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As news of delayed shipments and back-ordered items continues to pour in, all eyes are on the unfolding supply chain crisis. Container ships are backing up in the harbors and wait times are growing as quickly as price inflation.
At this critical point, it is vitally important that manufacturers understand what is driving this crisis and how to navigate the future. And make no mistake, this story is still developing. By most estimates, this is only the beginning of what will be a very long backlog in the global supply chain.
Let’s explore what is happening and why.
Over the past couple of months, container ships have been backing up in the ports of Long Beach and Los Angeles in California. Last month, the number of cargo ships waiting to be unloaded in the harbor reached 100. And that number is rising.
To put this in perspective, it is important to understand that these ports are accustomed to seeing one or two ships anchored in the harbor – never more than 20. Yet now, the harbor is literally too full to hold the current queue. Port officials are instructing new container ships to drift in deep water, as there is no space for anchoring in the harbor. These ships, accustomed to waiting a few hours or days under the worst scenario are now drifting for weeks on end, awaiting their turn to be unloaded.
Each container ship typically carries approximately 23,000 TEUs, or twenty-foot-equivalent container units, or half as many of the forty-foot-equivalent units (FEUs) typically transported by the average truck. Each one of these containers FEUs holds approximately 58,000 pounds or about 2,000 cubic feet of cargo. And there are nearly 12,000 of these containers on each of the 100 ships floating in the harbor.
But it’s not just California. Many ships have been rerouted to other US ports to relieve the bottleneck. Currently, there is a growing backlog of ships in New York harbor and outside the port at Savannah, Georgia. And experts predict this crisis will last at least a year or more, causing widespread shortages and price spikes for the upcoming Christmas shopping season.
So, what happened? How did we get here? While this is a highly complex problem, and solving it will take creative thinkers and a lot of time and resources, there are primarily two driving factors: increased commerce and decreased infrastructure investment.
The Biden administration has lamented a lack of planning and infrastructure investment in America’s port systems to keep up with increasing demand. Currently, the administration is negotiating a multi-trillion-dollar infrastructure bill to modernize and expand existing capacity.
But without a doubt the primary driver behind this supply chain crisis is America’s shift in demand. Since the global health crisis of 2020, Americans have reduced eating out, attending events and attractions, and vacation travel. Instead, these dollars have gone to a sharp increase in consumption.
As the pandemic lockdowns and restrictions set in, Americans also began ordering workout equipment, sanitation products, electronics, and other items to reflect their new, home-oriented lives. And of course, many of these products come from China, South Korea, or Japan.
As a result, we are experiences shipping shortages across the board:
In fact, over the past two years, the cost to ship just one 40-foot container across the Pacific has risen from $2,000 to $20,000. This is a 1,000% increase in the cost of shipping manufactured goods from Asia to US markets. Shippers are scrambling for anything to put in the water, as they are essentially mining money.
Many companies are realizing that this shift in demand, coupled with a lack of capacity, is here to stay. The shortages we’re experiencing will only grow. And this holiday season will be an unprecedented crisis of shortages and delays. What can manufacturers and retailers do to navigate this supply chain process and keep their customers happy long term?
To prepare, major players like Walmart, Dollar Tree, and Home Depot are chartering private ships. But these private charters are only measures of desperation. The cost of a charter can be nearly $100,000 per day and require charters of at least one year. One Japanese holding company is actually spending $130,000 per day on a three-year charter to ride this crisis out long term.
But other companies are realizing this is more than a temporary crisis. This is a wake-up call. The United States imports approximately $43 billion is goods from our #1 trading partner, China. But in addition, we also import from other Asian countries like Japan, South Korea, and Vietnam, all of whom are also in our top ten. With 90% of global trade shipped at sea, globalization may represent a substantial liability in contrast with regionalism.
For years now, forward-thinking manufacturers have been leaving China for Mexico in a rejection of the global model. Recognizing that the maritime port system on the west coast represents a weak link in the global supply chain, regionalism becomes the more attractive model. Under this model, US firms can leverage the lower costs and advantages of manufacturing in Mexico, to service a US market.
Regardless of how the current supply chain crisis plays out, many producing companies are re-thinking their reliance on Asia and trans-oceanic shipping. In this way, the current crisis presents an opportunity for improvement going forward. The alternatives that result may prove more beneficial than the old ways of doing business.