Whether you are watching the stock market news or tracking your missing package, you are probably frustrated with issues tied to supply-chains. It may seem that a treatment for Covid, or a large sum of money may fix the problem, but the issue is deeply interwoven across industries and the solutions are a lot more complicated. The list of goods, materials, and anecdotal stories is only getting longer, and it could be enough to hold back the economic recovery in many countries. The two prevalent issues in today’s supply-chain delays are: a demand that outstrips supply and a global transportation network that cannot keep up. We thought delving into this subject would be helpful to our readers, especially with the holidays around the corner.
Demand Outpacing Supply
Demand for goods in the U.S. and other developed nations was quick to bounce back from the stand-still economy of March 2020. Strong demand resurgence turned out to cause many issues in the global supply chain. First, in the beginning of the pandemic when all social events and travel were essentially cancelled, wealthy countries put their spending towards goods versus services. This quick recovery in consumer spending built a base layer of increased demand. Second, in response to an economy in a nosedive, many companies rushed to save their bottom lines by reducing inventories to streamline production, cut costs, and boost profits. The pandemic has only exacerbated this trend of cutting back inventories, which has been going on for years to improve efficiency and margins. When demand came roaring back surprisingly fast, these companies were stuck with small inventories and a huge order slip. Finally, in response to headlines of “supply-chain problems,” companies and consumers alike have been stocking up on certain goods on top of normal demand, further compounding the issue.
Although most factories in developed economies are back near full capacity, goods coming from other countries, such as those in Southeast Asia, are still greatly impacted by Covid-19 and the Delta variant. In Thailand, the Philippines, Malaysia, and Vietnam (to name a few) the coronavirus continues to force factory closures and cause a shortage of workers needed to produce raw materials and manufacture goods.
From Point A to Point B, But Slowly
If you get frustrated with airport delays, try working in transportation. Shipping companies face unique challenges whether goods move by air, land, or sea. Not only that, but when one medium of transportation falls short, the others struggle to pick up the slack.
Covid-19 and changing labor force dynamics have taken a hit to the labor availability at seaports. Coronavirus cases have delayed loading/unloading in many instances and even caused entire ports to close. Another delay to the movement of goods has been the need to distribute Covid protective gear and vaccines to those countries in need.
A more enduring obstacle may be the structural problems that are now showing in the mismatching of land and sea infrastructure. New-age, giant containerships drop off too many containers to be processed at port. This causes a boom-bust flow of containers.
Ocean freight seems to be an area where government intervention can provide support. For example, the White House has put forth plans to help key West Coast ports stay open 24/7 to ease bottlenecks. The fact that U.S. ports were closed on weekends versus the rest of the world was surprising to many!
Source: BBC, MarineTraffic
About 65% of global air freight moves in the belly of passenger planes. Many of these flights did not happen in the last 18 months, and that put more pressure on ocean shipping. Strategists expect normal functionality of air freight as soon as international travel resumes to normal levels.
The trucking industry showed signs of weakness even before the pandemic. New regulations, insurance issues, and a trend of millennials avoiding trucking jobs, led to a systemic tightness in the trucking industry. Then came the pandemic, which closed driving schools to new workers. Going deeper, long-haul trucking, with its demanding work-life imbalance, is not attracting workers at quite as high a rate as short-haul drivers. On the other hand, the acceleration of ecommerce shipping has created an even larger demand for these short-haul and “last mile” drivers.
In the years to come, there is excitement around the autonomous vehicle space as an alternative to human drivers. Estimates show that Level 4 autonomous trucks may be on roads before 2024, which could ease labor concerns. Morgan Stanley’s strategy team believes that of all the transportation methods, the issues in trucking may be the most lasting, as they are structural, not cyclical. You are not alone if you are seeing more signs saying “Drivers Wanted”.
US Truck Utilization (as a %)
Source: Bloomberg, FTR
What is next?
There is no silver bullet to the global supply chain issue: air freight return is contingent on improved international travel; ocean freight continues to play catch up and counts on government intervention and additional labor; and the trucking industry needs fundamental changes.
This holiday season the consumer wants to spend. The consensus outlook is that shelves will be lighter, and inventories may run out in some cases. Unlike past years, there may not be a big mark-down season in January, which will keep prices elevated. In conclusion, if you see it and you want it, buy it!
 Reuters https://www.reuters.com/world/us/us-consumer-prices-increase-solidly-september-2021-10-13/
 CNBC https://www.cnbc.com/2021/10/13/supply-chain-biden-backs-running-west-coast-ports-24-7-to-ease-bottlenecks.html
 Morgan Stanley podcast Thoughts on the Market
 The Journal of Commerce https://www.joc.com/trucking-logistics/labor/short-haul-demand-lengthens-truck-driver-shortage-coyote_20210315.html