Friday, October 8, 2021

Explaining the logistics crunch

 

In a comment to my post on the US trade balance, and in the light of our recent discussions about supply chain problems, reader Howard Brewi asked:


So if we are buying all that stuff, you could say that is the cause of hundreds of ships backed up at ports. If that is so why are store shelves full of empty spots and Costco putting limits on every day stuff. Also why are high tech things like computer chips made in Asia and why are they short in supply since they are small and light enough to air freight so the car companies could deliver their back log of vehicles? It just doesn’t add up!


I guess it's hard for a lot of people to understand why, if we've got all these goods coming in, they can't be delivered to where customers can buy them.  It's a long, complex chain, and interruptions in any one part will impact the links before and beyond them.  I'll try to explain the links one by one, in a nutshell.


1.  THE FACTORY.  Once our goods have been manufactured, the factory has to get its hands on containers in which to load them, and send them to local harbors to be put onto ships.  Right now, there's a massive shortage of empty containers, because so many of them are filled with cargo already in transit and/or waiting to be unloaded.  (They can't be shipped back to China for reloading until that's done).  Makers of containers are churning them out as fast as they can, but they still have to deliver them to the factories that want to load them - and the trains and trucks to do that are tied up with delivering already-loaded containers to harbors.  Thus, our goods are delayed for days, weeks, even months before they can leave the factory on the first stage of their journey.  Meanwhile, they occupy space at the factory and nearby warehouses, restricting its operations and preventing it from working at full capacity, because it's running out of space to store input materials or put the finished products.

2.  THE HARBOR.  Chinese ports are jammed full of containers waiting to be shipped.  Under normal circumstances, there'd be a rapid turn-around of ships offloading empty containers, being loaded with full ones, and sent on their way.  However, a shortage of staff due to COVID-19 restrictions, plus the fact that many more containers than usual are piled up, makes handling them slower and more difficult.  What's more, because ships are taking longer to load, others have to wait at anchor outside until there's space available for them.  It was reported last week that "There are over 60 container ships full of import cargo stuck offshore of Los Angeles and Long Beach, but there are more than double that — 154 as of Friday — waiting to load export cargo off Shanghai and Ningbo in China."

3.  THE VOYAGE AND UNLOADING.  Once loaded, the ship can make good time between China and US ports.  However, it doesn't matter how fast it sails if there won't be a harbor berth available to unload it when it arrives!  There are dozens of ships waiting off US ports for vacant berths, as noted above.  Some have been there up to, or even over, a month, because our ports are subject to the same pressures as Chinese ones.  Incoming cargo is stacked up many containers high, because it can't be cleared fast enough (see the next section for more on that).  That means ships can't be unloaded in a hurry, because there's nowhere to put their containers until previous cargo has been cleared.  That, in turn, means incoming ships have to wait for a berth, because the ships preceding them can't be turned around fast enough.  Every day that a ship is delayed, for loading or unloading, is a day it can't spend in transit.  Under present circumstances, a container ship that might, under normal conditions, make seven or eight round trips between the USA and China every year, will be lucky to make three or four this year, given delays in loading and unloading.  The capacity of the trans-Pacific pipeline has effectively been cut in half or worse.

4.  HARBOR TO DISTRIBUTOR.  Train and truck companies have only so many rail cars and trucks available.  When one is loaded with a container, it has to take it to where it's needed, unload it, then return to get another one.  That's all very well, if there's a place to unload it.  Because of frenzied ordering to fill the supply pipeline to US consumers, many wholesalers and distributors now have no warehouse space available to receive the containers and unload them.  They're full to capacity and beyond - so much so that many companies are investing literally billions of dollars in new warehouse space across the country.  (For one example, see here.)  They expect it to be needed.  Be that as it may, while the container(s) is/are on the rail car(s) and/or truck(s), those vehicles can't be re-used, effectively taking them out of the available fleet of transporters and cutting the capacity of the "road and rail pipeline" in half, just like trans-Pacific shipping (see above).

5.  REGULATORY DELAYS.  There's all sorts of bureaucratic red tape surrounding freight services.  Chiefio wrote a very informative blog article about them, to which I refer you for details.  Here's an excerpt from his excellent post.

First off, a few years back the law was changed to MANDATE that truckers must have a 10 hour rest period, 8 hours of sleep and 2 hours to “ramp up and ramp down” ... Crossing the USA, as I’m flying by middle of the night, I see EVERY rest area chock full, trucks up the entrance and exit ramps. Often trucks parked on ramps of whatever place they could find.

You see, the law mandated the stop, but it didn’t provide the places to PUT the trucks. In San Jose, for example. it is illegal to park a big truck anywhere on the street, at your home, or at a truck stop (since they also banned them, too, so we don’t have any). So trucks need to be out and gone before their mandatory HALT hours arrive (by the clock or by the total drive hours) and find a place to do the HALT.

Guess what, halting all the trucks reduces total transport being done, but does not provide more trucks nor more truckers to get the capacity back up. Furthermore, many truckers are paid by the mile or by the hour. Since BOTH are reduced, net pay is not as good as it was before. Some percentage just cash in the chips and retire or find a different job.

Then along comes California and MANDATES you must change your engine for a new one or junk your truck. A WHOLE lot of folks just decide not to go to California (which would be fine, were it not that a LOT of freight for the rest of the country comes through California ports from Asia / China / Pacific).

It all adds up to not enough working truck hours and truckers in California, that then ripples through.

So not only are there not enough trucks available, they're subject to all sorts of restrictions that make them even less available. 

6.  DISTRIBUTION TO RETAIL STORES.  By now I'm sure you can see that many delivery vehicles are tied up taking containers to distribution centers, then waiting there until they can be unloaded, then heading back to the harbors to get another one.  They're therefore not available to take goods from distributors to wholesalers, to retailers, and to local warehouses for distribution to small businesses.  The trucks that are available for that are all working flat out:  but their drivers are facing all sorts of pressures, including COVID-19 restrictions (including vaccination requirements, which many drivers are refusing to accept), organized theft rings (sometimes violent ones) and risks from urban unrest (so much so that many drivers are refusing to deliver to cities with "defunded" police departments), and so on.  The work has become so complex and difficult that many drivers have simply quit.  They're living on COVID-19 benefits and enjoying the peace and quiet.  To entice them back to work, companies are having to offer exorbitant salaries and benefits (see our discussion Tuesday for one example), and even that isn't enough to fill all the vacancies.  Therefore, local and last-mile distribution and delivery is overloaded and problematic.

7.  RETAIL STORE PROBLEMS.  Have you noticed how many stores have problems hiring enough staff, particularly enough good staff?  I've grown accustomed to seeing half, or less than half, of the number of store employees I was used to pre-pandemic.  It's not unusual at a big Walmart store in our area to have only one till manned by a cashier.  All the rest are empty, forcing customers to use the self-check-out tills.  When one asks staff for information, it's irritating how many don't know the answer to even the most basic questions, or simply don't care enough about customers to be bothered to help.  They're lower-grade staff, and there are too many of them, because so many of the former good staff won't work under present conditions, restrictions, etc.  That means unloading goods, unpacking them onto store shelves, and doing the detail work like pricing, inventory control, etc. are harder, more expensive, and take longer for almost all stores.  That, along with all of the preceding problems, is why so many products aren't as freely available as they once were, and why one sometimes has to settle for substitutes.


Mr. Brewi, I hope that long-winded explanation shows the extent of the problem.  It's not just a matter of putting chips on airplanes to bypass the shipping problem.  It's a whole lot more complex than that.  What's more, every day that the problems continue makes the whole situation, from factory to consumer, that much worse.  As for putting some high-value, low-bulk cargo on aircraft to bypass trans-Pacific delays, sure:  but when those aircraft land here, their cargoes are fed into the same already-jammed-up distribution pipelines.  You can't land a cargo aircraft in a factory parking lot.  Its load has to go through Customs, be sent to distributors where it's broken down into individual shipments to individual factories, loaded onto trucks and/or trains, and sent on its way again.  The trip to America is the fast bit.  After that . . . not so much.

It wasn't always this way, of course.  We used to make a great many products in this country, and imported more from European countries that made them there.  However, the great rush by industries to "offshore" manufacturing to Asia, with its lower labor costs (thereby increasing their profits) did away with most of that.  Now that almost all the First World no longer makes what it needs, we have to import it from those that do - so Europe is competing with the USA for container ships and transport space, making every transport pipeline worse on both continents.  We exported our high-cost manufacturing problem, but in getting rid of it, we created a transport problem that's worse - much worse - than the original one.  COVID-19 was simply the last straw that broke the camel's back, and exposed the size of the problem.

There are those who say we should simply increase the number of container cranes, forklift trucks, etc. on hand, so we can handle more containers and cargo and speed up shipping.  That's a great idea, except for one question:  Where are we going to buy them?  One country in the world makes almost all of that stuff.  Care to guess which one?  That's right - CHINA.  So, even if we order huge quantities of it right now, it'll face all the same delays and difficulties in getting here as the goods it'll then help to unload.  The same goes for buying more trucks, rail cars, etc. to speed up internal distribution and delivery.  The parts to make that equipment are sourced all over the world, including many from China.  We can't get them here fast enough to use them.  What's more, there aren't enough drivers and operators for our present cargo handling equipment and vehicles - so where will we find more to handle all the new gear?


There is no short-term solution available.  Period.


It took more than a year to get into this mess.  It's going to take more than a year - possibly more than a few years - to get out of it.  If we're very lucky, we may see some improvement by the new year, but that depends on whether the authorities get their act together and remove as many bureaucratic and regulatory obstacles as possible.  If they don't, as I said on Tuesday:


"Right now, our logistics snarl-up is posing the real danger of seizing up our economy - and the danger is growing worse by the day.  The next two to three months are likely to prove absolutely critical ... I don't believe we're going to make it to Christmas without things getting much, much worse."


I hope and pray I'm wrong.

Peter


21 comments:

McChuck said...

"that depends on whether the authorities get their act together and remove as many bureaucratic and regulatory obstacles as possible."

Watch for the authorities to double down on stupid. Power is as power does. If the system isn't working, the answer must be more regulations! If the regulations don't work, then nationalize the industry!

Guy Jean said...

China AND VIetnam make stuff, and this just happened in Ho Chi Minh City: https://www.reuters.com/world/the-great-reboot/we-are-tired-workers-flee-vietnams-largest-city-long-lockdown-eases-2021-10-04/
And Walmart is hiring its own ships, but at what cost, I wonder?
https://www.reuters.com/business/autos-transportation/containergeddon-supply-crisis-drives-walmart-rivals-hire-their-own-ships-2021-10-07/

Unknown said...

Great briefer.

Thank you, sir.

CA
WRSA

Dave said...

Really odd shortage at my local HEB on my last couple of visits - house brand fettucini noodles, the dry kind. Along with at least one other variety of long, thin/flat noodles. Tags on the shelf saying "warehouse out". No shortage of other noodle types - macaroni, penne, rotini, etc., or of national brands.

I know HEB makes some of their own stuff (like bread and buns), not sure about noodles.

Francis Turner said...

Plus don't forget that China has been having various power issues because they decided not to buy Australian coal and now don't have any coal to keep the power on. So factories in China aren't precisely running at full whack anyway

The Guy said...

I do some side work for a Marine Repair company. It has taught me a tremendous amount concerning the transportation segment of the economy.

1. Almost all of the trailer chassis's that the shipping containers sit on are owned by a handful of companies in the US. Truckers and trucking companies must lease the chassis(s) from them. Chassis(s) must be certified in order to be used. Many of them are being refurbished by US companies as it is cost prohibitive to purchase brand new from CHINA, or construct in the US due to steel prices and labor costs. So chassis availability for shipping containers will be constrained for the near future.

2. Shipping containers also have a recertification period (usually 10 years). I had a client that went bankrupt 7 years ago that was in the business of refurbishing shipping containers. At the time, it was cheaper to buy new ones from China. If the market has changed, then see the upcoming issues in 1 above.

Aesop said...

For the "I'm from Missouri" crowd, I will attempt to get a shore-side picture of the problem vis-a-vis San Pedro/Long Beach this week.

No promises, but weather permitting, and if it's otherwise do-able, I'll post pic(s) of the offshore situation as soon as practicable.

Paul, Dammit! said...

In a merchant marine discussion board this week, we were talking about the usual BS, and one of our foreign members noted that his bulk carrier (e.g., he can't load containers, just loose stuff like grain or palletized goods) got rerouted to load cargo that had been pulled from containers and repacked as palletized cargo. As a result, spot charter rates for dry bulk have also spiked, although in this case this is more of a recovery, as dry bulk rates have been in the toilet for years, leading to underinvestment.

It has to be noted that the Port of LA/Long Beach, the largest container port in the US, just started working a night shift only 3 weeks ago. it was a union thing. LA was the only major port complex with union restrictions on working nights. Somehow I don't think they lost much sleep over it.

From a mariner's perspective, the choke points are in the infrastructure. With Rollover still increasing monthly (Rollover is containers missing their assigned shipping slot), and short-sea shipping (a Spoke and Hub model, like American airports) nonexistent in US internal container trade, choke points at Intermodal points in the supply chain still aren't being adddressed. The rumors of hiring bonuses seem to be just that.

For my part, in the ship bunkering trade, with 80% of my time being spent supporting container traffic, 18% to oil movement and 2% to bulk movement, we're suffering from employment issues as well. With only a 2% raise in pay over the last 5 years, I'm coming around to understand why millenials, with their lower monthly bills, aren't lining up for jobs. I still see throwing some reasonable amount of money into salaries as an option we have not fully exercised in the shipping and transportation industry. Until the folks higher up open up their wallets a bit, the folks down low have less incentive to give a shit. With shipping companies posting record profits every damn quarter, the money is obviously there.

Uncle Lar said...

Peter, don't forget all that must occur before your 1. The Factory.
Raw materials must be mined, grown, extracted, harvested, refined, etc.
That all takes equipment and manpower.
And then those supplies must be transported to said factory, which most likely has been operating on a "just in time" methodology. Which breaks down when your supply chain is not rock solid.
Degrees in Industrial and Systems Engineering and Operations Research, and I've been preaching the inherent flaws in just in time for going on 35 years now.

Paul, Dammit! said...

Oh, other thought. With certain big box companies claiming to have chartered their own container ships, there hasn't been ONE posting by a shipbrokering agency, the folks who handle chartering, to reflect this and no surprise, as there is no spare tonnage to do so. For PR purposes, Coca-Cola and Home Depot have letters of interest with shipbrokers, but have not actually exercised any charter party agreements. Wal-Mart already has pre-negotiated special freight rates with all the carriers given their massive trades.

Unknown said...

People who promoted globalization have a lot to answer for.


Don in Oregon

Mustapha Bir said...

Question:
What percent of the total goods used by the U.S. population are imported?
I read somewhere that imported goods amount to 10% of GDP, but this isn't my field so I'm trying to understand whether we as a country could not easily survive without any imported goods at all, rendering this logistical panic moot.
We would of course have to do without all the cheap Chinese crap for Christmas. Horror!!

weaserdapi said...

I just heard ( second hand but a very inside source) that Target is leasing entire ships and making sure only their product is on board as customs is so backlogged that if one container doesn't clear they'll hold up the whole ship from unloading. Additionally they are shipping everything they can by air. Expect this to have an increase.in the price of goods.

Sean said...

Consider this: Fuel, from production to end user is breaking down also, with increased costs and higher prices worldwide. Throw a fuel supply breakdown into this mix, along with now raging, now out of control hyperinflation on it's way, and you got a perfect economic storm. Civil unrest? Oh yeah, the natives will be restless alright, and about what, won't be the Kung-Flu.

7916 said...

Don has it correct. The real reason behind each one mentioned is Finance. Mergers, offshoring, financialization, spot markets, lean, JIT, etc.

Redundancy and stability have been scrapped for a few basis points of earnings. Europe's natgas or coal shortage is purely about moving from LT contracts to the spot market. Why? Financialization and arbitrage.

There is no coincidence as to why China has cracked down on its FIRE industry and tech. Those are the main weapons used to subvert and parasitize nations. China is using them far more effectively, and they are ruthlessly excising them from their own nation.

The pressure for conflict with China now is because China has taken its own anti-parasitic meds and the parasites are very angry. Their next victim is saying no, and their disaster fallback of New Zealand and Australia are not looking too good.

ruralcounsel said...

The question about automotive chips goes unanswered. You'd think Ford would airfreight boxes (not containers) of them and stick them in a van and haul them to their assembly line. Say a box holds 100 ICBs. That's 100 vehicles that could go to dealer lots. Multiply that by a hundred, a thousand, and you'd fix the problem. At least for automotive assembly plants.

Small compact lightweight high value items like ICBs don't need to go by the container, or ship. And once at the airport, and clear customs, don't require an 18-wheeler.

Peter said...

@ruralcounsel: I didn't mention in my article the fact that one of the biggest automotive chip manufacturers in the world was crippled by a fire in one of its buildings. Two-thirds of the lost output was for the auto industry.

https://news.yahoo.com/fire-japanese-plant-latest-blow-185349999.html

This is on top of COVID-related shutdowns and staff lockdowns at many chip plants in Asian nations, disrupting production. You can't just stop and start these factories by flicking a switch. After a shutdown (even a partial one), it takes weeks, sometimes months to get the shut-down machines operational again. That's what caused the initial problem for the auto industry, even before the fire in Japan.

So, yes, one could postulate that Ford could load a few boxes of chips onto a plane and move them itself: but that's provided the chips were available. With the entire world clamoring for them, Ford has to take its place in line.

Like I said: there are no easy answers to this mess, and no short-term solution.

Noveske's Rock said...

I’d imagine that the counter-to-counter air shipments and air courier business is going strong. Cathay Pacific is still flying pax triple 7’s to / from the US just carrying cargo. It was profitable early in the pandemic - surprised it still is now

Cedar said...

Before it even leaves that factory, it needs to go into packaging. Plastic bottles, tubes, etcetera? Six months to a year lead time from order to arrival right now. On top of raw materials, and so forth. Prices are going up. Way up. On everything from toothpaste to shampoo and beyond. There's a shortage of drums and totes(big plastic and metal units that can hold up to a thousand kilograms of bulk material) as well. My company is bracing for impact as distributor after distributor warns us of issues.

Will said...

AFAIK, chip making fabs are few and far between here in the US. High labor costs to run them, and the local communities don't want the hazardous chemicals/gases near them (the NIMBY effect). They are very expensive to build, much more expensive than an equivalent size structure for any other use. And then they get filled with very expensive machines.
Here in Silicon Valley, when Intel mothballed their 80's vintage fabs, they ended up rotting, never repurposed.
Some states have outlawed them, due to the hazardous materiel used in chip making.

(The bunny suit covered bikini wearing machine operators were somewhat distracting when I did a field service visit.)

5stonegames said...

A lot of truckers are also on the older side, the average age is 48 and its a strenuous job.

Same applies to port personnel.

They can only work so much and so hard without risking injury or endangering others. This is why the time outs are required, we don't need cranked up truck drivers like we had in the 70's causing accidents thanks.

Also with 50 years of low fertility (technically 48) its reasonable to assume that the labor pool with gradually shrink and as its a suck job, its going to be harder to fill the slots.

All the recent talk about self driving trucks has deterred a lot of people from even considering it . They figure they'll will be facing layoffs or a massive pay cut in half a decade,, so why bother? This isn't exactly the case but the message is there. You'll be getting $10 an hour or so very soon dropping from $30 so they noped the job.