Supply Chain Resilience

In another seven days US Atlantic and Gulf coast ports may be hit by a dock strike. (Here and here and here and here and here and here.)

This possibility has been recognized all year. It is likely that higher-than-usual summertime flows into these same ports reflect supply chain front-loading (more). Recent record volumes arriving into the ports of LA and Long Beach probably represent some proactive redirection of flows (here and here). There is considerable variation — and varied constraints — among alternative freight channels (more and more).

Despite mitigation efforts, any extended strike will seriously disrupt many supply chains. Whenever this scope and scale of flow is disrupted otherwise hidden pinch-points will be exposed. We can watch carefully as the network shudders, shakes, and attempts to adapt. These behaviors and outcomes will help us understand dynamics that are too often obscured. This understanding can help us help the network to effectively adapt.

Even a short strike will prompt network congestion (more). As seen so clearly during the pandemic, this will take considerable time to clear. How much congestion, how far upstream from idle ports is something we can model and anticipate. I will be surprised if anyone can predict anything close to complete outcomes. It has been too long — and the supply chain has changed too much — since the last large scale US dock strike.

How other unions (here and here) and non-union workers react to a dock strike can make a bad situation even worse. But anytime this much capacity is suddenly extracted from midstream flows the outcome will be tough. This labor dispute could slash over half of US maritime flows. Especially when preexisting capacity is concentrated in so few high capacity nodes, resilient options are scarce.

The Biden administration was active and successful in a 2023 effort to avoid a strike of west coast dock workers (here and here and here). It is not yet clear such efforts will be attempted in the next few days (here). But the Biden administration has said it will not invoke a “cooling off period” to delay the Atlantic and Gulf coast labor action. The International Longshoremen’s Association has promised slow-downs if a cooling off period is imposed. The scuttlebutt that comes my way expects a strike (for both good and bad reasons) and once the strike begins expects a painfully long strike (the result of very human reasons — such as pride, anger, and fear — that will intensify the longer the strike continues).

Next week there will still be abundant supplies. There will still be enormous demand. The infrastructure and functionality to match this demand with that supply will persist. In case of a strike, however, network capacity will suddenly be cut basically in half. Demand will often not be fulfilled. Prices for still available flows will increase. Those on strike will not be the only ones losing a paycheck as flows into and out of major ports slow and eventually stop.

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September 24 Update: Bloomberg reports, “Just as US policymakers shift focus from curbing inflation to shoring up the job market, the economy faces a jolt that threatens the kind of supply-chain disruption and consumer discontent rife during the pandemic. This time, the shock looms just weeks before a knife-edged election. Some 45,000 dockworkers at every major eastern and Gulf coast  port are threatening to strike Oct. 1. With talks at a stalemate since June, industry officials now believe a strike is inevitable, and ocean carriers and port operators have started sending out customer advisories and making contingency plans.”

Tomorrow — Tuesday, September 10 — the US Department of Commerce and the Council on Foreign Relations will host a Supply Chain Summit. It is organized to explore proactive strategies to strengthen global supply chain resilience. At the link you can still register to participate virtually.

Rana Foroohar, one of my favorite thinkers and writers, will moderate a morning panel. In today’s FT she writes:

US commerce secretary Gina Raimondo… told me last week that the biggest surprise of her tenure was learning “just how unprepared the federal government was to identify and react to supply chain disruptions, and how unsophisticated the approach to this has been for so long”. Part of this is down to the fact that the entities holding the best and most granular information about supply chains are private companies. They tend to be looking for individual risks in specific areas, rather than systemic issues across the economy. Governments, on the other hand, may be able to identify the need for more resilience in areas that are crucial for economic or national security — such as semiconductors or pharmaceuticals — but have little understanding of the particulars of each supply chain, or how they might interact with areas like logistics, transport, energy or power in the midst of a crisis.

This summit is being hosted to enhance understanding. A Department of Commerce Supply Chain Center has been created. Other federal agencies have created similar functions. Various data gathering efforts and analytical approaches are underway. Over the years I have contributed some thoughts about how to be more data-informed regarding big flows under serious stress.

It is important work. We are early in the work. We need to work smart — both near-term and long-term.

Contemporary high volume, high velocity demand and supply networks are Complex Adaptive Systems — not neat Newtonian machines. The more granular our flow data, the more dynamic — and paradoxically — unpredictable our outcomes. Probabilities can be estimated and assessed. More and better data will improve our sense of probabilities. But strict predictability will remain elusive.

Several weeks ago a client asked me to help them look at an emerging risk to some crucial flows. Other outsiders were also asked to offer insights. I tend to focus on midstream flows, especially the confluence of several flows (aka capacity concentrations). One of the others generated a sizing and siting of downstream — fairly granular — demand. I deduce midstream probabilities from diverse indicators. They induce demand dynamics from specific, carefully curated data sources. I hope to be data-informed. These others are definitely data-driven.

In this particular case, for a host of idiosyncratic reasons, the data sources available were seriously wrong. Unfortunately, the data curators and analysts involved did not have a sufficient contextual understanding to recognize several signals of data deficiency. Instead of running the results, recognizing problems, and trying a different way to slice and dice their data, they generated an authoritative report of initial results.

The client did not need me to point out problems. The client understood their own demand well-enough to immediately suss-out fundamental problems in the data-driven analysis. It was embarrassing for everyone. But quickly recognizing the problems was much better than making decisions off wildly skewed angles on reality.

The client was wise in involving several different angles on their potential problem. The client was wise in not expecting a silver bullet. This client’s senior decision-makers are well-informed regarding context. More than many others, these decision-makers are very curious and consistently humble (somehow those two characteristics seem seldom-enough compatible).

I have seen this client be decisive. But they are, if anything, unusually patient. Their corporate culture values shaping and recognizing the “right time” for making and executing a decision. They watch their flows — upstream, midstream, and downstream. They listen to their suppliers, stakeholders, and customers.

This client brings well-informed, well-conceived deniable hypotheses to potential problems. They actively probe context. They adapt their hypotheses to emerging signals. They act courageously, continue to watch/listen for outcomes, and adjust accordingly. They are not afraid of being wrong. They assume that even when they are right, their actions will create outcomes requiring adaptation. The goal is less a matter of being right or avoiding wrong and much more about being effective in context.

Of course data is needed to make constructive decisions. More quantitative and qualitative data is usually better than less. But no matter how much granular data is eventually gathered by all the fabulous sensors distributed across our 2054 Internet-Of-Things, the decisions to be made — by human wet-ware or the most advanced AI — will still require a sense of context, purpose, and emergence.

Data gathering, creation, and analysis is tough. Synthesizing outcomes in meaningful context to advance constructive purposes is crucial.

In July 2019 residents of the United States, according to the Bureau of Economic Analysis, expended 1, 081 billion “real” inflation-adjusted dollars on Food-At-Home. This July we spent 1, 173 billion real dollars on groceries and related, about eight percent more. With inflation included, in July 2024 we spent almost 26 percent more on groceries than in July 2019. This compares to a roughly 19 percent inflation rate for all personal consumption expenditures. See chart below where blue is nominal dollars expended on groceries and red is real dollars (chained 2017 dollars).

There is disagreement regarding the cause of late-pandemic and post-pandemic inflation. There is even more controversy regarding food price increases (at link see August 28 Update below video). The classic cause of inflation is a mismatch of demand and supply where “too much” demand is chasing “too little” supply. The more time-extended this mismatch the more inflation. The more intense — even price-insensitive — the demand, the higher prices will track.

Before the pandemic many Americans spent over half their food dollars eating away from home. From March 2020 through the end of 2021 spending on Food-Away-From-Home was disrupted. Consumers shifted their food dollars from eating out to eating in. This created a classic mismatch of demand and supply. Food prices increased accordingly (again, see chart below).

What has surprised me is how demand for Food-At-Home has remained well above pre-pandemic patterns even as consumers returned to eating out. By mid-summer 2021 US consumers were spending about the same nominal dollars at “food and beverages places” as we were pre-pandemic (today we are spending one-fifth more eating out than in July 2021). Late summer 2021 we finally stopped spending consistently more real dollars on groceries. Between January 2022 and March 2023 we reduced our real grocery spending by almost five percent. This makes sense. This reflects our return to restaurants, fast food, and other Food-Away-From-Home. I expected this gradual rebalancing to continue.

But by mid-Spring 2023 this spending adjustment stopped. Since this Spring — even as food inflation has flattened — US consumers have started spending more real dollars at the grocery store, even as we spend more more than ever before on eating out.

In late July and early August McKinsey and Company interviewed a statistically valid sample of US consumers. Among the questions asked was, “With regard to products and services you will spend money on, do you plan to splurge/treat yourself over the next 3 months? For example, are there categories of products or services where you expect to make more expensive purchases than normal or purchase something to treat yourself?” Food is the most popular answer, see second chart below. Among Millennials and GenX consumers food is even more a “treat” than for others. According to this and similar findings, food is now less a staple and much more a discretionary expense — even a small luxury.

A supply chain for staples is different than a supply chain for luxury goods. Demand for staples is — or usually has been — less volatile than that for luxury. A paternal great-grandfather was a tailor. My grandfather explained that he became a grocer, “because I was the best dressed kid in school but was always hungry.” But for the last generation “Center Store” — where most of the staples are shelved — has consistently declined as a proportion of total sales. Fresh and prepared foods are the profit leaders. Is Food-At-Home an emerging luxury category? Produce, cheese, olive, and sushi cases suggest yes. The proliferation of and throughput at food banks suggest no.

High volume, high velocity supplies originating from many different places and flowing to many different places with sustained, demonstrable, effectual demand implies an innately resilient system. So far, many luxury-oriented “treats” have been well-integrated into nodes and channels that deliver staples. Center-Store flows have not become appreciably less resilient and supply chains for fresh, prepared, and other periphery-products have become more resilient. Everything is more complicated, costly, and complex (which has resilience implications) and the system-as-system is robust.

The food production and logistics capabilities that supplied my grandfather’s grocery stores could never have fulfilled contemporary density, diversity, and intensity of demand — at any reasonable price-point. Today’s supply networks have demonstrated amazing resilience when 1) effectual demand persists and 2) capacity concentrations continue operations. If effectual demand is lost, but capacity concentrations persist , flows can continue and often will continue unless the network determines demand is not coming back anytime soon.

Loss of upstream or midstream capacity is more quickly and certainly a fatal blow. It depends on context — especially distance from other sources of capacity — but once food networks experience long-term loss of between one-quarter and one-third of capacity, the preexisting flow network is unlikely to survive. A new network may form around surviving push capacity and continued demand pull, but at least in my mind this is less a matter of resilience and much more a matter of triage. It is also true that in the thirty-plus years since the emergence of the contemporary food supply chain we have not experienced anything close to the loss of such a huge capacity proportion for a full network over a wide area. I would prefer to avoid any significant opportunity to prove or disprove this hypothesis.

Most freight movements are local. But local deliveries often depend on significant upstream flows. Below is a map that the US Bureau of Transportation Statistics developed showing upstream flows by proportional ton for the United States. Some crucial domestic flows depend on global flows (mostly maritime flows) suggested by the screen capture farther below of August 22’s ocean vessel traffic.

Late in the pandemic volumes delivered to US east coast ports — through both the Panama and Suez canals — grew in part to avoid congestion at US west coast ports. Flows through the Suez Canal now have dwindled due to the Houthi threat in the Red Sea. Flows around the Cape of Good Hope have surged, but mostly toward European destinations. The transpacific channel, especially into the ports of Los Angeles and Long Beach, has grown for many reasons including a possible October 1 dockworkers strike for US east coast and Gulf ports. The continuing risk of a rail shutdown in Canada has pointed even more vessels toward US west coast ports.

Pandemic era congestion and other sources of domestic freight friction prompted an expansion in US freight capacity. In December 2019 there were just about 1.65 million carriers in the United States. By December 2022 there were over 2 million carriers. That’s where the US has more or less remained even as the number of trucks, drivers, and hours driven has slowly declined from a summer 2022 peak. (Here and here and here.) Despite softening consumer demand, volatile fuel costs, and many other pinch-points, US freight capacity continues to be robust — probably even a bit higher than needed.

Demand growth for freight has slowed, especially for direct purchases of goods. But demand remains at least five percent above pre-pandemic trend even for goods. Food inflation is way down. Upstream food flows are abundant. Fuel prices and inflation are not flat, but despite geopolitical and other storms fuel stocks and flows have been entirely sufficient. Affordable fuel costs and persistent demand keep trucks and truckers hauling. Tender rejection rates are below five percent in most markets.

Todd Davis at Freightwaves comments, “intermodal capacity appears to be more capable of handling current levels of demand and may keep the truckload market from experiencing significant tightening. A caveat: The bulk of hurricane season lands this time of year.”

So far Hurricanes Beryl, Debby, and Ernesto have claimed my sustained attention. Beryl was the earliest-forming CAT5 on record. All three caused significant flooding. Two of the three (Beryl and Ernesto) resulted in extended, wide-area US grid loss. Yesterday Accuweather forecast six to ten named Atlantic tropical storms for September.

Where there is extensive and extended grid loss, water, food, and fuel supply chains are disrupted. If storm damage and grid loss reduces cell coverage and/or other telecommunications, supply will be more difficult to calibrate with demand. If major public water systems or grocery distribution centers are taken down this will be shock to any regional ecosystem of supply. As previous posts have emphasized, in the United States there is substantive Supply Chain Resilience unless major capacity concentrations — nodes or channels or modes — are lost.

Water, food, and fuel capacity concentrations — and the channels by which each capacity flows — are where I focus. All of these capacity concentrations are important. But fuel is especially important. When the grid is gone, fuel for the emergency generators supporting water pumps and treatment facilities is how water flows persist. Trucks and truckers hauling food and bottled water can be creative and courageous finding alternative routes, but even the most tenacious trucker can’t make up for lack of fuel. So, inside every cone of uncertainty where are the refineries, pipelines, fuel storage facilities, and loading racks? Do they survive? Is the grid still connected — if not, how quickly can it be? What can be done to facilitate continuous flow of fuel to support continued flows of water and food and more?

The second half of 2024 has opened with moderating pull and sustainable push for food, energy, and most aspects of crucial freight. The Red Sea (Suez Canal) pinch point continues to prompt higher prices and some Asia-Europe port congestion. But current — and prospective — flows are mostly well-calibrated with fundamental demand.

Food Flows

Once a month I try to track yield projections and anticipated prices for wheat, rice, corn, and beans as rough upstream indicators and compare this upstream capacity with close-to-actual downstream demand. My purpose is to discern the match or mis-match of upstream push to downstream pull.  The global market often reflects price functions (greed, fear, surprise, etc.) that I don’t follow close enough to have a well-informed judgment (many readers will have a much better sense of these factors). But if prices are stable or declining or slowly increasing, that is usually a dependable signal that supply is reasonably calibrated for most effectual demand. Based mostly on outcomes during the second half of June, the USDA’s World Agricultural Supply and Demand Estimates reports:

This month’s 2024/25 U.S. corn outlook is for larger supplies, greater domestic use and exports, and slightly lower ending stocks. Corn beginning stocks are lowered 145 million bushels, mostly reflecting a greater use forecast for 2023/24. Exports are raised 75 million bushels based on current outstanding sales and shipments to date. Feed and residual use is up 75 million bushels based on indicated disappearance in the June Grain Stocks report. Corn production for 2024/25 is forecast up 240 million bushels on greater planted and harvested area from the June Acreage report. The yield is unchanged at 181.0 bushels per acre. Total use is raised 100 million bushels with increases to both feed and residual use and exports based on larger supplies and lower expected prices. With use rising slightly more than supply, ending stocks are down 5 million bushels. The season-average farm price received by producers is lowered 10 cents to $4.30 per bushel.  

The same USDA report says, US “Soybean production is projected at 4.4 billion bushels, down 15 million on lower harvested area. Harvested area, forecast at 85.3 million acres in the June Acreage report, is down 0.3 million from last month. The soybean yield forecast is unchanged at 52.0 bushels per acre. With slightly lower beginning stocks, reduced production, and unchanged use, ending stocks for 2024/25 are projected at 435 million bushels, down 20 million from last month. The U.S. season-average soybean price for 2024/25 is forecast at $11.10 per bushel, down $0.10 from last month.”  Both wheat and rice yields — and overall supplies — are expected to increase slightly.

Recent global crop conditions are better than the last couple of years in most places. (Here’s a helpful map.)  La Nina’s return could impact the northern hemisphere’s harvest season. These El Nino to La Nina transitions have often reduced actual yields below forecast by five to ten percent (with related price increases). But I consider it too early to confidently project where, when, or how this climate transition might impact the second-half’s balance of food demand and supply.

Energy Flows

The Energy Information Administration reports:

U.S. power plant operators generated 6.9 million megawatthours (MWh) of electricity from natural gas on a daily basis in the Lower 48 states on July 9, 2024, probably the most in history and certainly since at least January 1, 2019, when we [EIA] began to collect hourly data about natural gas generation. The spike in natural gas-fired generation on July 9 was because of both high temperatures across most of the country and a steep drop in wind generation. According to the National Weather Service, most of the United States experienced temperatures well above average on July 9, 2024. Temperatures were particularly high on the West Coast and East Coast. Wind generation in the Lower 48 states totaled 0.3 million MWh on July 9, 2024, much lower than the 1.3 million MWh daily average in June 2024.

Despite this demand spike, US natural gas prices have remained comparatively low. Natural gas stocks in Europe are well above long-time seasonal averages. East Asian natural gas demand in 2024 has increased but unevenly and more modestly than many expected (more and more).

Crude oil prices have been remarkably calm (see chart below), especially given so many geopolitical uncertainties. Yesterday  CNBC reported, “U.S. crude fell more than 1% on Friday, posting a third weekly decline as worries about demand in China outweigh strong economic growth in the U.S. West Texas Intermediate oil fell 3.7% this week, while Brent dropped 1.8%. The U.S. economy grew at a 2.8% pace in the second quarter, much stronger than expected. But oil imports to China were down 10.7% year over year in June, and refined product imports fell 32% during the same period, according to customs data. China is the world’s largest crude importer.”  

Despite various efforts to reduce supply and increase oil prices, the global market for refined petroleum products has — for the moment — achieved a rough equilibrium that can supply energy at an affordable price for most needs.  The New York Times recently commented, “That the price and demand for oil have been so strong suggests that the shift to renewable energy and electric vehicles will take longer and be more bumpy than some climate activists and world leaders once hoped.”

In 2023 a bit more than one-fifth of electricity consumed in the United States was generated by renewables.  Electric power consumption is growing fast in many places.  The US proportion delivered by renewables is steadily growing, though fast-enough remains an open question.  About half of the European Union’s grid output depends on renewables.  Global deployment of renewables — outside China — is proceeding at a pace that some consider inadequate to avoid even more extreme climate consequences.

Freight Flows

Earlier this year constrained capacity at the Panama and Suez canals caused delays, congestion, and increased costs worldwide.  Better rains have since increased throughput at Panama.  Houthi attacks continue to slash Suez sailings.  But maritime flows have successfully shifted to other routes.  This shift has reduced — and complicated — velocity with a predictable months-long impact on volumes (and prices).  But in the last couple of weeks spot market prices indicate the higher pressure flows are beginning to even-out.  On July 26 Loadstar reported, “Drewry’s World Container Index (WCI) Shanghai-Los Angeles declined 5% week on week, to yesterday’s level of $6,934 per 40ft, while Xeneta’s transpacific XSI saw a 6% drop, to $7,322 per 40ft, and the Freightos FBX dropped 4%, to $7,738 per 40ft. Meanwhile, pricing on the Asia-North Europe route was either flat or saw slight declines: the WCI and XSI were flat, at $8,260 and $8,474 per 40ft respectively; while the FBX dropped 2% week on week, to finish at $8,420 per 40ft.”

US freight flows reflect sustained — if moderated — consumer demand.   The frontloading of holiday imports is requiring more trucking capacity than can often be the case later in the summer. Traditional rail and truck shipment metrics continue what seems to be a slow, systemic decline.  But Todd Davis at FreightWaves comments, “June was possibly the best month for freight in nearly two years from a service provider perspective. Tender volumes hit their highest monthly values since August 2022, and rejection rates breached 6% for the first time since the same month. While neither of these values broke any records, both are signs of a healthier freight market.” 

For the last two years, by late July  Mississippi River levels have gotten iffy for barge movements.  But  this year — so far — river levels (here) are one-third higher or better along much of the Lower Mississippi.  

As of the end of June the New York Fed’s Global Supply Chain Pressure Index was about as close to its historic average as it gets.

Push Reflects Pull

Global flows are huge, but without much pent-up demand.  China’s economy is growing, but not as fast as pre-pandemic.  Japan’s GDP prospects are for no-growth or worse.  The Eurozone’s economy has improved, but is not expected to grow much better than Japan’s (more).  Among the biggest economies, only the US has recently shown the ability to surprise to the upside.  Real (inflation adjusted) US Personal Consumption Expenditures (see second chart below) are mostly maintaining their post-pandemic levels — with modest rates of growth.

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July 28 Update: About 12 hours after I posted the above, the Financial Times published a lead story headlined, “US consumers show signs of flagging.” The second and third sentences read, “This week’s shaky start to the corporate earnings season has fuelled concerns that consumer strength has peaked, despite data on Thursday showing stronger than expected GDP growth in the second quarter, thanks in part to consumption spending. Kathy Bostjancic, chief economist at Nationwide Mutual, said she expected “consumers to rein in their spending as we head through the second half of this year” because “pandemic savings [are] depleted, lower income households increasingly maxed-out on credit and . . . employment growth will continue to cool”.

Cooling, slowing, walking not running are all consistent with what I also perceive for US demand pull. This means less pressure on supply chain volumes and velocity, more opportunity to invest in resilience, efficiency, and serving what is still very strong demand.

Last week McKinsey reported, “The decline in postpandemic logistics funding continues. After reaching an unprecedented $25.6 billion in 2021, venture funding for logistics start-ups fell to just $2.9 billion in 2023—a two-year plunge of nearly 90 percent, and the lowest level of funding since 2015.”

The consultancy offers several credible explanations for the decline. I will offer another: between 2020 and 2021 VC funding for logistics doubled from about $13 billion to almost $26 billion. Many of those investments have not paid off. Many of those investments were poorly conceived. Too many of those investments were misspent in the maelstrom of pandemic volatility. Manic demand was often prompting schizoid supply. Investors are pausing to assess lessons-learned.

There is absolutely the need (and opportunity) for VC and other supply chain investments that anticipate increased uncertainty, consumer volatility, technological change, persistent stress, and recurring systemic shocks. Today’s flows of pull and push are a much more promising context for conceiving, refining, and scaling innovations with a sustainable Return-On-Investment than the fast floods and deep droughts of 2021 to 2022.