Supply Chain Resilience

Despite my less frequent posts I have heard from some surprisingly persistent readers. They have each asked for my take on the Trump tariff proposals (here and here and here and here among many more).

Mr. Trump is not yet President. He is well-known for aggressive negotiation tactics. What is promised — threatened — often morphs to close a deal. So, any speculation by me regarding future tariff impacts on Supply Chain Resilience would be mostly noise. Anticipating the strategic threat certainly reinforces principles of capacity diversification and avoiding excess capacity concentration. This is true whether the threat is tariffs, typhoons, or terrorism…

That acknowledged, I will note that, first, many players are making forward-leaning procurements to receive imported products/components before Mr. Trump can act. December and first-half-January container numbers should be unusually strong. Second, supply chains prefer open, flexible, low-friction, high-confidence flows. Uncertainty and sudden impediments increase costs, time-expended, and — often — congestion. Where replacement products and channels exist, adaptation will happen — how long it will take and how costly is very tough to predict.

More later, though probably not before next month. But thanks for asking.

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I’m not the only one not talking. The International Longshoremen’s Association (ILA) is not talking to the US Maritime Alliance (operators of US East Coast and Gulf Coast ports). The current contract extension closes on January 15. The parties have agreed to a 61.5 percent pay increase over six years. But talks have broken down over potential automation (more and more and more). While also a matter of negotiations, this is a much more binary risk to Supply Chain Resilience than more morphable tariff threats.

The fourth quarter has opened with abundant US flows. According to Bloomberg,

The Port of Long Beach moved nearly 1 million containers in October, beating a record set just two months ago. The surge was driven in part by importers diverting cargo to Southern California to avoid risk of delays from a labor dispute that shut every major port on the East and Gulf coasts for three days in early October. Other businesses have been bringing in goods to get ahead of the tariff increases promised by President-elect Donald Trump.  The Port of Los Angeles, which together with Long Beach account for roughly a third of all U.S. container imports, also beat records set during the pandemic in Q3. Businesses are poised to continue bringing in larger volumes of goods through the end of the year, which is normally a quieter time for the ports. The dockworkers’ dispute is still unresolved and, if there’s no agreement before January 15, there’s a possibility of a second port strike at East and Gulf coast ports early in 2025.

Second half 2024 US rail flows are much more robust than the first half (see chart below and more). Trying to work ahead of the threatened dock-workers strike may well keep volumes higher than most Decembers — and depending on if the strike is avoided or abbreviated, deepen the first quarter 2025 slowdown.

As these rail numbers indicate, intermodal trucking volumes have stayed positive, but long-haul trucking is still supply-heavy and demand-short. According to FreightWaves for the second week in November, “loads moving more than 800 miles, declined by 3.62% w/w.” The broader Cass Freight Index for October (released yesterday) also shows a continuing decline in shipping volumes — partially seasonal and partially reflecting a normalization of freight flows from August 2022 post-pandemic peaks (more). Reefer rates are climbing into the ramp to Thanksgiving, but most other categories have softened (more). DAT Trendlines reports more loads per tractor than last month or last year. But spot rates remain flat or softer.

Last week ACT research set out three key factors for the 2025 transportation sector:

Slower Freight Growth: Freight growth is projected to slow in 2025, driven by softer consumer demand and inventory adjustments across retail and manufacturing. As retailers stabilize their inventories after pandemic disruptions, freight volumes will reflect a more measured environment, with limited urgency in replenishment cycles. Capacity Rebalancing Continues: Overcapacity remains a significant challenge, particularly within the truckload market, where rebalancing efforts are ongoing. While private fleets continue to absorb a larger share of freight volume, diverting it from the spot market, the rate recovery remains prolonged. This dynamic will keep spot rates under pressure, likely delaying a clearer equilibrium until late 2025. Modest Spot Rate Gains: Truckload spot rates have seen gradual increases entering 2025, but upward momentum remains limited by ongoing overcapacity. Fleets are taking a conservative approach to expansion, waiting for further market stabilization. As inventories normalize and consumer demand stabilizes, a more favorable rate environment could emerge by late 2025, with potential demand increases in retail and e-commerce sectors driving freight needs.

Unless complicated by physical or policy impediments, freight outcomes — and most other aspects of supply — are driven by consumer demand. (And — consumer demand can even overcome many physical and policy impediments.) This morning Walmart released very upbeat Third Quarter results and upgraded its FY2025 guidance. This mirrors strong third quarter US GDP outputs (and a significant upside revision to 2023 outcomes). The upper two quintiles (more and more) of US consumers have more cash-on-hand and good cash-flow, which is — so far — translating into sustained pull for goods and services.

The remnants of Hurricane Helene (September 27-28) were especially destructive for higher elevations northeast of Asheville, North Carolina. A Baxter Healthcare facility in North Cove, North Carolina along the North Fork Catawba River, about 1500 feet above sea level, was hit especially hard (NC flood map). According to the American Hospital Association, “The plant manufactures 60% of the country’s supply of IV solutions and produces 1.5 million bags per day.” As a result, in early October several IV solutions were added to the FDA shortage list.

On September 29 Baxter reported, “heavy rain and storm surge triggered a levee breach, which led to water permeating the site. The bridges accessing the site have also been damaged.” (See picture below and several more pictures at HealthExec. Video of nearby here.) The temporary “rock bridge” shown in the second picture below was facilitating site access by the first week in October. Many employees were also disaster survivors dealing with damaged homes, lack of grid power, and disrupted transportation routes. Helene slashed the preexisting capacity of both this place and these people.

Intravenous solutions are essential medical goods. They are also low-margin, commoditized products with predictable demand that can be effectively transported long-distances. This practically ensures highly concentrated production capacity, such as the North Cove facility. North Cove is Baxter’s single largest manufacturing facility. Concentrated capacity involves concentrated risk. Whenever sixty-percent of national capacity is suddenly lost, there will be potentially serious consequences and urgent need for effective mitigation. In this case, mitigation measures included:

On October 3 Baxter announced, a temporary pause in shipping several products and an allocation plan. “… After review and consideration of available inventory and the medical necessity of the impacted products, a specific limit on what a customer can order has been implemented. This allocation helps limit stockpiling and increases the likelihood of equitable access to available products. The current allocation includes saline, dextrose and PD solution products manufactured in all sizes.” (More) The company and its competitors also announced plans to increase production at other sites. On October 9 FDA authorized Baxter to import replacement products from its manufacturing facilities outside the United States. The company reported, “by the end of the year, we project that collectively approximately 200 747 airplanes full of product will be delivered to the U.S., which represents nearly 18,000 tons of product from Europe and Asia.”

On October 14 Baxter announced, “A second temporary bridge is being installed at the site, thanks to the support of ASPR (Administration for Strategic Preparedness and Response), North Carolina Department of Transportation and our local team. This will enable additional truck and equipment traffic to enter and leave the site. In the interim, our first temporary bridge has already transported more than 350 truckloads of finished product off site to begin shipments to customers.” The evacuation of existing inventory from the North Cove facility — across the temporary bridge — was an essential step in maintaining minimum product flows. As both inventory evacuation and imports increased available supply allocation limits were loosened. (More here.)

On October 17 Baxter announced, “We achieved a critical milestone in our recovery efforts this week, with full restoration of utilities, including electric capability, water and wastewater treatment. IT infrastructure is also now fully operational.”

On October 28 the FDA announced “extended use dates for some parenteral drug products, after a review of the stability data submitted by Baxter International. Providers and patients that have the lot numbers in stock will be able to use them through the corresponding new use dates to help with supply.” (More here and here.)

On October 31, the company announced, “Baxter has restarted the highest-throughput IV solutions manufacturing line. At its peak operation (prior to Hurricane Helene), this line represented approximately 25% of the site’s total production and approximately 50% of the site’s production of one-liter IV solutions, the most commonly used size by hospitals and clinics.”

On November 7 Baxter announced that a second temporary bridge has been installed at the site. Since early October, the first temporary bridge allowed for the evacuation of more than 1000 truckloads of finished product. (More here )

Earlier this week Baxter restarted a second IV solutions manufacturing line. According to the company, “Together with the line restarted the week of Oct. 28, these two lines represent – at their peak operation (prior to Hurricane Helene) – approximately 50% of the site’s total production and approximately 85% of the site’s production of one-liter IV solutions, the most commonly used size by hospitals and clinics. “

To review: mitigation included 1) demand management through allocation and related product conservation efforts; 2) distribution management by building temporary bridges, evacuating surviving inventory, and allowing importation of related products from outside the United States; and 3) production management by rapid remediation of preexisting capacity. More liberal extended use dates are a form of inventory management that I would characterize as a midstream adjustment, but not a distribution management measure. In any case, upstream, midstream, and downstream mitigation has, so far, minimized clinical consequences. The real test will probably emerge in mid-to-late December and early in the New Year as inventory drawdowns begin to pinch the most. This week Baxter noted, “While we currently expect that all lines will be restarted by the end of the year, we do not yet have a timeline for when we expect North Cove production to be fully restored to pre-hurricane levels. ”

It is worth foot-stomping that restoration/recovery/remediation of preexisting capacity is usually the only effective means of Supply Chain Resilience at scale. It is worth highlighting — and celebrating — that private-public collaboration was effective in this case. Power restoration was prioritized. Temporary bridges were rapidly constructed. Regulatory flexibility was actively and creatively deployed to enhance access to constrained products.

Prevention questions worth asking: Is it wise to ever concentrate more than one-third production or distribution capacity in any single place? Is it wise to ever place a major capacity concentration in a significant flood plain or seismic zone or storm-surge risk area or name your most deadly poison. How can preventive wisdom be incentivized? How can lessons-learned be mindfully embraced and sustainably implemented?

Close up of northwest corner of Baxter North Cove facility, showing flooded employee parking lot to left. Roughly 500 feet from midstream of the North Fork Catawba River channel.

Temporary “rock bridge” under construction to reconnect Baxter facility to US Route 221

The Bureau of Economic Analysis report on September Personal Income and Outlays signaled healthy and growing demand. According to the BEA:

The $105.8 billion increase in current-dollar PCE in September reflected an increase of $72.1 billion in spending for services and an increase of $33.7 billion in spending for goods (table 2). Within services, the largest contributors to the increase were health care and housing and utilities (led by housing). Within goods, the largest contributors to the increase were other nondurable goods (led by prescription drugs), food and beverages, and motor vehicles and parts (led by new light trucks). These increases were partly offset by a decrease in gasoline and other energy goods.

This increased demand was paid for with higher wages (up 0.5 percent from August) and another slight decline in the personal saving rate. Even with strong demand, the inflation rate continued to moderate. The BEA finds, “From the same month one year ago, the PCE price index for September increased 2.1 percent. Prices for goods decreased 1.2 percent and prices for services increased 3.7 percent. Food prices increased 1.2 percent and energy prices decreased 8.1 percent. Excluding food and energy, the PCE price index increased 2.7 percent from one year ago.”

The chart below reflects inflation adjusted “real” personal consumption expenditures. The blue line is total real PCE. The red line is real PCE on Food-At-Home. To be very clear: spending due to inflation has been smoothed out of these outcomes. Overall PCE has recovered its long-term pre-pandemic incremental increase. Slightly more affluent folks expend slightly more on consuming goods and services. This is good news.

The red line is also good news, but more mysterious (at least to me). During the pandemic FAH purchases suddenly surged when Food-Away-From-Home was much less available and other forms of consumption were likewise constrained. But FAH consumption has stayed higher even as FAFH reopened and many splurged on other forms of “revenge spending.” Even while spending much more on eating out and often complaining about grocery price inflation, consumers continue to expend much more on inflation-adjusted grocery purchases than they did pre-pandemic.

On September 23 I posted on a prospective dock strike. Four weeks later I resume blogging following a brief dock strike, two major hurricanes (Helene and Milton), another grim permutation of the Gaza crisis, and plenty of evidence of persistently strong flows — almost everywhere except where most needed.

It is a month-long story of bottlenecks becoming chokepoints.

Post-Helene In the Western Carolinas and Eastern Tennessee chokepoints emerged for water, food, fuel, and more. Food and fuel were unchoked within a couple of days. Water has been much more difficult. In Central Florida the fuel network was seriously threatened by both Helene and Milton. It was hit but did not shatter. Some day we will not be so lucky.

For purposes of Supply Chain Resilience, flow is the motion of specific volumes of selected material intended to fulfill expressed demand (usually effectual demand ) at specific places and times. A flow network emerges from myriad independent agents working to move different materials at different volumes and different velocities while sharing adjacent space, some principal modalities, and many closely connected sources of demand.

So, for example, trucks are used to move various different materials. Regardless of material being moved or the final delivery destination, a high proportion of trucks will often use the same high-capacity roadways, bridges, and truck-stops. Both human-built and natural networks tend toward these capacity concentrations, clusters, nodes with channels, or modules. In many cases the most influential modules co-locate to produce a network with hourglass characteristics.

Here’s how Constantine Dovrolis, a network scientist at Georgia Tech, and his co-authors explain the modularization of hourglass structures:

…many complex systems, both in technology and nature, exhibit modularity: independent modules, each of them providing a certain function, are combined together to perform more complex functions. Additionally, modular systems are also organized in a hierarchical way: smaller modules are used within larger modules recursively. Examples of such systems exist in a wide range of environments: in natural systems, it is believed that hierarchical modularity enhances evolvability (the ability of the system to adapt to new environments with minimal changes) and robustness (the ability to maintain the current status in the presence of internal or external variations). In the technological world, hierarchically modular designs are preferred in terms of design and development cost, easier maintenance and agility (e.g. less effort in producing future versions of a software), and better abstraction of the system design.  

Big flows almost always depend on manifold discreet interactions. A driver needs to get to the fuel tanker truck. The fuel tanker itself needs fuel to go. The truck needs most of its tires to stay inflated. The truck needs roads to be accessible between where it was parked and the fuel rack.  Grid or emergency power is needed to pump the fuel to the rack and into the tanker truck.  The financial transaction system needs to still work or be quickly replaced. Roads to the retail location need to be open. Et cetera, etc.  Each of these independent functions are often modularized to perform more complex functions.

To reduce costs and speed fulfillment, demand bottlenecks are fused to supply bottlenecks becoming an hourglass. Smooth, continual, sustainable, timely flows are the result. But the neck of the hourglass can be especially vulnerable. If the neck is clogged or broken, flow is stopped.

Over the last month, in Asheville, North Carolina, Greeneville Tennessee, Gaza, and several maritime ports, necks were broken. Some healed fast. Some are still being mended.

One example: The Central Florida Pipeline. More than 40 percent of all refined fuels consumed in Florida usually flow through Tampa Bay ports. This Tampa-sourced pipeline supplies an even larger proportion of fuel consumption in the Orlando metro-area. On September 29 Hurricane Helene’s storm surge disrupted pipeline operations for at least three days (here and here). Then on October 8 the pipeline was preemptively shutdown for the approach of Hurricane Milton (more). The gasoline pipe was reopened on Friday night, October 10. The diesel and jet-fuel pipe did not reopen for another two or three days, more precisely when or how is not yet clear to me. I have not yet confirmed the cause for this delay.

Port Tampa Bay, its terminal racks, and loading bays are the fuel hub for Gulf Coast Florida. The Central Florida Pipeline from Port Tampa Bay to Taft Terminal near Orlando International Airport is crucial to fuel accessibility across Central Florida. Continuity of flows from these channels and racks is especially important to support emergency power generation when the grid is gone including for ongoing water pumping and food distribution.

A time-extended – weeks long – loss of the concentrated fuel capacity at Tampa is a complex network adaptation challenge.  If Port Canaveral is (as with Milton) simultaneously targeted/constrained, it becomes almost impossible to meaningfully mitigate lost network capacity. A wide area event impacting the heart of the Interstate-4 corridor (that Milton paralleled slightly to the south) and featuring an extended grid outage, would result in most retail grocery stores being unable to continue operations on emergency power within 48 to 72 hours.  Given other high priority demands on limited fuels, it is even possible that grocery distribution centers would be unable to continue operations.

On October 9 at 0500 eastern the National Hurricane Center reported, “Milton has been maintaining its strength as a catastrophic category 5 hurricane… Damaging winds, life-threatening storm surge, and heavy rainfall will extend well outside the forecast cone… Milton has the potential to be one of the most destructive hurricanes on record for west-central Florida.”  Less than 15 hours before landfall many models included strong probabilities for a route that would have seriously disrupted and perhaps caused a hard stop of fuel and food supply chains serving much of Central Gulf Coast Florida and extending east to Metro-Orlando (more).

On October 10 Mansfield Energy, a national energy distributor, based in the Southeast United States, reported on Milton to its clients, “A last-minute turn southward by the storm helped avert a worst-case scenario for fuel infrastructure of a direct strike on Tampa, with the storm making landfall roughly 40 miles south of the city. Given the storm’s counterclockwise rotation, the worst storm surge came to the south, away from Tampa Bay.”

These sorts of high-capacity, high proportion bottlenecks are core characteristics of contemporary high volume, high velocity supply chains. Other examples are water treatment plants, grocery distribution centers, and major freight routes. When and where these bottlenecks survive, supply chains have lots of options. When and where these hourglass necks are broken, options shrivel.

My reductionist formula for Supply Chain Resilience: Vital bottlenecks are vulnerable to becoming deadly chokepoints. So, find the high proportion capacity concentrations and their essential functions.  Identify the related interdependencies.  Identify Sentinels to help understand and intervene where and when needed.  Watch, listen, think, act. Repeat as necessary.

NOAA Worst Case Projections for Storm Surge at Tampa Bay

Path of Hurricane Milton

Developed by Bloomberg