Marc Levinson

Tag: Supply Chains

  • Forgetting Friendshoring

    Remember friendshoring?

    Back in the days of COVID-19, when manufacturers and retailers suddenly paid attention to supply-chain risks they had previously ignored, the notion that they could reduce risk by “reshoring” manufacturing from abroad to U.S. locations came into vogue. The concept has some obvious limitations: it doesn’t eliminate the risks of relying on a single source of critical inputs or finished products, and costs make it impractical to produce many things domestically. “Nearshoring” was advanced as an alternative: perhaps some production could be moved from Asia to lower-wage U.S. neighbors. “Friendshoring” emerged during the Biden Administration — former Treasury Secretary Janet Yellen is often credited for coining the term — as another option, the idea being that national security risks could be controlled by sourcing sensitive goods from countries that are aligned with U.S. interests as well as from the United States.

    Since he took office on January 20, President Trump has taken or threatened unfriendly actions against some of those friends, including several countries — Panama, Colombia, Mexico, Canada — with which the United States has signed agreements to eliminate tariffs and other trade barriers. The announced tariffs on imports from China would also strike at many firms that draw on important inputs from China but are based in other friendly countries, such as Japan, South Korea, and Taiwan.

    The Trump Administration hasn’t had much to say about friendshoring, but its actions, whatever their other purposes, undermine the rationale for it. Companies that shift important links in their supply chains to “friendly” countries can no longer assume unfettered access to the U.S. market. That uncertainty may be enough to convince some firms to leave their Asia-based supply chains intact: If moving supplier locations doesn’t lower the firm’s costs or reduce the risk that trade barriers will interrupt its supply chains, why should it bother?

    The danger, of course, is that a decision that seems sensible for a firm may not be so sensible from a national security perspective. By being unfriendly toward friends, the United States may be increasing the very risks in critical supply chains that it has sought to minimize.

  • The Supply-Chain Bureaucracy

    Back before the covid-19 pandemic — it seems decades ago, not a mere four years — nobody in Washington gave much thought to supply chains. Queues of container ships outside ports, rate increases of 500 percent or more for ocean shipping, long delays in shipments of imports and exports, and factory closures due to lack of critical components changed all that. President Biden appointed a supply-chain “czar” to straighten it all out, and claimed victory when port congestion cleared and freight rates returned to normal (although the end of the pandemic had far more to do with that than federal action). Transportation Secretary Pete Buttigieg even asserted this week that “part of what’s led to disinflation is the attention we paid to shipping costs,” although there’s not much evidence that Biden’s criticism of “foreign-owned shipping companies” is responsible for bringing inflation down.

    Now, the Biden Administration has named a White House Council on Supply Chain Resilience, whose 27 or more members — the membership list includes unspecified “other senior officials” in addition to a bunch of cabinet secretaries — are supposed to advance a “long-term government-wide strategy to build enduring supply chain resilience.” What does this mean? According to the press release, the plan includes funding to “strengthen our domestic food supply chains and create more opportunity for farmers and entrepreneurs in 37 states and Puerto Rico”; “to develop a nationwide plan for smart manufacturing”; “investment in clean energy supply chains” in communities affected by closures of coal power plants; and so on.

    It’s all interesting stuff. But you wouldn’t know from the Administration’s announcement that most supply chains are organized by private companies to meet their business needs. Many of those companies are currently trying to figure out how to make their supply chains more resilient in the face of disruption without raising costs so much that they sacrifice market share. This is a problem they must resolve in cooperation with their suppliers, freight forwarders, transportation carriers, and customers. They don’t particularly need the help of an expanding federal supply-chain bureaucracy.

    It’s not that the federal government has no useful role here. The Administration has done a lot to provide better data about the flow of freight into and within the United States. The Bureau of Transportation Statistics’ supply chain and freight indicators, first published during the pandemic, are particularly valuable. And defense supply chains are a legitimate federal concern. But the United States would be better served by pursuing international arrangements to smooth trade through supply chains, such as the 14-country Indo-Pacific Economic Framework it negotiated in 2022 but has since turned its back on, than by an all-of-government effort to manage the flow of goods in a $25 trillion economy.

  • Supply Chain Risks and Rewards

    Supply chains rarely received much attention in Washington until container ships started queuing outside the ports. Now, they’re a big deal. Even the White House is involved, first by appointing a supply chain “czar” and how by publishing a chapter on supply chains in the annual report of President Biden’s Council of Economic Advisers. The report reflects how much the conventional wisdom about supply chains has changed in just a few years — but it also reflects the bewilderment of government officials about what is basically a private-sector problem.

    Much as I argued in Outside the Box, the CEA report asserts that the evolution of supply chains has “been driven by shortsighted assumptions about cost reduction that have ignored important costs that are hard to turn into financial measures.” In other words, the companies that forged supply chains have often failed to account properly for risk. The CEA’s economic analysis, which draws heavily on a recent paper on supply-chain risk by Richard Baldwin and Rebecca Freeman, is well worth reading.

    The report goes astray, though, when it attempts to define an appropriate role for the government. This section underplays the complexity of modern supply chains; it highlights how the government resolved shortages by publishing data on hospitals’ stocks of personal protective equipment, but that doesn’t have much to do with industries in which the absence of some obscure component made far down the chain forces the final manufacturer’s production line to shut down. The report praises stiffer requirements for domestic content in federal purchases — a Biden Administration priority — but offers no evidence to support its claim that this will make U.S. supply chains more resilient.

    The challenge in developing more resilient supply chains is that it’s not always in firms’ interest to do so. Imagine two competitors. One serves the global market from a single location, taking advantage of economies of scale to lower costs. The other spreads production of a critical item across three continents to minimize risks. Much of the time, the low-cost company will outperform the low-risk one. The resilient strategy will win out if a fire or an earthquake intervenes, but in most years that doesn’t happen. The CEA report does not address this reality.

    Under pressure from customers and investors, many large firms have already taken measures to make their supply chains less fragile, from routing cargo through multiple ports to integrating vertically to control production of key inputs. The best way for the government to support such adjustments is by addressing distortions that lead to economically inefficient trade, such as by ending subsidies for freight transport and attaching a price to greenhouse-gas emissions in shipping (a subject briefly mentioned by the CEA). These sorts of actions are politically distasteful. But they might force companies to evaluate costs and risks more carefully when they decide what to make where.

  • Fixing Chains

    “Shipping costs have finally slumped,” the Financial Times asserts. Bloomberg affirms that trend, contending that container shipping rates are past their peak. With retailers like Walmart and Target now taking charge of their supply chains by chartering ships to move some of their goods across the Pacific (albeit at extremely high cost), the supply-chain crisis may be starting to fade from the headlines.

    That’s not entirely a good thing, because many manufacturers and retailers still haven’t drawn the correct lessons from the past year’s confusion.

    Three factors caused international supply chains to seize up in the summer of 2020. First, starting early last year, governments and central banks everywhere stoked their economies to avert a pandemic-related depression, giving consumers massive amounts of money to spend. Second, COVID-19 forced a major shift in spending patterns in much of the world; with restaurants closed, vacation destinations off limits, and easy money burning holes in their pockets, consumers binged on the sorts of goods that move in shipping containers. Third, as I’ve written in Outside the Box, companies persistently misjudged the risks of long, complex value chains, focusing almost entirely on the production-cost savings of making shoes or dining tables in Asia without adjusting for the risk that the goods might not arrive as promised.

    The first two of those forces are how history: the economic stimulus that drove the consumer spending boom is gradually being withdrawn. The third, however, is still very much with us. There is surprisingly little evidence that major companies are moving to create redundant sources of parts and raw materials, to assemble their finished goods in multiple places, and to find multiple paths to move their goods to market. Even the threat that recurrent tensions between China and its trading partners will disrupt the flow of trade doesn’t seem to be making much of an impression on executives concerned about maximizing this quarter’s profits.

    The onus now is on investors. Careful questions are in order. How are firms building redundancy into their supply chains? How are boards overseeing supply-chain risks? Inattention to the risks of globalized manufacturing holds dangers for shareholders, and falling freight rates and diminished port congestion won’t make those risks go away.

  • The “Crisis” in the Ports

    “Ports face biggest crisis since the start of container shipping,” the Financial Times headlined the other day. At the time, according to the article, 353 container ships were queuing outside the ports to unload cargo. “Ports are in desperate need of investment,” John Manners-Bell, head of the consultancy Transport Intelligence, is quoted as saying. Even before the pandemic-driven rush of cargo, Soren Toft, the CEO of the huge shipping group MSC, told the FT, “Port complexes were becoming old, there were capacity restrictions [and] there were restrictions on the ability to serve the ever-growing size of ships.”

    When you hear that sort of thing, I advise clutching your billfold. Container ports are indeed crowded today, but “crisis” warnings are a clarion call for the public sector to make investments that should be funded by shippers and carriers, not the public purse.

    Until the middle of 2020, it’s worth remembering, the problem facing ports was not excess demand, but excess capacity. Some ports had overexpanded; others suffered because competing ports had taken their business. The arrival of megaships, some now carrying as much freight as 12,000 over-the-road trucks, meant that fewer vessels were calling at most ports, leaving storage areas and costly ship-to-shore cranes underutilized. Poor business prospects led to shotgun weddings among ports like Seattle and Tacoma in the United States and Yokohama and Tokyo in Japan, in hopes consolidation would help the ports cut costs to attract more business.

    Things have been very different over the past 14 or 15 months due to COVID-19. Consumers in the wealthy economies, flush with economic stimulus and unable to enjoy vacation trips, live concerts, or visits to the spa, have been spending like crazy on bicycles, appliances, furniture, and the like, creating blazing demand for imports. But only a portion of the seemingly endless supply-chain delays that are hampering manufacturers and retailers can be blamed on the ports. Importers, their distribution centers overwhelmed, are leaving their inbound containers stacked in ports and rail terminals for several days longer than normal, hindering the routine movement of freight on railroads as well as ships. Those loaded containers are effectively unavailable to exporters, further interrupting supply chains. Shoppers can’t get their goods. Factories can’t get their components. Delays cascade, and everyone engaged in international trade points the finger at everyone else.

    Disentangling this mess will take a while. But we’re not back in the boom decades between 1987 and 2008, when trade grew twice as fast as the world economy. As vaccines slowly quash the pandemic — and as central banks cautiously cease lubricating the world with cheap money — international commerce will revert to its previous pattern, growing more slowly than global GDP. The pressure on ports will ease accordingly.

    And what of calls for new investment? Most of the world’s big container terminals are either owned by large multinational operators or by the major container lines themselves. If they think there’s a case for building high-density storage areas, lengthening wharves, or buying bigger cranes, more power to them: they are run by smart people who are paid to make hard-nosed investment decisions.

    The risk comes when the ship lines and their consultants try to squeeze money out of governments that are unlikely to be as sophisticated. Publicly owned container terminals that expand at the peak of the market may end up with more capacity than they need in a slow-growing world. State-sponsored dredging projects to accommodate the largest vessels may have little payoff, especially as the number of container ships calling at most ports will continue to decline. Since its inception, container shipping has been a boom-or-bust industry, and that pattern does not seem likely to change.

  • My Supply Chain Problems

    I got a ring today from Haverty’s, the furniture store. Last winter — January 16, to be precise — my wife and I purchased a sofa there, with delivery promised for May. In March, I got a phone call: there were delays, and the sofa would arrive at the Haverty’s warehouse, in Atlanta, on July 13. That schedule has now been abandoned. Today’s news was that our sofa is expected in October. By then, Haverty’s will have had the use of our money for nine months and delivered us nothing in return.

    The sofa, by the way, is to be made in Mississippi. The problem, it seems, is that the blue fabric that is to cover the frame and the cushions comes from China. It apparently hasn’t been delivered. The salesperson explained that the entire furniture industry is having supply-chain problems. My response to her was that I don’t accept this excuse. As far as I’m concerned, the problem lies not with China or with the ship lines that are to carry the fabric, but with Haverty’s. The company has badly mismanaged its supply-chain risk, and my wife and I, as its customers, are bearing the cost.

    Let’s be clear: supply-chain interruptions aren’t always avoidable. Things happen. Earthquakes and fires disrupt factory production. Ships and trains run behind schedule. Deadlines are missed. No business operates a hundred percent according to plan.

    But well managed businesses seek ways to control those risks. They purchase inputs from different places (no one told Haverty’s to order all its upholstery fabric from China). They ship those inputs via different routings (overdue ships may be bobbing in a long queue outside Long Beach harbor, but there aren’t long delays in Houston or Savannah). They use multiple plants to turn those inputs into finished goods. They build resiliency into their supply chains, which usually means building redundancy into their supply chains.

    If Haverty’s had done that, it might have had some options to offer us when it first informed us in March that our sofa would not arrive on schedule. Perhaps we could have switched to a different upholstery fabric, not made in China, that would have been available sooner. Perhaps we could have changed our order and selected a different sofa, assembled in a different location, that wouldn’t have taken so many months to produce. Instead, its failure to manage supply-chain risk left us, its customers, exposed to its inability to make good on its promises.

    Alas, our sofa is only a small part of a much larger story. Many, many retailers and manufacturers have misjudged the risks of long and complicated supply chains. In seeking to minimize costs, they have failed to incorporate the risk of business interruption into their cost calculations. The cost is very real: finding customers is a significant expense for most businesses, and driving them away by failing to live up to promises is money down the drain. Once potential business interruptions are accounted for, many of today’s supply chains may not make sense.

  • Stuck in the Mud

    On the morning of March 23, a container ship called Ever Given ran aground in the Suez Canal, blocking passage to the 50 or more vessels that transit the canal each day between the Red Sea and the Mediterranean. This disruption to global supply chains is likely to prove extremely costly. The grounding is one more example of how the shipping industry’s insane quest for size and scale has made global value chains more fragile and less reliable.

    Ever Given was launched in March 2018. The ship, a quarter-mile long and nearly 200 feet across, is reportedly able to carry the equivalent of 20,388 20-foot containers — enough cargo to fill more than 10,000 over-the-road trucks. It was en route from China to Northern Europe, one of the few ocean routes on which such enormous vessels are practical. The number of containers on board at the time of the grounding has not been disclosed, but in recent months load factors on the Asia-Europe route have been high.

    What went wrong? At this point, much is speculation. But the vessel’s massive size was likely a factor, for at least two different reasons.

    The first is that ultra-large container ships need deep water: when the ship is fully loaded, the deepest part of Ever Given‘s keel lies 15.7 meters — nearby 52 feet — beneath the water line. If a ship of that size wanders out of the proper channel, it can quickly wander into trouble.

    The second factor that may have contributed to the grounding is the ship’s heavy load. The only way to fit 10,000 40-foot containers aboard a single ship is by stacking boxes high on its deck. Ever Given, photographs suggest, had containers stacked 10-high from stem to stern, in addition to the many boxes in its hold. Steaming north through the canal, it would have presented a solid 80-foot-high wall longer than four football fields to winds blowing from the west. If, as reported, a wind storm struck the canal that day, it is easy to imagine how the vessel could have been blown off course. Something similar happened to Ever Given before. In February 2019, less than a year after its launch, high winds pushed it up against a ferry in the Elbe River in Hamburg, with unfortunate consequences for the ferry.

    The price tag on the physical damage is likely to be far less than the cost of the economic disruption the grounding has caused. Hundreds of ships have been delayed, each potentially facing tens of thousands of dollars per day in crew wages and lease or mortgage payments while it rests at anchor. The bill facing cargo owners will be even higher, as they face the carrying costs on the tens of billions of dollars’ worth of cargo marooned aboard vessels now moored at either end of the Suez Canal.

    It’s not clear whether they will be able to recover these losses, or who might pay for them. Like many merchant ships, Ever Given has a complicated chain of control, with its Japanese owner having chartered it out to a Taiwanese ship line which engaged a German company to operate it. Future litigation promises to be interesting.

    The Ever Given incident is one more demonstration of the vulnerabilities of extended value chains, a subject I discuss in Outside the Box. An accident can happen to any ship, and the potential cost needs to be factored into decisions about where to make things and how to transport them.