Much has been written about the backlog of container ships off the U.S. West Coast, but even when that situation eases, the supply chain bottleneck that it created will still be felt well into next year.
It is the price a global economy pays for building ultra-efficient networks in which just-in-time inventory practices dominate the manufacturing and retail worlds. When it works correctly, just-in-time allows manufacturers and retailers to reduce inventory costs and still operate at optimum efficiency; but when a single spoke of the just-in-time wheel snaps, the entire system careens into a ditch.
Right now, that is the ports, but according to Rock Magnan, president of RK Logistics Group, additional spokes could soon break and further gum up the supply chain.
“What has for the better part of two decades worked almost flawlessly is now [disrupted],” he told Modern Shipper. “You can clear the ports in six weeks miraculously but that doesn’t fix the problem. The ships are unloaded, but that doesn’t fix the logistics problems. You have containers on the wrong side of the ocean. You have a shortage of truck drivers. You have a lack of warehouse space where it’s needed.”
Magnan’s company, which offers third-party logistics services including warehousing for industrial and e-commerce retailers, is running at near 100% capacity utilization. RK Logistics is opening two new facilities in Newark, California, but the space is nearly entirely accounted for at this point.
Hold on to that space
“We have clients who are holding on to space they might previously have let go, even if it’s empty and not immediately being utilized, because they want the assurance of capacity going forward. They don’t see the market loosening anytime soon,” Magnan noted. “We are looking to add an eighth warehouse to meet growing demand in the East Bay and are looking for a ninth facility in the Tracy-Stockton area where rents are a little cheaper.”
Unfortunately, Magnan sees a multitude of issues that will continue to plague the supply chain, and warehouse space is only one of them. There are also labor shortages and rising wages, equipment delays, and longer wait times for facilities.
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Those are ultimately short-term issues, though. A longer-term dynamic that Magnan sees playing out is the shifting strategies of manufacturers and retailers, moving away from just-in-time inventory practices to guard against future supply chain disruptions.
“Retailers are getting messed up because they’ve missed the seasons because of the delays. Seasonal goods missed their window so they have to figure out what to do with those products that are coming in late,” Magnan said. “There is a lot of stuff that is stuck because of the way they’ve prioritized the ships they’re unloading. [It’s left retailers] with unsalable stuff right now.”
Buffer stock
Many manufacturers, Magnan added, are looking at building in “buffer stock” of critical items or single-sourced items to protect their assembly lines.
“I think COVID exposed a lot of the weak nodes in the supply chain,” Magnan noted. “You can get the supply back up and running but [it’s not easy].”
The other side of the equation is consumption changes: How has the pandemic changed consumer shopping behavior?
“COVID was either a boom or a bust depending on where you were. As local stores were shuttered, the Targets and Walmarts saw a boom,” Magnan said. People had money to spend due to stimulus “but people couldn’t spend it in a normal way by going to their local stores because they were closed, so they spent it on Amazon.”
This change in consumer behavior has disrupted the normal flow of goods and pressured logistics operators like RK Logistics to find available warehouse space in new areas.
“Space capacity is still an issue, but I think it is based on certain markets,” Magnan said. “In California, the Bay Area is very tight, but if you go out to the Central Valley there is still space available at a good price range but you are adding cost [to truck items].
“It’s going to take time to normalize. That’s why I think it is going to midyear at least,” he added. “And because people tend to focus at the macro node under stress and that is the ports right now … eventually it is going to flow down to the next strand in the string.”
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