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Market Madness & the COVID Recovery
Market Madness & the COVID Recovery
Whether you work in the Supply Chain industry or not, you’ve probably felt it. “The market is just crazy right now” seems to be a buzz phrase. The housing market is booming, with home sale prices at near-record highs. The cost of plywood and other commodities has skyrocketed so much that stores like Lowes are switching to digital price tags to keep up with the inflation. There is a car shortage due to a lack of semi-conductor chips, forcing the price of rental cars to be higher than that of a plane ticket for some summer travelers. Even our local Monday night wing spot raised the cost of their (no longer 69 cent) chicken wings due to a “wing shortage” … stop the madness!
Why is the economy seemingly booming in the wake of a pandemic that was expected by many to have an opposite effect? And how is the supply chain industry coping? What we’re experiencing is, for the most part, just an extreme case of supply and demand. There are nuances of course within each industry, but the reason many businesses are failing to keep up with current demand, relates back to measures taken by those businesses in the early days of the pandemic, and more importantly, their ability to recover from those measures quickly.
In early 2020 at the onset of the pandemic, many businesses slowed or halted production completely. They began shedding inventory surpluses and were forced to lay off employees due to declining sales, government lockdowns, health risk exposure and more. This part was mostly expected, as people were buying less, going out less, driving less, doing everything less, except maybe binge-watching Netflix and online shopping. What perhaps should have been expected but was not, was the rapid recovery phase.
The introduction of vaccines in early 2021, has brought about the “reopening of the economy” in a way we’ve never experienced before. As such, we see companies now competing for labor and struggling to ramp up production to meet the demand of a hungrier-than-ever population. And that’s not just hunger for food; it’s for travel, entertainment, public events, retail products and the likes. Not only is the economy seeing a resurgence of what once was in demand, but it is a stronger demand than ever.
At the center of it all, functioning as the economy’s central nervous system, is the global supply chain. No other industry is impacted by the ebb and flow of goods the way the supply chain industry is. Conversely, an impact to the global supply chain can send shockwaves throughout the international trade and transportation industries. This is why the post-pandemic era of logistics has seen challenges surmounting to unprecedented levels.
Widespread port congestion, equipment and capacity shortages, truck driver shortages and record low carrier schedule reliability, are just some of the issues plaguing the logistics industry as our economies begin to bounce back. These challenges are forcing logistics companies to rethink their strategies for accommodating their customers and maintaining adequate service levels.
At the onset of COVID-19, the transportation industry began to react. Ocean carriers started by taking many of their vessels out of rotation. This meant material moving on regularly scheduled sailings needed to find a new solution. For some that meant leveraging other sailing options, but for others that meant shifting to a different mode of transport – most often Airfreight.
The air freight space however was not without its own problems. Most of the world’s cargo that moves via air, travels in the belly of passenger aircrafts, as this is typically the most economical Airfreight solution. When countries began issuing international travel restrictions, airlines were forced to ground many of their passenger flights, leaving the airfreight space just a skeleton of what it once was. Airline capacity on most of the world’s major trade lanes was reduced sometimes by 90-100%, leaving shippers scrambling to find alternative solutions to get material delivered by customer promise dates. With lengthy ocean transit times not being an option for already short-cycled shippers, many looked to the courier network for alternative air solutions. Courier providers such as FedEx or DHL Express, which are typically only cost effective for smaller parcel items, were largely able to avoid the impact of the grounded passenger flights since most of their material moves on their own freighters or cargo planes (i.e., non-passengers aircrafts).
Not long after the impacts to Air and Ocean transportation, did the trucking market start to feel the pain. With fewer flights and sailings, comes less demand for trucker drivers to support the inland moves to and from ports. In addition to prolonged driver shortages which have been prevalent in the trucking industry even prior to the pandemic, trucking companies were now laying off drivers and closing terminals just to stay above water.
As COVID cases worsened and lockdowns increased, labor shortages made maintaining any semblance of normalcy in the transportation industry, nearly impossible. Even if there was demand for transportation in the peak days of COVID, there were not enough workers to sustain it. The constraints on freight space across all modes and regions was bad – really bad, but not entirely unexpected. The pandemic has and still is impacting every portion of every supply chain, but over time people began to adapt. Logistics companies started finding new ways to measure carrier on-time performance. Contracted freight rates were reengineered with shorter term validity to provide some flexibility to carriers in the volatile market. Common performance indicators like deflation and year-over-year comparisons were looked at, if at all, in a very different light. After months of trying to educate customers on the reason for late deliveries and inflated prices, expectations finally started to curb and people and businesses started adapting to this “new normal”. But new challenges loom on the horizon.
When COVID-19 vaccines were approved for widespread use in early 2021, it wasn’t long before consumer behavior started to change. There was newfound confidence that people would soon be able to get back to doing the things they hadn’t done in over year. People everywhere were eager to get back to their routines of shopping, dining, traveling, etc. but businesses and manufacturers did not respond so quickly.
Worker shortages have been partly to blame. With companies rapidly hiring to try to ramp up production to meet this demand, they struggle to find workers to support the jobs. The rise in retail demand in the US, largely attributed to online shopping, has US imports surging at near record highs, causing demand for ocean containers, terminal appointments, drayage haulers and domestic truckers to outpace the supply. This has led to massive port congestion at US ports which don’t have the infrastructure or operating hours to manage such demand. Making matters worse are atrocious levels of schedule reliability. In recent months, 75-80% of all vessels arriving at US West Coast ports are being delayed, with an average of 10 days delay. The average ocean container price on some key trans-pacific trade lanes has increased over 200% compared to last year, yet demand continues. Major domestic trucking companies typically seen as the most reliable, have had to shut down city hubs and discontinue service in some regions as they experience a backlog of requests. Airports and airlines respond by inflicting rules like 24 hours storage limits; intended to maintain capacity at airports but meantime further crippling the trucking industry as they scramble to find trucks and drivers able to collect in time.
Overall, the shipping industry is attempting to force a growing pile of cargo through a very tight bottleneck and so far the light at the end of the tunnel is dim. So long as the ocean market struggles to meet demand, effects will be felt in other areas of transportation. However, airfreight capacity is on a steady incline, leaving more options available to shippers for more expedited freight solutions. Some are pursuing new methods like rail transport which is experiencing a pace of growth like never before. Logistics companies are adapting and aiming to provide forecasting of transit times based on real data to aid shippers in their lead time planning. The US government has dialed back unemployment benefits in an effort to get people back to work again and end the workforce shortage which has been blamed for lagging production levels. All of this ahead of peak season, has anticipation mounting for whatever new challenges or solutions the remainder of 2021 will bring.
Contributor: Lauren Mayher
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit www.allynintl.com.