Supply Chains Under Siege | Is there a way through the U.S. maze?
Part 2 of 3 | Domestic Disruptions and Opportunity
In the first article, we discussed disruptions to the global supply chain and its impact across a wide range of factors. Below is a discussion on the domestic supply chain and how disruptions are impacting the U.S. right now and well into the future.
U.S. Disruption from Port to Amazon
Domestic trade and supply chain disruption occurred as soon as COVID-19 was identified as a threat. While this phenomenon appeared limited to day-to-day consumables (hand and related sanitizers, paper products, and food), the challenges are more far-reaching. Dependence on Chinese medical supplies and pharmaceuticals is a glaring example. The short and long-term implications for domestic supply chain disruptions are myriad:
The Chain Starts at the Port
- There is significant confusion, delays, and cost increase with the resumption of carrier shipments from Asia. The problems are exacerbated by the need to receive goods in the U.S. during October for delivery to stores before Thanksgiving. The LA/Long Beach ports are the epicenter of problems due to driver and truck shortages, poor scheduling protocols to return empty containers, and bottlenecks across every element of the inbound supply chain.
- U.S. ports are investing billions of dollars to expand their capacities and better accommodate the increasing size and frequency of global transport vessels. Many companies are targeting proximity to U.S. ports for new facilities. This has been the case for decades in the burgeoning Inland Empire of Southern California. However, the Savannah, Georgia port and region was the fastest-growing industrial real estate market in 2019. While imports have primarily driven growth, new facilities proximate to ports have also increased to support exports of products worldwide from domestic operations.
- The Southeastern U.S. ports have invested heavily to construct on-port rail yards to minimize handling time and reduce costs. The intermodal strategy minimizes truck transport bottlenecks and the impact of more punitive trucking regulations. Overall, intermodal rail costs are 10-12% cheaper than shipping by truck with a comparable speed to market.
Intermodal and Rail
- Rail shipments from U.S. ports to inland intermodal terminals will continue to increase. Intermodal loads ending September 2020 were 25% higher than a year ago. Railroad operators recently pulled 4,160 railcars out of storage to meet the increasing demand. Intermodal shipments have been the fastest to rebound as retailers replenish inventories.
- “Dry port” intermodal facilities have existed for decades and are primarily located in major inland cities like Chicago, Atlanta, and Kansas City. However, they are now being placed in second-tier cities or even rural areas, especially throughout the Southeastern U.S. (Georgia, South Carolina, Alabama, and Virginia) to mitigate U.S. supply chain disruption.
Industrial Space Demand and Reshoring
- Over the next decade, significantly more warehouse, distribution, and manufacturing facilities will be constructed throughout the U.S. to handle increased inventories and mitigate geopolitical risk to essential product deliveries. Supply chain resilience will be highly valued, and reshoring of foreign production facilities is being given serious consideration.
- While reshoring is a popular concept, in theory, it imposes several inherent challenges. These include the large capital investments required for new facilities, the ability to identify locations that achieve supply chain optimization where there is also an available and experienced workforce, and finally, the significant time required to plan and implement meaningful reshoring or nearshoring strategies. For many, a quicker response is needed.
E-commerce and Amazon
- E-Commerce during COVID became America’s lifeline and will continue to increase at the expense of traditional retail. Demand for E-Commerce facilities is exploding across all product categories. According to AlixPartners, 45% of Americans plan to do most of their holiday shopping online, up 15% from last year’s survey.
- As a result of higher e-commerce demand, industrial real estate developers are scrambling to find viable sites for new speculative buildings; and rental rates are at an all-time high. The ability to meet the high labor demand for e-commerce facilities is always challenging since a +- 1 million square foot facility usually requires over 1,000 full-time workers, which doubles in the 3rd and 4th quarters to meet peak holiday season demand.
- The “Amazon factor” has seriously disrupted countless labor markets in cities across the U.S., where Amazon has located new e-commerce facilities. The impacts are on labor availability and wage rates, the latter being $15.00 per hour minimum for a typical warehouse worker.
Conclusions at Home
The U.S. supply chain will experience continual disruptions for many years to come. Everything seems to be in flux: where products are sourced, major capital investments in transportation infrastructure, shifts in how consumers purchase goods, and the collective goals to protect and preserve U.S. interests.
There are many strategies available to companies to manage supply chain disruptions better. Most companies are taking a holistic approach, not presuming any preconceived norms and soliciting guidance from a wide range of consultancies.
While change is often disruptive, it can also produce the opportunity to achieve unforeseen benefits. This supply chain series’s final article will address various strategies to reduce disruptions to a company’s U.S. and global supply chain.