Supply Chain Resilience

In 2022 UPS averaged more than 20 million deliveries per day (source). This reflects roughly a quarter of national parcel delivery flows (see chart below).  Over 80 percent of UPS volume is NOT next day or expedited. Last year Business-to-Consumer (B2C) shipments represented roughly 60 percent of average daily volume (B2B is most of the remainder).

UPS is especially focused on maintaining and growing volumes/profits associated with serving Small and Medium-sized Businesses (SMBs, accounting for about 30 percent of total UPS volume, more). Only three-hundred eighty UPS customers are the source of about one third of total volumes. These bigger volume shippers are in an especially uncomfortable place in case of a strike.  They have also been the most proactive in arranging alternatives. But Monday one long-time shipping friend confessed, “I’ve been working contingencies since early June but can’t find any real alternatives. Many B2C will not be shipped and many that are shipped will probably go missing until long after any strike is over.”

Amazon is a big UPS customer, accounting for 11.3 percent of 2022 UPS revenue (it was even higher in the past). In recent years this key relationship has become more competitive, as each party became increasingly concerned by their dependence on the other. Amazon now has substantial self-shipping capacity (see chart below). Mutual “de-risking” is underway and more is planned. Combine this dynamic with huge shifts and swings in parcel delivery prompted by the pandemic and even more caution than usual is needed when trying to use past-history to predict future outcomes. The 1997 UPS strike might as well have happened on another planet in terms of potential economic consequences (more and more).

The healthcare category is another UPS strategic priority.  According to the CEO, “Our goal is to become the number one complex healthcare logistics provider in the world.”  According to the CFO, during the first quarter of 2023, “Logistics delivered revenue growth driven by gains in our healthcare logistics and clinical trials business and increased operating profit.”  UPS began focusing on medical and life science logistics prior to the pandemic. The UPS contribution to rolling out cold-chain solutions for covid vaccines accelerated the scale and calendar for this strategy.  The 2022 UPS purchase of Bomi, an Italian healthcare logistics firm (here and here), reflects the significant priority UPS gives this higher margin product category.  The UPS Healthcare unit earned about $9 billion last year and has been expected to earn $10 billion plus this year (sans a Teamsters strike). 

In the event there is a Teamsters strike against UPS, parcel deliveries will be disrupted and delayed (more). The other big players in parcel delivery, including Fedex and USPS, do not have current capacity to absorb total UPS flows. Credible, data-informed analysis suggests less than one-third of UPS flows could be effectively carried into other preexisting parcel delivery flows. Moreover, if these others are undisciplined in trying to fill the gap, their effort to serve real needs (and claim market-share) will create knotty congestion in their own networks. While the strike continues, everyday in August will be Christmas in terms of volume potential for other players. 

There is existing excess capacity in the Less-Than-Truckload (LTL) service sector.  LTL can help fill the gap in local, regional, and long-distance logistics, but NOT for last-mile direct-to-consumers. There are other parcel carriers and  courier-type service providers (e.g. Uber, DHL, more) who will offer services to fill the last-mile gap. Prices will be higher and delivery times will lengthen, especially in more rural and other less intensely served geographic areas. Last mile will remain a challenge despite creative adaptations (though less challenging than would have been the case pre-pandemic, now that there are many more direct-to-consumer options).

Specific to medical and other life science products, there is existing excess capacity in the refrigerated transportation service sector (reefers). This sector will — already is — stepping up to provide UPS customers (and their customers’ customers) with options. But given constrained capacity, allocation decisions are likely… and allocations almost always generate collateral damage to overall network velocity and therefore volumes.

Any loss of preexisting flow this significant is a bit like going to war: suddenly a battalion of previously unrecognized interdependencies can — almost certainly will — come over the hill screaming and shooting.

But given what is set out above, I am most concerned about potential slow-downs and last-mile impediments related to medical goods, pharmaceuticals, and related life science product categories. This would be the first strike for the relatively new UPS Healthcare unit (and very new unit leader).  These are especially time-and-quality sensitive products. Alternate sources of delivery are not abundant, especially in terms of last mile capabilities.

Home delivery (AKA “prescription delivery”) of chronic care medications is increasingly common. USPS and UPS are the most common delivery options for this product category.  UPS can handle some controlled-substances that USPS will not handle (example).  A loved one receives her blood pressure medications every 90 days (more or less).  She currently has in-home stock sufficient through mid-September. The longer a labor action lasts, the more likely lack of timely and confident delivery options will create nervous buying — and diminished at-home inventory — that will prompt both urgently true and misleadingly false demand signals… hoarding… and other congestion-causing behavior in healthcare networks.

The anticipated labor action is unlikely to have a significant impact on upstream production. Core downstream demand for parcel delivery and other UPS services is unlikely to significantly shift in the near-term (and has recently been softening). But given the high proportion of midstream flows that depend on UPS capacity — and the potential slowing or stopping of these flows — demand signaling is likely to escalate and capacity will not exist to effectively fulfill demand.

Last Saturday when I asked my loved-one about her blood pressure medications, she had not given any recent thought to her prescription delivery schedule or current supply on-hand. Given her current inventory, the possible strike should not impact her. But for those whose prescriptions will run-out in the next three to six weeks, re-filling now could avoid serious problems in the near-to-mid term… and reduce stress on networks that will be plenty stressed if the strike happens.

I have asked — but have not received answers — on the following questions:

1.  Can HHS or FDA or others identify which high-volume chronic care medications are NOT handled by US Postal Service?   I bet these medications are sourced from a sparse handful of places/players. Does HHS etc. know who and where?  In extremis could USPS handle these products?  In any case, which high volume chronic care products will be most constrained by a strike?  Are there other essential medical goods, pharmaceuticals, or life sciences products for which UPS is an especially high-proportion carrier?
2.  Does HHS or ASPR or others know — or can they find out — if all UPS Healthcare flows also depend on Big UPS nodes, links, and labor… or are there some legacy (or otherwise) non-union carve-outs?  Does UPS Healthcare have capabilities to procure third-party logistics support during a strike?  Does it plan to do so?  Is the plan actionable?  Will the Teamsters actively resist or focus elsewhere? 

There are obviously plenty of other questions… and potential problems… and possible mitigation measures. We now have just over two weeks to do our best to be ready, while the Teamsters and UPS consider their options. Just In Case, while still hoping for Just In Time.

US domestic inventories of gasoline and diesel ended the first half inside their multi-year averages. See two charts below. The US Department of Energy also (finally) confirmed that US refinery capacity has increased:

U.S. refining capacity (excluding U.S. territories) increased this year for the first time since the COVID-19 pandemic… U.S. operable atmospheric crude oil distillation capacity, the primary measure of refinery capacity, totaled 18.1 million barrels per calendar day (b/cd) at the start of 2023, up by 117,000 b/cd (0.6%) from 17.9 million b/cd at the start of 2022… The number of operable refineries in the United States—including both idle and operating refineries—decreased to 129 refineries at the beginning of 2023, down from 130 refineries at the beginning of 2022. The single refinery closure reflects the loss of a small facility in Santa Maria, California, with 9,500 b/cd of crude oil distillation capacity. Despite the loss of the Santa Maria plant, overall capacity increased because PBF Energy reactivated a previously retired crude oil distillation unit at its Paulsboro, New Jersey, refinery. The unit’s crude oil capacity increased from 100,000 b/cd in 2022 to 160,000 b/cd in 2023.

Constrained global energy demand — due to reduced economic activity — and significant US energy production have allowed US energy prices to remain much lower than last year when war-related supply disruptions prompted significant price spikes.

Since January the US economy has been navigating a spending plateau. It is a high plateau. In May Real Personal Consumption Expenditures were measured at $14,386 billion. In May 2019 real PCE was $13,037 billion (see chart below). The most recent PCE strikes me as consistent with the entirely constructive pre-pandemic trendline — disregarding all our turmoil in-between.

This morning’s US Bureau of Labor Statistics‘ Employment Situation Summary for June reports historically low unemployment, continued (if moderating) growth in new jobs, and a slight increase in the labor participation rate among workers age 25-54 (the participation rate is flat as a ratio of total population). A friend told me, “job growth was going too fast for conditions, we are now back to a sustainable safe speed for where we want to go.” According to Bloomberg, “The increase in average hourly earnings followed similar gains in the prior two months, and was up 4.4% from a year earlier. The average workweek edged up.” Recent rates of wage growth exceed the inflation rate.

In addition to a mostly favorable employment context, many US households still enjoy “excess savings” (more and more). This savings buffer is gone for some and much reduced for most. But depending on who’s counting what, the amount of reserve cash still available is between $500 to $900 billion. No wonder the current Personal Savings Rate remains less than the pre-pandemic average. The overall money supply is well-off its late 2021 peak but well above pre-pandemic expectations. In other words, while economic growth is soft, demand capacity is strong… and US consumers are spending.

There are admittedly mixed signals regarding fulfillment capacity. Stubborn — and occasional surprise — points of friction can be found. More than normal? More than pre-pandemic? Atypical given level of demand and labor patterns?

At cruising altitude, the Global Supply Chain Pressure Index suggests helpfully fluid conditions. The Cass Freight Index for May shipments was a comparatively healthy 1.166. Since recovery from the Great Recession, a “healthy” total business inventory to sales ratio has typically ranged between 1.35-to-1.45. Significant supply chain stress was signaled when the 2021 ratio fell below 1.3. So far in 2023, the total business inventory to sales ratio has been flirting with 1.4 to one. According to one Federal Reserve analysis supply constraints are much less likely to be disproportional contributors to PCE inflation than between 2020 and the first half of 2022.

Then consider the second chart below. In May 2019 roughly one-third of new domestic manufacturers orders could not be fulfilled during the survey period. Between May 2019 and May 2023 nominal (not-inflation-adjusted) demand grew by nearly one-fifth, yet the proportion of unfulfilled orders edged up barely two percent.

US consumers are pulling and have the capacity to continue at close to current velocity. Domestic push capacity is about as well-matched to current pull velocity as it was pre-pandemic.

[Updates below after the graphics] According to the National Weather Service, “an upper-level high over the south-central portion of the country, along with high temperatures and temperatures not cooling off much overnight, have contributed to Excessive Heat Watches/Warnings and Heat Advisories over most of Texas, southern New Mexico/Arizona, southeastern Oklahoma, Louisiana, Arkansas, Mississippi, and western Tennessee.” (See graphics below and specific forecasts here and here and here.)

The intensity of this week’s heat over such a wide area involving several significant population concentrations will stress grid capacity and continuity. (Significant force prompting wide-area, unpredictable demand for essentially fixed supply capacity (more).)

As noted last week, the ERCOT dashboard provides near real-time capacity, supply, and demand information. In recent days, solar has often exceeded anticipated capacity, while natural gas has contributed less. Wind has been, well, variable: some days delivering more than anticipated, other days less. Wind speeds could make a crucial difference this week. As of Sunday afternoon, Tuesday’s wind speeds are forecast to be ten or less miles-per-hour. Wednesday’s wind speeds are forecast at between 9 and 14 MPH. (More and more and more.) For current proportional flows, see “fuel mix” on the ERCOT Dashboard.

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June 27 Update: Monday’s demand for electricity across Texas fell just short of the record. Every type of fuel delivered as needed. Natural gas usage has hit a new record. According to S&P Global, “As the National Weather Service issues excessive heat warnings for dozens of counties across central Texas, gas-fired power burn demand has surged to an average 7.1 Bcf/d over the past week – about 1 Bcf/d above the prior three-year average and a new record high for late June… ” Tuesday’s projected supply from all sources exceeds projected demand by more than 10,000 MW despite even higher projected heat (here and here and here and here).

Bloomberg has a detailed piece on systemic problems complicating the contribution of natural gas to electric generation.

June 28 Update: Tuesday’s demand for electricity hit a new record (here and here and here and here). Despite the high heat and 80,875 MW pull, an almost 7000 MW buffer (operating reserve power) was maintained (more and more and more).

July 1 Update: S&P Global provides a concise after-action and look-ahead, “The heat wave that spread triple-digit high temperatures across the Electric Reliability Council of Texas footprint since mid-June has dissipated, slackening power demand forecasts for the first week of July, but substantially weaker wind forecasts have boosted day-ahead prices for July 3 delivery. CustomWeather forecast highs to average 96 degrees F July 3-7 for the Dallas metro area, up about 1.5 degrees from normal for those dates but down about 2.5 degrees from the National Weather Service’s average highs June 26-30. ERCOT’s 2:30 pm CT (June 30) load forecast shows peakloads averaging 76.3 GW July 3-7, down 4.7% from the July 26-30 average of about 80 GW.” I perceive that one factor that helped was a purposeful, prudent decision to over-estimate demand. This signal served to maximize production potential and output. This reflects the lessons of Winter Storms Uri and Elliott applied to summer extremes.

On Sunday, June 11 the driver of a gasoline tanker truck lost control on the Cottman Avenue exit from Interstate-95 in Philadelphia. The resulting fire caused the elevated deck of the northbound Interstate to collapse and seriously damaged the southbound deck. The driver did not survive. Since the accident, several miles of Interstate-95 have been closed to traffic.

City and state officials took quick action to divert traffic, extinguish the fire, establish detours, expand public transit options, and facilitate freight flows on other routes. Up to 160,000 vehicles per day often travel the disrupted route (AADT and more and more).  This includes up to 20,000 freight-hauling trucks per day.  On most days three-quarters of this freight volume is focused on serving the immediate urban matrix in Southeast Pennsylvania. 

Local carriers have — with difficulty — adapted to the impediment. Most long-distance flows actively avoided this densely traveled route even before the incident. 

On the best days, Interstate travel in the Philadelphia region can often be congested. Closure of this segment of I-95 has increased congestion and slowed both commuter and freight flows. Freight flows discharging into and out of central Philadelphia have been especially impacted.  While longer distance flows have been less impacted, the additional friction has time and cost implications that are acute for some carriers and consumers and have been accumulating across the region.

Federal, state, and local leaders all promised quick action to restore the lost network segment. Less than two weeks later, a temporary solution just reopened to flow. According to the Associated Press, “… Workers [have filled] the gap — which is roughly 100 feet (30 meters) long and 150 feet wide — by piling recycled foam glass aggregate into the underpass area, bringing it up to surface level and then paving it over so that three lanes of traffic can reopen each way…”

The glass aggregate is produced by AeroAggregates of North America. The company operates south of Philadelphia where it processes recycled glass bottles and jars into powder that is then heated into a foam to produce small, lightweight glass nuggets. The company’s CEO, “estimated that it will take about 100 box-truck loads to haul about 10,000 cubic yards (7,600 cubic meters) of the glass nuggets required for the I-95 project. The total weight is around 2,000 tons, a fraction of the weight of regular sand or dirt, meaning that it will take many fewer trucks to bring it to the site…” More on this innovative solution is available via the week-old local TV news report below.

This morning — Friday, June 23 — two fire-trucks were the first two vehicles to cross the reopened section (more and more).

Resilience implications: The importance of this channel — this concentrated capacity — was widely recognized by both private and public sectors. Coordinated intergovernmental funding and action was taken to expedite mitigation. Private sector flows adapted as possible. Public sector decision-makers sought out innovative means of reopening the channel. Upstream has now reclaimed its downstream capacity in less than two weeks. It does not always happen this way. It is absolutely worth celebrating when it does.

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June 28 Update: Very nice after-action from Bloomberg. Here’s a taste: “The fast feat was “a small miracle” in many respects. What made it possible: emergency, no-bid contracts, around-the-clock repair crews, a guarantee from the federal government to pick up the check, and no small amount of Rust Belt ingenuity.”

September 3 Update: In late August the Washington Post ran a related story headlined: “Avoiding ‘carmageddon’ after the I-95 collapse“. Some details confirming what is outlined above.