freight-forwarding

Don’t Mistake Today’s “Whack-A-Mole” Logistics Regime For A New Era Of Global Supply Chain Management

The on-going rotation of congestion around the world—both within and among countries, from China, to the U.S. to the U.K. and Europe and beyond—of cargo ships moored offshore waiting to berth; empty containers piled up at ports; undriven trucks parked at depots; and warehouses filled to the brim is likened to the game of “Whack-A-Mole.” Just where will the next pain-point emerge until the gamemaster rings the bell signaling termination of the session?

If only it were so simple. Unfortunately, it is not a game of Whack-A-Mole. There is no finite start and finish. Nor is there an individual or deus ex machina overseeing the process.

The outbreak of Covid in China at the end of 2019 and Beijing’s subsequent command-and-control shut-downs of its economy—often referred to as “the globe’s factory”—as the virus’ pandemic worsened, forcing an economic contraction in a number of other countries, unquestionably triggered the global congestion of supply chains we experience today. But it would be a serious misdiagnosis to attribute the core of current state-of-affairs in supply chain management and logistics decision-making to the Covid pandemic.

The confluence of several other far more significant challenges long present prior to the onset of Covid lie at the heart of the matter. These include a mismatch between the schedule of transport pricing charged by shippers and “just-in-time” (or “just-in-case”) demand expectations by recipients and final consumers; underinvestment in modernized port facilities and warehousing operations, such as provision of deep-water harbors, utilization of digitalization and automation, and the spatial location of such facilities relative to the different stages of production and location of end-users; and inadequate understanding of how the state-of-the-art global tiered supply chains are structured and operate.

Prior to the outbreak of the Covid pandemic, few people thought much about global supply chains. Indeed, most of the globe’s population, except for those of us who either have been employed by the amalgam of firms that comprise the logistics sector—think packaging; shipping, port management and dockworkers; air cargo, railways, freight forwarding, and trucking; and warehousing, inventory control and informatics, or who had responsibility for negotiating the international rules and policies that discipline how businesses in the sector operate (I plead guilty here)—probably were familiar with the term “logistics” only in the context of military operations.

What did focus the population’s attention were the startling news headlines and photos of the U.S. West Coast in October 2021: More than 100 cargo ships were moored in the Pacific Ocean—a record amount—unable to unload their Asian cargo at the Ports of Los Angeles and Long Beach. In excess of 100,000 containers destined for outbound Asian routes lay empty on the ports’ docks blocking the way. At the same time, West Coast truckers arriving at the ports were unable to deposit their empties, thus freeing up space to on-load on their rigs incoming containers full of merchandise to be delivered to warehouses and distributors.

How best to diagnose what we are observing? A key to understanding what gives rise to the serious challenges at play today in global supply chains and logistics—and how to solve them—is to distinguish between cyclical and secular (or structural) factors.

Much commentary, especially with respect to the current state of congestion, unfortunately, focuses largely on cyclical issues. Perhaps because they’re more visible, easier to understand and address. But more often than not, it is the structural factors that are the real Achilles Heel.

Take cargo freight rates—whether by sea, air, rail or truck. Changes in these rates—whether increases or decreases—serve to re-equilibrate visible distortions and dislocations in markets. They are often the focus of the press. Such it is that when cargo rates at specific seaports, say those in Southern California, rise significantly as a result of congestion (or other factors), vessels coming from Asia may well try to sail to other ports where rates are lower, for example Oakland.

However, what most commentators miss is that while such rate differentials may well reduce congestion in the LA Basin, the question remains as to the whether or not Oakland’s port facilities, especially its on-land infrastructure, can provide the same quality of service, competitive rates, speed of transfer, and access to key inland networks as those at the Ports of Los Angeles or Long Beach.

These latter features are key secular or structural factors. They are the harder nuts to crack, and often require substantial investment commitments, upkeep, and oversight. Yet these are the ones that if efficiently provided and modernized, will likely yield greater returns to improve supply chain management than modifying cyclical features.

Another crucial secular dimension of supply chain management and logistics that is rapidly changing the face of such operations is digitalization. This is being driven by the increasing complexity of such networks. Incorporation of end-to-end digitalization, including of backend processes, will be crucial to maximize value added to logistics firms’ customers—on both ends of a transaction. It is clear that the diminished competitive edge of traditional versus digitalized logistics networks means the latter are slated to become a permanent fixture of the global economy. Logistics firms who fail to digitalize system-wide or do so only partially, rather than throughout their entire network, risk becoming relics.

The main drivers of the transformation toward a globally system of digitalized logistics networks is that the industry’s customers—both senders and receivers—are increasingly demanding instantaneous information on their shipments; greater speed in sending and delivery; and lower costs of shipping. This is a hallmark of the economy’s drive for “just-in-time” supply chain operations.

Does embracing digitalization in logistics necessarily amount to a wholesale threat to incumbent workers? Not necessarily. Is some re-training needed? Most likely yes. But it will likely also mean higher wages. Why? Because digitalized processes not only economize on time but also generates added value. Think of utilizing a travel software program at home that allows one within the space of several minutes to build and compare various itineraries with different flight times and air fares, hotel options, car rentals etc. without utilizing a travel agent or calling the airline.

The competitive structure of the logistics industry is another obvious secular issue. Here there are several initiatives afoot in various jurisdictions around the world—arguably with the United States in the lead. Two deserve mention.

In June, President Biden signed into law the bipartisan Ocean Shipping Reform Act of 2022, which expands the authority of The Federal Maritime Commission to guard against US business from being charged unfair shipping rates and from unreasonable denial of shipping U.S. exports. More recently, based on antitrust concerns expressed by the U.S. Department of Justice, A.P. Moller-Maersk dropped pursuing a $1 billion sale of its refrigerated container manufacturing business to China International Marne Containers Ltd.

While in the past, the bargaining power of labor unions at ports was often seen as the other side of the coin of firms’ market power, the strength of union leverage may well be diminishing, especially as the cost of introducing automation into logistics operations decreases. But it would be a mistake to conclude there is uniformity in this regard across ports around the world.

In India, for example, unions at some ports seem to have staying power, if for no other reason that their interests are fully aligned with local politicians. The recent termination of the dockworkers’ strike at Felixstowe, the U.K.’s busiest port, without workers garnering any raise in wages runs in the opposite direction. In the U.S., all eyes are on dockworkers at the Ports of Los Angeles and Long Beach. They have continued to work even though their contract expired on July 1, which is not the first time there has been such a turn of events over the last several decades.

An increasingly common feature of the modern economy’s on-line shopping experience is rapid delivery of ordered merchandise. In just a decade’s time, it has become routine for consumers—at least in many advanced countries—to receive products within 2-3 days. But what few consumers probably realize is fulfilling such “just-in-time” deadlines requires a sophisticated spatially, diverse network of warehousing, inventory management and transport facilities—a network that heretofore did not exist.

Without taking away from the employment generation benefits of such a system (notwithstanding the important—and highly sensitive and politically charged—issue of whether such workers are paid enough or work under wholly satisfactory conditions) nor from the convenience of such a shopping experience for the consumer, it is not unreasonable to ask whether there is sufficient differentiation in prices charged commensurate with variation in delivery times. Specifically, are there deep enough discounts in prices if delivery is lengthened? Or conversely, is there a sufficient premium charged for such just-in-time service?

It’s complicated enough when supply chains are confined to a single geographic market. And certainly more complex when supply chains span several different markets geographically dispersed. But even more complicated when supply chains are not bilateral but tiered.

As an example, manufacturing a washing machine may well have a variety of supply chains with respect to the different components from of which it is comprised. While its core may be produced in China, that core is then shipped to Thailand where an additional part is added. In turn, that assembly is then shipped to Mexico where additional components are added and the product is finalize, suitable for delivery to the destination market.

No-one should believe that even if it were possible to unilaterally end the pandemic and wave a magic wand to end the current scale of congestion, the configuration of global supply chains and the challenges of logistics management would return to their status quo ante. Indeed, commentators in the press who continue to forecast—or express hope—a “return to normal” are myopic. And that’s being charitable.

The message from the Whack-A-Mole game being played out in today’s supply chains’ chaos is clear: the logistics industry will have little choice but to become far more agile structurally and employ pricing and delivery schemes that better align “willingness to pay” on the demand side with “ability to deliver” on the supply side.