Supply Chain Resilience

On Monday President Biden attempted to engage very present uncertainty with prospective clarity. In prepared remarks for a White House news conference, the President said:

… on Thursday, I’ll be putting forward a detailed strategy outlining how we’re going to fight COVID this winter — not with shutdowns or lockdowns but with more widespread vaccinations, boosters, testing, and more. 

Only moments later a reporter asked and the President answered:

QUESTION:    Are lockdowns off the table — 

THE PRESIDENT:  Yes, for now.  Yes.

QUESTION:    — in dealing with this?  Fau- — Dr. Fauci, why is that?

THE PRESIDENT:  Well, because we’re able to — if people are vaccinated and wear their masks, there’s no need for the lockdowns. 

In late winter and spring 2020 shutdowns and lockdowns were crude prophylactic measures for a poorly understood threat for which we had no proven defenses. We now understand the virus much better. Even this early, we understand the omicron variant better than we understood the original version back then… thanks to the openness and initiative of South African physicians and scientists.

We will know much more in the next few weeks. But we already know that this virus thrives in crowded, unventilated, interior spaces where breathing can become increasingly risky over time. We already know that air movement, distance between humans, reducing the potential viral load of exhaling or inhaling, and vaccination reduces risk.

We also understand now — in a way that most did not understand in 2020 — that flows of demand and supply are not similar to household tap water. The better analogy is a wide, wild watershed. A sudden significant shift in either demand or supply, drought or flood, prompts cascades of consequences that reverberate over time and space. It is much better to preserve, facilitate, and gently shape flows than crassly interrupt flows.

The noon news conference in the Roosevelt Room was a late addition to the President’s Monday schedule. A 2PM event in the Executive Office Building next door had been planned before omicron so rudely crashed our Thanksgiving. The notion was to gather various CEOs around the President to reassure consumers that supply chains are delivering. The President told his guests:

I want to hear from each of you about what you’re seeing this holiday season; how well prepared are you to and — to have products you need on your shelves; and, you know, how you’ve innovated and hired to overcome the supply chain challenges you have; and kept workers safe from COVID-19 so that the American people can have a holiday season that they’ve been long hoping for.

To which each of the CEO’s present responded with mostly positive news.

The CyberMonday event was both a substantive process of engaging key private sector stakeholders and a symbolic process to claim credit. Elinor Ostrom and others long ago (and ever since) have demonstrated that “Cheap Talk” (2568 more) is an inevitable and potentially important aspect of effectively managing complex adaptive systems (such as demand and supply networks). But Cheap Talk is not a magic formula. Cheap Talk can be cheapened to the point of negative returns. The conflation of noble and ignoble motivations is not unusual, yesterday afternoon’s session involved both. I’m not sure which was more prominent.

Even as this happy talk unfolded within the Executive Office Building, the Federal Trade Commission, Bureau of Competition ordered nine large food supply chain players to respond within 45 days (even Bob Cratchit got off Christmas Day) as follows:

The orders require the companies to detail the primary factors disrupting their ability to obtain, transport and distribute their products; the impact these disruptions are having in terms of delayed and canceled orders, increased costs and prices; the products, suppliers and inputs most affected; and the steps the companies are taking to alleviate disruptions; and how they allocate products among their stores when they are in short supply. The FTC also is requiring the companies to provide internal documents regarding the supply chain disruptions, including strategies related to supply chains; pricing; marketing and promotions; costs, profit margins and sales volumes; selection of suppliers and brands; and market shares.

This is not happy or cheap talk. This has all the markers of a fishing expedition into deep and rough waters. This could get very expensive.

At least yesterday’s FTC order is justified as only a study to “shed light on the causes behind ongoing supply chain disruptions.” In contrast, on November 17 President Biden sent a letter to the FTC chair asking for an investigation of Exxon, Chevron, and their competitors noting, “mounting evidence of anti-consumer behavior by oil and gas companies.” 

Food and fuel are, of course, the most dramatic contributors to US inflation. Cheap talk, happy talk, and saber-rattling? All techniques of jaw-boning? Again, I perceive both symbol and substance.

All of this fits the policy framework set out in the July Executive Order on Promoting Competition in the American Economy. This White House is especially concerned with the longer-term economic and network effects of consolidation and concentration (me too). According to the EO:

A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers…. This order recognizes that a whole-of-government approach is necessary to address overconcentration, monopolization, and unfair competition in the American economy. (More)

So, while wandering through the forest we find a supply chain responding heroically (if erratically) to unprecedented demand gyrations. This includes a stressed supply chain that feeds us well, but has recently been less predictable and is charging us (sometimes, much) more. Then there’s a third supply chain that seems to be built on a roller coaster. We have not enjoyed the recent angle of ascent (before the sharp decline of the last four days). What do we do with these hot, cold, and in-between options?

While the original Goldilocks ate her porridge and got her sleep, it is worth remembering that in the end she suffered quite a scare or worse. It would have been better if she had communicated and collaborated much more than she did. Or as one version of the fable tells us, “If she had been a well-brought-up little girl she would have waited till the Bears came home, and then, perhaps, they would have asked her to breakfast; for they were good Bears—a little rough or so, as the manner of Bears is, but for all that very good-natured and hospitable. But she was an impudent, rude little girl, and so she set about helping herself.”

As a supposed-to-be supply chain guy, I view the pandemic in terms of demand-pull and supply-push. I look at each covid case as a potential pull signal on health care services. Given this angle on reality, I want to see health care supply exceed covid’s demands. I want covid patients to have enough health care supply to credibly support potential recovery. I don’t want covid cases to crowd out health care for non-covid conditions. I want to reduce demand by consistent and widespread practice of non-pharmaceutical mitigation behaviors and maximum vaccination.

While many look at data focused on confirmed cases or deaths, I am much more focused on hospitalizations. Confirmed cases, even when reasonably accurate representations of population trends, are only indirectly related to demand for health care. So far, the vast majority of those infected with the growing family of SARS-CoV-2 viruses do not require medical care. Those who die no longer need medical care. From a network perspective — a supply chain utilitarian perspective — the most serious problems emerge when demand/need/pull for medical care exceeds the push capacity of the health care system. I regret sounding so Hobbesian.

In terms of Omicron (B.1.1.529) there are suddenly surging case counts in parts of South Africa, with more than 3800 new cases being confirmed per day. This is an increase of 827 percent over last week. Wastewater surveillance has found significant increases in proportional presence of viral fragments, in some sample locations increasing by a multiple of 100 over the last two weeks.

According to South African researchers:

There is no evidence for any clinical differences yet. What is known is that cases of B.1.1.529 infection have increased rapidly in Gauteng, where the country’s fourth pandemic wave seems to be commencing. This suggests easy transmissibility, albeit on a background of much relaxed non-pharmaceutical interventions and low number of cases. So we cannot really tell yet whether B.1.1.529 is transmitted more efficiently than the previously prevailing variant of concern, delta. (More and more.)

Given the quick-onset there has not yet been an increase in hospitalizations (see chart below). There will almost certainly be an increase in hospitalizations. Barely 20 percent of the South Africa population is vaccinated. But the virulence of this variant is not yet clear. The effectiveness of current vaccines is just now being examined.

I will monitor data updates from South Africa’s National Institute for Communicable Diseases. I will watch the chart-action generated by NextStrain, Reuters, and others. I will scan the Sunday Times online (Johannesburg). I will also pay attention as we see how, when, and where the variant moves around. As noted above, I will especially look at hospitalization counts.

I will stipulate again — as I have here and here and here — that the root cause of recent port congestion has been extraordinary consumer demand. There is also a pig-in-the-python effect associated with delays in East Asia. And… these two factors have been very effective stress-tests for the intricate work of every global port — most dramatically the ports of Los Angeles and Long Beach. Today Bloomberg has done nice work summarizing these interdependent intricacies in an online piece headlined: Every Step in the Global Supply Chain is Going Wrong — All at Once.

As also noted, moving more volume than ever before does not suggest everything is going wrong… and I perceive real progress in the last three weeks with increased velocity and reduced volatility. But this stress-test has certainly unveiled plenty of opportunities for future improvement.

Fear-Of-Missing-Out (FOMO) is a well-known demand creation technique. In recent years it has been profitably refined and deployed especially by so-called fast-fashion retailers (here and more).

Throughout the pandemic US consumers have demonstrated unprecedented demand for groceries. In March and April 2020 nationwide grocery consumption surged one-third or higher Year-Over-Year for many product categories. Some of this reflected very real channel-shifting as restaurants closed. As occasional empty shelves emerged, FOMO also played its part.

By Thanksgiving 2020 grocery demand had settled at about one-tenth higher than pre-pandemic, with product-specific spikes, such as 18 percent higher for frozen and 28 percent higher for seafood. This made sense (to me). I expected this level of grocery demand and volatility to continue until restaurant dining resumed.

Consumer attitudes toward dining out remain cautious. But actual spending on food away from home reclaimed pre-pandemic totals this May and is now above November 2019 (more). Nonetheless, current grocery consumption is another four percent higher than elevated 2020 demand. I am surprised.

Positive possibility: during the pandemic people rediscovered the joy of cooking and eating with family at home. Probable factor: until recently many Americans had more cash on hand and have been demonstrably ready to spend it. Less positive possibility: people continue to be nervous about stock-outs or worse.

All and more could be at play.

For several weeks I have been in unusually intense supply chain-related discussions, mostly with government officials, reporters, or supply chain professionals. There have been plenty of problems — as previously addressed here and here and here and elsewhere. But while difficulties are real, troublesome, and often frustrating, for me these have been “interesting” problems mostly arising from robust spending rather than profound need or hunger or hurt. I have not been (and am not now) concerned about supply chain “failure.”

But last week I belatedly recognized a deep anxiety with which many (millions, I now assume) are viewing supply chains. This seems to begin with the occasional empty shelf at the grocery store (more). When and why and for how long something disappears strikes most consumers as undecipherable. Then there is inflation. Turkey prices are almost one quarter higher than last Thanksgiving. A tank of gas costs one-quarter more than 2019 and almost one-third more than last year. The cause of inflation and its prospects are a matter of mind-bending debate (more). Framing these intimate encounters with less predictability and higher costs have been recurring headlines regarding our supply chain crisis (here and here and here). Explanations range from simplistic to sublime, but for most consumers personal implications remain inscrutable. Systemic implications can sound like science fiction. (Does anyone else perceive analogies with the Spacing Guild?)

Then, of course, there is the pandemic, which is implicated in many of these problems. Perceiving some kind of connection among these shifting patterns is not just paranoia.

Evolution taught us to be attentive to changing patterns. We were — still can be — a vulnerable species. Being able to perceive not yet fully formed threats gave humanity decisive protective (and predatory) advantages. Observation — watchfulness — is fundamental. But it is our imagination that works to unveil potential meaning behind the feedback. Intellectually we may agree that life is uncertain. But emotionally (perhaps even physically), extended ambiguity can prompt a primitive predisposition for immediate response.

“If this is truly a crisis, what should I do?”

Our watchful range has profoundly expanded. Within this range we can observe more change more precisely than ever before. Whether or not change has become more rapid, our ability to experience change over space and time has certainly grown. Our sense-making — meaning-making — ability has not always kept up with this shift in experiential scope and scale.

How do we constructively, creatively — even collaboratively — apprehend ambiguity?

Given all the bottlenecks and chokepoints now exposed, it may be meaningful to note that the ancient Greek from which anxiety is derived is ἄγχω (ánkhō) meaning “to choke”. When our throats, personal or metaphorical, are constricted we can become obsessed about quickly clearing. But a tracheotomy is seldom needed. A Heimlich maneuver can be an over-reaction. Hyperventilating will further complicate.

A sip of water may suffice. A calm, deep breath can help.

Working with supply chain professionals, this is the worldview, attitude, and behavior that I consistently encounter. The constrictions are real and can be complicated. Unusual shifts in demand have revealed sources of friction that previously were seldom worse than inconvenient. Now, given increased — and volatile — volume, these pinch-points are limiting velocity (both direction and speed) needed to deliver even more volume. The pros are mitigating the problems. Progress is being made. Huge volumes — much more than before — are flowing.

A few weeks ago I was talking to a reporter about my angle on demand as the core cause of the perceived crisis. After I had moved through about a dozen data points with this very supply chain-savvy guy, he said, “Makes total sense, Phil. But you’re not giving me a bad guy to blame.” It was an authentic — and self-critical — complaint. The media is not alone in wanting to replace ambiguity with someone or at least something to blame.

Where objects of anxiety are typically ambiguous, fear tends to focus. Fear will find a bad guy or something to blame. When there is a bad guy or other specific cause, this is helpful. When the actual cause is complicated or complex, this reductionism is counter-productive. It is not a huge leap from FOMO to fear itself.

Too often it is fear itself that transforms a problem-to-be-solved into catastrophe.

Americans are anxious about inflation, about the general direction of the nation, about climate change, and more. Last week I heard from smart folks who have added fear of supply chain failure to this list. They are not alone. In a recent McKinsey & Company survey of business executives supply chain disruptions were identified as the single greatest threat to economic growth. Once again, perceiving potential relationships between these problems is not just paranoia (though paranoia can also be involved).

I have been so engaged working with others to accurately understand and resolve practical supply chain problems — and even succeeding some (more) — I failed to feel this rising anxiety. I am late to appreciate that my more political colleagues have been working tirelessly to assuage this anxiety. Until now, I found many of their efforts annoying: political theater that tended to obscure more than clarify supply chain behavior. I could have been more helpful. I should have embraced the role that anxiety (including FOMO and even “retail therapy”) is playing in strong consumption. I should have been doing my part to reduce the impact of this demand accelerant. I expect some of my political colleagues have found me annoying: blind to the reality of increasing public anxiety.

Anxiety acknowledges disequilibrium. Anxiety can help us locate and label real problems. Anxiety can even motivate reaching-out for help to solve these problems. But we need to learn to deploy anxiety, rather than be deployed by fear.

Almost two centuries ago Søren Kierkegaard pondered Grimm’s Fairy Tale of the Boy who went Forth to Learn Fear. It is a complicated, perhaps paradoxical, tale of fearlessness. The Danish philosopher concluded “This is an adventure that every human being must go through — to learn to be anxious in order that he may not perish either by never having been in anxiety or succumbing to anxiety. Whoever has learned to be anxious in the right way has learned the ultimate.”

We are living in a moment with abundant opportunities to learn the ultimate.

Many perceive port congestion as a clog in a corroded pipe that needs replacing. I have argued port congestion is the outcome of flooding (more). Our pipes are delivering more flow than ever before. But a great flood has overwhelmed preexisting channels. Along the way, clogs have emerged, showing us where and how current flow capacity is most constrained.

Still, even where there are clogs, flow is usually well-above any prior level. In 2018 the Port of Los Angeles handled a record-breaking flow of just under 9.5 million containers (TEU equivalents). As of the end of September 2021, the port had handled 8.2 million containers. By this New Year’s Eve, the 2021 flow is likely to be one-tenth to one-fifth more than the 2018 record.

Recently 80 (more or less) container ships have been waiting to be unloaded at the Ports of Los Angeles and Long Beach. Early November is always a busy time at ports, but this size back-up is unprecedented. There are many contributing factors. Congestion at East Asian ports has generated a pig-in-the-python push. A pile-up of containers on US docks has slowed unloading new containers. Dock density has increased truck wait-times. An almost fixed number of trucks and truck chassis constrain options for removing containers off the docks. Full shelves at warehouses have slowed unloading of containers and release of chassis (to move new containers). Restrictions on how many containers can be stacked on top of each other disallows a relief valve available at other ports. This list could easily continue. These various points of friction have been building up over the pandemic and especially since Spring 2021.

Now some of our supply chain clogs are beginning to clear. The flood has found new channels in which to flow. There may even be evidence of less precipitation upstream.

Over the last sixty days significant progress has been made discharging containers from LA/Long Beach by rail. On November 10 Union Pacific CEO Lance Fritz said, “We are essentially normal in our international supply chain on Union Pacific from ports to intermodal ramps inland.”  Ocean carriers are deploying sweeper ships to collect empty containers off the docks, freeing room for new containers arriving. With more space on the docks to maneuver, less time is being spent unloading which is also reducing wait times at anchor (“dwell times”). (See the Port of Los Angeles Dashboard and the Port of Long Beach Dashboard.)

The ports of LA and Long Beach are not alone in experiencing significantly increased volumes… and related challenges. This is a global pattern. As congestion in Southern California has worsened, maritime carriers have tried to shift to less congested ports. Import volumes for the ports of Seattle and Tacoma are up one-fifth this year. On the US East Coast, Savannah throughput volumes are at record highs. Port of Charleston is up about 15 percent. Port of Virginia is up over 16 percent. Flows into New York/New Jersey are up 23 percent over last year with much less congestion than Southern California. According to Loadstar, trans-Pacific carrier prices have begun to soften: “The discounting and waiving of premium fees for late November and December shipments caused a mini-collapse in container spot rates this week.” The potential return of a “traditional slack season” is even being referenced.

As with any crisis — personal, institutional, or national — stress unveils strengths and weaknesses that the everyday can obscure. I was recently introduced to inventory and tracking tools that should significantly enhance the flow of empty containers and empty pallets; two separate tools deploying very similar concepts and functions. I bet there is something similar for chassis by now. California DMV is trying to remove friction-points for more folks to qualify for a Commercial Drivers License. A Local zoning ordinance has been waived to allow containers to be stacked higher. More warehouse space is being built. Higher wages are being offered to warehouse workers.

We will enter 2022 with improved capacity for expanded flows. But none of these incremental improvements address the core cause of congestion and its consequences. These are flood mitigation measures.

The flood is the result of Americans — traveling and eating-out much less and having much more cash on hand than usual — gorging on more groceries and household “stuff”. The chart below shows the extraordinary shift in consumption of Durable Goods. Nondurable goods consumption is also up dramatically. Many of these goods are produced in East Asia, shipped in containers, and arrive at a few sea ports that were quite reasonably configured and organized for less throughput.

We are beginning to see the flood subside. There are signals that unprecedented pandemic demand is resuming something closer to pre-pandemic volumes and velocity. Durable goods consumption (immediately above) is already off its springtime peak. Consumption of services (and experiences) is closing in on its pre-pandemic proportion of expenditures. The Personal Saving Rate has fallen from an amazing 26.6 percent in May to a much more normal 7.5 percent as of the end of September. Price increases (aka inflation) for the highest-demand products are also beginning to reduce pull, making it easier for push to fulfill demand.

As of today, November 15, we are forty days from Christmas. This Great Flood is off-peak, but there is a huge watershed still to drain. We will still see logjams (especially adjacent to “bridges”, aka nodes and intersections). We will continue to see our excess flow carving new channels. Some long-suffering dikes may yet fail. We will not always be able to receive what we want, when we want it at a price we prefer. But this sure ain’t no drought.

+++

A reader — and evidently client of Goldman Sachs — says my analysis is similar to what they are telling him. Here’s the pull-quote he sent me.

The inflation overshoot has been startling, but so far is attributable to a surge in durable goods prices driven by surprisingly severe and persistent supply-demand imbalances. We do expect persistent inflationary pressure from faster growth of wages and rents, but only enough to keep inflation moderately above 2%, in line with the Fed’s goal under its new framework. The current inflation surge will get worse this winter before it gets better, but as supply-constrained categories shift from a transitory inflationary boost to a transitory deflationary drag, we expect core PCE inflation to fall from 4.4% at end-2021 to 2.3% at end-2022.

Here’s the full Goldman Sachs note. This was evidently published yesterday, but unfortunately I did not see it until about six hours after I posted my note above.

Glad to have independent, distinguished, and credible complementary analysis. But I will also point out, the Goldman Sachs economists are looking at price action, while I am more focused on demand pull and supply push. Related? Absolutely. Chicken or egg? I bet we might differ.

[Original post about 0600 Eastern Time. This addition was posted at about 1500 Eastern.]