Fixing Broken Supply Chains

At the beginning of the pandemic, we saw shortages of personal protective equipment, pharmaceutical precursors, drug manufacturing, test reagents and ventilators. Later, semiconductors moved to the forefront.

Now, we are seeing widespread shortages and supply chain kinks in just about every segment of consumer goods.

In November 2020, I shared insight on the immediate aftermath the coronavirus pandemic had on global supply chains and how best to prevent future issues. Earlier this year, I discussed the pandemic’s ongoing effect on U.S. supply chains, which included the shortage of computer chips, it’s impact and President Biden’s executive order calling for a review of supply chains.

The government completed their 100-day reviews as directed by the Executive Order and the one-year analyses are ongoing. Responding to the DoD portion of the effort, the individual performing the duties of the Undersecretary of Defense for Acquisition and Sustainment established a Supply Chain Resiliency Working Group to ensure the uninterrupted supply of critical material and components through stockpiling, increased domestic production capacity and leveraging allies and partners.

However, challenges in the supply chain continue to spread, expand and cascade. Problems exist in nearly every link of the supply chain from factories to transportation and storage networks, all the way to store shelves.

Solving for one issue moves the problem to another link, creating shortages, rising prices and longer waits.

Shortages and increased demand 

We are seeing impacts from the continuing pandemic – chiefly, the rise and spread of new variants – and other factors, which have exacerbated the initial problem.

A shortage of containers and containers in the “wrong” places, throughput bottlenecks at ports and railheads, levels of supply and labor shortages all play a role. The interaction of these and additional factors have created second and third order effects.

In fairness, we should note that U.S. ports are handling record amounts of cargo due to increased demand, however, the supply chain simply cannot keep up with the requirements.

As they have done in other sectors, China has cornered the market to manufacture shipping containers, making it uneconomical for U.S. based industries or other countries to produce containers.

The pandemic slowed shipping from ports in China and other Asian countries, because of the impact on producers of various goods in Asia and the slowdown on loading ships. One result of the slowdown was the build-up of empty containers at destinations.

This build-up drove both a shortage of containers at the origin and also hampered throughput at the destination, due to of limited storage space for empty containers. This has increased congestion at ports, leading some to keep the containers they received and instead use them for temporary storage, as stacking containers costs less than renting additional warehouse space.

With less capacity to offload containers from truck chassis at warehouses, some truck drivers drop the container with the chassis, instead of offloading the container and taking the chassis back to the port, which leads to a chassis shortage at the port.

This is where you begin to get a sense of the second and third order effects.

Until recently, U.S. ports did not operate 24-hours per day or on Sundays, which suggests they were operating at 60 to 70 percent of their capacity. Moving the port operations to 24/7 will help, but that alone cannot solve the problem.

Across the supply chain, companies struggle to hire the workers they need. In the U.S., we have 0.8 workers available for every open job. This suggests that even at full employment, we would continue to have vacancies throughout the supply chain.

We need more drivers at many of the links in the supply chain. Right now, there are simply not enough truck drivers to move containers, over-the-road drivers to move goods from the ports to large distribution centers or local drivers to make the “last tactical mile” delivery.

The railroads also have a shortage of labor to load freight trains, as do warehouses, restaurants and retailers.

Recently, rather than continuing to “rely on the system,” some major retailers have moved to charter their own ships and route them to less busy ports. It’s too early to tell what the impact of this “every man for himself” attitude will be, though it may be harmful to many small businesses down the road.

For the larger retailers, this may alleviate some pressure for the holidays, but it is not a sustainable practice. The increased costs will flow to consumers.

In some cases, various links in the supply chain – shipping lines, dock workers, port operators, trucking companies, warehouse operators, shipping hubs, railroads and stores all blame the other. Solving the problem requires a team effort and cooperation across many sectors.

For example, if all 13 private terminal operators at the ports of Los Angeles and Long Beach operate 24-hours per day, then truckers would need to pick-up containers 24-hours per day to make room for the longshoremen to offload the next ship. Additionally, the warehouses take would need to accept these trucks 24-hours per day – and so on.

No truck driver wants to sit and wait to pick up a load due to port congestion. There is a possibly they miss a drop off appointment or they could drive away with a load they’re unable to drop off, because the warehouse or trans-shipment hub is not open.

Because federal regulations limit commercial truck drivers to 11 hours of driving in a 14-hour workday, they need to continue to move, not sit idling.

Mitigating risks

No one can accurately forecast when these significant disruptions will end and it will likely get worse before it gets better.

Globalization adds value, both by lowering costs in the U.S. and by contributing to the economies of developing nations. If all our trading partners were allies and not competitors or adversaries, there would be less risk with this option.

As a nation, we need to rationalize our supply chains. We need to ensure access to raw materials like rare earth elements, metal ores (think of the recent disruption and cost increase in aluminum and copper caused by the coup in the African nation of Guinea), and components like batteries, pharmaceutical precursors and test reagents.

I am not suggesting we stop trading with competitors or adversaries, as there certainly is value in intertwining our economies – however, we need to understand the risk and take steps to mitigate, so we are not solely relying on them.

For example, 60% of the worlds advanced semiconductor manufacturing resides at the Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan. Loss of this capacity would cripple our economy, impact our national security and affect the entire world.

Natural disasters or hostilities with mainland China are two things that could disrupt TSMC. In this situation (and in similar cases), it is imperative for us to develop alternatives and reduce risks.

We must work to build reliable, robust, redundant and flexible supply chains, and demonstrate the willingness to evaluate risks and solve for the long-term.

Moving forward

Our supply chain issues did not arrive overnight – and they will not be solved overnight.

The Secretary of Transportation recently suggested that we will see empty shelves, rising prices and consumer frustration well into 2022.

While the pandemic brought these issues to the forefront, we are seeing the result of long-term decisions made by industries, commercial entities and others.

Although government involvement is helpful, they alone cannot solve all the problems our supply chain is facing. We need every segment of the supply chain need to contribute and cooperate, from industry associations, trade groups, unions and individual companies, in order for this crisis to end.