Supply Chain Resilience

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.

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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.]

The World Health Organization has warned, “Europe is back at the epicenter of the pandemic.” (More)

Germany appears to have a fourth wave starting.

Despite widespread vaccinations, British hospitalizations have remained persistently high. The Guardian editorializes, “Mandatory masking on public transport and in places such as supermarkets should never have been dropped in England and must be readopted: it is a minor inconvenience with major dividends.”

China strikes many as over-reacting, but the increased case-counts are real enough.

The situation in Russia is very tough. Vaccinations have lagged. Non-pharmaceutical mitigation is uneven. Hospitals are filling and deaths are spiking.

For several months, I have been tracking US, UK, and Israel covid hospitalizations. Following is a display of a logarithmic demand curve for hospitalizations in these three nations, now plus Canada, France, Italy, and Spain. These data are reasonably accurate. I don’t have confidence in public data from China and Russia. I can’t — yet — find directly comparable data on hospitalizations in Germany.

My supply chain — or better: demand and supply network — angle on the pandemic emphasizes the need to effectively manage demand for hospitalization. From a network perspective, supply of hospital care is the bottleneck that most often requires mindful exploiting (ala Goldratt). When hospitals are overwhelmed the network experiences more disease and death. When demand for hospital care remains within supply capacity, disease and death can be systematically mitigated across populations.

Hospital congestion is bad. Hospital flow is good. Local to regional demand is the flow factor most readily influenced. As is often the case, supply capacity is finite. Available medical staff is often the acute rate-limiting factor for hospital care.

Most people infected with covid-19 have not needed hospitalization or even much medical care. But a significant fraction of those infected have experienced severe illness (here and here and please see this caveat). The elderly, those with preexisting respiratory conditions, and the immuno-compromised are especially likely to require hospitalization. There have also been mysteriously deadly cases involving the young and seemingly healthy.

Vaccination, avoiding crowded interior spaces, social distancing, reduced circulation, and facial coverings are demand management techniques for slowing and containing transmission vectors across populations. The “consumer” often perceives these as self-protecting behaviors. But from a flow perspective, these are other-protecting measures, even network-protecting measures. Being vaccinated makes it much less likely that a person will transmit the virus to others. Encounters between vaccinated persons are much less likely to give the virus a mutation opportunity. Less transmission and less mutation equals less demand for hospitalization.

I have been tracking hospitalization rates in Israel, United Kingdom, and the United States. Obviously, these are three very different contexts. But each nation was early to make vaccines available and vaccination was well-along before or early-in the spread of the Delta Variant. Data quality on hospitalization can be a problem, but Israel’s small and sophisticated healthcare network may have the best data-integrity in the world. The British National Health Service is also data-savvy. The fractured US healthcare system creates plenty of data challenges, but overtime more accurate, real-time outcomes are being reported.

On October 19 Israel had at least 540 people hospitalized with covid, the UK (mostly England) had about 7000, and the United States had almost 52,000 people hospitalized with confirmed cases of covid. While the raw numbers are hard to compare, I find the logarithmic display (as below) — showing the rate of change — to offer something close to comparable demand curves for hospitalization. All three are doing better than late July or early August. But the numbers remain much higher than had been hoped when vaccination campaigns began. The UK’s persisting plateau is of particular concern.

According to The Financial Times (October 15):

The UK’s weekly death rate stands at 12 per million, three times the level of other major European nations, while hospitalisations have risen to eight Covid-related admissions a week per 100,000 people, six times the rate on the continent. The decision to end compulsory mask-wearing and to pause plans for vaccine passports in England has made the British government an outlier for its management of the pandemic and could account for the worsening trends, according to scientific experts. (More)

According to Reuters, “Four months into one of its worst COVID-19 outbreaks, Israel is seeing a sharp drop in new infections and severe illness, aided by its use of vaccine boosters, vaccine passports and mask mandates, scientists and health officials said.

On October 18 the FT also reported:

Scientists are anxiously tracking a descendant of the Delta coronavirus, which is responsible for a growing proportion of Covid-19 cases in the UK, and could be more infectious than the original Delta variant, they say. This AY.4.2 subvariant has only recently been recognised by virologists who follow the genetic evolution of Delta but it already accounts for almost 10 per cent of UK cases. Its prevalence is increasing rapidly, though not as fast as the original Delta variant when it reached Britain from India early this year. (More and more and more.)

Israel has just confirmed its first case of AY.4.2. So far six have been confirmed in the United States. Waaay too soon to raise any alarms.

Quite the contrary, I will confess that my attitude toward covid has shifted in the last two or three weeks. I want to acknowledge that a combination of vaccination and natural immunity — assisted by modest behavioral adjustments — could reduce US viral risks to something akin to automobile injury and death (even less for vaccinated persons). Covid and car wrecks could even compete over bad luck and bad behavior as co-conspirators. (More)

But while my attitude is shifting, my considered judgment is not yet persuaded. It is waaay too soon to decide the next mutation (or two) will not be worse than Delta. As the contrasting accounts of Israel and the UK suggest, it is also waaay too soon to put aside behavioral cautions. Credible data does not (yet) signal anything more than continued uncertainty. So… if you can, get vaccinated if you are not; if you have been vaccinated, prepare to get your booster; avoid interior crowds; give other folks plenty of space; minimize travel; and cover your nose and mouth when you cannot avoid sharing interior spaces. When for practical or social reasons you cannot take all of these network-protecting, other-protecting steps, please do what you can whenever you can.