The Reason Supply Chains Are A Mess

Businesses are unsure whether to invest to meet higher demand, fearful that it will begin to slow as the economy readjusts. 

The impact of that indecision, in the short term, is that transportation costs are skyrocketing, upsetting traditional routes, exacerbating delays at ports and on truck and rail lines, while denying access to many suppliers. This is not expected to end this year. JL 

Jeanna Smialek and Madeleine Ngo report in the New York Times:

Container shipping rates from China and East Asia to the US East Coast climbed above $20,000, compared with about $4,000 a year ago. Those attractive high prices are encouraging ships to abandon other routes, causing the problem to spread. And shipping issues have been exacerbated by related imbalances: Boats are backing up at ports, and as demand for goods booms in the United States, empty shipping containers haven’t been able to get back to China fast enough. Some suppliers are eating higher production and transport costs.

Catrike has 500 of its three-wheeled bikes sitting in its workshop in Orlando, Fla., nearly ready to be sent to expectant dealers. The recumbent trikes have been waiting for months for rear derailleurs, a small but crucial part that is built in Taiwan.

“We’re sitting on $2 million in inventory for one $30 part,” said Mark Egeland, the company’s general manager.

The company’s problems offer a window into how supply-chain disruptions are rocking companies in the United States and around the world, pushing inflation higher, delaying deliveries and exacerbating economic uncertainty.

It is unclear when the snarls will clear up — and it’s possible they will get worse before they get better. The holiday season is right around the corner, American companies are running light on inventory, and coronavirus outbreaks continue to shut factories around the world. Demand for goods remains strong as households use money saved during months stuck at home to buy athletic equipment, couches and clothing.

That could keep pressure on global goods producers and the transportation routes that serve them even as consumers begin to redirect their spending back toward dinners out and theater tickets — a shift that many analysts had hoped would help supply chains return to normal.

The critical questions for economic policymakers are how long the problems will last and how much they will feed into consumer prices, which have jumped sharply this year, both because of data quirks and bottlenecks. Federal Reserve officials regularly say they expect the faster price gains to prove “transitory,” but they are careful to stress that supply chains are a major source of lingering uncertainty, making it unclear how quickly rapid gains will fade.

“I’m less in that ‘transitory’ camp,” said Phil Levy, the chief economist at Flexport, which tracks ocean shipments and helps importers plan so that their parts can get in by desired dates. “And more in the ‘we have reason to be concerned’ camp.”

Container costs have rocketed up. Earlier this month, container shipping rates from China and East Asia to the United States’ East Coast climbed above $20,000, compared with about $4,000 a year ago, according to data from the freight-tracking firm Freightos. Those attractive high prices are encouraging ships to abandon other routes, causing the problem to spread. And shipping issues have been exacerbated by related imbalances: Boats are backing up at ports, and as demand for goods booms in the United States, empty shipping containers haven’t been able to get back to China fast enough. Some suppliers are eating higher production and transport costs. Full Speed Ahead, which produces crank sets for Catrike, has seen expenses increase as the demand for raw aluminum has risen. Shipping costs are also four to five times what they were a year ago, said Mark Vandermolen, the company’s managing director.
Full Speed Ahead has passed “very little, if any at all,” of those cost increases on to customers, he said, and he hopes to “maintain pricing for as long as possible until it is no longer sustainable.

But not all of Catrike’s suppliers have absorbed climbing costs, and whether higher prices for components make for more expensive consumer products — actual inflation, as it is conventionally measured — depends on how companies like Catrike and the dealers they work through decide to adjust.

Catrike raised prices by $200 early this year, its first adjustment since 2010, to cover costs. But the company is at a “sweet spot” where it’s outperforming competitors by offering affordable products, so it would prefer to leave prices steady now, Mr. Egeland said.

He’s also cautious: Catrike hasn’t printed prices in its newest catalog, in case rising expenses make another increase necessary.

The Fed — which has primary responsibility for keeping inflation steady — has made clear that it is content to look past a recent pop in inflation. If companies lift prices once or twice amid reopening challenges, the central bank can tolerate that as a one-off change.

Officials would worry more if price increases dragged on for months or years. If that happens, consumers and businesses alike could come to expect consistently higher prices. They might demand higher pay, and a cycle of inflationary increases could take off. It will take time to know whether the bottlenecks will lead to more permanent damage. Supply chains are still badly snarled. The time it takes for parts from one of Catrike’s suppliers to arrive by sea in North America from a factory in Indonesia has jumped to three months, and sometimes it takes four — double what it took before. Estimates from Flexport confirm the problem is widespread along that shipping route.

For Full Speed Ahead, average transit times have increased from about a month to up to seven weeks.

“There’s been bottlenecks at, I’d say, every point along the way of the supply chain,” Mr. Vandermolen said. “Even if they’re small bottlenecks, that just adds up all the way through.”

Mr. Egeland thinks it could take 12 to 18 months to sort out issues across Catrike’s suppliers, he said, and he doesn’t think the firm will ever return to the kind of lean manufacturing process — carrying limited inventory — that it used to use.

“It’ll be a hybrid until we get comfortable,” he said. “This is probably the new normal.”

Consumer firms, suppliers and transit companies have been unsure whether to make permanent adjustments to deal with what could be temporary disruptions. And if they do decide to expand, it takes time.

Firms are building out shipping capacity by more than 20 percent, but much of that will take effect only in 2023 or later, based on new fleet orders tracked by Ocean Shipping Consultants. The White House wants to improve port capacity — which might lower shipping costs and thus prices in the long term — but that, too, is no quick fix.

In the meantime, backlogs are building.

“This is here for the rest of the year, and it’s only going to get worse because of the Christmas season,” said Ryan Petersen, the chief executive of Flexport.

Mr. Levy, the company’s economist, suggested that around the Chinese New Year in early February — when factories and shipping typically experience a lull — was probably the earliest things might begin to normalize.

It could also help if, as the money from stimulus checks is spent down in the United States, consumer demand for goods begins to cool more. Retail sales data for July, released last week, showed early signs of waning demand for furniture, cars and apparel.

And the future hinges in part on the virus. Nada Sanders, a professor of supply chain management at Northeastern University, predicted that the highly contagious Delta variant would most likely delay a return to normal until at least 2023. Given that many parts of the world still have large unvaccinated populations, hot spots across the globe could lead to more factory and port shutdowns, she said.

“There is no question that we’re going to continue to see stoppages,” Dr. Sanders said.