GLOBAL SHIPPING WOES: THE SAGA CONTINUES
As 2022 unfolds, the pandemic-driven supply chain crunch is showing little sign of relenting. U.S. imports are at record highs and ports are clogged with ships waiting to enter and containers waiting to be emptied. Throngs of workers are off sick with the Omicron variant, severe winter weather is disrupting numerous transportation routes, and the International Longshore and Warehouse Union (ILWU) contract negotiations are on the doorstep. Given the current state of affairs, and with the latest forecasts pointing to persistent supply chain bottlenecks, companies involved in international trade should focus on building supply chain resilience to weather the storm long-term.
CONSUMERS WANT THE GOODS
With a strong economy, declining unemployment rate (3.9% in December), and limited opportunity to spend their money on services (e.g., travel, events, restaurants) due to COVID restrictions, consumers are buying more durable and non-durable goods: think flat screen TVs for Netflix bingeing, furniture for the home office, and more kitchen appliances and groceries to cook at home instead of dining out.
Personal expenditures on goods remain high, increasing by 0.1% in December 2021, according to the latest U.S. Federal Reserve Economic Data (FRED) data. As Omicron spreads like wildfire across the country and service businesses grapple with staff shortages and new restrictions, consumer spending will continue to flow away from experience-based expenditures towards the purchase of tangible goods.
With consumers clamoring for products, retailers are still contending with availability issues, as reflected in the worrisome inventory-to-sales ratio of 1.07 (October 2021, latest update). According to FRED, this problematic ratio is tied with April 2021 as the lowest since the start of the pandemic—not good news for retailers facing aggressive consumer demand and empty shelves.
PORTS ARE STRUGGLING
The intense consumer demand for goods is one of the most significant drivers of high import volumes and the resulting global shipping challenges. While container import volumes declined in December compared to December 2020 and December 2019, volumes still broke records. According to U.S. import data, volumes increased 1% and 25%, respectively. In fact, year-over-year 2021 container import volumes were 18% higher than 2020 and 22% higher than 2019.
Source: Descartes Datamyne™
The record import volumes, coupled with driver shortages and a U.S. workforce crippled by the Omicron wave, continue to wreak havoc at the ports. Despite lower import volumes in December, port delays worsened, according to analysis from Descartes Datamyne™.
Delays reached staggering heights—Port of Los Angeles (15.1 days), Port of Long Beach (15.6 days), Port of New York/New Jersey (11.7 days)—and the number of ships waiting to dock and unload increased in tandem. As of January 7, 2021, there were 105 ships waiting to enter the Ports of Los Angeles and Long Beach, up from 96 at the start of December 2021.
Notably, in response to problematic port delays, importers and LSPs are accelerating their shift away from the large West Coast ports. In fact, the Port of New York/New Jersey processed the most containers in December.
Source: Descartes Datamyne
RELENTLESS PANDEMIC-DRIVEN CHALLENGES
The pandemic continues to leave uncertainty in its wake, dashing hopes for a fast recovery from the supply chain chaos. Importers, LSPs, and ports are contending with record numbers of the labor force away sick or self-isolating. This is greatly impacting the ability to get goods into the hands of consumers—from electronics to beef and everything in between.
In the U.S., manufacturers are bracing for the impact of renewed lockdowns underway in China. As the country attempts to keep the Omicron variant from taking hold, its zero-tolerance policy may trigger another round of shutdowns at Chinese factories and ports, leading to further supply chain disruptions and constraining the ability of supply chains to recover.
At least 20 million people (~1.5% of China’s population) are in lockdown and the Hong Kong airport has initiated a month-long suspension of transit flights from approximately 150 “high-risk” countries; Volkswagen and Toyota have temporarily suspended their operations in the port city of Tianjin due to lockdowns. This “Omicron effect” will continue to exacerbate pressure on an already-taxed global supply chain in the near term.
Even as countries recover from the latest coronavirus variant wave, they will be under enormous pressure to simultaneously catch up on previous trade flows while trying to meet new demand—creating a whiplash effect on global logistics, as monthly TEUs swing dramatically between high and low volumes moving through the supply chain.
LOOKING AHEAD: DÉJÀ VU
If consumer behavior in 2022 mirrors 2021, the demand for goods and the associated logistics services to get them to market will stay at elevated levels through 2022, extending the supply chain capacity crunch and forcing stakeholders to adapt to the new normal. What steps can manufacturers, retailers, and LSPs take to mitigate risk moving forward?
In the short-term, importers and LSPs should track the spread of COVID variants to understand their path and the impact on critical parts of the supply chain. Companies should focus on keeping and nurturing the supply chain resources they have, especially drivers, and prioritize shipping higher-velocity and higher-margin goods to maximize profitability in the face of shipping capacity constraints. In addition, by considering alternate ports, such as eastern or inland ports, companies can hedge their bets against upcoming ILWU contract negotiations.
Shippers should also explore the possibility of shifting the movement of goods to less congested transportation lanes, or using alternative lanes into the U.S. (e.g., entry via northern and southern borders), to improve supply chain velocity and reliability. While total transit time is an important metric, supply chain predictability is a valuable attribute in the face of pandemic-driven volatility.
Thinking long-term, companies should evaluate the location density of their suppliers and factories to mitigate reliance on over-taxed trade lanes. While density does create economies of scale, the pandemic and subsequent logistics capacity crisis has highlighted the downside and inherent risks of this approach.
RESILIENCY HELPS ANSWER THE CALL
With months of shipping backlogs, labor shortages, and increased consumer demand for goods taking their toll on importers, LSPs and ports alike, companies must implement strategies that build resilience into their supply chains. From shifting to more resilient inventory models (i.e., saying goodbye to just-in-time) to leveraging global trade intelligence solutions to determine the most expedient and cost-effective routes and modes of transport, organizations can take steps to evolve their operations to better manage shipping challenges, mitigate supply chain risks, and protect their business from costly disruptions.