Freight Flows

This is the fourth post in a series examining the supply chain resilience reports released by the White House on Thursday, February 24.

The US Department of Transportation’s supply chain assessment of freight and logistics includes the following concise consideration of recent (and systemic) problems (pages 10-11). Any three-paragraph explanation of something this complex can be critiqued, but this is a very constructive framing. USDOT gives demand deserved prominence:

The demand for consumer goods has surged during the COVID-19 pandemic as consumers have shifted their spending from services to goods. Many of these goods are imported or rely on parts or materials sourced from abroad. At the same time, the pandemic has created disruptions in supply chains, including for businesses and workers. Surging demand for imported containerized goods and supply chain disruptions are among the numerous factors that have contributed to unprecedented levels of congestion at ports and intermodal facilities. These short-term changes have been coupled with long-term, macroscale trends in the freight and logistics industry, brought on by deregulation of the ocean shipping industry, that have produced conditions that make the nation’s freight system more vulnerable to disruption than in the past. As one industry expert noted, “[this current supply chain challenge] is 40 years in the making.

Over time, increased international trade, rising demand for consumer goods, sustained macroeconomic growth, and other factors have increased demands on our transportation industrial base. U.S. manufacturers and retailers increasingly rely on global supply chains for products and resources. In recent decades, U.S. firms trying to lower their labor and inventory costs have turned to strategies such as outsourcing, offshoring, and “lean manufacturing,” which optimizes processes and limits waste. While these strategies have in some circumstances reduced prices for consumers and increased profits, contributing to economic growth, they have also contributed to increasing the vulnerability of supply chains to disruption. Rising e-commerce and increased consumer demand for rapid home delivery have led to significant changes in how supply chains operate, as retailers seek to increase the speed and efficiency of their networks to distribute goods directly to consumers.

The evolution of supply chain distribution has led to rising consumer expectations for rapid delivery, and this demand has put increasing pressures on logistics, warehousing, and last-mile delivery services. Retailers face steep competition to move goods efficiently to consumers at increasing speed. This dynamic is driving demand for land to support distribution centers for both retail and last-mile delivery, and for labor to stock warehouse shelves and make deliveries. At the same time, the labor force has aged, and parts of the logistics industry have increasingly struggled to recruit and retain new workers due to challenging working conditions and reductions in take-home pay, especially in industries like trucking. In addition to demographic and economic changes, climate change—particularly the increased frequency and severity of extreme weather events—has increased the potential for disruptions to supply chains.

Lots of moving parts. Lots of interdependencies. Lots of potential trade-offs: intended, unintentional, predictable, surprising. The USDOT report does not shy away from the tensions.

Not infrequently an offered outcome can be both good and bad, depending on context or angle of observation. But good or bad, this report gives particular attention to three structural consequences: concentration, consolidation, and congestion. Moving enormous volumes in a cost-effective manner usually rewards those with a velocity advantage. Enhanced targeting and optimum speed tends to push developing economies of scale at particular places (hence concentration of flows). The investments needed to achieve economies of scale are usually easier to secure for those with more cash-flow, so the capital requirements to effectively manage concentration tends to result in greater consolidation of industry participants. Organizing and operating these planned bottlenecks usually maximizes volume and velocity — unless something “unexpected” (outside design parameters) disrupts flow or suddenly demand much more flow. Congestion is the predictable result. When the unexpected happens, well-planned bottlenecks can become extremely messy chokepoints.

The USDOT reports outlines several policy approaches and recommendations intended to reduce the likelihood and mitigate the consequences of congestion. In another concise summary of a much more complicated bill of particulars, the report notes, ” The pandemic and the supply chain challenges that have resulted from it are a reminder that “perfect storm” events can occur and cause enormous, sustained disruptions. America’s supply chains must be able to respond and adapt to future disruptions more quickly and flexibly. To ensure supply chains remain resilient in the future, the United States must invest in freight infrastructure, promote competition and fair markets, and enhance cooperation and information sharing across stakeholders, modes, and firms.”

Starting on page 49 of the report USDOT briefly details sixty-two policy steps either underway or recommended. There are five policy action staircases, sometimes merging in Escher-like confluences: 1) Infrastructure Investment, 2) Planning and Technical Assistance, 3) Research and Data, 4) Rules and Regulations, 5) Coordination and Partnerships. That last staircase is mostly federal interagency coordination and partnerships with states. Of the sixty-two recommendations, I perceive that six or seven involve conversation and collaboration with the private sector outside a regulatory context. I am sure lobbyists will insert themselves, but the public sector predilection is powerful.

Fours days after the White House released these supply chain reports the Biden administration announced potential legal and regulatory action focused on consolidation of ocean shipping (more and more). The announcement claims, “three global alliances, made up entirely of foreign companies, control almost all of ocean freight shipping, giving them power to raise prices for American businesses and consumers, while threatening our national security and economic competitiveness.”

Concentration can present serious problems for supply chain resilience and adaptation. Consolidation can be be both an effect of and contribution to concentration. In a high volume, high velocity demand and supply network, congestion will often be contagious. Once it starts, it tends to both accelerate and spread. Regulation may well be necessary to extract pernicious causes of concentration and related negative behaviors.

But if freight flows are part and parcel of a complex adaptive system, regulation will usually tend to lag outcomes. This will especially be the case when congestion is emerging from disaster or swift shifts in demand. In such contexts, to prevent congestion and mitigate concentration, a much more forward-learning strategy is voluntary collaboration among key players in the freight system. The public sector can often play a crucial convening and brokering role in fostering voluntary collaboration. According to Elinor Ostrom, empirical outcomes have demonstrated six prerequisites for resolving treacherous problems of over-use, congestion, and related:

  1. Communication is feasible with the full set of participants. When face-to-face communication is possible, participants use facial expressions, physical actions, and the way that words are expressed to judge the trustworthiness of the others involved.
  2. Reputations of participants are known. Knowing the past history of other participants, who may not be personally known prior to interaction, increases the likelihood of cooperation.
  3. High marginal per capita return (MPCR). When MPCR is high, each participant can know that their own contributions make a bigger difference than with low MPCR, and that others are more likely to recognize this relationship.
  4. Entry or exit capabilities. If participants can exit a situation at low cost, this gives them an opportunity not to be a sucker, and others can recognize that cooperators may leave (and enter other situations) if their cooperation is not reciprocated.
  5. Longer time horizon. Participants can anticipate that more could be earned through cooperation over a long time period versus a short time.
  6. Agreed-upon sanctioning capabilities. While external sanctions or imposed sanctioning systems may reduce cooperation, when participants themselves agree to a sanctioning system they frequently do not need to use sanctions at a high volume, and net benefits can be improved substantially.

The USDOT report accurately diagnoses a complex dynamic of pull and push freight flows. It then prescribes a rather narrow set of interventions. It is analogous to an ecological analysis of a big river’s rich watershed being followed by engineering recommendations for a certain set of flood protection districts. The recommendations are not wrong, but the problem to be solved — the opportunity to be engaged — is of very different proportions.