One particularly troublesome lingering effect of the pandemic is the challenges with the supply chain. It doesn’t matter what industry you’re in, everyone is still struggling to get what they need. From raw materials to finished products, we’re seeing supply chain issues.
When thinking about the supply chain, it is more than the different materials required to create a product. It’s also the warehouses, containers, ships, trains, planes, and trucks that deliver the product to the retailer or end-user. A complex process that typically operates without incident is now creating problems globally.
In looking at the causes of the problem, the closing of plants during the pandemic is just the beginning. By the end of last year and into 2021, demand for products was increasing. Online purchases increased as did specific types of purchases, such as home improvement projects. As demand increased, supply was unable to keep up. Even in bringing people back to plants, labor, transportation, and logistics challenges have continued to cause problems with the traditional supply chain model.
According to a recent LA Times article, “We might be able to buffer against one type of risk or two types of risk, but it’s the fact that all these challenges are happening at the same time,” said Nicole DeHoratius, an adjunct professor of operations management at the University of Chicago’s Booth School of Business.
The pandemic only made existing labor shortages more acute. Truck drivers, warehouses, and distribution centers were facing labor shortages before COVID-19. This issue has become evident at ports around the world. In Los Angeles, there are more than 60 ships in a holding pattern, with an average wait of two weeks to unload their cargo.
“West Coast ports were barely keeping up with the growth in freight before the pandemic and had no ability to absorb disruption, said Ayman Omar, an associate professor at American University’s Kogod School of Business. The pandemic has only worsened the situation, including a shortage of trucks to haul cargo containers to their destinations.”
Costs for shipping goods from China to the United States have increased 4x in the last year and more than 10X in the past two years. According to Waterways Journal, “Because of the pressure to move increased freight with a given capacity, there has been increasing pressure on bringing in shipping containers full of consumer goods or component parts from China to the United States, unloading them and returning them to China, where they will be reloaded for repeat journey.”
The companies that own the shipping containers are unwilling to deviate from this route, though the United States would like to load the containers with agricultural products for example that can be exported. “The current spot rate to ship a container from China to the West Coast of the U.S. is $16,004. The rate to ship a container from the West Coast back to China is $1,020. If an ocean vessel company can be compensated almost 16 times for the front haul journey (China to the West Coast) vs. the back haul journey (West Coast to China), there will be a strong economic incentive to limit the amount of time a container is allowed to be transported to a distant location in order to be loaded with agricultural or other products that will pay less for the return journey.”
Most supply chain experts anticipate a minimum of six months to a year before the supply chain is able to normalize. It’s going to require fixes along the entire process. Ports are beginning to run 24×7, expanded unemployment benefits are expiring which will encourage more people to return to work, and plants are changing their ordering processes to meet demand. These are just a few of the changes economists are seeing.
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