply of truckers or warehouse space to handle a big jump in cargo volumes, said Anthony Hatch, a rail transportation analyst and principal at ABH Consulting.
“They make for nice stories,” Mr. Hatch said. “But they are all on the margin.”
The efforts have sent cargo to established West Coast gateways like the ports of Seattle and Oakland, Calif., and to destinations still farther from traditional container shipping trade lanes.
The Port of Portland, Ore., which lost regularly scheduled container service in 2016, has recovered some operations and gained some charters this year. The Port of Hueneme, known mostly as an import gateway for Del Monte bananas, expects its first chartered container ship to arrive in November.
Ports on the East Coast like Baltimore and Port Tampa Bay, Fla., also are trumpeting congestion-free operations in an effort to lure container lines and their shipping customers.
The capacity at those ports pales against the operations at Los Angeles and Long Beach. That complex handled just over 6 million loaded inbound containers in the first seven months of the year, nearly 40% of all container imports that landed at U.S. ports over that time, according to Beacon Economics, a research firm based in Los Angeles.
The scale of the import business there has created a sprawling network of trucking, rail and warehousing operations aimed at delivering imports to U.S. markets, both for the big consumer base in Southern California or distribution centers and freight hubs reaching out to Chicago and other inland sites.
The ports’ high profile as an import gateway has grown as retailers have rushed to restock inventories that were depleted earlier in the pandemic, helping push some 1.1 million more containers through Los Angeles and Long Beach during the first seven months of this year than they handled over the same period in 2019.
The flood of imports has led to a logjam of vesselswaiting offshore for berth space that has persisted over the past year. The bottleneck has hovered at between 60 and 70 vessels this fall and reached a record 79 container ships on Thursday, according to the Marine Exchange of Southern California.
Sailing to alternative ports can add weeks to the time it takes to get goods from Asia to the U.S., however, and can pile on new costs and complications.
Rachel Rowell, a spokeswoman for freight middleman C.H. Robinson Worldwide Inc., said shifting the flow of goods requires container availability, space on a vessel, truck capacity and equipment including the chassis that attaches to trucks to allow them to carry containers. All of those may be in short supply.
“Shifting entire chains is a more challenging ordeal than a cab shifting which street it takes, which is why shifting ports is not often a preferred option and why it is difficult to do last-minute,” she said.
Freight forwarder Seko Logistics has chartered ships to Portland, Ore., and Jacksonville, Fla., for frustrated importers. Each time, the firm must lease sea containers for the voyage. It also has leased extra space in Portland to manage the boxes and spent weeks finding local trucking companies capable of moving the goods to distribution hubs in Ohio and California.
The efforts have brought shipping costs to as high as $20,000 per box, not far from the high rates in today’s spot container shipping markets.
Transferring cargo from containers to trucks isn’t ideal for importers like Jim Jones, senior manager of international logistics at RST Brands, a Salt Lake City-based furniture seller, that used the service. “The more times the product is touched the more times you have an opportunity for damage and for things to get lost,” he said.
Even so, Mr. Jones said that if supply-chain congestion continues to frustrate his attempts to import furniture he would use the service again.
ITS Logistics has moved truckers from Jacksonville, Fla., to Charleston, S.C., to serve shippers who wanted to avoid the Port of Savannah, Ga., after ships started backing up offshore in August and September. It has considered moving other drivers to Houston but doesn’t take such steps lightly.
“For the drivers and for us it is taxing,” said Paul Brashier, vice president of drayage and intermodal at ITS Logistics, based in Reno, Nev. “When you reposition folks hundreds of miles away and they’re used to running back and forth locally and they’re home every night that’s a definite challenge.”
Amazon Touts Drivers, Warehouses As Salve To Supply-Chain Woes
Amazon.com Inc. is talking up the size of its delivery operation to ease public alarm that a supply-chain crisis could strangle holiday shopping.
In a corporate blog post Monday, the world’s largest online retailer said it has expanded its roster of drivers, warehouses and planes to handle an expected crush of orders in the coming weeks, potentially giving Amazon a competitive advantage.
The blog also provided new visibility into the company’s effort to get goods to shoppers itself, rather than rely on the U.S. Postal Service or United Parcel Service Inc.
John Felton, the senior vice president of worldwide delivery services, wrote that the company can draw on several hundred thousand delivery drivers worldwide. Some 260,000 are employed by the company’s startup-in-a-box Delivery Service Partners, supported by “hundreds of thousands” more Amazon Flex drivers, who make deliveries from their own vehicles.
The company says it now has more than 800 delivery stations — facilities typically located closer to shoppers than Amazon’s massive exurban fulfillment centers. Bloomberg reported last year that Amazon planned to build about 1,500 of these delivery hubs.
Amazon says it has started bringing inventory into its warehouses from additional ports, doubled its ability to process shipping containers and expanded its network of ocean freight carriers.
Felton wrote that Amazon’s rapidly growing air cargo arm will have more than 85 aircraft “later this season.” Amazon also operates a pool of more than 50,000 trailers, driven by contractors, the company said Monday.
“Our teams have been hard at work for months, focusing on capacity and demand planning to balance our customers’ needs against any supply chain or transportation challenges that may occur,” Felton wrote.
Amazon was down less than 1% at 10:50 a.m. in New York.
Amazon, which aims to hire some 150,000 seasonal workers, runs the risk of not having enough employees to meet demand in a tightening labor market, said Marc Wulfraat, president of MWPVL International Inc., a logistics consultancy.
But the company’s physical infrastructure represents a huge advantage over smaller rivals, he said on a conference call last week hosted by analysts with Jefferies LLC. Amazon can store inventory in warehouses that serve as import way stations, an advantage shared by the likes of Walmart Inc., Target Corp., Home Depot Inc. and Best Buy Co.
“The biggest, most powerful retailers will emerge from this relatively clean,” Wulfraat said. “It’s everybody else out there that depends on the holiday season that’s going to get hurt.”
You Could Be Competing With Bots To Buy Gifts This Christmas
As shortages of sneakers and other goods persist, the digital cat-and-mouse game between retailers and resellers is intensifying.
Jason Kent, a self-described “hacker in residence” at Cequence Security Inc., sat down in front of a pair of computer monitors at his home in Hilliard, Ohio. On them he watched as one of his clients sold off millions of dollars in assets in thousands of transactions conducted across mere minutes.
Kent was acting as a digital sentry, guarding not against theft but against arbitrage, in this case of limited-edition sneakers that a sports apparel retailer was releasing for sale on its website: Nike SB Dunks, the latest Yeezys, and some Air Jordans.
Kent was there to make sure ordinary people had an honest shot at buying these sought-after shoes. Standing in his way, on this particular day last March, was an army he describes as “15-year-old kids sitting in a basement somewhere making $200,000 a year reselling sneakers.”
To siphon up shoes, they deploy automated shopping software, or “bot” programs, such as Cybersole, GaneshBot, and Kodai, which have roiled the sneaker market and spawned a bot economy that some experts fear could wreak havoc on a number of retail categories during a holiday shopping season that’s already been upended by supply chain drama.
One of Kent’s monitors displayed chatter from Slack channels and Discord messaging groups, where he could communicate with his security team and eavesdrop on “cook groups”—gangs of bot users—as they coordinated campaigns. On the other, he could see detailed data on his client’s inventory.
The sale would pit his company’s proprietary software against the bots, which went into action about five minutes before the shoes went on sale.
The cook groups deployed scraping software to scour the website for the stock-keeping units, or SKUs, associated with new inventory.
As new SKUs came online, the bots would add each item associated with that unique ID number to a shopping cart, and once the sale started they would try to complete the checkout process using preloaded credit card or gift card information. Running this routine many times per second, a single cook could buy hundreds of pairs, which were ostensibly limited to one per customer.
“It was painful,” Kent says. Many retailers tend to struggle with web traffic beyond 60,000 page requests per second; coordinated bot campaigns can add tremendous strain. “In this case they tripled that traffic,” he says. “It was just insane.”
“People will … leverage automation to grab anything that has a limited inventory. It used to be concert tickets … now it’s vaccine reservations and even more mundane things”
For cooks with some software and a little hustle, even a modest haul from the right drop can yield significant profits on StockX and other resale sites.
“When the Yeezy ‘Sun’ drop happened, that shoe cost maybe $250 retail, and you saw them on EBay for $600 that same day,” Kent says. In July 2020, Cowen Inc. estimated the sneaker resale market was worth $2 billion in North America alone, with plenty of room for growth.
And because Nike Inc. and Adidas AG continue to release popular shoes in relatively limited quantities, retail bots play an increasingly prominent role in determining who gets to buy them and how much they have to pay.
They can render price tags all but irrelevant, valuing a pair of sneakers at whatever someone is willing to pay and driving appreciation in the few moments it takes resellers to corner the market.
With supply chains everywhere being throttled, the pain once reserved for sneakerheads appears to be spreading. Bot use has grown and branched out throughout the Covid-19 pandemic, according to Patrick Sullivan, chief technology officer for security strategy at Akamai Technologies Inc., one of the world’s largest providers of security and other network services.
“People will try to jump the line and leverage automation to grab anything that has a limited inventory,” he says. “It used to be concert tickets, then purses and tennis shoes, and now it’s vaccine reservations and even more mundane things.”
Big box retailers such as Walmart Inc. are deploying Akamai to stop bot users from gobbling up limited inventories of sought-after items such as Sony Corp.’s PlayStation 5 console, which has been on the market for a year and still sells for more than $300 above retail on StockX.
On the resale site’s “collectibles” page, you can find everything from Star Wars Lego sets to Oculus virtual reality headsets to sealed boxes of Pokémon, Yu-Gi-Oh!, and Topps trading cards going for above list price.
Akamai saw a taste in early October of what U.S. consumers could be in for, as bot traffic surged in India during the online shopping rush that typically takes place ahead of the five-day Diwali holiday, which this year begins on Nov. 4.
For a two-week period, potentially malicious bot activity targeting companies based in India jumped more than 55% over the previous two weeks. The bots “included web scrapers, automated shopping cart ‘sniper’ bots, and login and checkout abusers,” says Timothy Whitman, a spokesperson for Akamai. “We think this is a sign of things to come for holiday shoppers in the U.S. and Europe.”
In 2006, Eric Budish was a Ph.D. candidate at Harvard, carrying out research on the economics of the concert ticket market. The subject had fascinated him since his teen years, when he spent countless hours lined up at New York City Ticketmaster locations for hot concerts, elbow to elbow with old-school scalpers.
In one study, Budish explored Ticketmaster Inc.’s attempts at thwarting scalpers, who’d begun to repurpose bots favored by EBay sellers looking to automate some aspects of the nascent online junk sale economy.
Compact discs, video games, and DVDs that could sell for $5 or $6 on one site might be available for $2 or $3 on another—low-hanging fruit for a power seller with a rudimentary web-scraping script. The commodities they dealt in were a volume business, but they were cheap enough for buyers that few noticed or cared much about the role bots were playing.
That all changed with the rise of StubHub, the first major resale marketplace for event tickets. Within a few short years of its founding by a pair of investment bankers in 2000, StubHub became vastly more stable and transparent than the informal haggling process that had taken place outside concert venues for decades.
But tech-savvy scalpers quickly caught on to how valuable bots could be. From 2002 to 2009, a single company, Wiseguy Tickets, made more than $25 million in bot-fueled profit. And the more tickets its software secured to a particular event, the more it controlled pricing.
“For years performers had priced tickets below the market-clearing price, either out of fairness or out of concern for the long-term value of their brand,” says Budish, who’s now a professor of economics at the University of Chicago’s Booth School of Business. “That system kind of worked, but then the internet broke it by giving an economy of scale to the brokers using ticket bots.”
In 2007, EBay Inc. paid $310 million to acquire StubHub, which got a boost that same year when New York state eased regulations meant to curb ticket scalping. Within a few years, Ticketmaster, a longtime leader in the live concert ticketing business, pegged the ticket resale trade at about $15 billion annually and found that bots were siphoning up as many as 60% of the available tickets for some popular events.
A lawsuit filed by the company in 2013 accused a single group of scalpers of requesting 200,000 tickets per day using bot software. Finally, in 2016, Congress sought to curb the practice with the Better Online Ticket Sales (or BOTS) Act.
That’s around the time Lucas Titus, the 19-year-old founder and chief executive officer of bot maker Cybersole Ltd., got into the game. One Saturday morning that year, with few commercial retail bots available on the open market, Titus, still in secondary school in London, used a simple open-source script to help buy some Yeezys, which he flipped for a profit.
“Once I started to get into reselling, I quickly understood that the only way to make a good profit was to automate the process,” Titus told me in May.
That process used to involve camping out, rather than high-tech arbitrage: For four days in February 2005, almost 100 sneakerheads slept outside New York City’s Reed Space boutique for a chance to buy the Nike SB “Pigeon” Dunk designed by the store’s owner, Jeff Staple. “It was blizzarding,” he later recalled in an interview with blogger Justin Block.
“I felt bad. Every night I would buy pizzas for the kids, because they were sleeping outside in a snowstorm for four days.” When the police tried to break up the line, a riot ensued, and a legend was born. “A lot of people call this shoe the shoe that catapulted sneaker culture to the masses,” Staple said.
As sneaker culture increasingly moved online, even giants such as Nike and Adidas struggled with server crashes and fulfillment issues. That started to change in 2011, when New York boutique Kith partnered with e-commerce platform Shopify Inc., which began working out how to manage the flash-sale conditions of sneaker and streetwear drops.
But by the time the BOTS Act came around, developers were building workarounds. And because sneakers and other goods aren’t covered by the BOTS Act, Titus was free to build on the legacy of the high-tech ticket scalpers.
Each type of online retail experience became a unique problem to solve. For retail websites that make customers wait in virtual lines, using multiple Google profiles increases the chances of passing through them; for sites using virtual raffles, creating simple scripts allows for more than one entry.
The more Titus learned about coding, the more sophisticated his scripts became. Before long, sneaker resellers were reaching out to him on Twitter to ask about buying his software, which in 2018 led him to hire staff and start working on Cybersole full time. He now offers it as a subscription-based service, charging some 5,000 users £300 ($407) for a six-month license.
The bots have become impossible for big shoe companies to ignore. In March, Ann Hebert, Nike’s vice president and general manager for North America, resigned after a Bloomberg Businessweek cover story detailed a lucrative sneaker reselling operation run by her son, Joe.
The sneaker news site Complex reported that Nike CEO John Donahoe addressed the departure days later in a virtual meeting with employees, acknowledging that the incident may harm consumer trust surrounding product launches. The company hasn’t publicly addressed the Businessweek story since it was published, and Ann Hebert didn’t respond to requests for comment on that piece or this one.
Nike spokesperson Sandra Carreon-John said in the first story that Hebert had disclosed relevant information about her son’s company to Nike in 2018, and that “There was no violation of company policy, privileged information or conflicts of interest, nor is there any commercial affiliation between WCS LLC and Nike, including the direct buying or selling of Nike products.”
Carreon-John declined to respond to inquiries for this piece about why Hebert had resigned but did say, in response to a list of questions about Nike’s approach to bots, “We are constantly looking at the best way to combat bots across our digital ecosystem.
Nike is fully committed to making sure that our real, loyal consumers are the ones who get fair access to our products and that we continue to evolve best-in-class solutions in the marketplace.”
Despite Nike’s internal efforts, which Carreon-John declined to describe, bots continue to bring unprecedented volatility to what was once a straightforward retail experience. “People are still asking for transparency, and they are still frustrated and angry,” says Jacques Slade, a sneaker influencer with a popular YouTube channel.
“For those who are outside the sneaker bubble, it’s especially confusing. They think, ‘Well, the iPhone is super popular, but Apple will still sell me one, so why can’t I get a pair of Jordans?’ It just doesn’t make sense to them.”
Kent, of Cequence Security, sees signs that Nike is taking the problem seriously, not just for its own direct-to-consumer sneaker drops but in its relationships with retailers. In March he told me he expected the company would eventually threaten to cut allocations of sneakers for retailers that don’t take the problem seriously enough.
“We’ve actually had retailers tell us that when they proved that they could get through a drop all right, their Nike reps lit up and started talking about more allocation,” Kent said.
How serious the retailers are is a matter of much online speculation. Titus sees major third-party dealers such as Foot Locker Inc. as ambivalent about stopping bots because, frankly, they’re good for business. “They create a huge amount of demand for sneakers and ensure that they sell out extremely fast,” he told me in May. (Smaller, boutique-style sneaker shops still look to e-commerce partners such as Shopify for their anti-bot solutions, as a recent New York Times article showed.)
Last year, near the end of October, Titus and his team at Cybersole noticed something big: Foot Locker, which had been contracting Akamai to protect its retail websites from near-constant bot attacks, suddenly switched to a different set of tools. “They had been using Akamai for as long as I can remember,” Titus says.
“And it’s always been considered one of the most difficult anti-bot solutions to get through, because you need to solve various challenges to beat it, such as proving that you’re typing on your keyboard and using your mouse. Most bots aren’t able to beat it.”
Akamai’s services are ubiquitous, and also among the most expensive on the market. In recent years, as bots and resellers proliferated, more retailers began contracting with Akamai to protect themselves—its clients now include Adidas, Nike, Walmart, and Yeezy Supply.
Foot Locker’s sudden reversal surprised Titus: For resellers, the company dropping a gold-standard provider made its online sales more vulnerable to bots.
The difference was big enough that Titus and his team saw a dramatic drop in their weekly workload. “I think they’ve given up on stopping bots and are now focused on slowing them down,” he says. If so, he adds, “it would make sense to switch to a cheaper alternative than Akamai.”
Representatives from Foot Locker declined to comment on its decision to part ways with Akamai. Cara Tocci, Foot Locker’s vice president for corporate communications, did say that it was “making significant changes that we are excited to share in the future” but declined to provide details or a timeline for implementation.
In the meantime, according to Titus, Foot Locker’s retail sites are vulnerable enough that half a dozen new bots have sprung up to take advantage. “That’s made things quite difficult for us, actually, because we have that much more competition,” he says.
“Supply chains being screwed up should only exacerbate the usual bot dance”
Despite Foot Locker’s departure, Akamai’s anti-bot services remain extremely profitable, according to Sullivan, the CTO for security strategy. “We have a line of business built around bots that brings in just under $200 million a year,” he says. “It’s growing at 40% annually, which makes it one of the fastest-growing areas of cybersecurity.”
For years, growth was driven by efforts to combat scalping of concert tickets, luxury handbags, and sneakers. But the pandemic proved that bots can be quickly adapted to exploit any market inefficiency. Along with Covid vaccine reservation systems, Sullivan says, such products as N95 masks and hand sanitizer were popular targets of bot attacks when supplies were low.
With each advance, security experts scramble to adapt, then bot software teams respond, and the pattern repeats again, in what Sullivan calls a “very active software development cycle.”
The cycle’s speed also arises from the atomized, highly competitive nature of the bot market, where players range from individual resellers writing their own code to flash-in-the-pan bots cooked up by weekend warriors to established subscription services like Kodai, which has dozens of employees.
What they’re up against, when it comes to top-flight cybersecurity firms like Akamai, are machine-learning tools that act as a kind of Turing test. “What they are doing to some extent, as a bot, is telling a lie, so the question becomes whether we can spot the lie in what’s happening,” Sullivan says.
Bot developers use their own machine-learning tools to come up with more effective ways of lying. During global product launches, which unfold over many hours as the sun rises across time zones, a bot’s behavior can evolve fast enough that its strategies for gaming a drop will be different from one country to the next. “There’s a lot of intellectual capital being invested on both sides of this operation,” Sullivan says. “It’s very much a cat-and-mouse game.”
Asked how long it might take until bots are so deeply enmeshed in the fabric of retail markets that they can’t be taken out of it, he replies, “We’ve already passed that moment.”
If his company were to set up a site for a startup retailer, as a sort of experiment, he figures, “it would be hours, not days, before we were visited by probes from attackers. It’s all automated now, so there’s this constant scanning for vulnerabilities and opportunities.”
Demand for Cybersole, like Kodai and other major retail bot software, has soared high enough during the pandemic that the company has capped subscriptions. Otherwise it would be too hard for Titus and his staff of 12 to keep on top of software updates and customer service issues.
It would also risk devaluing the product. “With a limited amount of stock in each store,” Titus says, “our users’ chances of success start to decline if there are too many of them out there.”
And so, naturally, a secondary market for bot software has emerged. Resellers unable to secure a license for Cybersole or Kodai must instead rent access to them from such companies as Tidal Market, which charges $10 per day for access to Cybersole, and Easy Rentals, where one week of access to Kodai costs $150.
Sneakerheads who want a single pair of Jordans for themselves, meanwhile, can pay bot-savvy personal shoppers anywhere from $20 to $50 to help them cop it. Some specialize in Nike or Yeezy, while others are tailored to streetwear brands such as Off-White and Supreme.
In the immediate future, with Covid continuing to slow the global supply chain, Budish, the economics professor, expects bots could play a major role in dictating the spread of good cheer in some quarters this holiday season. “Supply chains being screwed up should only exacerbate the usual bot dance,” he says.
The scarcity of some in-demand products could introduce “a lot of volatility and unpredictability” to holiday shopping, with retail pricing likely to be even further below what the market will actually pay, for more products, than usual.
Foot Locker, Walmart, and their competitors have distribution relationships and brand identities built around selling PlayStation 5s and Air Jordans at the list price or lower, even if they receive less stock than anticipated—a perfect scenario for resellers with the right software, a little hustle, and a grinchy approach to the season.
Titus, for one, agrees. “For bot users targeting retailers,” he says, “I think it will be a very merry Christmas.”
America’s Jammed-Up Ports Need Help
For too long, U.S. seaports have lagged the world. Resisting automation is part of the problem.
As supply-chain woes have wreaked havoc on the global economy, one chokepoint in particular has stood out: America’s woefully inefficient ports.
Ships idling off the coast, waiting to offload goods, have become an icon of paralysis. At one point last week, about 200,000 containers were stranded aboard anchored vessels outside the Port of Los Angeles. East Coast seaports have seen similar lags.
Such delays impose serious costs: Retailers face shortages, manufacturers have slowed production, goods have spoiled, and exporters have lost customers. Experts expect the crunch to last for months.
To be clear, port congestion isn’t the whole story. As the pandemic ebbed, consumer demand for goods soared. Imports surged and warehouses filled up. Labor shortages put trucking and rail networks under stress. Disruptions to the flow of critical components — such as truck chassis and shipping containers — clogged cargo facilities. As bottlenecks proliferated throughout the economy, ports bore the brunt.
Even so, U.S. ports have exhibited glaring shortcomings for years. Not one cracked the top 50 in last year’s Container Port Performance Index, which compares efficiency at 351 sites around the world. Moving a container off a large ship in L.A. takes twice as long as it does in Shanghai. And while Asian ports generally run 24/7 (or 168 hours a week), many in the U.S. run just 112 hours a week, with nights and weekends off.
Why Is This?
A crucial factor has been organized labor. Unions representing longshoremen have been remarkably effective in advancing their members’ interests — gains that have come at the expense of other workers and the general public. (The average wage is $182,000 a year for dockworkers at West Coast ports, much more for foremen, leading terminal operators to limit hours to avoid overtime.)
Fearful that jobs might disappear or migrate to offices from the docks, unions have also resisted the kind of automation that is standard overseas. The result was serious turnaround delays even before the recent swell of pressure on capacity.
Automation won’t make sense at every port, but its potential benefits are plain. It could make shipping goods faster, safer, greener and cheaper. It could ease congestion, boost economic growth and reduce consumer prices.
A study by McKinsey & Co. found that, done prudently, automating ports could slash operating costs by up to 55% and boost productivity by up to 35%. Yes, some workers will be displaced. But if history is any guide, better technology will expand the total number of jobs that ports create long-term.
One might think that a historic supply-chain disruption would prod policy makers to take up this cause, but there’s little sign of it. In this area, as in others, President Joe Biden has shown greater concern for union labor than for the wider public.
His plan to get West Coast ports running 24/7, which he hailed as a potential “game changer,” was in fact a small-time pilot program that had nothing to do with technology; the ports involved simply agreed to pay more overtime.
One provision in the infrastructure bill Congress is debating would offer $3.5 billion to invest in zero-emissions technology at ports. It specifically prohibits investment in automation. This is a head-scratcher: government throwing its weight behind antiquated procedures when the benefits of technological innovation are so plainly manifest across all of society — from vaccines to batteries to reusable rockets and beyond.
In fact, such reluctance could hardly be more shortsighted. Even after the current crisis subsides, the shipping trade is expected to continue growing for decades. By 2040, according to a forecast commissioned by the ports of Los Angeles and Long Beach, regional container traffic could reach 41.1 million 20-foot equivalent units, up from 17.3 TEU at the complex last year.
State and federal policy makers should take this year’s epic bottlenecks as a warning sign. Investment in automation should be one priority. Ports could also use help standardizing the oceans of data they collect and sharing it with other actors in the supply chain.
Retraining programs — which unions have in the past been amenable to — could help dock workers transition to high-level logistics work. And standard-issue infrastructure projects, such as improving connections to rail and road networks, will be essential in the years ahead.
None of that will be cheap. It will be even more expensive if the Biden administration continues to prioritize union labor over workers and consumers at large. That needs to change — but if it does, few investments would offer as much potential to grow the nation’s economy.
LA, Long Beach Ports Will Issue Fines For Backlogged Cargo
The Los Angeles-Long Beach port complex will begin fining shipping companies if they let cargo containers stack up as the nation’s busiest twin harbors deal with an unprecedented backlog of vessels.
The Los Angeles and Long Beach harbor commissions voted Friday to implement a 90-day “container excess dwell fee” that sets time limits on how long containers can stay at marine terminals.
About 40% of all shipping containers entering the U.S. come through the Los Angeles and Long Beach ports. The number of ships waiting to unload has risen to record volumes.
As of Friday, there were 153 ships at anchor, berthed or “loitering” — cruising while awaiting dock space — and more than 100 of those were container ships, according to the Marine Exchange of Southern California, which monitors port vessel traffic.
Ships anchored at the complex have well over a half-million containers on board, officials said. They hold hundreds of millions of dollars worth of toys, electronics, clothing and furniture.
“We’re going through a significant crisis,” Mario Cordero, executive director of the Port of Long Beach, told that harbor commission on Friday.
The logjam of ships has interrupted the global supply chain and prompted the Biden administration to allow the port complex to operate 24 hours a day to try to get goods unloaded and out to consumers as the Black Friday and Christmas holiday season approaches.
The joint container fee program that starts on Nov. 1 will charge ocean carriers $100 per container. But the fine increases by $100 per container per day until the cargo moves.
Containers moving by truck can remain for eight days before the penalties kick in, while containers moving by rail have a five-day deadline, according to the Port of Los Angeles.
The penalties won’t take effect until Nov. 15 at the earliest, however, depending on whether daily snapshots of the situation show progress in clearing the docks.
“Our objective with this program is not to generate revenue” but to make room for ships waiting to enter the port, Los Angeles Harbor Commission President Jaime Lee said in a statement.
The average waiting times for cargo to be picked up has doubled in the wake of an import surge partly brought on by the COVID-19 pandemic, which affected traffic from Asian suppliers.
Another problem is a lack of industrial warehouse storage space in the region. Before the surge, truck-bound cargo generally left a terminal in less than four days, and containers headed to trains only languished for a couple of days.
Supply-Chain Crisis Has Companies Asking: Should We Still Advertise?
With inventory low and demand high, firms like Hershey’s and Kimberly-Clark cut back on ad spending.
The global supply-chain crisis is spreading to Madison Avenue.
Many companies have been struggling for months to get products to consumers, as they face shortages in everything from raw materials to labor to cargo containers, among other problems. Some are questioning whether it makes sense to promote products they can’t adequately stock.
“It’s not wise to drive demand when shelves are bare,” said Susan Cantor, chief executive officer of branding firm Sterling Brands.
Chocolate giant Hershey Co. and household-goods manufacturers Kimberly-Clark Corp. and Church & Dwight Co. in recent days said they cut back on ad and marketing spending in the third quarter because of supply-chain issues.
“The supply-chain challenges just wouldn’t enable us to be able to meet further demand that we would create through our very impactful advertising,” Hershey Co. Chief Executive Michele Buck said on an investor call. “It just didn’t make sense.”
Kimberly-Clark Chief Financial Officer Maria Henry said her company, which makes Kleenex facial tissues and Huggies diapers, had more demand than it could meet at the moment. “We have challenges getting the product to our customers,” she said on an investor call.
Church & Dwight, the consumer-product company behind the Arm & Hammer and OxiClean brands, said Friday that it pulled back on third-quarter marketing for products most affected by the shortages, especially household products. The New Jersey-based company said it expects supply-availability issues to begin to abate in the first half of 2022 for most of its brands.
Two of the largest players in online advertising, Facebook Inc. and Snap Inc., said recently that they expected a slowdown in revenue growth in the fourth quarter, due in part to macroeconomic factors such as supply-chain bottlenecks and labor shortages.
Both companies said their advertising business’s performance was also hurt by Apple Inc.’s new privacy rules, which make it harder for advertisers to target their ads at audiences.
The retreat comes as the ad market has been booming, thanks in part to strong consumer confidence and the end to some restrictions intended to slow down the spread of Covid-19. The fourth quarter of the year is typically the most lucrative for media entities as brands and retailers rely heavily on the critical holiday shopping season.
Jason Wagenheim, president and chief revenue officer at Bustle Digital Group, which owns publications Gawker, Nylon and W Magazine, said his company is seeing “temporary but significant advertising pauses” from many clients because of severe product shortages across many sectors including cars, diapers, toys, food and consumer electronics.
“I think large media organizations are going to see short term significant impacts in these categories until the supply-chain issues right themselves, which should be early in 2022,” Mr. Wagenheim said in an email.
Some digital publishers are planning for ad spending to shrink by at least 5% in the fourth quarter compared with their previous projections, according to media executives.
Not all platforms are expected to be affected equally by the ad pullback. Digital ad sellers often can be the first to see an advertising retreat because online ads are easier to cancel. Those ads are often bought in real-time or closer to their run date and are unlike TV ads, which are often sold well in advance of when they air.
Still, some TV networks are also seeing some softness in spending from several ad categories including auto manufacturers, according to ad buyers and TV network executives. Some fast-food chains also aren’t spending as much as expected because of the labor shortage, a TV executive said.
Fox Corp. CEO Lachlan Murdoch said his company had seen advertising pullbacks from car makers and telecommunications companies.
“It’s a supply issue, not a demand issue,” Mr. Murdoch said at a conference in September. “So we expect those clients and those partners to come back strongly once they have the supply of their cars to be able to sell.”
Fox and Wall Street Journal parent News Corp share common ownership.
The auto sector has been particularly hampered by the global chip shortage. This has caused manufacturers to cut production, resulting in car shortages at dealerships in the U.S.
General Motors Co. and Ford Motor Co. this week reported steep drops in third-quarter profit. They said supply-chain disruptions should slowly improve in the fourth quarter and throughout next year, although strong car demand will make it difficult to restock dealership lots.
Neither company mentioned cutting back on advertising while discussing their results. In an email, GM’s chief marketing officer said the company planned to have “a hearty media presence” in the fourth quarter. Ford didn’t respond to a request for comment.
Advertisers tend to be reluctant to cut marketing expenditures too deeply. Many believe it is important to remain top of mind with customers and fear that deep cuts to advertising can allow rivals to be more visible, which can lead to the loss of market share.
Consumer-product giant Procter & Gamble, PG 1.40% one of the largest advertisers in the world, said it would continue to invest in marketing despite the supply-chain crisis, which has led to escalating costs. “We continue to drive marketing spend,” said Andre Schulten, P&G’s chief financial officer, during a recent call with investors.
Ad-holding companies, which work on behalf of big advertisers, appear largely unaffected so far by the supply-chain bottlenecks.
“To date, we haven’t seen any impact from supply-chain disruption in our numbers,” said Mark Read, CEO of WPP PLC, the world’s largest ad-holding company by revenue, on a call with analysts on Thursday. Still, Mr. Read said his company had seen a “little bit of weakness” in automotive during the third quarter because of the semiconductor shortages.
WPP expects U.S. ad spending to surge 22% to $276 billion this year, according to a prediction made in June by WPP’s ad buying firm GroupM, and has no plans to downgrade its estimates.
“The factors which have driven the U.S. advertising market up so much, so fast, aren’t showing signs of abating, despite the issues with supply chains and Apple’s operating system,” said Brian Wieser, global president of business intelligence at GroupM.
Supermarkets Play Supply-Chain ‘Whack-a-Mole’ To Keep Products On Shelves
Retailers reroute shipments, expand storage to stay ahead of product shortages; Nutella, Pringles hard to get lately
Supermarket chains are revamping their operations to navigate persistent product shortages, expanding storage space and curbing discounts to make sure they don’t run out.
Companies are planning for shortages of popular brands of food and staples to continue for months and managers are trying to keep up as different products run short from week to week, industry executives said.
While food supplies overall remain plentiful, Nutella spread, Prego pasta sauces and Pringles chips are among many items that have been tough to secure in recent weeks, some supermarket companies said. Lunchables snacks and Capri Sun drinks have been hit-or-miss for months.
“The fact is, it’s like whack-a-mole,” Vivek Sankaran, chief executive of Albertsons Cos., said on a conference call recently. “On any given day, something is out of stock in the store.”
Ferrero U.S.A. Inc., the maker of Nutella, and Pringles producer Kellogg Co. said they have seen heightened demand for their products. Campbell Soup Co. said it is increasing production and looking to hire to meet demand for Prego sauces. Kraft Heinz Co. said that orders for Lunchables and Capri Sun are exceeding expectations and that it is accelerating investments to increase production.
‘What orders showed up? And who do we need to call? It’s our battle every day.’
— Kristen Hanson, Tops Markets
Some packaged-food makers, struggling with stretched staffing and hard-to-find raw materials, are limiting shipments of products, companies said. In response, grocery buyers, who are in charge of planning and coordinating orders, are spending more time tracking down vendors, managing trucks that arrive late and searching for substitutes for out-of-stock items.
Food retailers are buying extra inventory whenever they can, ordering items months earlier than usual and sending their own trucks directly to manufacturing plants to make pickups and speed up delivery times.
Some retailers are withdrawing discounts to reduce demand. Others are expanding or opening new warehouses. While some executives said stockpiling itself can exacerbate shortages, retailers said they are buying more goods to get ahead of delays and spotty availability. Supermarkets are receiving incomplete or late orders from suppliers and are carrying fewer flavors, sizes or brands.
“You don’t want to promote when you can’t fill the products,” said Neil Stern, chief executive of Good Food Holdings LLC, an operator of Bristol Farms, New Seasons Market and other West Coast retail chains. Consumers typically find it easier to substitute products or switch brands when there isn’t a huge promotion going on, executives said.
When Covid-19 began spreading in the U.S. in early 2020, grocery chains struggled with the surge in demand for staples ranging from baking products to toilet paper. As pandemic restrictions lifted this year and the U.S. economy rebounded, food makers haven’t been able to find enough workers to fully staff production lines, or drive trucks to deliver goods to stores and warehouses.
Kroger Co. is securing added warehouse space to hold an expanded “safety stock” of more than 70 staples such as baking items and cleaning supplies, according to Gabriel Arreaga, the grocer’s chief supply chain officer.
To work around international shipping delays, Kroger is now receiving product deliveries through a broader range of ports, and taking on additional carriers to speed up shipments.
Kroger is using its data analytics business to identify substitutes when suppliers can’t produce more, Mr. Arreaga said. Other retailers say consumers have been forgiving of shortages and are buying different products or brands.
Supermarkets are trying new tactics to speed up the distribution process. They are adding time slots for drop-offs and creating more aisles in warehouses to increase capacity.
Tops Markets LLC, based in New York state, is picking up food directly from manufacturers and taking full truckloads of one product rather than the typical mix of items, said Kristen Hanson, who oversees the grocer’s merchandising. She said she and her team are ordering three months in advance for some products, compared with one week before the pandemic.
“What orders showed up? And who do we need to call? It’s our battle every day,” Ms. Hanson said.
Associated Wholesale Grocers Inc., a wholesaler serving more than 3,000 locations, started buying supplies of whatever it could find to get ahead of shortages, said Chief Executive David Smith. The company holds 30% more goods compared with a year ago and is expanding its warehouses, with plans to open another next year.
“I do think everybody has shifted their thinking” to build more inventory, Mr. Smith said.
Food sellers’ strategies to buy bigger and earlier represents a shift from the “just-in-time” model of holding as little inventory as possible. Industry executives said they plan to continue storing more supply at least for the next several months, but don’t yet know if the change will be permanent.
Those efforts are adding to supermarkets’ costs. Keith Milligan, controller of Piggly Wiggly stores in Alabama and Georgia, said they are holding about $45 million of inventory in total, a nearly 30% increase from typical years. The grocer might reach $50 million in inventory before year-end if it can secure more packaged food such as canned goods.
Other executives said there is only so much they can do to work around shortages. In Massachusetts, Roche Bros. Inc. has been running low on PepsiCo Inc.’s Gatorade drinks for months.
The grocer instead tried ordering Coca-Cola Co. ’s Powerade and smaller sports beverages from local suppliers to little avail; they are having challenges keeping products in stock too. PepsiCo didn’t respond to requests for comment. Coca-Cola said it is working to address supply-chain challenges.
Arthur Ackles, Roche’s vice president of merchandising and buying, said: “The problem is people buy more of the other products.”
Online Shopping Tips For A Limited Supply Holiday Season
If a gaming console or in-demand toy is on your list, start shopping now—and use an inventory tracker to see who might have it in stock.
When in stock, Sony’s PlayStation 5 with disc drive retails for $500. But the game console’s supply is so limited now, some opportunists are listing it for over $1,000 on eBay.
It is hard to find a variety of items right now, not just consoles. There are supply-chain issues, Covid-19 issues and people-stocking-up-before-you-do issues affecting graphics cards, Christmas trees, bikes, dolls and countless other products.
Retailers are already warning holiday shoppers to start early—and many have. That thing your kid has been asking for all year?
It Might Not Make It To The Christmas Tree
Out-of-stock messages on websites have nearly tripled compared with pre-pandemic levels going into the gifting season, according to a report from Adobe. The most affected categories are apparel, sporting goods, baby products and electronics.
Expect shipping delays for iPhones, too. During Apple’s most recent earnings call, finance chief Luca Maestri said, “We expect most of our product categories to be constrained during the December quarter.”
Most configurations of the iPhone 13 Pro and Apple Watch Series 7 currently have a ship estimate of late November. And when I checked when Apple could ship a base iPad Mini to me in San Francisco, the company’s website said December. (A more expensive variant, with cellular, was available for pickup 20 miles away.)
Desperate times call for bots: Some good guys and less-good guys are deploying shopping bots that can automatically make online purchases faster than you can say “checkout.” Malicious bot activity, which includes bots that log into and check out from retail sites, has increased 19% from Sept. 4 to Oct. 26, according to networking-services company Akamai.
I don’t recommend trying them. Using a bot might violate the store’s terms of service, which could result in the retailer restricting your access to your account. Plus, bots typically require coding know-how.
Instead, you’ll need to harness the power of your human fingers: waiting until your desired item is in stock, then adding it to your cart with lightning speed. I can’t do the legwork for you, but I can offer some tips that could help you score what you’re looking for.
Make Two Lists
Mentally divide up the things you want based on priorities, said Taylor Schreiner, director of Adobe Digital Insights, which analyzes online consumer shopping transactions. “One list has what you need to get—and get on time—and are willing to pay a little bit more money for,” he said. “Then make another list for things that you’re flexible on price, timing and model for.”
For the first list, make purchases early—well before Black Friday, he says. And don’t count on discounts this season. Adobe reports that computer prices typically drop 9% by this time of year. In 2021, however, prices haven’t dipped. In fact, online prices overall are up, according to the data.
Some retailers are incentivizing early shopping. At Best Buy, if you purchase qualifying items starting on Nov. 1, and the price goes down between then and Nov. 26, the retailer will refund you the difference. Target’s deals start on Halloween, and the company also offers a price-match guarantee through Dec. 24 for deals marked “Holiday Best.”
Walmart doesn’t have a similar guarantee but it’s launching its Black Friday deals on Nov. 3. Members of Walmart+ ($98 a year) will get a four-hour head start—at 3 p.m. ET.
For Your Second, More Flexible Wish List, Adobe Estimates That These Are The Best Days To Shop Online For The Steepest Discounts, Based On Data From The Past Four Holiday Seasons:
• Thanksgiving, Nov. 25, For Toys
• Black Friday, Nov. 26, For Furniture, Bedding, Tools And Home Improvement
• Nov. 27 For Electronics And Appliances
• Nov. 28 For Sporting Goods And Apparel
• Cyber Monday, Nov. 29, For Tvs
• Dec. 1 For Laptops And Desktop Computers
Apple hasn’t confirmed it will have its annual sale this year, but in the past, it began at midnight on Black Friday and ran through Monday. Instead of promotions, Apple typically offers gift cards of up to $150 on purchases of select products. You’ll likely find better deals on Apple devices elsewhere.
Follow Inventory Trackers
Consoles, PC graphics cards and in-demand toys are difficult to find anywhere right now, except on marketplaces where they’re marked up by hundreds of dollars. The HotStock website tracks a large catalog of products across the U.S., U.K. and Canada.
You can go to the page of a specific item and see where it’s in stock at retailers like Amazon, Walmart and Target. You don’t have to subscribe to set an alert, but premium HotStock iOS and Android app subscribers ($5.49 a month) get notifications before anyone else.
NowInStock.net tracks a smaller group of electronics, apparel and toys, but it can show availability in more countries, including Germany, France and Japan. Stock Informer is specifically for consoles and graphics cards.
FixitFixitFixit Show Real-Time Stock Status Of Popular
Graphics Cards At A Number Of Retailers.
For the graphics-card seekers, your best bet may be YouTubers such as DataLover and fixitfixitfixit, which are streaming dashboards showing live inventory statuses. (You could also buy prebuilt gaming PCs or laptops to harvest their graphics cards, but they too are likely marked up.)
Create Accounts At Major Retailers
Make sure you’re logged in and ready to check out when stock is available. If you don’t have them already, create logins where your item is sold. Major retailers include Best Buy, Amazon, Target, Walmart, Costco and Sam’s Club. If you’re looking for consoles, sign up at GameStop, Antonline, Microsoft and Sony’s PlayStation website, too.
Sony has a sign-up page where PS5 seekers can register for an invitation to purchase directly from the company. Invitees will be selected “based on previous interests and PlayStation activities,” according to the site’s FAQ.
Consider Independent Shops, Too
If you can’t find in-demand toys at big-box retailers, try local independent shops, says Polly Wong, president of retail marketing firm Belardi Wong. Google’s Shopping search tab now has filter options for “Smaller shops” and “Available nearby,” and the results indicate whether the item is on shelves or in limited stock at a particular store. Before you make a trip, give the store a quick call to see if the product is, in fact, available.
Pick Up, If Possible
If it’s an option, choose in-store pickup to avoid shipping delays. If not, check ship estimates to make sure it’ll arrive on time. Just be warned: Those estimates can be pushed back.
FedEx spokeswoman Alexandra Shockey said the company continues to face labor shortages and increased package volume, resulting in estimated-delivery-date changes for some packages. Enrolling in FedEx Delivery Manager will give you the most up-to-date information on packages, she said. UPS has an equivalent called My Choice.
And always remember when on retail websites, “6 to 8 weeks” is often code for “Your guess is as good as ours.”
Buy From A Marketplace—With Caution
Willing to pay whatever it takes? Many hard-to-find items, from the new Xbox to the Magic Mixies Magical Misting Cauldron, are listed on peer-to-peer marketplaces like eBay and StockX at a markup.
There is some risk involved. It is possible that a listing marketed as a PlayStation 5 arrives on your doorstep as a PlayStation 4. EBay has a money-back guarantee, which a spokeswoman said “protects all buyers in case something goes wrong with a transaction, such as if an item isn’t received or not as described in the listing.”
But the process of actually retrieving your money can be arduous, involving reaching out to the seller and requesting a return. EBay can intervene if the seller hasn’t responded, but only after a period of time that can range from three to 21 business days.
StockX, which only lists products considered “brand new,” has verification teams that authenticate the item before sending the product to the buyer. If the item doesn’t meet StockX’s requirements, the buyer is matched with a new seller. The downside?
The verification process typically takes one to two business days, but can take longer. StockX says it aims to fulfill orders within 12 business days.
No Dice? Get A Digital Gift
If you can’t find what you’re looking for, well, at least you tried. A couple thousand Fortnite V-Bucks or a year of Spotify may have to suffice this season. Just blame the elf shortage and reindeer logjam. Santa’s got a supply-chain headache this year!
Supply Chain Crisis Risks Taking The Global Economy Down With It
New Bloomberg Economics gauges show the extent of the global supply shortages that are pushing prices higher and putting economic recoveries at risk.
Last year the global economy came juddering to a halt. This year it got moving again, only to become stuck in one of history’s biggest traffic jams.
New indicators developed by Bloomberg Economics underscore the extremity of the problem, the world’s failure to find a quick fix, and how in some regions the Big Crunch of 2021 is still getting worse.
The research quantifies what’s apparent to the naked eye across much of the planet — in supermarkets with empty shelves, ports where ships are backed up far offshore, or car plants where output is held back by a lack of microchips. Looming over all of these: rising price tags on almost everything.
Central banks, already retreating from their view that inflation is “transitory,” may be forced to counter rising prices with earlier-than-expected interest-rate hikes. That poses new threats to an already stumbling recovery, and could take the air out of bubbly equity and property prices.
Behind the logjams lies a mix of overloaded transportation networks, shortages of labor at key chokepoints, and demand in the U.S. that’s been bolstered by pandemic stimulus and focused more on goods than services.
It’s not just a problem of moving stuff around. The world is still struggling to make enough stuff too.
Producers have been caught off-guard by this year’s rebound after they slashed orders of materials last year, when consumers stopped spending.
In Vietnam, plants that make Nike shoes had to scale back output because migrant workers had decamped to their home provinces out of fear of Covid-19. China, the world’s manufacturing powerhouse, is confronting new virus outbreaks and responding with targeted lockdowns. Its factory prices are rising at a 10% annual rate, the fastest since the 1990s.
Pulling all these pieces together, the Bloomberg Economics supply indexes show shortages just off a 20-year high in the U.S. Gauges for the U.K. and euro area are at a similarly elevated level.
The measures are based on a range of data, from factory gate prices to the ratio of inventory-to-sales for retailers, and the backlog of orders for service-sector firms.
Readings of zero indicate normal conditions, negative ones mean goods are abundant, and positive points to constraints. The gauges show an abrupt shift from excess supply before the Covid crisis to today’s significant shortages.
For global manufacturers like Toyota — which slashed September production by more than a third from 2020 levels as shortages stalled its famed just-in-time production process — as well as the firms that move their products around the globe, and the shoppers waiting for deliveries, the big question now is: when will the disruptions end?
Even giants like Amazon and Apple — used to bending supply chains to their will — don’t see the situation improving fast. Amazon said its entire fourth-quarter profit could be wiped out by a surge in the cost of labor and fulfillment. Apple said it lost $6 billion in sales because of inability to meet demand, and could lose more next quarter.
Shipping conditions should start to ease after the Chinese New Year in early February, “although disruptions could last at least till the middle of next year,” said Shanella Rajanayagam, a trade economist at HSBC. Even then, with pent-up demand and inventory restocking keeping the pressure on, Rajanayagam says it could still take some time for supply chains to fully disentangle.
What comes next is uncharted territory partly because of the sheer number of bottlenecks along the route from assembly lines to shopping baskets. As one supplier waits for another to deliver, the delays are feeding on each other.
Logistics systems usually ride the ups and downs of the global economy in a predictable pattern: Rising demand boosts trade, pushing shipping rates up and heralding good times for cargo carriers, until they over-build capacity and a bust follows.
But the pandemic has thrown that cycle out of whack. Even amid signs of slowing growth, the pipeline of international commerce has never been so clogged.
The more than 70 ships anchored off Los Angeles, for example, are loaded with enough 20-foot containers full of goods to stretch from Southern California to Chicago if laid end to end.
And even when those vessels get to dock, their payloads will only slam into the thousands already stuck in the ports waiting for a ride inland. That will require more truckers and trailers in the short run.
A longer-term fix means getting Covid-19 under control, building new infrastructure such as more efficient ports, and improving technology for digital transactions and faster communication.
Elsewhere in the world, shipping bottlenecks have often followed severe weather and virus outbreaks, like the recent Covid-19 flareup in Singapore. An analysis of port congestion showed the backlog Monday in that city-state center of finance and logistics was elevated, with 53 container ships at anchor, the highest count since Bloomberg started tracking the data in April.
That’s a problem for the U.S., where the clothes and home electronics that fill up shoppers’ carts rely on foreign inputs and assembly. And with vaccination rates in many Asian countries still low, it’s a problem that won’t disappear anytime soon.
“For the supply chain to recover, it is going to require a certain amount of luck” — avoiding weather disasters or new Covid hotspots — “plus time and investment to add more logistics capacity,” said Simon Heaney, senior manager for container research at Drewry in London.
For a global economy exiting the deepest recession in recent history, supply shortages caused in part by strong demand are a good problem to have. Clearly worse would be the opposite one: abundant supply because economies remained depressed, with millions more unemployed.
But this least-bad option is still creating plenty of problems of its own.
Inflation is already running high enough to be outside the comfort zone for monetary policy makers. In the U.S., it’s at 5.4% now and could stay lodged in the 4% to 5% range next year if supply constraints don’t ease, according to Bloomberg Economics models.
That doesn’t mean the world is in for a re-run of 1970s-style stagflation. It took a decade of overheating and policy missteps to drive U.S. inflation above 10% back then. The Fed and its peers are unlikely to make the same mistakes again. And unemployment is far below its 1970s peaks, and falling.
Still, the current environment — call it stagflation-lite — is a challenging one for central bankers.
Keeping rates at their current lows would allow the recovery to continue, but risk prices spiraling higher if households and businesses come to expect more of the same. Tightening would quell inflation not by addressing inadequate supply, but rather by stifling demand. It could turn into the monetary policy equivalent of the surgeon who declares: “Operation successful, patient dead.”
Traders are currently pricing in two Fed rate hikes in 2022, two more than the median member of the Federal Open Market Committee. A Bloomberg Economics model of the Fed’s reaction function — its policy response to changes in the economy — suggests that if inflation runs strong and unemployment falls, even two hikes next year might not be enough.
Of course, predictions of rapid monetary tightening have been consistently wrong in the past, and they could be again. Demand for goods might cool as pandemic stimulus fades or fears of tighter financial conditions erode confidence.
A rotation of spending from goods back to services, already under way in the U.S., will lessen the imbalance between constrained supply and booming demand. A sustained slowdown in China might hit commodity prices.
And supply chains could unsnarl quicker than expected, too. The Bloomberg gauge of shortages in the U.S. has edged down in the latest readings — while staying at historically elevated levels. It’s just that there’s no precedent that sheds much light on when, or how, conditions will normalize.
“The current situation is unique and quite different from the more isolated disruptions the world has experienced,” said John Butler, president of the World Shipping Council, which represents the biggest ocean freight carriers. “The way in which the current congestion ultimately unwinds will also be different.”
Texas Tells Cargo Ships To Join Tesla And ‘Escape California’
A month after Texas poached Tesla Inc.’s headquarters from California, it’s now trying to attract freight carriers dealing with near-record backlogs at the U.S.’s largest ports of Los Angeles and Long Beach.
Texas Governor Greg Abbott launched the ‘Escape California’ Twitter campaign Monday with a 30-second video telling carriers that in less than two weeks, they can re-route cargo to “one of the 24/7 functioning Texas cargo ports.”
“Choose a state that doesn’t see inflation and America’s supply-chain backlog as a good thing,” the promotional video says. “Escape California, everyone is doing it.”
The seventh-busiest maritime hub in the country, the port of Houston is the largest on the Gulf Coast. It moved about 320,000 containers in August — about one-third the number handled by Los Angeles in that month.
Port delays are up to 100 days in California. In less than two weeks, your cargo can set sail from California & be at one of our 24/7 functioning Texas cargo ports.
Escape California. Choose Texas. pic.twitter.com/D6aWip1UAF
— Texans for Abbott (@AbbottCampaign) November 1, 2021
Abbott isn’t the first Republican governor to try to attract business amid the California logjams. Last month, Florida Governor Ron DeSantis also pitched the state’s 15 seaports to help alleviate bottlenecks, saying local ports “are used to operating around the clock” during a visit to the state’s busiest Port of Jacksonville.
Tiny Commodity Carriers See Demand Bonanza From Container Crisis
The boom in container shipping is firing up demand for some of the world’s smallest commodity-hauling vessels.
With rates to hire 20-foot steel boxes soaring this year, charterers are looking to the smallest ships to lower their costs. It has helped push products like steel, aluminum and grain, which would normally be sent in containers, into the small bulk vessels.
The move means that earnings for some of the world’s largest bulk ships, known as capesizes are now lower than tiny ones. Capesize vessels were earning about $27,000 a day on Thursday, while the handysize ships fetched $32,000 a day.
“We’re carrying cargoes that have come out of containers,” said Jan Rindbo, chief executive officer of DS Norden, which has a fleet of so-called handysize tankers. “It’s a trend we have seen for most of this year where, relatively speaking, the smaller ship types have outperformed capesizes.”
Rindbo said that among the cargoes that his company has been carrying have included grains and aluminum ingots. They would normally be shipped in containers, he said.
Panicky Holiday Shopping Is Dumb And Self-Defeating
Sure, there are shortages. But those experts out there yelling at people to buy now are just doing marketing work for retailers.
Hey, calm down! Ignore all those frantic experts who are urging consumers to tackle holiday shopping earlier than usual due to supply-chain issues and shipping delays.
The idea that all, or even most, shopping has to be completed as soon as possible this year is overkill. The only real beneficiaries are retailers and their bottom lines.
Sure, there may be low stock for certain items. But all that means is that it’s smart to be opportunistic about grabbing specific, cherished goodies that might fly off the shelves. Think of a particular Lego set that your child has her heart set on. Most holiday gifts don’t actually fall into that category.
Rushing to complete all holiday shopping out of fear of things becoming unavailable is likely to backfire.
Research shows that in an environment where perceived scarcity looms large, consumers are less thoughtful about their purchases. They buy more than they need and spend more than they ordinarily would.
In addition, if shoppers buy too early in the season, the pain of payment often recedes so that as the holidays near, they wind up adding more to the pile of gifts than they had intended.
It’s much like diners who pay for high-end meals in advance, and then tend to spend on extras such as wine or specialty items when they get to the restaurant, according to Charles Lindsey, a marketing professor at the University at Buffalo.
Shoppers can also miss out on some of the best deals if they buy most of their holiday items too early. It’s true that some retailers have bumped up their promotions. Amazon.com provided discounts in early October, for example.
Target Corp. launched savings offers on Halloween, and Walmart Inc.’s first round of deals is kicking off now. But Black Friday and Cyber Monday, now three weeks away, are still when the biggest savings are likely.
Procrastinators, rejoice! Christmas falls on a Saturday this year, so even bigger deals may come the week leading up to it, according to Marshal Cohen, chief industry adviser of the NPD Group, which provides market data for retailers.
Some retailers may offer price matches to make consumers more comfortable about buying early. So, if an item is listed for a lower price at a competitor later on, they’ll be made whole. Beware, though. Retailers often have exclusions such as blackout periods on Black Friday, when price matching won’t be available.
Also, if rebates are any guide, consumers who think they’ll avail themselves of the price-matching guarantee usually don’t, meaning that buying early is likely to cost them money.
For high-end shoppers, where the luxury market already plays on a sense of limited inventory and exclusivity, anxiety about nabbing holiday gifts could lead to even more needless spending. Still, sales are expected to be limited and any discounting may just be for out-of-season merchandise.
Shoppers who just can’t tune out the holiday warnings should consider a gift card. That way, they’ll be able to spend what they want, when they want, hassle-free.
Smaller U.S. Ports Pitch For Cargo As California’s Logjams Swell
The U.S.’s busiest port complex in southern California has more demand than it can handle — and that’s left smaller hubs along the nation’s coastline angling for some of that business.
After dealing with supply-chain issues of its own over the summer, California’s Port of Oakland is now ready “to be put to use to help shore up” the crisis, its Maritime Director Bryan Brandes said last month.
Over in Florida, Governor Ron DeSantis has pitched the state’s 15 seaports as the relief the U.S. needs, saying local harbors “are used to operating around the clock.” And in Texas, Governor Greg Abbott launched an “Escape California” campaign aimed at attracting carriers to the Gulf Coast.
The Los Angeles-Long Beach port complex has been dealing with record-breaking backlogs since the summer that have hardly eased despite ramped-up operations and the involvement of a White House-led task force. The situation has escalated to the point where the twin ports will start fining carriers for letting their containers stay too long at the terminals from Nov. 15.
To be sure, shipping goods to alternative ports has its own supply-chain challenges. When it comes to moving cargo from China to Florida, the extra leg through the Panama Canal can sometimes add over 10 more days to the trip on top of the two weeks it usually takes to ship goods to the West Coast, according to Bloomberg Intelligence analyst Adam Roszkowski.
But with containers piling up and logjams swelling in California’s San Pedro Bay, those extra days would likely even out for cargo destined to the East Coast, Florida Ports Council President Michael Rubin said.
“If you’re trying to move it to this side of the United States and you’re parked off the coast of California, those 10 days are now being eaten up,” Rubin said by phone. “They’re probably less than what you’re paying now.”
Florida’s busiest Port of Jacksonville, known as Jaxport, is offering incentives to attract carriers by working with analysts who can develop cost-beneficial alternatives to their current routes. “We are within about a one day truck drive of nearly 100 million consumers,” said Jaxport Director Robert Peek.
So far, the port has managed to successfully glean business from Georgia’s congested Port of Savannah, with Hapag-Lloyd AG announcing in October it’s temporarily sending its calls to Jacksonville to “optimize our service portfolio.”
But attracting shipments from California’s mega-ports may be a longer shot, said Nathan Strang, director of ocean trade-lane management at logistics firm Flexport. On top of the longer shipping times, West Coast-bound carriers turning to Florida would also have to deal with more modest capacity. “Just sending everything to the East Coast isn’t quite gonna work,” Strang said.
Florida’s ports “are pretty much running at 70-80% capacity right now,” he added. “It would not take too much more cargo to tip them over.”
Meanwhile, about 400 miles north of the San Pedro Bay, the Port of Oakland is also telling carriers they have room for the overflow.
Oakland dealt with bottlenecks of its own over the summer, when about 30 ships were waiting to anchor in the San Francisco Bay due to a months-long shortage of dockworkers. It has since added about 300 employees, which helped boost the workforce by 16% and the number of ships waiting at bay has fallen to zero, according to Danny Wan, the port’s executive director.
Amid the worker shortage, some companies decided to omit Oakland from their schedule, but now they’re “realizing they overcorrected,” said Wan. The San Francisco Bay port is expecting vessel calls and cargo volume to recover toward the end of the year, but administrators say it has capacity to handle part of southern California’s spillover.
“We have all the capacity Los Angeles and Long Beach have on a smaller scale, that’s all,” Wan said.
Flexport’s Strang warned that “the difference between Oakland operating at optimal capacity and Oakland being overwhelmed is only a couple of more ships a week.” As ports everywhere hunt for more business to counter the crisis in southern California, they should be cautious about how far they can go, he said.
“These ports can drown in their own success very quickly,” Strang said.
Snarled Supply Chain Is Making U.S. Warehouse Shortage Worse
Record numbers of cargo ships bob in the waters off Southern California, unable to unload. A late shipment of patio furniture gets moved — three times — before finding a home for the winter. With no warehouse space, a crew assembles holiday displays in a parking lot in an effort to get them to clients on time.
It’s all fallout from the global supply-chain crisis that’s clogging U.S. ports, pushing warehouses to capacity and forcing logistics managers to scramble for space. And it’s making already scarce warehouse space even more valuable.
Take B.J. Patterson, chief executive officer of Pacific Mountain Logistics in San Bernardino, California. He had to make room for new goods coming in, so the patio furniture, which arrived from China too late for the summer sales season, had to go. It got moved first to Nevada, then to Arizona, and finally to Texas.
“It’ll sit there till spring comes and they’ll try to sell it,” he said. “There’s going to be a lot of cheap patio furniture out there.”
A complex web of factors, exposed by the Covid-19 pandemic, is snarling supply chains: Severe labor shortages, antiquated infrastructure, containers in the wrong places and free-spending U.S. shoppers spurring an import surge have all disrupted the normally synchronized flow of global trade.
“I think it’s going to get worse,” Hamid Moghadam, CEO of industrial landlord Prologis Inc. said during a company presentation last month. “The short-term problem, I think, is going to be with us through 2023.”
His company and other major warehouse owners like Blackstone Inc. are the winners in this logistical logjam, with rents that are skyrocketing more than 30% in some of the hottest U.S. markets. Vacancies of 1% or less aren’t unheard of in gateways such as Southern California.
Blackstone also is booking gains on its holdings as valuations rise. Since September, the firm has cashed out almost $1.3 billion by refinancing two mortgages on industrial properties, according to reports by Moody’s Investor Service and Fitch Ratings. And one of the firm’s portfolio companies, Link Logistics, is spending $5 billion to build 30 million square feet of new space.
Developers can’t build fast enough. Every $1 billion increase in online sales equates to a need for an additional 1 million square feet of warehouse space, CBRE Group Inc. estimates. And U.S. suppliers will need 800 million square feet more to store backup inventory in case critical parts for autos and other products run short, according to Prologis.
Congestion is palpable in Southern California, where redistribution and fulfillment centers process Asian imports for the likes of Amazon.com Inc. and Home Depot Inc. In the Inland Empire, east of Los Angeles, about 20 million square feet of new space is under construction in a market that needs 50 million square feet to meet demand, CBRE Managing Director Ian Britton said.
Another effect of supply-chain snags: Delayed shipments of building materials like doors and conveyor belts are stalling construction of new logistics properties.
“Our subcontractors can’t hold their bids with prices or delivery dates as they simply don’t know when they will get materials,” said Fran Inman, senior vice president of Majestic Realty Co., a Southern California-based warehouse owner. “It’s a giant Rubik’s Cube of co-dependency.”
About 100 ships are waiting to unload at the Ports of Los Angeles and Long Beach, nearly double the number docked at berths in the sprawling complex, the Marine Exchange of Southern California reported. Once offloaded, goods sit on docks for days, with 18 containers per available truck in the region, according to C.H. Robinson Worldwide Inc., the largest U.S. third-party logistics manager.
The warehouse shortage forced a Robinson crew to unload containers in a parking lot last month, because there wasn’t room inside to repackage goods in time for clients.
Workers combed through boxes to beat Halloween deadlines, “setting down Christmas lights for the moment and pulling out witches on brooms to be shipped,” said Jim Mancini, the company’s vice president for North American surface transportation.
“Right there in the parking lot, we built displays that could go straight to a storefront.”
Patterson, who founded Pacific Mountain Logistics in 2009, has raised staff wages 36% on top of paying at least 30% more for storage space. More than a dozen empty shipping containers await removal from his parking lot, hogging real estate needed for incoming goods.
“A lot of spring goods got here late and didn’t sell, and then a lot of Christmas stuff came early because they were afraid of being late,” he said. “This is the biggest challenge I’ve faced in my career.”
Ships Keep Coming, Pushing U.S. Port Logjam And Waits To Records
The logjam of container ships outside the California ports of Los Angeles and Long Beach swelled to another record as stepped-up efforts to clear cargo off the docks failed to prevent the average wait for vessels from reaching nearly 17 days.
The queue, both at anchor and in a holding zone, rose to 83 ships as of late Friday, four more than Wednesday and topping the previous high of 81 set earlier in the week, according to officials who monitor marine traffic in San Pedro Bay. The average wait increased to 16.9 days, double the level from two months ago, according to L.A.’s Wabtec Port Optimizer.
Strained supply chains have become an economic drag on the world’s largest economy and a political risk for President Joe Biden as the disruptions put upward pressure on inflation while highlighting shortages of workers, including truck drivers and warehouse staff. Consumer sentiment is deteriorating amid a spike in the cost of living.
“Every sector of the supply chain has reached capacity,” Port of Long Beach Executive Director Mario Cordero said in a statement this week announcing that its terminals had their second-busiest October on record.
“We are trying to add capacity by searching for vacant land to store containers, expanding the hours of operation at terminals, and implementing a fee that will incentivize ocean carriers to pull their containers out of the port as soon as possible.”
The White House earlier this week touted incremental progress at L.A.-Long Beach– a 20% decline in the number of containers sitting for more than nine days days in the week to Nov. 8. The adjoining gateways for 40% of the nation’s containerized imports have handled 17% more volume this year, while their land-side storage capacity remained unchanged.
The bottlenecks at West Coast ports are tying up container capacity and underpinning already-soaring rates for transpacific ocean freight. That’s pinching margins for companies that import from Asia, like athletic goods giant Adidas AG, which said this week that its freight costs will be almost 200 million euros ($229 million) higher this year than initially planned.
Shipping a 40-foot container of goods from Shanghai to Los Angeles cost $9,947 this week, down from a record of $12,424 hit in September but still 145% higher than a year earlier, according to the latest Drewry World Container Index. Freightos, which measures container rates plus premiums and surcharges, shows a 40-foot box commanding $18,730, a nearly fivefold increase from a year ago.
The East Coast is seeing a surge in imports, too. More than 20 container carriers were counted in an anchorage area outside Georgia’s Port of Savannah, according to data compiled by Bloomberg.
Making Acquisitions To Control The Supply Chain
Executives try bringing vital resources under their corporate umbrella to limit disruptions.
Just about anything that could go wrong with global supply chains has gone wrong in the past two years: There’s been a pandemic, volatile swings in demand, an unrelenting wave of extreme weather events, shortages of workers and cargo space—even a giant container ship lodged in the Suez Canal.
It’s an operating environment that executives have taken to comparing to a game of whack-a-mole. The term has been used at least 30 times on investor calls in recent months, according to data compiled by Bloomberg.
Now a growing number of companies are deciding if they want something done right on their supply-chain management, they’re going to have to do it themselves. Walmart Inc. and Home Depot Inc. are among the U.S. retailers who’ve chartered their own container ships to try to speed deliveries.
Specialty retailer American Eagle Outfitters Inc. has acquired a pair of logistics companies—AirTerra and Quiet Logistics Inc.—to help manage inventory between stores and e-commerce fulfillment and compete with larger companies in offering affordable same-day or next-day delivery.
American Eagle also expects these logistics operations to be a revenue-generating business in their own right: Quiet has previously provided services to fitness-attire retailer Outdoor Voices, Birdies shoes, and other brands, according to its website. American Eagle paid $350 million for the business—its largest ever acquisition, Bloomberg data show.
Sherwin-Williams Co. announced in late September that it would acquire coating ingredients company Specialty Polymers Inc. to bring more of its supply chain in-house and reduce its reliance on manufacturers in the hurricane-prone Gulf region of North America.
Specialty Polymers, which generated about $112 million in revenue in 2020, including sales to Sherwin-Williams, has production facilities in Oregon and South Carolina.
“We’re going to take the steps necessary to serve our customers and eliminate problems for them, and this is an important step in our ability to do that,” Sherwin-Williams Chief Executive Officer John Morikis said on a call with investors.
Chocolate giant Hershey Co. just announced it’s buying Dot’s Pretzels—a fast-growing brand with a cult following—but also Pretzels Inc., which manufacturers products for Dot’s and other snack companies at three facilities in Indiana and Kansas.
“Working in the global supply chain right now is incredibly difficult,” Hershey CEO Michele Buck told the Wall Street Journal. “The ability to have a facility in-house just reduces one level of that complexity.”
CEOs are betting that vertical integration of manufacturing and distribution operations will give them earlier insight into potential pain points and more flexibility to address them.
The current crunch has exposed the vulnerabilities of overly globalized supply chains and also the risks of being dependent on someone else—wherever they might be located—to meet customer demand.
One reason the semiconductor shortage was so crippling for the auto industry was that chip purchasing decisions were made deep into the supply chain.
The end vehicle manufacturers didn’t know there wasn’t enough supply to support a production rebound until it was too late, David Simchi-Levi, a professor of engineering at the Massachusetts Institute of Technology who focuses on supply-chain management, said in an interview earlier this year. In a time when so many things feel unpredictable, companies are grabbing whatever control they can.
Ocean Shipping Rates Fall But Ports Are Still Jammed
Cost to ship a container across the Pacific declined by more than one-quarter last week, signaling demand is finally easing.
The cost to move a container across the Pacific fell by more than one-quarter last week, the biggest decline in two years. The decline signals that the huge demand for Asian exports is easing, though shipping executives say it will be months before the logjam of ships outside of U.S. ports clears up.
The decline in ocean-freight rates coincides with the winding down of the traditional peak shipping season, which starts in August when Western importers start to load up on cargo ahead of the year-end holidays. With most products at least on their way, space is gradually opening up on the front end of the trip, leading to lower prices.
That easing hasn’t made its way to U.S. ports, where dozens of ships packed with everything from Christmas trees to electronics and heavy machinery are still waiting for weeks to unload at big gateways like Los Angeles and Long Beach, Calif. Shipping executives say they don’t expect the traffic to ease until February at the earliest.
“It could be months before the logjams ease, but if we don’t get more closures at ports, the volumes should become more manageable after Chinese New Year,” said Lars Jensen, chief executive of Denmark-based Vespucci Maritime.
The cost to move a container from China to the U.S. West Coast fell 26% last week compared with the week before to $13,295, according to the Freightos Baltic Index. That is still more than three times as high since the start of the year when the same box cost $4,200.
Freightos head of research Judah Levine said it was the first decline since June in the premium cargo owners pay to secure space on ships.
Analysts and freight forwarders said there are fewer ships with short-term charters sailing across the Pacific after wholesale inventories rose 13% year over year in September, according to the U.S. Census Bureau.
Big importers such as Amazon.com Inc., Walmart Inc. and Home Depot Inc. account for around one-quarter of all imports that sail into the U.S. West Coast. They have been struggling to replenish their inventories since late July, when freight rates shot up more than 70% within a couple of weeks.
Demand for ship space has been so high that some of these retailers chartered their own vessels to bring in cargo like decorations, gadgets and other hot-selling items before Christmas.
“The inventory numbers suggest that big retailers have stocked up and ordered early during the port delays,” said Jonathan Roach, a container analyst at London-based Braemar ACM Shipbroking.
The Lunar New Year this year falls on Feb. 1, when millions of workers go on break for at least a week to visit families and manufacturing output in China falls substantially.
With more capacity from big vessels expected to come on line, freight forwarders say dozens of smaller ships that have been chartered since the early summer will gradually withdraw to smaller, regional trade routes.
These smaller ships cost twice as much to operate, with the average cost per box across the Pacific at around $30,000, according to freight forwarders.
For now, the wait to dock in the gateways of Southern California continues unabated. There are around 80 boxships waiting to unload at Los Angeles and Long Beach for two weeks or more.
“I’ve never seen so many smaller ships like ours waiting to dock outside L.A.,” said Madalin Butoi, captain of the Hyundai Express, a Greek-operated vessel with 5,000 boxes that has been stuck outside the port since Oct. 3 after sailing in from South Korea.
“Everybody has gone bonkers to secure space on any kind of ship,” he said. “It will become better, but it won’t happen this year.”
Truckers Steer Clear of 24-Hour Operations At Southern California Ports
The lone terminal with all-night hours has raised the bar for opening its gates, citing high costs and scant use by trucking companies.
The Biden administration pressed ports in Southern California to open 24 hours a day to help ease supply-chain bottlenecks. The move has barely made a ripple.
One terminal at the Port of Long Beach flung open its gates around the clock for truckers in mid-September, from Monday to Thursday. But no trucks showed up, prompting the terminal to tighten the rules.
In late September, it said it would open during overnight hours only if 25 trucks made appointments. Since then, those criteria were met only one night, and only five big rigs showed up.
Giles Broom, a spokesman for the terminal operated by Total Terminals International LLC, said it cost on average almost $10,000 to remain open during overnight hours. Trucking companies that make appointments but don’t show up face no penalties.
The slow adoption of 24-hour services at the ports of Los Angeles and Long Beach, the nation’s busiest port complex, highlights the challenge facing the Biden administration as supply-chain problems persist despite months of government and industry measures to ease congestion.
This week, the complex set a record of 86 container ships waiting offshore for a berth, according to the Marine Exchange of Southern California.
Mr. Biden said last month that the neighboring ports would move toward 24-hour operations in an effort to double the hours that cargo moves off terminals.
Today, TTI is the only one of the port complex’s 13 terminals offering 24-hour operations. The ports of Los Angeles and Long Beach are public agencies that act as landlords to private terminal operators.
Transportation Secretary Pete Buttigieg said Tuesday during a press conference at the Port of Los Angeles that moving to 24/7 operations isn’t like “flipping a switch.”
The inertia has prompted finger-pointing by various participants in supply chains built to move goods from the ports to inland distribution centers and then on to retailers and manufacturers across the U.S.
One trucking company that would like to use the 24-hour pickups said TTI’s appointment restrictions are so onerous it struggled to qualify for an appointment. To pick up loaded boxes, TTI requires firms to drop off certain types of empty containers as well as certain types of truck trailers, known as chassis, so the terminal can maintain a balance of equipment.
“I can have 100 or 200 containers” to return, said Paul Brashier, vice president of drayage and intermodal at Reno, Nev.-based ITS Logistics. “But if they aren’t the specific steamship line box on the specific chassis they need at the specific minimum, you’re out of luck.“
Gene Seroka, executive director of the Port of Los Angeles, said terminal operators are reluctant to move to 24/7 operations because truckers and warehouses don’t work those hours.
The Biden administration is encouraging shippers, truckers and warehouses to extend shifts. Port officials say 24-hour port operations will take off once other links in the supply chain work all night. “I think it’s going to take time,” said Mario Cordero, executive director of the Port of Long Beach.
The Southern California ports complex is a primary focus of administration attention because it handles nearly 40% of the nation’s seaborne container imports by volume.
The terminals there have been overwhelmed by a pandemic-fueled rush by retailers and factories to restock depleted inventories to meet strong consumer demand.
Between January and August of this year, the port’s terminals processed the equivalent of 6.9 million loaded containers, an increase of 23% from the comparable months of 2019, according to research and consulting firm Beacon Economics.
The cargo surge has clogged many links in the supply chain, leading to shortages of goods and contributing to inflation reaching a 31-year high in October.
Ships arriving from Asia must wait at sea for days or weeks because berths are occupied, and when they do pull up to the docks they can’t unload quickly because marine terminals are full of boxes.
Port truckers can’t pick up containers because of a shortage of the trailers needed to haul the boxes, and when they do deliver a box it often sits for days longer than usual outside warehouses that are struggling because of a lack of workers and space.
The White House has notched successes with some measures to ease congestion.
Major companies including Walmart Inc., Target Corp. , FedEx Corp. and United Parcel Service Inc. have committed to making better use of nights and weekends to pick up containers at the Southern California ports.
The ports said they would start adding charges for loaded containers that sit for nine days or more on marine terminals from Nov. 1. They have delayed assessing the fee for a few weeks, but by Nov. 8, the number of such containers had fallen by 20% to 101,000.
U.S. Labor Chief To Meet Truckers On Supply Chains In L.A. Trip
U.S. Labor Secretary Marty Walsh plans to meet with key members of the transport industry in Los Angeles to discuss supply-chain issues at the nation’s biggest port that are fueling goods shortages and inflation.
“We have to make sure that we ease that supply chain — the president’s very focused on turning the ports into 24-7” operations, Walsh said in an interview on Bloomberg Television’s “Balance of Power” with David Westin to be broadcast Friday. “I’m going out to Los Angeles in a couple of weeks to talk to some trucking companies and the ports about how do we continue to stay on top of that.”
The Los Angeles-Long Beach port complex has been dealing with record-breaking backlogs since the summer that have hardly eased despite ramped-up operations and the involvement of a White House-led task force.
The American Trucking Associations has said the country has a current shortage of about 80,000 drivers, with the figure set to swell to 160,000 in 2030.
Crucial equipment such as chassis — which are hooked to trucks to move loaded containers at ports — are also in short supply, with tariffs on imported ones from China placing strain on logistics, according to Weston LaBar, head of strategy at digital freight-brokerage company Cargomatic Inc.
Persistent supply-chain constraints have contributed to quickening inflation, with prices climbing at the fastest annual rate since 1990 in October. Economists have been ratcheting up their forecasts for price gains through 2022.
When asked about inflation and how it’s eating into wage gains, Walsh indicated that President Joe Biden’s two longer-term fiscal packages — an infrastructure program enacted last month and a social-spending bill that awaits passage by the Senate — would help to address rising living costs.
“If you have more supply of product and you have people earning more money, I would say that’s a recipe for success,” Walsh said.
Italy Will Benefit From The Breakdown of Global Supply Chains
Italy is set to benefit from the shortening of supply chains around the world, according to the chief economist of state-backed lender Cassa Depositi e Prestiti SpA.
“Italy can become the go-to supplier for European industrial champions,” economist Andrea Montanino said at a conference on Friday.
The pandemic, Montanino added, has only accelerated the already ongoing breakdown of global networks into three main regional trade hubs — China, Europe and the U.S. Disruptive events like the blockade of the Suez canal earlier this year show that “long supply chains are no longer convenient.”
Desperate Parents Turn To Shopping Bots To Hunt For Hottest Christmas Gifts
Use of programs that scour retail sites for hard-to-find items has soared since the start of the pandemic.
Frustrated by empty store shelves, some parents are turning to a new kind of Santa’s helper: the consumer-friendly shopping bot.
Shopping bots scour retail sites to find out when sold-out items get restocked and automatically place orders. Long used by resellers looking to buy and flip high-demand goods for a profit, the technology is now being used by desperate holiday shoppers, too.
Craig Douglas wanted to get a PlayStation 5 for his two oldest children, plus a Hot Wheels carwash playset and a CoComelon plushie for his two youngest. Last month all three items were sold out online and at every store he visited near his home in York, Maine.
With Christmas fast approaching, the 34-year-old electrical engineer subscribed to a $99-a-month shopping bot called SnailBot that crawls Amazon.com Inc. and Walmart Inc.’s WMT 1.83% websites. He connected the bot to his accounts for both retail sites, selected the items he wanted and a few weeks later they arrived at his doorstep.
“It’s pretty much saved Christmas this year,” said Mr. Douglas.
The use of bots—or botting—was popularized a few years ago by sneaker enthusiasts looking to get their hands on high-end pairs released in limited quantities. The programs have since expanded to target different products and services, including appointments for Covid-19 vaccine shots and spots for workout classes when those were scarce.
Shopping-bot developers say there has been an increase in people using their software to buy just a few items at a time.
Traditionally, bots have been used to purchase dozens or hundreds of the same products to resell on platforms like eBay and Facebook Marketplace. Small-volume purchases indicate users are acquiring items to keep for themselves, developers say.
This holiday season, bot developers say their users are chasing hard-to-find gifts such as a “Gabby’s Dollhouse” playset from Spin Master Ltd. ; Cracker Barrel Old Country Store Inc.’s LED Blow Mold Nostalgic Boy Reindeer; and Playmates Toys Inc.’s Teenage Mutant Ninja Turtles Original Party Wagon. Videogame consoles, trading cards and computer graphics cards are also hot.
Many people see botting as market distorting, especially ahead of Black Friday, a day many consumers wait to do their holiday shopping in anticipation of discounts. One group of lawmakers tried to outlaw the practice through the “Stopping Grinch Bots Act” in 2019, but it failed to pass Congress. Bot activity has since surged.
Monthly bot attacks on retail sites have increased more than eightfold over the past two years, according to estimates from Imperva Inc. Peter Klimek, director of technology at the cybersecurity firm, attributes the growth largely to the pandemic’s social-distancing restrictions and the global supply-chain crunch.
Critics have long argued that botting gives users an unfair advantage, allowing them to skip the line. Resellers say they frequently get angry messages from shoppers about their listings for items with marked-up prices. Proponents argue that bots are available to anyone and point out that resale sites typically only allow listings of nonessential goods.
Some toy makers stressed that there are more than enough items available for the holiday season and they are doing their best to keep their most popular items in stock.
Chris Beardall, chief commercial officer for Spin Master, said more “Gabby’s Dollhouse” toys are coming to retailers over the next several weeks. “We’ve doubled capacity in response to consumer demand and are making best efforts to get quantities to retailers quickly,” he said.
Earlier this year, Thomas George turned to a shopping bot called SlapX after consistently being outgunned as he tried to buy the sports-trading cards and bobblehead toys he collects.
“I went a long time not getting items I wanted,” said the 31-year-old cryptocurrency miner in Oklahoma City. “It levels the playing field.”
He recently used SlapX to get his 9-year-old niece Moose Toys Ltd.’s Magic Mixies Magic Cauldron for Christmas after being unable to find the popular toy for sale at any retail stores.
“I remember when I was a kid I always wanted the gift that everybody else is getting,” said Mr. George, adding that he is now trying his hand at reselling trading cards and toys.
Because they catered to resellers, bots have traditionally required tech savvy, but now some developers are building easy-to-use versions for the average consumer struggling to purchase scarce goods.
For example, some of the newer ones don’t require any downloading or for users to buy multiple internet addresses to fool retail sites into thinking lots of people are shopping for an item instead of just themselves. Users also don’t have to tinker with various settings or closely monitor the programs to achieve their goals.
“I just wanted to simplify botting and make it available to the masses,” said SlapX’s creator, Peter Ironside of Wisconsin. His two-year-old startup, Bontek Solutions LLC, sells access to the software for around $40 upfront plus a $30 monthly fee.
Bot developers commonly promote their software on social networks such as Twitter and Discord. Many limit the number of users allowed to purchase or subscribe to their bots to minimize competition for products. Prices vary greatly and bots tend to come and go, as retailers might make changes to their e-commerce stores that stop the programs from being effective.
Cybersecurity experts warn it can be risky to use bot software due to the potential for malware. Further, botting violates many retailers’ terms of service. E-commerce stores have fought back with their own bot-busting measures such as requiring online shoppers to type out randomly generated sequences of letters or solve puzzles before they can complete a sale.
Walmart declined to comment on the use of bots on its website. Amazon said it has systems in place to limit purchases of high-demand products.
Getting caught could lead to a user being banned from an e-commerce site, but that hasn’t scared off shoppers like Yamein “Chris” Eato, owner of a car dealership in Columbus, Ohio. He used SnailBot this summer to purchase a PlayStation 5 for his kids. The console, made by Sony Group Corp. , has been in limited supply at most stores since its release a year ago.
“You can never click and check something out as fast as automation,” said Mr. Eato, 41. He has since used the bot to purchase nearly a dozen more of the consoles for friends and relatives, who paid him back. “If you don’t have a bot, you’re handicapped.”
The Great Huckleberry Supply Crunch
Shortages of the tart-sweet berries have doubled prices in two years.
To the uninitiated, huckleberries might conjure up memories of Huckleberry Finn or Huckleberry Hound. But for Anna Baumhoff, the tart-sweet fruit has provided her livelihood for three decades—and with demand soaring as supplies dwindle, she’s starting to question how long she’ll last.
“On a daily basis, I wonder what I’m doing in this crazy business,” Baumhoff says. “It’s a Wild West show.”
Prices for huckleberries have almost doubled in the past two years, to as much as $17 per pound, as more people discover the fruit just as extreme heat in the American West has made for weak harvests. Last summer, Baumhoff spent more than $125,000 buying every berry she could—some 7,500 pounds—and she fears that still may not be enough. “Our website is going crazy,” she says.
Most huckleberries come from public lands in Idaho, Montana, and Washington, where pickers seek patches of knee-high bushes with bright green leaves and oodles of the smooth, purple fruit.
Gathering huckleberries was once a bucolic activity for recreational pickers who mostly competed with each other or the occasional bear. In the past two decades, though, commercial sales have exploded, sparking sharp price increases for the fruit, which is related to the blueberry but typically smaller, with a more intense flavor.
And efforts to cultivate huckleberries have proven largely unsuccessful because the wild habitat—subalpine forest slopes with just the right mix of soil, sun, and shade—is difficult to replicate.
Word can travel fast about a bountiful huckleberry patch thanks to a Facebook group that has swelled to nearly 10,000 members and has been growing as much as 20% per year. But global warming has made it harder to find berries in large quantities, says Langdon Cook, an author of books about wild foods.
“The erratic weather patterns have made foraging in general, and huckleberry picking in particular, more of a wild card,” says Cook, who has a favorite spot in the mountains of Washington that he and his daughter call “huckleberry heaven”—though he won’t reveal its location.
During peak growing season, just a few weeks in late summer, hundreds of thousands of dollars change hands every night in a market that looks increasingly like something run by a drug cartel.
Pickers plop the berries into buckets that they hand off to drivers, who transport them by the truckload to buying stations where gun-toting brokers fork over cash and then resell the fruit to jam and jelly producers.
“I haven’t heard of anyone shooting each other over a huckleberry patch … yet,” says Malcolm Dell, head of the International Wild Huckleberry Association, which grew out of a group at the University of Idaho that studies the fruit.
Dell estimates the commercial huckleberry market has grown to some 3 million pounds annually, with a total value topping $50 million last year. But he says squabbles among various groups about who should get to pick the fruit and how it’s harvested threaten further expansion. “The huckleberry is becoming a quagmire,” he says.
That’s bad news for Baumhoff, whose mother started Homemade By Dorothy in 1986 to sell jam she made from wild huckleberries in her Boise, Idaho home. Baumhoff took over the business in 1992, and now she makes almost two dozen huckleberry-themed products.
These days, she’s grappling with supply constraints similar to those faced by almost every business in the U.S. She’s paying more for everything she buys, it can take months to get certain jars and bottles, and Covid-19 has forced some distribution centers to shut down.
Worse, it’s harder than ever to find workers to help with cooking, packing, and shipping even as her sales surge. Typically, she employs as many as 15 people, but this year she’s had to make do with 11.
Baumhoff’s sales are headed toward $500,000 this year, vs. about $300,000 in 2020. She’s sold more than 7,500 jars of her best-selling jam this year, up 40%, going through almost two years’ worth of huckleberries.
That’s put a big dent in her frozen reserves of more than 20,000 pounds, and she fears she may not be able to replenish that supply next summer, forcing her to turn down several new wholesale accounts. “Nobody is stocking this stuff anywhere in the world,” she says. “It doesn’t work that way.”
In September, Baumhoff boosted prices: An 11-ounce-jar of huckleberry jam now runs $12.75, up from $9.95. She hoped the increase would reduce demand, but she’s selling more than ever as competitors exit the business because of the rising prices. “Sales haven’t dipped one iota,” she says. “And I keep getting hit with more orders.”
Supply-Chain Snarls Leave Southern California Swamped In Empty Shipping Containers
From the docks of ports to private yards, stacks of boxes are growing higher and spreading out, adding to the severe gridlock in distribution networks.
The biggest export out of Southern California these days is air. And it is suffocating the supply chain.
Hundreds of thousands of empty containers are filling marine terminals and truck yards across the region and tying up scarce trucking equipment as ocean carriers scramble to return empty boxes to factories in Asia.
The gridlock on the export side of U.S. supply chains is the mirror of the congestion tying up imports, and officials say it is complicating efforts to unwind the bottlenecks at the ports of Los Angeles and Long Beach.
“They take up space at the docks and they take up space at the terminals,” Mario Cordero, executive director of the Port of Long Beach, said of the stacks of empty boxes. “It’s a serious concern.”
Shipping lines have made recovering the empty containers a priority because they want to get them back across the Pacific Ocean to take advantage of high freight rates for Asian exports. That has fractured a round trip for shipping containers that normally stretches across the U.S., with more customers now unpacking shipments at nearby warehouses already swamped with goods.
With ships already full, there isn’t enough space for empty boxes that are then piled onto increasingly high stacks to await transport and loading onto outbound vessels.
Hundreds of private parcels of land have been opened up for empty containers, Gene Seroka, executive director of the Port of Los Angeles, told harbor commissioners at a recent meeting. Mr. Seroka said that during a recent helicopter tour from the port complex to San Bernardino, 80 miles away, he saw “containers strewn throughout the region.”
Some of those boxes might have been filled with goods. But because shippers don’t like to leave millions of dollars of merchandise in public, the majority were most likely empty.
The boxes are the result of an import surge that swamped the domestic supply chain this year as consumers switched spending from services to goods during the Covid-19 pandemic.
Loaded imports at the California ports complex totaled the equivalent of 6.9 million containers between January and August, an increase of 23% compared with the same period in 2019, according to research and consulting firm Beacon Economics.
The ports handled the equivalent of 6 million empty export containers during the first 10 months of this year, 20% more empty boxes than in all of 2019, according to data from the ports.
About 110,000 empties are stacked at port terminals on a typical day, officials say, and thousands more are piled in private yards and even scattered along streets. Before the current congestion, the ports had rarely tracked the number of empty containers sitting at docks.
Hundreds of thousands of boxes are lifted from ships each month, delivered to warehouses and their contents emptied. Truckers say that when they try to return the boxes they find terminals so full that it is almost impossible to secure an appointment to return them.
“It is like playing the lottery,” said Leslie Luna, freight coordinator for Luna and Son’s Trucking LLC, a small, short-haul trucking firm in Commerce, Calif.
Ms. Luna said she sometimes stays up until 2 a.m. or 3 a.m. refreshing appointment-booking websites to return containers that fill her company’s 2-acre yard.
To return a container Ms. Luna has to make an appointment on a different website for each of the port complex’s 13 terminals. Each terminal will only accept certain boxes for certain ocean carriers on certain days. The terminals are so full they often don’t take boxes at all or add requirements that truckers pick up an inbound box for each one they drop off.
The result is that many truckers are stuck with an empty container sitting atop the trailer, known as a chassis, that they need to pull loaded imports from the harbor. The Harbor Trucking Association, in a recent survey of 43 trucking firms, found that about 8,100 chassis were stuck beneath empty containers, contributing to an area-wide shortage of the equipment.
Ian Weiland, vice president of operations at Junction Collaborative Transports, a short-distance trucking company based in Long Beach, said that in recent months he has had to send about 25% of his drivers home after their first delivery of the day because of the hundreds of empty containers taking up chassis in his yards. Without an empty chassis, the drivers can’t pick up a new container.
That changed in early November, Mr. Weiland said, when the firm suddenly found it was able to make appointments for containers it had been unable to return for weeks. “Someone waved some sort of magic wand around Nov. 1,” he said.
The change coincided with the ports’ decision to impose a daily fee starting this month on loaded containers that dwell at terminals nine days or longer. Boxes will be assessed a charge of $100 on the first day over the limit and the fee would escalate if the container doesn’t move so that by day seven the charge would total $2,800.
The ports have postponed implementation of the fee, giving retailers, manufacturers and logistics companies more time to pick up boxes. Terminals know one way to help shipping customers retrieve boxes is to accept more empty containers and free up truck chassis.
Alan McCorkle, chief executive of Yusen Terminals LLC, at the Port of Los Angeles, said his facility began expanding capacity for empty boxes in October.
The terminal, which accepts boxes for five ocean carriers, leased 20 acres of nearby land, increasing its storage capacity for empty containers to 19,000 boxes from 6,500.
It also worked with another firm to create a third-party storage facility on 12 acres of land with capacity for 5,000 boxes. The facility opened three weeks ago and already has 3,000 containers, Mr. McCorkle said.
Several ocean carriers have sent small ships to pick up hundreds or a few thousand boxes at a time, but that hasn’t done much to clear the backlog. Some terminal operators and ocean carriers said they expect larger ships to arrive in Southern California in the coming weeks with capacity to pick up more boxes when the rush to transport goods eases after the holidays, making more ships available.
Some exporters say the ocean carriers’ drive to get boxes quickly back to Asia for imports has hurt their business.
Greg Jackson, executive vice president at Border Valley Trading, a hay, alfalfa and straw exporter based in Brawley, Calif., said he struggles to secure space on ships out of Southern California. What bookings he does make are frequently canceled, he said.
Loaded exports out of the port complex totaled the equivalent of 2.2 million containers in the first 10 months of this year, 1 million boxes fewer than total exports for all of 2019. The Agriculture Transportation Coalition, a lobby group, said a survey of its members showed that 22% of confirmed overseas sales are being lost because exporters cannot get their products shipped out.
Making Up For Lost Time, Cargo Ships Are Skipping Oakland And Returning Straight To Asia
Following long delays at southern California’s logjammed ports, cargo ships are bypassing the Port of Oakland and heading directly back to Asia to make up for lost time.
Total cargo volume handled by the Port of Oakland — the third-busiest in California — declined by 20% in October from a year earlier, it said in an emailed statement on Monday. About 60 vessels stopped at the harbor last month, 43% fewer than a year October 2020, it said.
The country’s busiest port complex of Los Angeles and Long Beach is facing crippling delays, with transit time for vessels arriving from Asia more than doubling to 62 days compared with pre-pandemic levels. Officials at the Port of Oakland, about 400 miles north of the twin ports, have said the facility is operating below capacity and is in a position to help offset the congestion.
Port of Oakland Executive Director Danny Wan, in an interview with Bloomberg News earlier this month, said he expected vessels calls and cargo volume to pick up again toward the end of the year. “We have all the capacity Los Angeles and Long Beach have on a smaller scale, that’s all,” Wan said.
The port’s total cargo volume in the year through October is up 2% compared with the same period last year.
Shipping Giant Offers Cold, Hard Cash To Help Clear L.A. Port Glut
One of the world’s biggest ocean carriers is dangling incentives of as much as $200 a container for help in clearing the backlog at Southern California’s ports.
CMA CGM Group said it will offer importers $100 for each container removed from terminals at the ports of Los Angeles and Long Beach during daytime hours and within the first eight days of arrival. Pickups during nighttime and weekend hours get a $200 incentive per container, the Marseille, France-based carrier said in a release on Monday.
The program starts Wednesday and will last for 90 days, potentially costing CMA CGM Group more than $22 million over the period, it said. The company also said it will assist Fenix Marine Services, which operates a terminal at the Port of Los Angeles, in expanding its hours of operation to support round-the-clock container pickups.
CMA CGM is the first ocean liner to offer such an incentive, according to Port of Los Angeles spokesman Phillip Sanfield.
Last month, the hubs of Los Angeles and Long Beach, which jointly handle more cargo than any other U.S. ports, said they plan to levy a surcharge on lingering containers. The charges would start at $100 per container and increase in $100 increments for each additional day. The ports announced Monday they would delay charging the fines for a third week until Dec. 6.
Supply Chains In Southeast Asia Are Less Vulnerable After Delta-Driven Disruptions
Vaccinations have risen and Covid-19 strategies have shifted in some of the region’s major manufacturing countries.
The Delta-driven wave of infections wreaked havoc on supply-chains when it tore across Southeast Asia this summer, disrupting production of everything from semiconductors to sneakers and raising prices for Western consumers.
But countries like Vietnam and Malaysia have learned from that experience and are better prepared for fresh waves of the virus, economists and factory operators say, as the new Omicron variant spreads globally.
Some countries in the region, including Vietnam and Thailand, have shifted away from aggressive Covid-19 containment strategies to boost their economies. That move has been aided by a rapid rise in vaccinations.
Government calculations “have changed to tolerate a much higher level of cases,” said Trinh Nguyen, a senior economist at Natixis.
Still, economists and business owners are cautious. Scientists are still studying the new Omicron variant, including its contagiousness and virulence. They are also trying to determine whether it can evade existing vaccines, though some scientists believe those will still offer protection.
The new variant arrives as conditions within the global supply chain are improving but still face challenges. Even though factories have been reopened for months across Southeast Asia, reducing a major source of pressure for Western companies, continuing labor shortages are limiting production in countries like Vietnam and Malaysia.
Factories in the region are also contending with elevated freight rates and raw material shortages. That all adds up to higher prices and longer wait times for Western consumers.
Still, companies are hopeful that Omicron won’t set things back too much. One factor that may lead to fewer disruptions in any future waves of the virus is Vietnam, which has shifted its approach toward managing the spread of Covid-19.
To contain a spike in cases over the summer, Vietnamese authorities ordered factories in its southern production hub to shut down or operate with far fewer workers than usual for around 2½ months, causing massive disruptions for clothing, furniture and footwear companies.
That failed to eradicate Covid-19, however, and in late September Vietnam’s government formally abandoned its zero-Covid policy, saying authorities must avoid taking extreme measures. By early October, many factories had resumed normal operations.
So far, the government has stayed the course despite a recent rise in cases, to around 14,000 a day—roughly on par with its summer peak. During this latest wave, which isn’t linked with the Omicron variant, businesses say the government has generally allowed manufacturers to keep operating even when some workers test positive.
“The government does not seem to be doing anything rash with factories right now,” said Jonathan Moreno, head of the American Chamber of Commerce in Vietnam’s manufacturing and supply-chain task force.
Enabling Vietnam’s less restrictive policies has been a surge in vaccinations. In early August, the U.S. had fully vaccinated half of its population, while Vietnam had vaccinated less than 1%, according to Our World in Data.
Vietnam’s situation was seen as so desperate that more than 80 shoe and apparel companies, including Nike Inc. and Gap Inc., wrote a letter to President Biden asking him to accelerate vaccine donations to Vietnam.
Today the vaccine gap between the U.S. and Vietnam has all but vanished. Around 55% of Vietnamese are fully vaccinated, compared with 59% of Americans. About 75% of Vietnamese are at least partly vaccinated, compared with 71% of Americans.
Covid-19 deaths in Vietnam have been averaging around 150 a day in recent weeks, about half the level as early September.
It is a similar story in Malaysia, where strict shutdowns early in the summer strangled key manufacturing sectors, even hitting production in the nation’s globally important semiconductor industry.
Just 3% of the country’s population was fully vaccinated in early June, when large-scale lockdowns began. Now about 78% of the country’s population has been fully vaccinated, well above the rate for the U.S. or the European Union.
Tan Thian Poh, a Malaysian factory owner and the chairman of a garment industry association, said he thought the current high vaccination rate meant it was unlikely that Malaysia’s government would impose large-scale shutdowns. “We can’t afford another lockdown,” he said.
Malaysian government officials have said it is too early to draw firm conclusions about the new variant, but they don’t want to overreact. “We also want to make sure that our response is proportionate to the risk. We still don’t know the full extent of the risk,” Malaysia’s health minister, Khairy Jamaluddin, said last week.
Vietnam’s government has said it is closely monitoring the Omicron variant.
The variant could still cause problems for supply chains. New border restrictions could prolong the return of foreign laborers to Asian manufacturing countries, depressing factory output.
In Vietnam, businesses are worried that migrant workers who returned to their rural villages during the height of the summer pandemic will be less likely to return to their urban factory jobs if the new variant causes a further increase in cases, or that the government could tighten domestic travel restrictions.
Some factory operators say they have lost faith in local authorities. “They say that it’s during the challenging times that you learn who your real friends and partners are,” said one senior member of an Asian manufacturing company with operations in Vietnam. He said the government harmed businesses by offering no flexibility during the summer lockdown.
On the prospect of the government reviving restrictions because of Omicron, he said, “I wouldn’t put it past them.”
Mr. Moreno, of the American Chamber of Commerce in Vietnam, said the new variant doesn’t seem to have yet pushed the government to take a harder-line approach. But that could change, he said, if there is a rise in the number of people in critical care or dying from Covid-19.
While no one discounts that possibility, many economists and analysts said they think governments like Vietnam and Malaysia would seek to avoid that outcome, so as not to further strain relationships with foreign companies.
“Both Vietnam and Malaysia have kind of decided to move towards a living with Covid stance,” said Louis Kuijs, head of Asia economics for Oxford Economics. “To my view it’s a bit less likely than last year that they would drastically close down factories.”
Retailers Restocking Inventory Face A Potential Postholiday Hangover
Merchants are rushing in orders ahead of the end-of-year holidays, but delivery delays may leave them with a surplus of untimely wares.
Businesses that have been ordering goods earlier and in larger volumes to guard against shortages are on a knife’s edge, balancing between the possibility of lost sales and the risk of getting stuck with excess or outdated inventory.
Sparkledots Wholesale Children’s Clothing tripled its holiday-season orders because of uncertainty over whether the goods would arrive on time, Chief Executive Ginny Pasqualone said. The Ridgefield, Conn.-based business, whose legal name is VBP Enterprises LLC, imports items from China to supply retail clients in the Southwestern U.S. and has spent five times more on freight this year than in 2020.
“We’d much rather have too much inventory than not enough,” said Ms. Pasqualone. “But then that eats up your margins as well.”
The stakes for retailers during the critical fourth quarter, when sales and profits traditionally peak, are high this year because of supply-chain volatility, transport bottlenecks and the uncertain impact of the Omicron variant of Covid-19 on shopper behavior.
“If you go over budget, people will be mad at you, but you’ll still have a job come Monday,” said Ted Stank, supply chain professor at the University of Tennessee’s Haslam College of Business. “And so the tendency is to make sure that we don’t stock out.”
U.S. consumer demand has been strong this year, and has been picking up steam heading into the holidays. Sales at online and physical stores rose 14% during the Thanksgiving weekend compared with last year, according to data released by Mastercard SpendingPulse.
Broad measures show retailer stocks remained severely depleted heading into the fourth quarter. U.S. retailers held $602.7 billion in inventories in September, according to U.S. Commerce Department figures, compared with the $664.4 billion they held in September 2019, before the pandemic upended supply chains.
But record backups of container ships in the U.S. and logjams at other distribution chokepoints suggest big volumes of goods are still tied up in supply chains. That leaves many businesses in limbo as Christmas approaches and facing a possible flood of out-of-season merchandise in the New Year.
Deep-pocketed companies such as Walmart Inc., Target Inc. and Home Depot Inc. say their inventories are in good shape after loading up early on products and even chartering ships to ensure items arrive in time for the holiday peak.
Merchants with smaller shipping budgets or less clout with suppliers have been hedging their bets, with some ordering double or even triple their usual volumes in case some orders don’t show up on time, or at all.
The risks of overbuying are higher for retailers that sell a narrow range of products or goods that age quickly, such as fast fashion or Christmas sweaters, than they would be for general merchandisers whose array of merchandise provides a natural hedge.
Even bigger operators like apparel retailer Gap Inc. are feeling the heat after coronavirus-related factory closures in Vietnam slowed orders in the third quarter, raising the potential for late-arriving orders.
“If we think that things are going to be too late for the holiday season, we won’t put them in stores or online and have them generate markdowns,” Gap Chief Financial Officer Katrina O’Connell said in a Nov. 23 earnings call.
In surveys by Morgan Stanley, more than 50% of companies including retailers said in each of the first three quarters this year that they planned to increase inventories. In the quarterly surveys in years before the pandemic, about 20% of shippers on average planned to increase inventories.
Retailers and suppliers typically plan their inventories months in advance, making it tough to respond to gyrations in consumer demand or the prolonged supply-chain volatility due to Covid-19.
“If you’re a midsize retailer, you have to decide what demand will be in Christmas in about May,” said Chris Caplice, executive director of Massachusetts Institute of Technology’s Center for Transportation & Logistics. “Forecasting for demand is just kind of out the window during the pandemic.”
This year, boutique owner Jodi Springer doubled the holiday inventory orders for Sassy Southern Designs, her women’s clothing and home décor store in Lawrenceburg, Tenn., because of high demand and shipping bottlenecks. Now she is worried some Christmas-themed items will arrive late, forcing her to hold on to the merchandise until next year.
“That’s just not feasible, I need that cash flow now,” Ms. Spring said. “So I’m just hoping and praying over here that things arrive.”
Merchants that end up with more product than planned often rent out extra warehouse space until they can liquidate the inventory. Such short-term arrangements tend to be more expensive than standard leases, and the value of the inventory can drop quickly, said Erik Trum, retail practice lead at Atlanta-based consulting firm Insight Sourcing Group LLC.
Mr. Trum said retailers should already be planning for January’s leftovers. Merchants looking to maintain more control over their brand can cut some losses by unloading extra inventory through pop-up or flash sales targeting certain customers, he said, or selling through their own outlet stores.
Many items will likely end up at discount chains like T.J. Maxx or Marshalls, both owned by TJX Cos. Liquidation typically yields pennies on the dollar. Persistent shipping bottlenecks may leave some retailers working to redirect entire late-arriving containers to discounters before the merchandise gets deeper into the company’s own supply chain, Mr. Trum said.
Not all retailers expect to discount heavily on outdated inventories.
Retailer Lands’ End Inc. said its supply-chain expenses are rising as it steps up efforts to get goods in stock. But seasonal items such as outerwear and boots may sell for closer to full price in January than they would normally, Lands’ End Chief Executive Jerome Griffith said during the company’s Dec. 2 earnings call, if customers couldn’t get their hands on the gear earlier in the season.
Rising Inventories Are a Bearish Indicator
Don’t be surprised if retailers are forced into heavy discounting and liquidation sales after enticing consumers to buy early this holiday season.
A big inventory cycle may soon unfold as early holiday gift-buying by U.S. consumers reverses and supplies of goods start to leap.
Retailers have habitually strived for sales growth only to end up with excess inventories that require profit-killing markdowns to unload. This year, supply chain disruptions have taken care of excess inventories.
So, casting their normal caution to the wind, retailers have stocked up. Target Corp. and Walmart Inc. both chartered expensive ships to import goods ahead of the holiday season and boosted hiring, at the expense of profit margins.
Target reported a 17.7% rise in inventories from a year earlier in its fiscal third quarter ended Oct. 30, while sales rose less, or 13.2%. Similarly, Walmart had 11.5% more in stock, while sales increased 9.3%, and Home Depot Inc. inventories rose 27.4%, almost three times its sales growth.
Without the rise in total private sector inventories in the third quarter, real gross domestic product would have shrunk 0.1% instead of growing 2.1%.
Ample inventories accommodated the 1.7% rise in retail sales in October from September on a seasonally-adjusted basis, double September’s 0.8% gain. Amazon.com Inc. started offering “Black Friday-worthy deals” on Oct. 4, according to the Wall Street Journal, and Target began promoting holiday deals in the first part of October, weeks earlier than in pre-pandemic years.
Surveys sponsored by the National Retail Federation found that 49% of shoppers started their Christmas gift-buying before Thanksgiving, but early buying robbed Thanksgiving weekend activity.
Shopping in stores or online between Thursday and Monday totaled 180 million, according to the National Retail Federation, down from 186.4 million in 2020, which was below the 189.6 million in 2019.
Online as well as brick-and-mortar sales suffered as online retail sales, $33.9 billion, were down 1.4% from 2020 and the first decline in years, according to data from the Adobe Digital Economy Index).
Excess inventory-building exists beyond retailers. The Bank for International Settlements warns that building precautionary stockpiles of components by some manufacturers might be exacerbating shortages. This creates a false picture of underlying demand.
Farm-equipment manufacturer Deere & Co., coming off the just-concluded five-week labor strike, plans to accelerate production to meet robust demand and rebuild inventories. Retail sales volume of high-horsepower tractors and combines are up 23% and 24% this year through October, according to the Association of Equipment Manufacturers, a trade group.
Meanwhile, the computer chip shortage is generating big production increases. Samsung Electronics Co., the world’s largest semiconductor producer by revenue, plans to invest more than $205 billion over the next three years with an emphasis on chips. It recently announced a $17 billion chip-making plant in Taylor, Texas.
Taiwan Semiconductor Manufacturing Co. plans to spend over $100 billion in the next three years on new chip factories. Intel Corp. has earmarked over $100 billion for new semiconductor production in the U.S. and Europe over the next decade.
On the supply side, there is growing evidence of supply-chain easing. Ocean freight rates are falling just as U.S. consumers retrench after pre-buying Christmas gifts. Anchored ships laden with retail goods — “floating inventories” — will probably soon be unloaded and trucked to their destinations, adding to inventories.
The number of container ships waiting to dock at the Ports of Los Angeles and Long Beach leaped from 9 in mid-June to 71 on Nov. 19, but down from 86 three days earlier, according to the Marine Exchange of Southern California.
Then there are hidden inventories in the form of partially-built vehicles that will hit the market when computer chips arrive to complete them. Excess inventories may already be in consumers’ hands.
During the pandemic, stay-at-home Americans bought hordes of goods ranging from TVs to kitchen appliances to bicycles, as durable goods purchases rose 7.7% last year. This year, adjusted for inflation, spending on long-lasting goods fell 26.2% in the third quarter from the second, at annual rates.
It will soon become apparent if consumers’ pre-buying and heavy inventories collide. I suspect that Christmas sales during December may disappoint, forcing heaving discounting and inventory liquidations early in the new year. At the same time, all that floating inventory from China and other Asian countries will arrive, exacerbating the overhang.
Also, many hidden inventories may be revealed, adding further to supplies. Economic softness in early 2022 could be exacerbated by the renewed spread of Covid-19.
Economy-crushing inventory cycles are nothing new. After World War I, price and wage controls were removed and pent-up demand and prices exploded. Manufacturers double- and triple-ordered to beat further price increases and shortages.
Retailers encouraged consumers to buy ahead in anticipation of further price jumps. Inflationary expectations fed on themselves and created a false sense of robust underlying demand.
Prices leaped 24% from the first quarter of 1919 to the second quarter of 1920, according to George A. Gade’s book, “Hand-to-Mouth Buying and the Inventory Situation.” In April 1920, however, the bubble broke and prices dropped 42% to the second quarter of 1921 bottom.
Falling prices revealed the false basis for demand, buying dried up and the massive production cuts to liquidate excess inventories resulted in the 1920-1921 recession, the steepest on record. After that bloodbath, inventories were shunned and buying was hand to mouth — hence the title of Gade’s book.
In the early 1970s, inflation was raging due to huge excess demand created by massive federal outlays for the Vietnam War and Great Society programs. Once again, double- and triple-ordered inventories were delivered and production cuts to liquidate them fueled the 1973-1975 recession, the deepest since the 1930s.
I’m not forecasting a 2022 recession — yet — but excessive inventories are a warning. Huge inventory build-ups that precipitated gigantic cuts in production resulted in the serious recession after World War I and in the early 1970s.
Southern California’s Container-Ship Backlog Moves Farther Out To Sea
Authorities say strong winds and rough seas have forced them to keep ships farther apart and away from the ports of Los Angeles and Long Beach.
The backup of container ships waiting to enter the nation’s busiest port complex isn’t letting up. But it has moved farther from shore.
Only about 30 vessels sat within sight of the ports of Los Angeles and Long Beach this week, waiting for berths at a gateway that has come to symbolize U.S. supply-chain bottlenecks.
More than 60 others destined for the port complex remained in waters farther out to sea, some hundreds or even thousands of miles away, including ships that reduced speed during their voyage from Asia to delay their arrival.
The ships are complying with a voluntary system set up last month by maritime officials because of fears the ports can’t safely accommodate the crush of waiting vessels as winter weather sweeps in with strong winds and rough seas.
“Container ships are very tall and blow around a lot in the wind,” said Kip Louttit, executive director of the Marine Exchange of Southern California, which monitors ship movements in the area. ”The numbers were not going down, so therefore we needed to find a way to spread the ships out.”
Before the new system was put in place, many ships rushed across the Pacific to secure a berth at a container terminal by crossing a line 20 nautical miles from the ports, said Jessica Alvarenga, a spokeswoman for the Pacific Merchant Shipping Association, which represents ocean carriers and West Coast terminal operators.
Under the new system, ships are placed on a wait list once they leave their last port of call, often in China. That gives captains an estimated date for a berth and allows them to slow their journey to the U.S., Ms. Alvarenga said.
The system has hidden from view a big part of the armada of cargo ships waiting to unload. But the backup at the biggest gateway for U.S. container imports remains as large as ever, with the lineup of vessels now stretching across the Pacific, signaling that big volumes of cargo are still heading for port terminals, warehouses and transportation networks that have been swamped by the imports.
Between January and September, the neighboring ports handled the equivalent of 7.7 million loaded import containers, an increase of 21% from the comparable months of 2019, before the pandemic, according to research and consulting firm Beacon Economics.
The Biden administration and maritime officials have sought to reduce the backlog with measures that included an attempt to extend the hours truckers pick up boxes. The measures have had limited impact, in part because of shortages of workers, trucking equipment and the sheer volume of boxes flowing into and out of the ports.
A month ago, a then-record 86 container ships waited at anchor or in special drift areas within 40 miles of the port complex. By this week, the number of ships waiting for a berth in the area had fallen to 30, according to the Marine Exchange, while another 66 ships were moving toward the port at reduced speeds, known in the industry as slow-steaming, or were waiting outside a new safety zone.
Jim McKenna, chief executive of the Pacific Maritime Association, which represents West Coast terminal operators in labor negotiations, said some ships now take 22 to 24 days to complete a voyage from Asia that used to take 10 to 14 days.
Mr. McKenna said the new system is good for the environment because it keeps pollution from idling ships far from densely populated Southern California and because ships burn less fuel when they slow down.
Ships approaching California from Asia are asked to stay more than 150 miles from shore, while vessels arriving from the north or the south are asked to stay 50 miles from shore so they can spread farther apart from each other and avoid collisions.
Nahal Mogharabi, a spokeswoman for the South Coast Air Quality Management District, an air-pollution agency, said that although the new system reduces the number of ships close to shore, near-shore congestion remains higher than it was before the pandemic.
The California Air Resources Board, another air-pollution agency, estimates that the cargo surge has caused a 60% increase in smog-forming emissions from port activity, Ms. Mogharabi said.
Mr. Louttit said the safety need for the new system was illustrated in November when winds of 40 to 50 knots caused eight ships to drag their anchors along the seabed, while one ship burned out the motor on equipment used to raise its anchor. No damage was caused during that incident, Mr. Louttit said.
Separately, the U.S. Coast Guard is investigating whether an oil spill close to the port complex in October was caused by a waiting ship’s dragged anchor hitting an underwater pipeline.
Mr. Louttit said that strong winds sweep across the San Pedro Bay waters off the ports at least once a month during this time of year and that it was “unacceptable to have this many vessels this close together through the winter.”