Perspective on the Supply Chain Dilemma
When TMA asked members in July what their primary pain points were, their responses were the following:
- “International logistics and inflation.”
- “Supply chain and costs.”
- “Supply chain issues.”
- “Access to needed materials.”
- “Decreased availability of materials.”
- “Material shortage.”
- “Inventory costs and scarcity is the issue.”
- “Material costs have become crazy.”
The comments indicated a notable trend that first appeared on the monthly TMA member survey radar in September 2020, when a tiny number of members mentioned supply chain and material cost issues as pain points. The mentions rose from 0% to 8% over six months, then skyrocketed to 40% of the questioned small- to mid-sized Chicago area manufacturers expressing pain on the issue by May 2021.
US manufacturers are historically the first to be aware and “feel” what’s on the horizon for the American public. Once again, they foresaw what Average Joes and Janes are now experiencing in real time: product scarcity and the resulting higher costs.
Anyone looking for a car recently experiences the shock of hearing the dealer say, “Sorry, the vehicle you want won’t be available for six months or more.” Followed with “And when it finally arrives, It will cost you thousands of dollars more than it would have a year ago.”
Or maybe a dishwasher, refrigerator or hot water heater needed to be replaced? “Eight weeks for parts, three months for replacement,” is the common response from appliance dealers. And the price when it arrived, they warn, will be much higher.
Those common experiences explained to the general public a truth many set aside: When supply demand increases, so does the scarcity of those products, which makes each one more valuable and, therefore, more costly.
Remember how much scarce toilet paper and disposable masks cost in the Spring of 2020, when COVID lockdowns were nationwide?
A new public empathy with American manufacturers and their predictive pain points emerged.
What’s behind the global supply chain challenge?
Theories and opinions abound on the why and how the supply chain crisis suddenly became such an urgent topic in 2020. Some experts say past international tariff policies are the main culprit. Others say sending once-thriving American manufacturers overseas was the pain source – an issue that came to light when the pandemic struck in 2020.
TMA News Bulletin spoke with John F. Di Leo, who has worked in import/export compliance management for over 40 years about the possible reasons for the supply chain crisis. Di Leo pointed to four links he saw as key weaknesses:
- The federal government’s Hours of Service regulations on the trucking industry
- Critical labor shortage in the ground transportation industry
- Unexpected pandemic-caused demands on air freight
- Outdated infrastructure for ocean-going freight
“My inclination is to say the following: These four main areas heavily affect the supply chain and are completely independent of each other,” Di Leo said.
HOS Regulations on the trucking industry
“HOS regulations” are laws in which the federal government has managed “hours of service” rules in ground freight. The federal law sets rules they say are to prevent truck drivers from falling asleep from too long of driving periods. During the Obama Administration, the rules became more stringent – cutting the hours a driver could drive a day. The process created havoc among nationwide trucking companies that were forced to relocate terminals and redesign their trucking services.
As a result, national Less Than Load (LTL) trucking companies such as Old Dominion, ABF Freight, YRC Systems, Dayton Freight, etc., were faced with major upheaval in an already difficult business directly affected by higher fuel costs and labor shortages.
Those that survived were faced with unprecedented demand during COVID shutdowns. Products were urgently needed and very difficult to make available. The trucking industry was simply unable to transport according to demand – causing temporarily empty shelves and higher consumer prices, and in some cases, consumer panic.
Lack of ground transportation workers
Similar to the manufacturing industry, America’s transportation industry is facing a shortage of willing and trained team members. Truck driving companies are offering $9000 or more signing bonuses – plus the highest wages and benefits in history.
Still, blue collar careers are not where the next generation is focused as a whole – while there appears to be a renewed appreciation for hands-on industries as a result of the attention the struggling global supply chain is getting post-pandemic.
Unexpected Air Freight Demands
Shipping components or finished products via air freight is most often viewed as an expensive, emergency-only route for the average manufacturer. Under normal circumstances, air freight is twice as costly as ocean freight. But during the pandemic, air freight costs suddenly skyrocketed three to fifteen times higher – making it unreachable for the vast majority of manufacturers.
Passenger planes, which normally also carry cargo in their bellies, were suddenly stopped. The only alternative became shipping cargo. That caused a major industry dilemma, Di Leo said.
“Passenger planes can’t be easily converted to cargo planes. They’ve had to manage the cargo demands – by doubling and tripling their prices,” he said. “They had to find a price higher than a passenger-filled plane requires to keep the cargo moving. On the whole, air freight costs are stable now at double the ocean-shipping price. Still, it was nearly impossible to move cargo via air freight for weeks.”
Such sudden, steep transportation costs taken on by a local manufacturer that imports parts from China would cause him or her to be forced to either increase prices or absorb the costs – eventually lessening the company’s competitiveness on the global market, and endangering the business.
Thus, ocean transportation became the focus once again.
Ocean ships, infrastructure, material shortages
The fourth weak link in the global supply chain Di Leo saw was the lack of investment by government and shipping companies into basic infrastructure and equipment.
Di Leo pointed to the development of the intermodal shipping container, which revolutionized transport and international trade in the 20th century. Containerization dramatically changed the repeat handling of individual pieces of cargo into transporting 20, 40 and now, 45 foot shipping containers. The process made ocean transportation much more reliable, safer and cheaper.
But the ships that carry those containers have become larger and larger over the years. The first cargo ships transported around 100 20 foot shipping containers (TEU). The largest cargo ship can now transport over 21,000 TEU shipping containers, putting unfathomable demands on aging international port infrastructure.
While the size and ability of these huge ships are stunning, the challenges of loading and unloading the containers off those ships have become a phenomenal infrastructure challenge. Heavy-duty cranes with long arms and capabilities to lift tons are needed to carry the containers and load them onto waiting freight trains or truck chassis.
That transfer takes time – even after the ships enter port. It also takes skilled labor and equipment to lift 21,000 containers from just one of these huge ships. Then it takes time and equipment to transport the containers via rail or road to transportation hubs prepared to take the shipments and move them onto local trucking companies and finally, delivery.
“Lack of sufficient steel and aluminum, along with shortage of some resin, has been serious for US manufacturers. But in comparison, the same material shortage has been an even greater challenge for container manufacturers that need vast amounts of the same materials,” Di Leo said. “Thus, another weakness was revealed by the COVID crisis.
“But from my perspective, while materials have been short, transportation is the biggest issue in the supply chain, and it appears it could take years to come back.”
More to come on this topic in future issues of the TMA News Bulletin.
From TMA’s July/August 2021 News Bulletin. By Fran Eaton. Used by permission.