COVID-19 & Supply Chains


TO START, WHAT IS ‘COVID-19’? Turns out our environment is full of constantly mutating viruses. Each year, at times when human immune systems are most vulnerable, those viruses attack then recede with the seasons, or as the population becomes used to them; that’s “herd immunity.” Unfortunately, before the next window of vulnerability, they mutate and infect the vulnerable among us again the next season. The common cold is a classic example.

On the other hand, measles is caused by a virus that doesn’t change much, so the antibodies one gets from an infection protect us from subsequent infections, as do the measles vaccines. Fortunately, in the cases of those slippery respiratory viruses. human immune systems have developed sufficient genetic resistance that we either don’t get infected by the new mutations or are sick for just a few days.

Most of us have had “the flu.” Of course, if a person is already vulnerable due to age or disease, those “normal” cases of flu can kill to the tune of more than 31,000 Americans a year. Take note—that is a risk we tolerate without government or much personal reaction. Unfortunately, every 10 years or so, there is a bad flu season when the death toll heads up toward 100,000, and every 75 years or so, there is a really bad flu season when the death toll may reach the millions. That we call a “pandemic.”

We have a pandemic now because the SARS-CoV-2 mutation of the flu is very contagious and can cause a severe immune reaction called COVID-19. It’s that reaction that kills, not the virus itself. As in the Spanish Flu of 1918, history tells us that such pandemic cases of flu hang around for two years or so, producing several surges of deaths. Then herd immunity develops, and we revert to being the annual victims of the normal non-pandemic cases of flu.

Pandemic Flus Are Scary!

Those of us with any knowledge of history know that, in the worst cases, the introduction of a contagious disease can devastate a population: in local conditions, a yellow fever or typhoid outbreak; over larger areas, a Spanish Flu, or the “Black Death” of the late Middle Ages. In the old days, people just got scared and hid. Now we still get scared but expect the government to DO SOMETHING to protect us. Unfortunately, it takes at least a year to develop a vaccine, so the government can do nothing except tell us to physically isolate ourselves, either through staying home or wearing a mask.

Unfortunately, in practice, such isolation regimes work poorly, if at all, and the pandemic lingers, just like it did in 1918-1919 before the wonders of modern medicine.

Because the authorities are reluctant to say, “I CAN’T DO ANYTHING,” they keep telling us to isolate. That said, medicine has worked wonders in treating the symptoms of COVID-19, and the death rate per infection has fallen dramatically and continues to fall. But, people are still dying, though the number of new cases is trending downward in the United States as vaccinations continue across the nation. Yet, government continues to advise caution; people stay scared. So, the governments are still telling us to be cautious. People stay scared.


The Good & Bad News

There are two pieces of very good news. First, the COVID-19 reactions to infections are largely limited to the old and sick (or both). That means most people can lead relatively normal lives without risk from this pandemic. Even the Centers for Disease Control and Prevention (CDC) acknowledges that schoolchildren are at very low risk when attending school. The second piece of good news is the appearance of several apparently successful vaccines. This combination has encouraged the authorities to relax most of the isolation restrictions. Just as important, most people have gotten over their fears of exposure.

However, there are two pieces of bad news. First, the vaccines do not prevent infection, just the bad reactions. So, there are still plenty of new cases and will be until we get full herd immunity sometime in the next 12 months. That leads to the second piece of bad news.

For complicated psychological reasons, our authorities, civic and other, have decided to be very cautious about this pandemic. They are reluctant to end isolation orders, continue to publicize the risks from COVID-19, and downplay the abundant good news. As a result, the return to a fully normal life is slow. I can sing in a choir now. But not at my home church and always with a mask—despite my having been vaccinated. Tenors are annoying, I admit, but are not infectious.

So What? The Freight Market Is Booming

We have in our supply chains real tension between several opposing factors. To the good, both governmental orders and personal fears have had relatively little effect on the demand for physical goods. I can buy, as I have recently, a new watch without risk from the virus. In addition, the depressed demand for services has left us with money in the bank, enhanced by a record round of government stimulus. That means I have extra money to buy stuff. I just bought a second new watch. Since trucks move physical stuff, this pandemic has been ironically good for trucking and trucking’s customers. Finally, for the truckers anyway, tight markets give them emotional cover to raise prices. They have raised prices to near-record levels.

What Tension Then?

The tensions come from the combination of the extreme isolation orders of last year and the fragility of modern supply chains. The extreme orders, plus the waves of panic hoarding (toilet paper and cleaning supplies) disrupted supply chains. Just-in-time, highly optimized supply chains fare badly when disrupted. They don’t have the safety stocks that the Japanese-inspired wave of “lean manufacturing” eliminated.

Throw in some disruptions from worker sickness, and you have major disruptions to supply chains. Peterbilt can’t deliver new trucks because electronic chip supplies are inadequate. That accident in the Suez Canal will put a two-week kink in a third of American import supply chains. Surges in demand overwhelm choke points like with the ports in southern California.

Finally—and this is important to our market—messed-up supply chains use trucks inefficiently. Trip cycles are disrupted by unusual timing, unusual directions, unusual volumes. Inefficiency means we need more trucks to move equal freight levels while surging demand has already tightened the market. In this case, the truckers are happy, but the stressed shippers are definitely not!

how much longer will the truckers be happy

How Much Longer Will the Truckers Be Happy?

I am taking little risk in assuring the carriers of strong times until mid-summer. We have a combination of surging goods demand and seasonal pressures that will keep pressure on truck supply until at least mid-July when the seasonals begin to weaken. Afterward, demand will be solely dependent on a continued boom in the economy. Given improving consumer and business confidence, such a boom is likely through the rest of 2021. Throw in the good seasonals, and you get strong demand until July 4, 2022.

What, an Optimistic Economist?

Of course, there is always an “on the other hand.” I’ll suggest three here.

First, COVID-19 deaths could surge again. They will probably make some upward movement next fall. Governments could reimpose isolation orders, although against much stronger popular resistance.

Second, and you can book this factor: there is a big difference between “strong” and “growing” demand. The spot market data tells us that we have probably reached a peak in this capacity cycle. That means prices will stabilize; high but will little further growth. Moreover, the fleets will now have the opportunity to catch up on capacity as they always do after capacity crises.

Result? Probably the same reductions in spot prices we got in late 2018. The market will still be strong—but it won’t feel that way to carriers euphorically used to rising prices.

Third, the Federal Government has entered a very risky stage where its huge stimulus policies depend on low inflation while at the same time encouraging rising inflation. As a result, damaging inflation has become a near-term risk for the first time, at least since 2006. If significant inflation occurs, the economy will suffer, perhaps badly. Probability? Less than 40% in 2021 but increasing over time.

Too Much of a Good Thing Can Be Bad

Two positive economic scenarios would be distinctly problematic for trucking-based supply chains. First, as the COVID-19 risks recede, the propensity of Americans to purchase services increases. Maybe my haircutter will go to Cancun again next winter as she did in 2019. That shifting of spending toward goods that have helped trucking so much will eventually reverse. The economy may boom while trucking is paying the price for its inflated demand now with deflated demand later. Unless you think a century of increased service demand has ended, this factor will eventually bite both carriers and shippers. Ironically, the most dramatic short-run risk is the possibility of an economic boom (or supply shock) while goods’ demand is so high.

Second, the industry is somewhere close to its maximum ability to move freight, as the backups in L.A. have shown. Another tranche of pressure could easily lead to freight sitting on docks undelivered. Sure, the carriers would like the spiking of rates as desperate shippers compete for critical capacity. Supply chains would clearly suffer—and suffer badly. So, let’s hope for the sake of the economy that demand stays strong but gets no stronger.

The Shape of Trucking-Based Supply Chains

I’ll address but one aspect of supply chain design here, leaving a host of possibilities for future discussion. We all know that the isolation practices accompanying this pandemic have accelerated the already-strong movement toward internet marketing of consumer goods. Interestingly, there has been relatively little effect on the over-the-road portion of the chains. Goods still want to go most of the way from the factory to consumer via 53-foot truck. Even Amazon’s much-publicized expansion of its warehousing network still receives supplies in full truckload lots. The prime change is the substitution of for-hire delivery of the goods to our doors rather than going to the store to pick them up ourselves. So, duh, the revolution is an expansion of the forhire value-add in the supply chain, and the provision of the hardest to provide transport at that.

Will I-80 Still Look the Same?

Well, it will, but for one very important exception. The trucks will move the same way with the same drivers until automation changes that sometime down the road. However, the names on the sides of the trucks will change. The COVID-19 shocks have pushed the revolution in retailing into the critical zone. Everything about retailing is changing. Ten years from now, this thing will be largely over, and the answers will look little like walking into Walmart now. Here’s the point: history tells us that revolutions of this magnitude are deadly to the incumbents. They exist because of their expertise at the old and are prone to defending it to the death. Most fail. We have already lost a third or so of existing retailers. Most of the rest will follow. Think about technical changes.

Of the big piston aircraft manufacturers, only one, Pratt & Whitney, survives. The steam locomotive producers all peer at us out of history books. Such pressures mean that the typical truckload fleet with major retail customers will have to replace almost its entire customer base. That process will be made all the harder by Amazon’s insistence on doing its own trucking. What’s worse, Amazon intends to become a for-hire supply chain provider once it has completed the buildout of its private network.

Yep, the trucks will still be there, but the customers will all be different, and so will many of the carriers. Were I a dry-van trucking executive, I would be far more concerned about this aspect of the COVID-19-influenced changes than any other. In truth, it is not fundamentally a COVID-19 issue. All the virus has done is to draw attention to something that was happening anyway. Retail is changing and those changes are affecting its carriers. Do you remember who did dedicated trucking for Borders Books?

Final Thoughts

Let me finish with one summary comment. The arrival of the SARS-CoV-2 virus is just another in an increasingly large collection of shocks to the economy and supply chains. Since deregulation in 1980, we have had four significant capacity crises, all occurring since 2004, and three in the last six years. It follows that success in supply chain management will have just as much to do with the handling of those shocks as the successful running of the day-to-day business. The widespread bankruptcies among restaurants are a sad example of this imperative.

Dealing with arbitrary shutdowns is, apparently, a fact of life for them now. What’s more, success in that challenging task has a double benefit, given the growing collection of radical changes from the evolving digital revolution. Only those firms that know how to manage change will survive. Dealing with the COVID-19-inspired changes is good practice for the far more difficult changes coming down the highway.Opens in modal lightboxNoël Perry Transport FuturesViewable Image – noel perryImage CaptionNoël Perry Transport Futures

Noël Perry is Principal with Transport Futures, located in Lebanon, PA. He can be reached at [email protected].