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