At the start of the pandemic last year, supply chain expert Daniel Stanton – aka Mr. Supply Chain – spoke about the “bullwhip effect” on supply chains. At that time, demand had just crashed heavily in April, resulting in U.S. manufacturers shutting down their factories and warehouses in response to the pandemic.
Stanton defines the bullwhip effect as “a pattern in which inventory peaks and valleys are amplified as they move upstream from one step to the next in a supply chain in response to small changes in demand at the point of sale.” The net effect is supersized orders to compensate for the extra time it takes to obtain supplies from factories and transportation companies, and much higher levels of inventory than what is actually required to meet demand.
Almost a year later, the bullwhip effect is rattling supply chains again, as manufacturers struggle to keep up with demand for consumer goods.
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DAT Freight and Analytics spoke to logistics expert and sales coach Dan Deigan this week to see how much impact the bullwhip effect is having on shippers. The most vivid example involved two forty-foot containers of bed sheets from China to Florida, noting that demand for the commodity category was already up 8% year over year according to the latest container import data from PIERS.
Delays add to costs
What would normally have cost $5,000 per FEU (forty-foot equivalent unit) container from China delivered door-to-door ended up costing his customer $9,600/FEU, but that was just the start of the problems. Not only is his client having to place larger orders further in advance to guarantee production at factories working around the clock along with tight ocean capacity, they’re also having to hold higher levels of inventory, tying up more working capital in the process. In this case, the bed sheet manufacturer in China is working 24/7 after a fourfold increase in demand.
Even though the two FEUs of bedsheets were ready to ship on Dec 16, tight capacity on the transpacific shipping lane resulted in the containers being “rolled” from one vessel to the next until finally slots were made available on Dec 29. Despite with the route from China to Savannah, GA, being a faster and recommended option due to West Coast port congestion, Long Beach was chosen as the port of entry.
Despite the vessel arriving on schedule in 21 days, it sat at anchor for 14 days along with 46 other vessels waiting to unload at an already congested port.
By the time the containers were unloaded and ready to ship inland, the originally intended intermodal option had evaporated since the client was left with just five days to get the containers to Florida. The 14-day delay at Long Beach was about to become even more costly due to tight truckload capacity, which was now asking $9,000/FEU ($3.59/mile, including fuel surcharges) for a sleeper team to make the cross-country run and have the bedsheets delivered just in time.
Dan’s client ended up losing around $10,000 on this shipment in order to keep the customer happy and meet contract service levels. According to Dan, his clients “are now wondering how long this go on before companies just say, ‘You know, this isn’t worth it.’ The ripple effect U.S. importers created from the huge rock that was thrown into our North American pond has created a tidal wave overseas.”
On top of bedsheet demand being higher this year and imports of furniture up 34% y/y, local snowmobile sales are up 19% y/y, as Americans seek the outdoors to alleviate the stress of being cooped up indoors. Lumber prices are up 112% y/y, as demand for new homes skyrockets. In response, consumers are now looking to shipping containers as a viable alternative to outdoors building construction due to the shortage of lumber. As a result, used shipping container prices are up 77% y/y.
What’s ahead?
Is there an end in sight? Not anytime soon according to Jason Miller, supply chain economist and Associate Professor at Michigan State University. Citing retail inventory data from the Bureau of Economic Analysis, Prof. Miller noted, “current retail inventory levels are at about $645 billion compared to about $680 billion pre-Covid-19 in March 2020. That’s a shortfall of about $40 billion of inventory, and if we do a back-of-the-envelope calculation estimating retail freight at $6,000 per ton, we still have a tremendously large volume of inventory still to be replenished.”
A $40 billion shortfall in retail inventory equates to around 6.6 million tons – or just over 300,000 truckloads – of retail freight to get back to normal inventory levels. In other words, 2021 is starting to look a lot like 2020.
