Supply Chain Struggles Hit The Holidays
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The holiday season is here, but buyers may be finding empty shelves and inflated prices in place of gifts for friends and family. The pandemic, among other factors, has wreaked havoc on global supply chains, leading to shortages of anything and everything. There are delays at every single step, and experts say some issues may not be resolved for months or even years.
The problem starts right at the beginning of the supply chain. South Asian countries, which manufacture a large portion of goods for American brands, were hit hard by COVID-19. Factories were closed and workers were sent home as outbreaks spread. In Vietnam, the government shut down factories from July into September to prevent upsurges in cases, and it may take months for them to return to their previous levels of production. Brands such as Nike, Under Armour, Michal Kors, and more produce much of their goods in South Asia.
Once the goods are made, they have trouble leaving Asia. The ports of Shanghai and Ningbo-Zhoushan in China are the first and third largest ports in the world, respectively. Both have had closures in recent months and will need time to return to their previous efficiency.
COVID-19 is a major cause of disruptions; for example, a terminal at Ningbo-Shan Port closed for two weeks in August after a worker tested positive. When Typhoon Chanthu reached China in September, ports were closed for three days due to the extreme weather. Additional disruptions due to power shortages and subsequent electricity rationing have added even more delays to factory production and deliveries.
According to Project44, a supply chain visibility provider, it is estimated that 40 per cent of the world’s container trade passes through China. In October, there were 386 ships around Shanghai and Ningbo waiting to enter the ports. Rollover rates, referring to ships that are unable to sail on schedule, are at 36 per cent at Ningbo, 41 per cent at Hong Kong, and 37 per cent at Shanghai as of September. This is signaling the lack of progress being made on clearing backlogs.
Ships that are able to leave Asia find there is no space to unload on the other side of the Pacific. According to Marine Exchange, 179 ships are in or around the ports of Los Angeles and Long Beach, a record high. These ships are enormous, carrying up to 20,000 twenty foot equivalent units (TEU) each. In October, the White House announced that ports would be open around the clock in an attempt to reduce delays. By November 15, shipping companies were being fined $100 a day per container left on the docks. American Shipper estimates that fines were applicable to nearly 60,000 containers in the ports.
These measures may not make much of a difference, as the problem is not a lack of motivation on the part of carriers, but rather a shortage of dock workers and truck drivers to move containers out of ports.
The American Trucking Association estimates the US is in need of another 80,000 truck drivers. Without more drivers, cargo gets stuck at ports and there isn’t space for ships to unload. The California’s Labor and Workforce Development Agency is attempting to solve this by increasing job training and encouraging more people to get a Commercial Driver License (CDL). However, there is a large number of people with valid CDLs that aren’t currently driving. Why? They don’t want to.
Trucks wait hours in line at ports before receiving their cargo, and drivers are paid by the mile. They get nothing for time spent waiting, so as ports got busier, wait times longer, and driver positions more crucial, there were fewer and fewer people willing to take on these jobs. Solving this shortage will require better benefits for this essential link in the supply chain.
There’s also the matter of empty shipping containers. 15 per cent of all containers at the Port of Los Angeles are empty. That’s 55,000 containers, according to American Shipper. There isn’t enough space to store all these empty containers, to the point that they’re being abandoned in the streets surrounding the Los Angeles port.
Why don’t carriers want to make the return trip and bring those containers back to Asia? According to freight transporter Hillebrand, carriers earn 66 cents per 40 foot container per nautical mile from Shanghai to Los Angeles, but only 10 cents on the way back. It’s more lucrative to simply leave the containers on the US side of the Pacific. Meanwhile, more containers are leaving China than being returned, creating yet another shortage.
There isn’t any more space to store goods in warehouses, either. In Southern California, there are vacancies of 1 per cent or less, according to Bloomberg. Warehouse owners are one of the few groups benefiting greatly from the backlogs in the global supply chain. According to CBRE Group Inc., rent for industrial spaces is at a record high price of USD $8.92 a square foot.
At home in British Columbia, there are even more factors at play. After the devastating floods and mudslides that destroyed highways and railways, it’s next to impossible for goods to travel from ports inland. Vancouver is the fourth largest port in North America, as supplies from Asia must move through here before being transported to Eastern Canada. The infrastructure that was destroyed won’t be repaired for months, and so there will be shortages across Canada for some time while bridges and roads are rebuilt.
How did things get to be this bad? The global supply chain usually runs close to 100 percent capacity, and is heavily based on the just in time model. This means companies rely on supply chains to deliver stock as it’s needed, rather than keeping large inventories. This is advantageous in the sense that companies can spend less money on storing materials, but
it also means they are very dependent on their supply chains. If there’s a small hitch in any one step, the entire production line is delayed. Any slight issue has a ripple effect, and a backlog in one stage leads to backlogs everywhere.
When the pandemic started, lockdowns caused there to be fewer workers at docks, warehouses, and driving trucks. Now, pent up demand and lasting effects from the first wave mean companies are struggling to keep up. The omicron variant may become the next big challenge, as restrictions re-turn to stop the spread of a potentially more infectious strain. Whether or not the situation gets worse, it’s clear that the effects will continue to be felt in the months to come.