Are Supply Chain Failures the New Normal?

are supply chain failures the new normal

Noël Perry | TRANSPORTATION INTERMEDIAIRES ASSOCIATION

WHAT IS GOING ON IN THIS MARKETPLACE? For years, I have published estimates of truckload capacity utilization, emphasizing the special levels of 95% and 100%. You can see that data in the accompanying graph. The mean value for capacity utilization since 2000 has been 93%. At that level, carriers have a nice cushion of surge capacity. But, when market conditions tighten, as they did in 2000, 2004, 2018, and more recently, capacity utilization goes above 95%. Demand accelerates faster than the carriers can adjust. Things get tight. I call that 95% capacity utilization the moaning level. At or above 95%, truckload supply is tight enough for shippers and brokers to work extra hard to find capacity. Carriers have trouble adding drivers. All the actors moan about the pain they are enduring. Although some loads may be delayed and transaction expense goes up, the freight usually moves—enough that few supply chains notice—except for those moans from over-worked traffic departments. There sure is a lot of moaning going on from those frustrated people right now.

But it’s more than moaning this time! Beginning in the third quarter of last year, those moans were often accompanied by shrieks from senior management because of supply chain failures; some freight did not move, at least fast enough to keep stores full and production lines humming. That is capacity utilization above 100%, the failure level, as shown in the upper chart. Of course, most loads do get through. There is toilet paper in the bathroom, gas in the car and milk in the fridge.

Still, some commodities and some services are highly stressed, at times to the point of market failures. What’s worse, even when the trucks arrive to load, some commodities can’t be produced fast enough, and some ports and distribution centers can’t handle the high volumes of freight caused by the surges in demand. That gives us very apparent supply chain failures, as with U.S. auto and truck production restrictions caused by the lack of electronic chips. The producers of those chips in Taiwan are having their supply chain failures. In addition, the chips they ship may be on a vessel parked off Long Beach, California, waiting for unloading or waiting in a distribution center stateside for a truck. The result can be seen in the auto sales numbers shown in the in the second chart. The drop last year was the result of the COVID-19 shutdowns. The rise through April of this year was because of the recovery from those shutdowns. Those were market demand phenomena. The drop since then is from production and delivery slowdowns, supply chain failures. You can’t sell what you can’t get. In my 46 years as an economist, this is the first evidence I have seen of a supply chain failure big enough to affect macro-economic numbers.

How come? Supply chain failures occur for three reasons. The favorite reason presented in the trade press these days is a lack of workers. The relative unattractiveness of transport jobs makes this a constant problem for supply chains. Sleep in a truck for two weeks straight? Note the qualifier, constant. Somehow, carriers usually find people, even if the task gets a little more complicated every year. Any current shortage then must come from conditions that make the hiring task especially hard right now. That is the case in an environment where people are afraid of the virus or are incented to stay unemployed by historically generous unemployment benefits. While this factor has dramatically affected the service sector, it is not clear that industrial jobs have been as hard hit. What data we have from the trucking sector shows a dramatic response to the tight conditions, easily exceeding the aggressive response to the recent 2018 capacity crisis. The additions might be late, but they are occurring. That’s what happens after any capacity crisis.

What else could it be? The second factor is inefficiency in the supply chain. Supply chains are just like freeways when crowding or an accident degrades performance; throughput falls. We see that now in the intermodal sector.

Ports are crowded with record backlogs, drayage is slowed, and rail congestion has lowered productivity. The same thing is happening in manufacturing, where parts’ shortages in one operation affect the entire production line. Is this happening in trucking? Highway performance is typical—no productivity problem there. The flood of out-of-route shipments does degrade efficiency. Lack of truck service parts may be robbing the industry of capacity. So, yes, on balance, there is some influence from this factor.

The drama is in the third factor: Fortunately, we have good data about trucking demand. That’s important because the truckload sector has experienced a surge in demand, more significant than any transport surge since the beginning of World War II. The third chart above shows the stress clearly. The orange line is the average growth in truck freight since 2000. When the blue line is over that orange line, we have extra demand. You can see that happened back in 2003 when the economy boomed during the recovery from the 2001 downturn. Because there was also a tightening of hours-of-service rules, carriers got behind in their hiring. We experienced the peaks in capacity utilization shown in the first chart in this article. The industry was at the moaning level. Now compare that surge to the one we are in now, shown at the extreme right of the chart. It is twice as powerful as the 2004 event, 15% above average freight demand. No industry can hope to adjust instantly to that kind of shock. Supply chain failures occur. Keep this chart in mind as you think about this crisis. Yes, the first two factors—supply and productivity—are contributing to the problem.

Nonetheless, the big kahuna is demand. The nature of the recovery from the lockdown-caused downturn has funneled consumer money into goods consumption quickly enough to outstrip short-run trucking capacity. I emphasize the term short-run capacity because the FMCSA tractor chart indicates a robust response to the problems, one that will allow the carriers to catch up sometime in 2022. They always have in response to demand surges in the past. They will this time too.

People don’t build the church for Easter: This whole crisis sums to a classic micro-economy challenge. Demand for any good or service fluctuates for a variety of reasons. That means a business that sizes itself for its peak demand will have unused capacity most of the time. Perhaps if peak demand creates exceptional pricing or has access to part-time capacity, a business can thrive at the peak. UPS and FedEx do every Christmas. But for most companies, providing capacity is the result of a careful tradeoff decision that balances the benefits of total capacity with its costs, including the costs of flexible capacity. The result is periodic shortages of capacity when demand surges. This is true of energy production, chip production in Taiwan, and the supply of trucks and drivers. Such shortages are largely predictable if one can see a surge coming. That was the case back in early 2020 during the lockdown recession. All that pent-up demand would eventually fuel a sharp recovery. The only question is how significant the shortages are and how long until demand recedes and supply increases, ending the scarcity. As the previous chart shows, this crisis is historically bad because a historically dramatic demand surge has occurred—at the same time, supply is difficult, and productivity is down.

Are supply chain failures the new normal? Understanding the causes of the current failures, we can now consider whether they are a new normal or just the result of an anomaly, a 500-year flood. There are two answers. Sorry, as an economist, I will always reference both sides of a debate. On the one hand, some level of supply chain failure is expected, an old normal. Few businesses build the church for Easter. In 2004 under demand and supply pressures, capacity utilization peaked at 98%, way up in the moaning range, with some modest failures occurring during peak months and in special market niches.

UNDERSTANDING THE CAUSES OF THE CURRENT FAILURES, WE CAN NOW CONSIDER WHETHER THEY ARE A NEW NORMAL OR JUST THE RESULT OF AN ANOMALY, A 500-YEAR FLOOD.

understanding the causes of the current failures

On the other hand, will the economic climate turn 500-year floods into 10-year floods? Will they create such BIG floods? Yes, I think, because the data indicates that demand surges and other micro-economic disruptions are becoming more common. However, this event was unprecedented. Is the government going to shut down economic activity again, after having seen the results of their panic a year ago? Will financial markets allow the extraordinary fiscal and monetary stimulus from a government already approaching dangerous debt territory? Perhaps the best way to put it is that we have entered a heightened general economic volatility; remember the Great Recession? So prudent businesspeople should exercise caution while increasing their flexibility and their ability to survive shocks. That said, the chance of this particular kind of shock continuing or reoccurring shortly is slight. The markets are adjusting with their typical lags, and the unusual combination of factors that has created this crisis remains an outlier, again, unlikely to reoccur soon—if ever. So, when the next big shock hits, it will have a much different flavor. Be alert! Stay flexible!

Noël Perry is Principal with Transport Futures, located in Lebanon, PA, and TIA’s Chief Economist. He can be reached at nperry@transportfutures.net

The viewpoints expressed by the author are for general informational purposes only, and is the opinion of the author. All information in 3PL Perspectives magazine is provided in good faith, however we make no representation or warranty of any kind, express or implied, regarding the opinion of the author.

Image credits: Transport Futures; ISTOCK.COM/VLADRU; NANCEKIEVILL/SHUTTERSTOCK.COM