Supply Chain Risk – Is Another Nightmare Possible?

Supply chain risks remain surprisingly plentiful, so today, there is a reasonable question to ask yourself: is another supply chain nightmare possible?

Three years ago, transportation and supply chain managers were neck-deep in the midst of an unprecedented crisis. The pandemic threw manufacturing and shipping schedules into disarray. No one saw it coming, so everyone was unprepared for the tumultuous experience. The disruptions and steep business costs that Covid wrought were previously unfathomable.

Since then, resilience tactics have been implemented by businesses around the world. These initiatives certainly mitigate the risk of experiencing a similarly devastating business crisis.

However, with improvements in place and operations running smoothly, some businesspeople may now be overly confident in their updated supply chains. Further, major media outlets are currently focused on big-picture issues such as inflation, economic uncertainty, and geopolitical tension. As such, some people may be unaware that multiple supply chain risks continue to exist, any of which could turn into a severe disruption for their business.

So yes, another supply chain nightmare is possible. Read on to learn more about the real-world risks in the areas of port operations, ocean-container shipping, overland freight transportation, and parcel shipping.

PORT TERMINAL DISRUPTIONS ARE STILL A SUPPLY CHAIN RISK

In June, the U.S. Chamber of Commerce sent an open letter to President Biden voicing concerns about the recent service disruptions occurring at West Coast ports. After a year of contract negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), tensions were mounting.1

Intermittent shutdowns and slowing terminal operations were causing supply chain delays. So, the Chamber’s President & CEO, Suzanne Clark urged the president to appoint an independent mediator to, “prevent a larger economic catastrophe”. 2  Strong words!

In response, acting Labor Secretary Julie Su helped broker a tentative agreement between shippers and West Coast dockworkers. 3 Terms of the agreement were not publicly released, but clearly, an imminent shipping and supply chain crisis was averted. For that, Julie Su’s involvement and leadership deserve praise.

However, two critical points were glossed over by most media outlets.

First, the key words used were “tentative agreement”. The ILWU has 42,000 members in more than 60 local unions in the U.S. It will take months for the ratification and voting process to be completed. Until a contract is finalized, a cloud of uncertainty hangs over all U.S. Pacific port operations.4

Second, Canadian Pacific ports were not a part of this agreement. Thousands of workers belong to the autonomous ILWU Canada, and those workers went on strike on July 1. As this post is being published, the strike is impacting the major container-shipping ports of Vancouver and Prince Rupert as well as 28 other ports across British Columbia.5

These labor disruptions are jolting both Canadian and American businesses, as the two countries share one of the largest trading relationships in the world.

Until the ink is dry on both the US and Canadian ILWU contracts, some experts are encouraging shippers currently using other trade lanes to not be too eager to return to West Coast ports.6

SHIPPING DISRUPTIONS ARE STILL A SUPPLY CHAIN RISK

You may be surprised to learn the Panama Canal, a crucial waterway that connects the Atlantic Ocean to the Pacific Ocean, is currently dealing with a water shortage.

This seemingly stranger than fiction reality exists because a severe drought is scorching Panama and other parts of Central America. Ships traverse the canal through a lock system, which uses water from a number of freshwater reservoirs to float the enormous cargo vessels overland.

Water levels may soon hit historic lows at Gatun Lake, which is a vital source for the canal as well as the entire region. Further, El Niño may worsen drought conditions, per the Panama Canal authority. 7

Because of the drought, the canal has already restricted the amount of cargo shipping vessels can carry through the watershed. This means the flow of goods from Asia to the U.S. East Coast and Asia to Europe (as well as return voyages) have already slowed down. Plus, costs are rising as some ocean carriers, including CMA CGM and Hapag-Lloyd have implemented “low-water surcharges” for containers traveling through the canal. 8

If a prolonged drought occurs, or if demand for ocean cargo grows, the Panama Canal may become a key chokepoint that disrupts the flow of global trade.

FREIGHT TRANSPORTATION DISRUPTIONS ARE STILL A SUPPLY CHAIN RISK

The Logistics Managers’ Index (LMI) is a key tracking metric of logistics activity as measured by a survey of supply chain professionals in the U.S. The LMI has existed for 6.5 years and the index recently moved into contraction territory for first time (a neutral level is 50, and in May the index stood at 47.3).

Digging deeper into the LMI report reveals transportation capacity in the U.S. continues to rise, even as transport utilization is registering steep declines. That combination is why freight transportation prices are getting pummeled. The index’s pricing measure in May was 37 points worse YoY and 63 points lower than two years ago.9 Ouch!

Some experts are calling the current reality “the worst freight market since the Great Financial Crisis”. Craig Fuller, the CEO at FreightWaves, a price-reporting agency and publisher of supply chain news, recently wrote an article entitled, “An unusually terrible freight market may get a lot worse.”10

Per Fuller, from the early days of the pandemic, multiple Covid-relief stimulus measures by the Federal government put extra cash into the bank accounts of millions of American consumers. This in turn, fueled the demand for goods, which boosted freight volumes.

Those measures are now history. On September 1, student-loan forbearance will end, which means 25 million Americans will return to paying off their student loans. Student loans represent 7% of U.S. GDP and the average student loan payment is $393 per month. For millions of Americans, disposable income will shrink, which will put a damper on the demand for goods, In turn, freight volumes will surely decline.11

Thankfully, so far this year only a few trucking companies have declared bankruptcy. However, if the transportation trends continue their current trajectories, that may change.

Per recent news reports, one of North America’s largest less-than-truckload (LTL) carrier has informed the Teamsters Union that the company will soon be out of money if a change of operations is not approved by the union. Yet, union leadership has expressed frustration about making past concessions to the carrier and recently said, “The Teamsters cannot and will not keep bailing out this company with concessions.” 12

Only time will tell if other freight carriers are also traveling into dire straits. But with operating costs rising while freight demand and rates are declining, disruptions in the North American freight market are possible.

PARCEL FREIGHT DISRUPTIONS ARE STILL A SUPPLY CHAIN RISK

In April, the International Brotherhood of Teamsters (IBT) and UPS began talks regarding a new contract to replace the existing contract that expires July 31. In mid-June, 97% of union members voted in favor of authorizing a strike to start on August 1, if there is no agreement in contract talks. Of course, the vote does not mean a strike will occur and the threat of a strike is a routine part of the bargaining process.

Still, as this post is being published, tensions are running high and there are not yet signs of a contract settlement.13 Much is at stake for Big Brown, as the Teamsters comprise 340,000 UPS workers. A finalized agreement will be the largest private-sector labor contract in North America.14

The Teamsters point out that UPS… “hauled in more than $100 billion in revenue just last year. It’s time for UPS to pay up.” The union is seeking higher wages for all workers, more full-time jobs, an end to forced overtime and more.15

If a strike were to happen, it could be economically devastating, given that UPS delivers more than 18 million packages a day in the US alone. A remarkable 6% of US gross domestic product (GDP) moves on UPS trucks.16

However, if the Teamsters get all they are asking for, the end-result is sure to be higher parcel-shipping costs for UPS customers in 2024. In fact, parcel consultants believe UPS and FedEx will be implementing 6% to 10% increases in base rates and accessorial charges in 2024. Of course, that is on top of the record 6.9% GRIs that the parcel carriers announced for 2023.17

So, even if a strike is averted, the price increases in 2024 may disrupt your supply chain – and your transportation budget – to a greater extent than ever before.

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Contact us to learn more about the many ways in which our team can save you money, improve efficiencies, and help you succeed.

Footnotes:
1, 2. U.S. Chamber of Commerce, “U.S. Chamber Letter on West Coast Port Negotiations”. June 09, 2023 as published by the U.S. Chamber of Commerce.
3. Brett Samuels, “Biden praises Su for role in reaching labor agreement at West Coast ports”. June 15, 2023, as published by The Hill.
4. Alex Lennane, “Calm at US west coast ports at last – but it stays stormy up north”. June 16, 2023, as published by The Loadstar.
5. The Canadian Press, “B.C. port strike enters Day 5, with talks deadlocked over maintenance“, July 05, 2023, as published by the Canadian Broadcasting Corporation: CBC Radio-Canada.
6. Alex Whiteman, “Don’t be too eager for return to west coast ports, shippers warned”. June 19, 2023, as published by The Loadstar.
7. Costas Paris, “How the Panama Canal Is Adapting to the Worst Drought in a Century”. June 20, 2023, as published by The Wall Street Journal.
8. Alejandra Salgado, “Panama Canal on alert as low water levels could affect transit”. June 6, 2023, as published by SupplyChainDive.
9. Todd Maiden, “Transportation prices fall at fastest-ever pace in May”. June 06, 2023, as published by FreightWaves.
10, 11. Craig Fuller, “An unusually terrible freight market may get a lot worse”. May 15, 2023, as published by FreightWaves.
12. Todd Maiden, “Teamsters not ‘bailing out’ Yellow again, unmoved by carrier’s finances”. June 13, 2023, as published by FreightWaves.
13, 16. Chris Isidore and Vanessa Yurkevich, “UPS and Teamsters’ marathon talks end without a deal to avoid a strike“. July 5, 2023, as published by CNN.
14. Chris Isidore, “UPS Teamsters overwhelmingly authorize strike if no deal is reached by August 1”. June 16, 2023, as published by CNN.
15. International Brotherhood of Teamsters, “Teamsters Vote By 97 Percent to Strike If UPS Fails to Deliver Strong Contract”. June 16, 2023, as published by the Teamsters.
17. Mark Soloman, “Look for hefty rate hikes in 2024, parcel consultants say”. June 08, 2023, as published by FreightWaves.

SSI blog post entitled: Supply chain risk – is another nightmare possible?