10.7.21 | Industry Insights
First, the good news. The U.S. economy is experiencing a robust recovery in the aftermath of the COVID-19 crisis. The Bureau of Labor Statistics (BLS) shows that non-farm payrolls have risen by $17 million since April 2020. The employment participation rate, at 61.7%, is now just shy of where it stood at the start of the pandemic. As expected, some sectors have rebounded more robustly than others. BLS shows that employment in transportation and warehousing is now slightly above its pre-pandemic level in February 2020.
Having sat out much of 2020, consumers are now spending some of what they have saved over the past year. Home and auto sales are at their highest levels in 14 and 15 years, respectively. Yet, with this good news come concerns over inventory shortages and supply chain disruptions.
Stretched to the Limits
The early days of the COVID-19 crisis revealed that many American corporations depended on supply chains that were overstretched, leaving them vulnerable when unforeseen disruptions, such as a global pandemic, hit.
Some efforts have been made to mitigate the problem of supply chain over-extension. Both the Trump and Biden administrations have invoked the Defense Production Act (DPA) of 1950 in order to assess whether American industry has the ability to respond to a similar crisis. The DPA permits the President to expedite and expand the supply of materials.
Yet, the vulnerabilities within the global supply chain remain a pressing challenge. Today, the spotlight is on the role shipping plays in tying together (or, perhaps more to the point, occasionally tying up) global supply chains. When there are disruptions to shipping at sea, or in canals or ports, the supply chain will buckle, if not break — at least for a while.
Events Speak Loudly
Over the past year, we have seen example after example of just how vulnerable the supply chain is to transoceanic shipping.
Perhaps the most widely publicized incident in recent memory was the Taiwanese-flagged Ever Given, a 1,300-foot cargo ship that ran aground in the Suez Canal at the end of March. The ship, carrying 18,300 containers, was wedged in a canal for nearly a week and caused delays for 372 vessels waiting to transit the canal.
With the canal blocked, the supply chain was disrupted, and the ripple effects were felt across the globe. Businesses of every kind and every size felt the pinch: car dealerships, appliance outlets, grocery stores, restaurant chains, clothing retailers, hospital equipment suppliers, hardware stores, and many more were affected. Some estimates put the cost of the Ever Given’s grounding at $400 million per hour. Accidents, such as the Ever Given incident, will happen. But shipping has another, more perennial challenge it must surmount: The weather.
Typhoon Chanthu closed down port operations off the Yangtze River in China in September, while U.S. ports on the Gulf of Mexico experienced delays due to successive hits by Hurricane Ida and Tropical Storm Nicholas. According to some shipping industry experts, the combination of storms and COVID-19-related bottlenecks is making what used to be a two-week journey from China to Los Angeles into a two-month ordeal.
Meanwhile, cargo ships are experiencing record-breaking delays at the ports of Los Angeles and Long Beach, which together account for one-third of all U.S. imports. Over the summer, there was an average of 30 container ships a day waiting to get into those ports. In September, that number nearly doubled to 56. The delays are being blamed on pent-up post-COVID related buying as well as other issues, such as the current U.S. labor shortage: Ships with greater and greater capacity are arriving at ports with fewer and fewer workers to unload them.
And the longer the ships must wait at anchor, the higher the shipping costs run. One estimate provided to Business Insider has shipping costs between the U.S. and China up 200% from this time last year.
Dealing with the Impact
These cost overruns cascade down the supply chain, with retailers struggling to replenish inventory and consumers seeing higher prices. Shipping delays will have an impact on the forthcoming holiday shopping season. Shoppers should prepare themselves for longer delivery times and a lack of inventory.
It is expected that supply chain delays will continue for the remainder of 2021. Therefore, business owners must monitor these delays to manage inventory levels. Business owners will need to adjust pricing to cover the increased shipping costs, requiring communication with customers to keep them apprised of any augmented impact.
Giacome Turone, Chief Financial Officer of Palm Bay International, notes that planning and prioritizing core suppliers’ shipments on a weekly and daily basis while at the same time preparing staggered price increases will likely affect all product lines. “Dry goods costs have also been substantially impacted by increased shipping costs and delays,” says Turone. “We expect that — in addition to the double-digit percentage increase in ocean freight — prices of finished goods imported from across the globe will also be increased by suppliers.”
Additionally, business owners should communicate frequently with their freight forwarders to mitigate unanticipated surprises, which could further disrupt operational and cash flow forecasting and calculations.
While the disruptions in the supply chain remain a fact of life, businesses like these are dealing with the matter head-on and planning around what they can’t change to place themselves in the strongest position when things eventually clear up in the not too distant future.
If you have any questions please contact John Fitzgerald at JFitzgerald@berdonllp.com | 212.331.7411.
Berdon LLP New York Accountants