The Global Supply Chain isn’t Broken – it’s overwhelmed

Posted on: June 15, 2022

Over the past year and half the Transpacific Supply Chain has almost universally been described using unhelpful adjectives as “Broken” or “Snarled”, while blame for the ongoing problems is laid on the supply chain providers – the ocean carriers, the terminals, the rail roads, and the truckers. Such interpretations mis-describe the situation and make it harder to envision solutions.

“Broken” describes something that needs to be brought back to its original function. An ocean vessel with a broken engine needs to be towed into port and repaired so that it can function as it did before. A snarled conduit needs to be unsnarled, like a tangled hose, so that it can flow smoothly as it did before. Both these descriptions, when applied to the world’s supply chains, leave us looking backwards for a solution where no solution can be found.

The alternative approach is to state that the Transpacific Supply Chain is currently overwhelmed by demand. Depicting the situation this way shifts the responsibility to the shippers – the importers – whose significant increase in sourcing overwhelmed the largest international transportation system in the world. This transportation network represents trillions of dollars of capital investment and moves more cargo than any other network, with the possible exception of the Far East to Europe trade lane, which faces the same overdemand issues.

We need to accept that the global supply chains have been overwhelmed because a rapid increase in demand for goods came much faster than had been forecast. It was projected these trade volumes would be reached by 2025, but the global COVID pandemic accelerated the increase. Government stimulus in countries all over the world combined with a significant shift in consumer expenditure away from services such as bars, restaurants, travel, and entertainment and toward material goods that could be consumed while we were confined to our homes. This has led to a situation where demand continues to overtax supply, and there is no going back to 2018 levels. We have to look forward for solutions.

In fact, the global supply chain reacted remarkably well to the shift in spending. In February 2019, China was locked down for six weeks and production and shipping were at a virtual standstill. In March 2019, the USA and Europe were in lockdown and we were all being told that the economy was on hold. But retailers and importers in the USA and Europe were seeing different data from their ERPs and they reacted quickly by placing an unprecedented quantity of orders to exporters and manufacturers in Asia. By as early as June 2019, just three months after lockdowns began, shipment volumes had not only fully recovered from China’s lockdown but what looked to be a substantial Peak Season was underway. That speaks to a highly functional global supply chain!

Market reaction

A significant number of new carriers have entered the trade in response to market inputs. Some of these are new to the Transpacific Trade and new to being VOCC carriers. Several were in the Intra-Asia trade and redeployed vessels to the Transpacific. There are also a host of NVOCCs that have reacted to their customers’ calls for more space by entering the charter market for the first time, despite charter hire rates that have more than tripled since January 2019 and the risks involved with equipment management. Add to this the established carriers that have redeployed vessels, and we must acknowledge that the market-driven response in the form of addition tonnage has been both surprising and awe-inspiring – not “broken” or “snarled”.

Moveable assets can be rapidly deployed in response to market forces but expansion of physical infrastructure, involving billions of dollars’ worth of capital assets, takes longer. Congestion in terminals has caused lengthy wait times that have reduced overall capacity by 30+%. After all, vessels are not productive when lying idle.

In essence, we are back to where the industry was at the dawn of containerization. Bulk vessels had become so large that the cost of dwell time in terminals was more than could be made up in carrying capacity, and a new way of doing business needed to be invented and implemented.

There will need to be a number of process changes to complement the capital investments already brought into play, and these process changes will need to be engaged in actively by all participants to enable global supply chains to handle increased volumes while being more responsive to major disruption and variability.

The terminals are where the biggest short-term enhancement will be achieved by focusing on process change vs capital infrastructure improvements. A number of the new vessel operators and entrants into the Transpacific Trade understand this, and are mitigating their risks by mandating operations process changes on the part of their customers: the importers. The focus has been on Live Unloads and Peel Off stacks and importers have been willing to comply in order to secure the space. At the same time, a number of truckers, NVOCCs, and Customs Brokers have been working to establish Peel Off Stacks with the terminals on behalf of their larger customers.

Incorporated within this shift to Peel Off Stacks and Live Unloads is the move to early Customs Clearance prior to the vessel’s arrival. This major process change involves both the Shipper/Seller and the Customs Broker, who must focus on getting the commercial invoice and shipment details to the Customs Broker early and entered/filed well in advance of the previous norm.

These three changes: early Customs Clearance, Peel Off Stacks, and Live Unloads are future-focused changes that will enable larger volumes of container flows both this summer and moving into the future. These changes are not a “return to normal” to fix or unsnarl a weak supply chain. They are major future-focused adaptations that will permanently change the import process. We can and should expect that these new processes will shortly become the norm or standard. The next question will be how technology anticipates these changes and moves to facilitate it.

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