Month: September 2021

More evidence of non-durable demand

Here’s the final paragraph in a September 27 WSJ report: “Year to date, new orders for durable goods are up 24.7% compared with the same period a year earlier. Shipments, meanwhile, are up just 14.1%.” Buried lede? It is for me.

Here’s the source report from the Census Bureau. Demand is up one-quarter. Supply is up about one-seventh.

Despite all the raw material, production, packaging, shipping, workforce, and other complications, total durable goods shipments are up more than 14 percent year-over-year. Remove the transportation category and orders are up a bit less than 18 percent and shipments are still up about 14 percent

The semiconductor shortage has seriously undermined the ability of automobile manufacturers to flex capacity to meet demand. But in most other categories — even with all the friction widely noted — shipments are within spitting difference of orders. In some cases demand and supply can be seen kissing: During August the computer and other electric products category shipped goods worth $208 billion against new orders worth $177 billion. Product offerings and inventories are being rebuilt.

Enough for this holiday-season? Perhaps not. But existing capacity is being well-deployed.

Will the recent demand surge for durable goods endure? I don’t think so. Exploiting current bottlenecks to maximize existing capacity makes enormous sense. Investing in huge, quick, expensive capacity expansion makes much less sense… for many, even most, categories.

Oxford Economics has released a very helpful supply chain stress indicator. According to their September 22 report:

With our tracker showing stress still rising, supply-chain headwinds look unlikely to ease in the near term. But we see a light at the end of the tunnel – current challenges will not be indefinite. As vaccination rates rise in the US and overseas and demand slowly returns to pre-pandemic patterns, transportation logjams will clear, input costs will normalize, and production and hiring challenges will recede. In other words, easing supply-side constraints, rising capital investment, and demand normalizing to pre-pandemic patterns will allow firms to clear the significant backlog of orders that have built up in the past 18 months.

How long this will take depends on the category — and the character of demand waiting at the end of that tunnel.

Facilitating Flow

Some of our problems begin with the label: supply chain. Chains are linked, which is helpful. But chains do not flow, rather they tend to tangle. For too many, mental images spawned by the term (supply chain) reinforce perceptions of linear links connecting origins with destinations. Replace weak links or untangle twisted links and problems are solved. It has not been that simple for at least a half-century (maybe never).

Wider understanding of demand and supply networks is also obscured by the wonderful work of Walmart, FedEx, UPS, Amazon and others in eliminating consumer-facing friction and related costs. Until recently it seemed so simple to track a package (often delivered with “free” shipping). If possible for a pair of shoes or books or dog food, why not several million computer chips?

Why can’t the Secretary of Commerce pull up on her smartphone (or at least on her secure laptop), a General Motors batch order of semiconductors and immediately see which fabrication plant or port or warehouse or cargo-carrier is causing the delay? As Secretary Raimondo explained on Friday, all she wants to do is solve the problem.

Demand and supply networks are not so simple. Network behaviors are especially susceptible to misaligned angles of perception. According to the economist Richard Sugden,

Most modern economic theory describes a world presided over by a government (not, significantly, by governments), and sees this world through the government’s eyes. The government is supposed to have the responsibility, the will and the power to restructure society in whatever way maximizes social welfare; like the US Cavalry in a good Western, the government stands ready to rush to the rescue whenever the market ‘fails’, and the economist’s job is to advise it on when and how to do so. Private individuals, in contrast, are credited with little or no ability to solve collective problems among themselves. This makes for a distorted view of some important economic and political issues.

Behind the clean lines of our tracking interfaces is a wickedly complex socio-technical system constantly pushing and pulling to calibrate high volume demand with right-velocity supply. Information is analyzed and financial transactions are dissected to move the most “units” at least cost to arrive at the right place at the right time to motivate more buying. Upstream from every very busy Fulfillment Center is a boiling, thrashing flood of flows cascading across space and time toward the wants and needs of 8 billion humans and all our related creatures and creations. The day-to-day creators and managers of this flood and flow are mostly “private individuals.”

High volume, high velocity demand and supply networks (and some low velocity too) are complex adaptive systems where a large number of independent, heterogeneous and (often) competitive agents interact dynamically (sometimes collaboratively) to shape flows and outcomes across the entire system through self-organization and self-similarity at multiple scales. Individual agents and the whole-system demonstrate adaptive behaviors that result in the emergence of functions and outcomes that transcend the capabilities of any individual agent or sub-system.

In my judgment this process of emergence has now created a global commons of demand and supply where the networks of information exchange, financial transaction, and physical movement are Common Pool Resources benefiting the vast majority of “supply chain” participants in most places most of the time.

In 2009 Elinor Ostrom, a great scholar of Common Pool Resources, was awarded the Nobel Prize for Economics. In her Prize Lecture, Ostrom highlights six recurring characteristics of effective problem-solving among stakeholders dealing with both public-goods and common pool resource challenges:

  1. Communication is feasible with the full set of participants. When face-to-face communication is possible, participants use facial expressions, physical actions, and the way that words are expressed to judge the trustworthiness of the others involved.
  2. Reputations of participants are known. Knowing the past history of other participants, who may not be personally known prior to interaction, increases the likelihood of cooperation.
  3. High marginal per capita return (MPCR). When MPCR is high, each participant can know that their own contributions make a bigger difference than with low MPCR and that others are more likely to recognize this relationship.
  4. Entry or exit capabilities. If participants can exit a situation at low cost, this gives them an opportunity not to be a sucker and others can recognize that cooperators may leave (and enter other situations) if their cooperation is not reciprocated.
  5. Longer time horizon. Participants can anticipate that more could be earned through cooperation over a long time period versus a short time.
  6. Agreed-upon sanctioning capabilities. While external sanctions or imposed sanctioning systems may reduce cooperation, when participants themselves agree to a sanctioning system they frequently do not need to use sanctions at a high volume and net benefits can be improved substantially.

Again and again, these are behaviors that supply chain stakeholders experience and demonstrate. As with most complex adaptive systems these behaviors are duplicated across very different scales of time and space: immediate and local to durable and global. These interactions are most often entirely private-private, occasionally facilitated by civic organizations such as associations or academic institutions. Governments can play a role, especially in convening and facilitating. But self-restraint is especially difficult for public sector players when crises unfold. Secretary Raimondo’s sense of urgency is not inappropriate. It is uncertain of best targets. It may also underestimate solution-paths already underway. (But the read-out of last week’s semiconductor consultation and a few quick conversations with participants suggests reality is not yet rejected and may even be, reluctantly, increasingly accepted.)

Current production capacity almost always reflects recent demand velocities. Sudden spikes in demand velocity are usually observed with considerable skepticism. Production capacity — especially for something as sophisticated as semiconductors — does not come cheap. No one wants to over-invest in a passing fad or soon-to-disappear legacy. But sustained effectual demand is an effective motivator.

The pandemic’s Great Interruption continues to disrupt current supply capacity for semiconductors even as it accelerates and diversifies demand. It has been clear for nearly one year that much of this demand is durable and worth accelerated investment in capacity expansion. These investments are being made (here and here and here and here). Will new supply sources close the gap by this Christmas? No. By New Years Day 2023? Maybe. Are there ways that current capacity could be further streamlined, rationalized, prioritized — something — to reduce the current gap? Yes. Many efforts are already underway.

Is there a helpful role for the public sector? Yes. But probably not by attempting a forensic analysis of a complex adaptive system and then developing an intervention strategy (please see Sugden supra). Flow mapping is something very different. Government fiscal and monetary policies have already amplified aspects of demand surge. These interventions are softening, so public sector help has already started. State and federal policies can probably nudge a bit more onshoring of production capacity. I don’t see many wise opportunities for expediting expansion of production capacity. Unwise opportunities are always available, but marginal or unlikely rewards do not justify certain significant risks.

If undertaken with skill, insight, and appropriate restraint, the public sector can play an important role convening and facilitating the six characteristics of effective problem-solving that Ostrom has highlighted. There is a rich literature of many more rigorously researched and confirmed attributes of stakeholder problem-solving. I wish Dr. Ostrom was still with us to advise. But there is plenty of expertise available, if asked.

Toward the close of her Nobel Prize lecture, Dr. Ostrom sets out an action orientation and a series of fundamental questions:

humans have a more complex motivational structure and more capability to solve social dilemmas than posited in earlier rational-choice theory. Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century. Extensive empirical research leads me to argue that instead, a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans. We need to ask how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of more effective, equitable, and sustainable outcomes at multiple scales.

The set of questions recently posed by the Department of Commerce implies that many supply chain stakeholders must be idiots or are too greedy or short-sighted or functionally incompetent or… something needing government guidance — to make choices consistent with their long-term self-interest and the public good. The questions imply that if the government receives honest answers, the government will be able to craft a rational solution. At least to me this reveals a Newtonian confidence poorly calibrated to a much more Quantum context. Continued private-private and private-public conversations can be very constructive. Please trash the hubris.

Seeking Transparency

Yesterday — Friday, September 24 — the Department of Commerce published a Request for Public Comments in the Federal Register. This RPC (sometimes RFI) is focused on providing the government with information that might assist in efforts to mitigate the persisting disequilibrium of demand and supply for semiconductor chips. According to the RPC:

With the goal of accelerating information flow across the various segments of the supply chain, identifying data gaps and bottlenecks in the supply chain, and potential inconsistent demand signals, the Department is seeking responses from interested parties (including domestic and foreign semiconductor design firms, semiconductor manufacturers, materials and equipment suppliers, as well as semiconductor intermediate and end-users) to the questions set forth in this notice.

This request was reinforced with comments by senior White House staff and Secretary of Commerce, Gina Raimondo. According to a White House blog post:

The federal government must be better equipped to get ahead of possible disruptions and have tools at its disposal to limit their impact on the U.S. economy, workers, and consumers. When supply chain shocks cascade, the spillover effects can impact the global economy in ways that no one firm or sector can anticipate or adequately resolve on their own. By taking a holistic view of the industrial base and supply chains critical to US economic and national security, the federal government can monitor, anticipate, and respond to economic, geopolitical, and climate-related shocks.

Secretary Raimondo was pointed in her call for greater transparency:

What’s still not clear is what specifically is happening. For example, I don’t know who is overordering or who is not supplying at the levels expected. Frankly, I’m not interested in pointing fingers. I’m interested in solving the problem. There’s so little transparency across the board. And that can’t continue.

The Federal Register asks specific and detailed questions.

The Department is specifically seeking the following information and data:

1. For semiconductor product design, front and back-end manufacturers and microelectronics assemblers, and their suppliers and distributors:

a. Identify your company’s role in the semiconductor product supply chain.

b. Indicate the technology nodes (in nanometers), semiconductor material types, and device types that this organization is capable of providing (design and/or manufacture).

c. For any integrated circuits you produce—whether fabricated at your own facilities or elsewhere—identify the primary integrated circuit type, product type, relevant technology nodes (in nanometers), and actuals or estimates of annual sales for the years 2019, 2020, and 2021 based on anticipated end use.

d. For the semiconductor products that your organization sells, identify those with the largest order backlog. Then for the total and for each product, identify the product attributes, sales in the past month, and location of fabrication and package/assembly.

i. List each product’s top three current customers and the estimated percentage of that product’s sales accounted for by each customer.

e. For each phase of the production process, identify whether your organization carries out the step internally or externally. For your organization’s top semiconductor products, estimate each product’s (a) 2019 lead time and (b) current lead time (in days), both overall and for each phase of the production process. Provide an explanation of any current delays or bottlenecks.

f. For your organization’s top semiconductor products, list each product’s typical and current inventory (in days), for finished product, in-progress product, and inbound product. Provide an explanation for any changes in inventory practices.

g. What are the primary disruptions or bottlenecks that have affected your ability to provide products to customers in the last year?

h. What is your organization’s book-to-bill ratio for the past three years? Explain any changes.

i. If the demand for your products exceeds your capacity, what is the primary method by which your organization allocates the available supply?

j. Does your organization have available capacity? If yes, what is preventing the filling of that capacity?

k. Is your organization considering increasing its capacity? If yes, in what ways, over what timeframe, and what impediments exist to such an increase? What factors does your organization consider when evaluating whether to increase capacity?

l. Has your organization changed its material and/or equipment purchasing levels or practices in the past three years?

m. What single change (and to which portion of the supply chain) would most significantly increase your ability to supply semiconductor products in the next six months?

2. Questions for intermediate users and end users of semiconductor products or integrated circuits:

a. Identify your type of business and the types of products you sell.

b. What are the (general) applications for the semiconductor products and integrated circuits that you purchase?

c. For the semiconductor products that your organization purchases, identify those that present the greatest challenge for your organization to acquire. Then for each product, identify the product attributes and purchases in 2019 and 2021, as well as average monthly orders in 2021. Then estimate the quantity of each product your organization would purchase in the next six months barring any production constraints as well as the amount your organization expects to actually be able to purchase. For each of your organization’s top semiconductor products, estimate each product’s lead times and your organization’s inventory for (a) 2019 and (b) currently (in days). Provide an explanation of any current delays or bottlenecks.

d. What are the primary disruptions or bottlenecks that have affected your ability to provide products to customers in the last year?

e. Is your organization limiting production due to lack of available semiconductors? Explain.

f. What percentage of your current production has your organization had to defer, delay, reject, or suspend in the past year? Explain.

g. Is your organization considering or carrying out new investments to mitigate semiconductor sourcing difficulties? Explain.

h. What semiconductor product types are most in short supply and by what estimated percentage relative to your demand? What is your view of the root cause?

i. Has your organization changed its material and/or equipment purchasing levels or practices in the past three years?

j. What single change (and to which portion of the supply chain) would most significantly increase your ability to purchase semiconductors in the next six months?

k. What percentage of your orders are fulfilled by distributors versus through direct purchase orders to semiconductor product manufacturers?

l. For the semiconductor products your organization purchases, how long (in months) are the typical purchase commitments? How, if at all, do your organization’s purchase commitments differ for products in short supply?

m. Has your organization faced “de-commits” (defined as a notification from a supplier that expected or committed supply will not be delivered in the agreed-upon time and quantity) in recent months? If this is a significant issue, please explain ( e.g., nature of product, supplier, impact).

These are reasonable questions in search of rational, logical, straightforward (linear?) answers. Those asking the questions realize these answers will often be difficult. It is not clear to me that those asking the questions understand how difficult. It is not clear to me that those asking the questions realize that by the time they receive earnest answers, most of the answers will be moribund. (And there will be some share of superficial, cynical, and grossly self-interested answers. There will also be meaningful silence.)

When accurate answers regarding demand and supply networks are possible, they will often have a half-life of a month, week, day, or a few hours. In the context of high volume, high-velocity demand and supply networks, accuracy is an exponentially decaying quantity and quality. As an indicator of strategic flow, an answer’s half-life can still be helpful… if the limitations of half-life are accepted. But depending on time elapsed, the most complete answers will take on that quaint quality of once-great value now deeply diminished. My grandmother’s silver tea service leaps to mind.

The Federal Register asks for answers to be received by November 8. This suggests that accurate answers will be based on something close to reality as observed in late September or early October. With extraordinary effort, the answers may be analyzed and assessed by early December. At year-end the answers offered will be about as relevant to problem-solving the chip shortage as our retrospective understanding might mitigate the Irish potato famine of the 1840s. It is too late.

[The next post suggests a different set of questions with a different action orientation.]

Improving Flow Prognosis?

The foreground of our picture is crowded. Too much demand for too much stuff. Too few containers for too much stuff. Too many ships waiting for too few cranes. Too many containers for too few chassis’ (truck or rail). Too much throughput for too few workers.

Contemporary supply chains are organized around demand. Fulfilling demand is the mission, purpose, obsession — perhaps even graven idol — of global business. So, eyes widened and jaws gaped on September 6 when Morten Engelstoft, CEO of APM terminals, told the truth to The Financial Times, “We need lower [consumer demand] growth to give the supply chain time to catch up, or differently spread out growth. Over a long period of time, we will need to recover efficiency.” (More and more and more.)

The FT reminds us, “US imported goods in July were up 20 per cent over the previous year and 11.5 per cent over 2019 as consumers splashed out, with their spending supported by stimulus measures since the second half of last year.”

The problem is most obvious at the Ports of Los Angeles and Long Beach, together the largest-by-far maritime cargo complex in the United States. Last week a record-setting sixty-plus ships were lined up waiting to unload. (See the satellite picture below and more from the Washington Post.)

Typically it is not darkest just before dawn, but we can confidently claim that dock density is worst just before incremental improvement:

The US personal savings rate has fallen to 9.6 percent, down from 26.6 percent as recently as March. American consumers still have a bit more cash-on-hand than pre-pandemic (February 2020: 8.3 percent), but the sense of having money to burn is unlikely to return.

On Friday (September 17) the LA-Long Beach ports announced they will facilitate more hours of truck access to retrieve and return containers. This is unlikely to increase the number of trucks, but it could increase velocity, almost certainly for truckers and trucks that arrive at off-peak-hours and maybe for the whole system if enough truckers decide to do so.

According to The Financial Times, the container construction industry, “is set to pump out a record 5.2m twenty-foot equivalent units (TEUs) this year, up two-thirds on 2020.”

With the usual shippers charging premium rates for tightly constrained capacity, alternative means and methods of moving cargo are beginning to fill some crucial gaps — for those able to pay. Non-traditional vessels are delivering to non-traditional ports that can move goods along less-crowded routes.

So, in the background of our current picture we may see dawn’s thin light rising to the east of crowded San Pedro Bay. There is finally some increased shipping capacity. There is incremental improvement in moving goods. But the current pile up is huge. Even if demand finally returns to something more sustainable, it will be months before something like 2019’s flow is experienced again.

Slowly (we) turn, step by step, inch by inch

US consumer demand remains strong. Despite the Delta variant’s determined discouragement, July retail sales were 0.5 percent higher than June. The Wall Street Journal explains, “With many schools, college campuses and offices reopening, consumers shelled out more for groceries and merchandise at big-box stores. Those purchases—along with higher spending on furniture and hardware—offset another big decline in car sales, which have suffered from a global computer chip-shortage that has crimped supply.”

Even with strong and often volatile demand — and constant reports of stock-outs — the ratio of retail inventories to sales increased to 1.11 . This remains very tight. But for three consecutive months, the ratio has remained above April 2021’s 1.07 asphyxiation level. It is, however, worth noting that breathing remains difficult for the food and beverage category. Here the seasonally adjusted ratio improved from 0.72 to 0.73. Grocery demand has continued to outpace most other retail categories. Could grocery stores sell one-fifth more with better assured supply? Or have upstream challenges introduced grocery to the charms of fast fashion merchandising? Are customers buying what’s available just-in-case?

As the Federal Reserve chart (below) suggests, the ratio had stayed within a narrow range since the end of the Great Recession. But when consumers stopped buying in March and April 2020 inventory quickly accumulated. Perceiving potential for a long-term demand drought, many retailers stopped ordering… just in time to be ill-prepared for a flash flood of retail demand in May-June 2020 and escalations since. In April 2021 US retail sales peaked at nearly one-third above the April 2020 bottom, Inventories have never caught up with this Niagara Falls of cross-cutting, fast falling inventory to sales ratio.

Covid Hospitalizations Update

Since about August 27 I have been spending 14 to 16 hours per day with a very demanding Hurricane Ida and her consequences. Except for related hospitalizations in southeast Louisiana I did not pay attention to the pandemic until September 9 and 10.

What I then found was that US hospitalizations had peaked during the last week in August, consistent with prior projections (here and here). But social and political reaction to the Delta variants surge was, if anything, still rising.

Per the data display below, Israel’s and UK’s experience demonstrate that Delta’s ferocity can be diminished but transmission, disease, and hospitalizations have not (yet) shown the precipitous drop that typified prior waves. With a lower rate of overall vaccination, it would be surprising if US results depart from this pattern.


Two weeks after landfall, grid power has not been restored to more than 160,000 electrical customers in Louisiana.  Local water systems are down for about 20,000 residents.  Boil orders are in place for another 320,000 plus. By the end of the first week after landfall, over 90 percent of cell sites in southeast Louisiana had been restored. Most grocery stores are operating at close to their pre-Ida levels. Yesterday (September 11) SNAP recipients in eighteen parishes received an emergency boost equal to 55 percent of their usual monthly payment.

On this Sunday morning, more than half of retail fuel stations in southeast Louisiana have gasoline and diesel to sell.  A combination of reduced demand volatility (with fewer emergency generators needed) and streamlined Fuel Loading Racks has steadily improved fuel distribution service levels. Of nine refineries closed, four are now “operating” and one other has begun its restart process. Approximately 60 percent of Gulf of Mexico crude oil production capacity remains shut-in. Supply chain implications for US and global petrochemical flows will be significant and long-lasting.

Truck freight flows have remained remarkably stable into and through the impact area. Bulk cargo operations at the Port of New Orleans resumed on September 2, container flows restarted on September 7. Commercial flights from Louis Armstrong International Airport took off again on September 2.  Norfolk Southern and most other regional rail cargo operations were underway by September 6.

It is a complex mix of problems and progress.

Along the axis of Ida’s track, especially the first ninety miles north of landfall, there is much slower progress and many more persisting problems. More than 300,000 people remain off the grid, with no safe tap water (even none at all), spotty telecoms, primitive means to cook whatever food they can get, and open gas stations few and far between.  Many have lost the roofs off their homes or worse. Last week the heat index was in the triple digits. This week rain is predicted every day. (More and more and more.)

On August 29 a very strong force hit a dense set of interdependencies in southeast Louisiana where roughly 2.4 million people reside.  Widespread destruction of the electrical grid prompted failure of several water systems and a considerable proportion of regional telecommunications.  As emergency generators started, demand for fuel exceeded the supply capacity of available loading positions at local Fuel Loading Racks. Long lines formed at those retail gas stations that got fuel. Damaged and without grid power, refineries did not quickly restart.

Given the important role of local refineries in national fuel flows, local inventories of refined products have been sufficient for local demand. But these refineries’ flows into outbound pipelines stopped. According to the EIA, “From August 27 to September 3, total gasoline stocks on the East Coast fell by 3.6 million barrels and total gasoline stocks on the Gulf Coast fell by 3.2 million barrels.”  Hurricane Ida’s landfall was very close to Port Fourchon, a crucial neck in the hourglass that connects Gulf of Mexico oil production with Gulf coast oil refining. Bloomberg explains

The monster storm’s direct hit on Port Fourchon a few hours before sundown on Aug. 29 completely disabled the primary jumping-off point for helicopters and vessels that service hundreds of offshore platforms and rigs. Even the lone road connecting Port Fourchon to the rest of the state — Louisiana Highway 1 — was knocked out of commission by Ida’s massive wall of sea water and the tons of sand it swept ahead. “When Port of Fourchon is out of service, it breaks a link in the chain,” said Winders, a Louisiana native who’s been working in the oil industry for four decades. [Bert Winders, a Baker Hughes Inc. health and safety manager]

In contrast, the comparatively — even surprisingly — quick restoration of telecommunications functions allowed grocery demand and supply to largely persist post-Ida. Point-of-Sale digital transactions were mostly working in metro Baton Rouge from the second day-after and in metro New Orleans from the fourth day-after. Grocery distribution and retail operations were constrained by work force absences, debris on roads, and damage to facilities. But  regional sales volumes had normalized by Labor Day weekend.

It is also true that on Friday, September 10, one national chain that usually sells groceries in many locations across southeastern Louisiana had no power back-up and no telecommunications connections. The grocery market leader in the hardest-hit area did not open three stores in order to ensure other nearby stores were well-staffed and stocked.  In the aftermath of something as strong as Ida, gaps will emerge in even the most resilient networks.