How Does a Business Survive the Supply Chain Issues of 2021?
Concerns about supply chain management are the result of an emerging trend impacting businesses today. The impacts related to supply chain management that we are seeing are tied to increased costs, labor issues (including availability and cost), and extended delivery time frames.
The Institute for Supply Management (“ISM”) reports both a monthly Manufacturing PMI and a monthly Services PMI. The August 2021 Manufacturing PMI was 59.9%, which shows fifteen months of expansion in the overall economy. The August 2021 Services PMI was 61.7%, which is also the fifteenth month of expansion.
According to GlobalTranz Enterprises, a third-party logistics solutions provider, their third survey this year of US supply chain leaders showed optimism related to supply chain performance, but 70% noted challenges with “final mile”/home delivery issues, and 9 out of 10 report the need to increase hiring.
Survey participants also weighed in on these issues:
47% say salaries and wages will need to increase before the end of the year,
over 30% are concerned about having enough resources to meet demand, and
more than 30% cited concerns related to congestion in the supply chain, increasing transportation costs, labor issues and potential lockdowns.
The ISM reports for August 2021 also indicated participants were concerned about certain supply chain issues.
The average production materials lead time in August was 91 days, which is up five days from July’s report. The August lead time was the highest since ISM began collecting that data in 1987.
According to ISM, among Business Survey Committee respondents, 62.8 % reported paying higher prices in August, which is down from 73.8% in July, but continues to show the expectation of increased costs by more than half of the participants.
Moving Beyond the Surveys
Companies need to move beyond the surveys to evaluate the impact of the trends on the unique situation each company experiences. To identify risk areas, the mode of transportation a business needs must be considered. Let’s consider marine container transport, trucking and air cargo trends.
Marine Container Transport:
Freightos Ltd. publishes various container indices which show transportation costs over time. First, consider the Freightos Baltic Index (“FBX”) Global Container Index, which shows a $10,519 global container shipping cost as of September 3, 2021, which is clearly a higher level than previously experienced during the reported time frame.
The next chart shows the year over year performance of the Global Container Index. Costs today are significantly higher than 2019 levels.
Using the global index does not tell the entire story. For US businesses it is important to consider the China/East Asia – North America West Coast Index and the China/East Asia – North American East Coast Index. Both of these indices are experiencing higher prices and higher upward movements.
First the China/East Asia – North American West Coast Index shows a cost of $19,140 as of September 3, 2021, which is double the July 2021 level.
And the China/East Asia – North American East Coast Index shows a cost of $20,615 as of September 3, 2021, which is double the July 2021 level and much higher than the $5,000 level experienced up to January of 2021.
The ten largest ports in the world in 2019, as defined by TEU, are listed in the next table. A TEU is a Twenty-foot Equivalent Unit, and is the basis of measurement for cargo capacity for container ships and ports.
Since Covid-19 impacts began, various ports have been closed at different times for different periods. The Chinese port of Ningbo was recently closed for two weeks beginning August 11, 2021. Earlier in 2021 the Yantian port was closed for a month.
In addition to port closures, staffing levels have been challenging and some ports are operating at less than full capacity because of government mandates or as a result of a smaller available work force.
The actual container boxes have also been in short supply and their costs are rising. According to Drewry, the price of a standard 40 foot shipping container made in China has more than doubled from $2,375 in 2015 to $5,795 in 2021.
Trucking costs have also increased. In an August 10, 2021 interview with Yahoo Finance, the CEO of US Xpress, Eric Fuller, said US Xpress has raised pay 30% to 35% over the previous twelve months, and expects more increases to be needed to attract and keep employees. Mr. Fuller also explained that employees are evaluating being able to spend more time at home, and as a result US Xpress and other trucking companies are competing with manufacturers for the same employees. This is causing trucking companies to need to increase pay to offset the lifestyle differences.
In addition to increasing labor costs, trucking companies are also dealing with increased fuel prices, increasing demand because inbound container shipments are up, and reduced load volume. The July Cass Information Systems Transportation Index Report reported July year over year shipments increased 15.6%, down from the June year over year increase of 26.8% due to driver and equipment shortages. Cass does expect to see more truck and driver capacity moving forward.
According to DAT Freight & Analytics, August 9, 2021 national van rates were $2.76 per mile and July year over year rates experienced a 33.4% increase.
The next table shows August year over year increases for split load, van, flatbed and reefer trucking. The year over year increases ranged from 10.1% for spot truck posts to 60% for reefer load to truck.
Air Cargo Transport:
Air freight costs are based on weight and volume, with charges based on either volumetric weight (dimensional weight) or actual weight. If the volumetric weight exceeds the actual weight, the shipping charges will be based on volumetric weight.
The Baltic Exchange Air Freight Index reports that after steep increases in 2020, the rates for certain routes have come down in 2021. Though, as the next graph shows, the Hong Kong to North America rates are continuing to rise and are nearly double the 2019 levels.
Emerging Trends are Combining to Impact the Supply Chain
The supply chain impacts are resulting from several emerging trends combining to increase the shipping costs and slow down shipping times. These emerging trends are the labor shortages and resulting impacts on costs, as well as overall inflation, and specific commodity price changes such as the costs of energy. Additional supply chain disruption has occurred as a result of cyber-attacks on important infrastructure supporting the supply chain. The impact of Covid-19 related shutdowns has also materially impacted the supply chain.
How businesses respond to these supply chain disruptions is key to success. Businesses need to continue to monitor supply chains and develop response strategies. Some of the strategies to reduce supply chain risk include:
Sourcing alternative suppliers on different shipping routes or closer to home.
Reshoring and near shoring.
Transportation options such as trucking versus inland waterways, or the use of different ports.
Technology investment to ensure data availability.
Businesses need to be monitoring their costs to ensure they are responding to the evolving cost structure. Supply chain challenges may mean a company needs to elect to invest in capex to reduce reliance on labor and to monitor the inventory levels throughout the procurement to delivery to customer delivery process.
The additional stress on the business may result in increased working capital needs to support higher levels of inventory and to augment existing supplier lines of credit, which could be capped out more frequently. These changes in working capital management could impact the line of credit structure, including needing increased line maximums, allowing for slower inventory turns, changing relationships between asset classes, and alternative ineligible calculations.
Overall, supply chain management is a business management category that requires the use of best practices, and detailed tracking and analysis, to ensure the business is positioned to survive these trending issues. Best practices include:
Sensitivity analysis to identify impacts of labor cost increases, benefit cost increases, transportation cost increases, and energy cost increases.
Plan B and Plan C shipping and inventory management options should be clearly laid out, and regularly updated.
Evaluation of inventory turnovers by SKU and/or by inventory categories.
Review of contracts for the ability to increase prices, both with customers and by suppliers. A regularly updated contract listing identifying key aspects of the contracts such as automatic renewal dates, current escalation capabilities, expiration dates, etc. should be laid out.
Evaluation of bid procedures to ensure increasing costs are immediately impacting the bids in process. Additionally, the capability to escalate costs in the bid agreements should be evaluated.
Working capital management best practices:
Accounts receivable: Collection efforts, customer credit lines.
Inventory: Turnover by SKU/category.
Accounts payable: Supplier line evaluation, extended terms.
Line of credit: Availability forecast by asset category. Evaluation of size, and structure.
The combination of emerging trends is impacting all companies. Each company needs an internal champion to focus resources on the key best practices to ensure a company’s success during these uncertain times.