The Supply Chain - Part 2: Out of Left Field...
“Part of my humor is the fact that I love coming out of left field. I don't want people to expect what is going to happen next.” - Howie Mandel
Great comedy is exactly how Howie Mandel explains it: the unexpected is what makes for good humor and what we enjoy about it. But while the unexpected may make for great comedy, it is the exact opposite of what we like in the business world. When a problem comes out of left field and impacts a business operation, the overall impact possibly affects all levels of that business.
It could impact their customers, who now must adjust what they are doing. It could also impact their employees and who they do business with, (the local restaurant, auto repair…) and so on. The ripple effect can spread in all directions. The bigger the issue, the bigger the impact. Think of the analogy of dropping a pebble in a pond. When the pebble impacts the water, it creates a ripple that radiates out in all directions, which then inevitably effects the shoreline. The bigger the pebble, the bigger the ripple, the bigger the impact on the shoreline.
For instance, the closing of a local auto repair shop has the impact of a pebble. While the closing will directly impact the customers of that particular repair shop, in the grand scheme of things, it will have little effect outside of that individual community. The ripples from this pebble won’t travel very far before they fade out. However, sometimes that pebble is substantially bigger, and instead of tiny ripples, we get a tsunami…
Image by Maxar Technologies
Let us drop a five ton bolder into the “pond”. In March of 2021, a 220,000-ton container ship named Ever Given blocked the Suez Canal, a major trade route between Europe and Asia that carries nearly 12% of the world’s trade, for one week. Consumer goods, industrial products, raw materials and even livestock were delayed or diverted because of the blockage. These delays caused shortages in Europe and Asia. Finished goods that were destined for other parts of the world were further delayed or made more expensive, as higher priced alternatives needed to be used instead.
Just a short one-week stoppage reverberated around the world, causing months of delays that were felt in every part of the supply chain.
Now, let us take it a step further… in early 2020, pebbles the size of Manhattan Island were dropped into every ocean around the world at the same time when COVID-19 hit. While governments and health care professionals were trying to get a handle on this new illness, businesses all over the world immediately began to react. Employees were laid off, standing orders were cancelled, manufacturing lines were shut down and transportation was drastically reduced. A microscopic virus brought the world economy came to a screeching halt.
Fast forward to 2021: We now have a better understanding of COVID, with most businesses adapting to new ways of reaching consumers, and the world’s economy is beginning to rev up once again. But the world’s economy is not a fine Italian sports car that can go from zero to sixty in under four seconds. It is a massive freight train that takes a long time to get moving, and we are all stuck, patiently waiting in front of crossing gates for the train to get up to speed.
As the world’s “freight train” begins to move once again, we must also understand that there is a finite amount of cargo space on it. Prior to COVID, excess capacity and inventory were frowned upon as a wasteful use of company and world resources, so manufacturers made only what was needed and transportation only had resources to handle that demand. Now, as businesses ramp up, not only do they need to meet current demand, they must also make up for ground lost during the federally mandated COVID shutdowns. Like attaching a garden hose to a fire hydrant, freight transportation companies are now being asked to handle far more than they are capable of, resulting in capacity issues.
There are four methods of hauling freight around the world: airplane, truck, train and ship. All four are vastly different methods, but have one single commonality… the container, which itself is currently in short supply. It is not that the containers don’t exist, it is just getting them where they need to be. Because of port congestion, truckers are having to wait longer for loads or to drop them off. With fewer loads being hauled, ports back up, fewer chassis are available for containers because they are sitting at warehouse docks waiting to be picked up with empty containers on them which are needed for more freight. See the ripple effect?
So why not just bypass all that and put freight on planes? Sounds easy right? Not really. Putting freight on a plane is very expensive and reserved for essential items that consumers really want and will pay top dollar to acquire. Prior to the pandemic, mail, small packages and small freight loads were placed in the cargo holds of commercial airliners. Airlines made a little extra money by selling excess cargo space and people would get their packages a bit faster. Now, with limited flights in the sky, space on airplanes is scarce and thus, sold at a premium, making air freight more expensive than in the past. Until international air travel returns fully, large freight must compete with mail and small packages.
Transporting goods is not the only issue caused by the COVID shutdowns and restart. There are numerous other unintended consequences. For example, at the start of the pandemic, the world’s auto industry cancelled orders for materials and components, and rental car companies sold off much of their inventory to stay solvent. Now that travel is returning, vehicles are in short supply.
Image by Justin Sullivan I Getty Images
Why you ask? Because one of the components that car manufacturers cancelled is a microchip that is not only in every vehicle, but also in virtually every electronic product made. This microchip shortage is expected to cost the worldwide auto industry $110 billion dollars. According to CNBC, Ford alone will lose 50% of its vehicle production in the second quarter. This has caused used car prices to sky rocket, and individuals that travel are now fighting with Avis, Hertz and all the other car rental companies for the limited number of vehicles available.
As you can see, everything in the supply chain is interconnected, and when one link is affected, it affects everything else. Even Trodat USA is not immune. We looked into replacing one of our older warehouse forklifts, and rather than the usual delivery time of 30 days, we were told to expect it in 35 to 40 weeks! That is more than half a year! So, whether it is a cargo ship simply getting stuck or a worldwide pandemic, disturbing the “pond” means affecting the shore and everyone on it.
So, what happens next? Good question. Have the changes in the global economy and business practices become permanent, will they return to a pre-pandemic style, or something in between? That we will discuss in the next installment.
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