By Jill Hurley, Director, Global Trade Consulting
One wouldn’t expect that in normal times high demand would fall into the “problem” or “challenge” category for business. But these aren’t normal times.
The fallout of the pandemic has been a dream scenario for businesses that have been cash starved over the past 18 months. The combination of early U.S. economic recovery from the pandemic and the continuation of pandemic-related stimulus measures have prompted consumer demand for durable goods to soar to near unprecedented levels.
But as most U.S. firms have learned rather quickly, high demand that can’t be met due to supply-side constraints has the opposite effect on business. Freight rates have hit record highs. Getting a 40-foot container from Shanghai to L.A. would cost a business just less than $10,000 in late July – an increase of 236% from the same week a year earlier.
If that was the only issue, it would simply be a matter of incorporating the higher freight rates into prices. But it’s not the only issue. Once containers get to port, they can face a delay of several days to get loaded onto a dock. Then a shortage of truck drivers nearly guarantees they’ll have to sit at port incurring demurrage fees (also at records rates) before making their way to a distribution or fulfillment center, or directly to a customer.
Pre-pandemic inventories have been entirely depleted and many businesses are struggling to obtain enough overstock to stockpile goods in warehouses (space for which is limited and prices also at a premium). While end consumers are frustrated by the delays, the pain is far more severe for businesses waiting on supplies, such as raw materials or intermediate goods, because they can’t effectively plan for the future. Supply chains are delicate and precise systems. Today’s circumstances are such that the supplier of a supplier’s supplier can’t get the materials they need to get to market, and it creates a ripple effect that goes through the entire supply chain. A late shipment or a delay in production can mean a disappointed customer, an outcome most businesses – especially small and medium-sized businesses – simply can’t afford.
No End in Sight
In March 2021, the Port of Savannah, Georgia recorded an all-time monthly high in TEUs. Savannah, is the second-largest port on the U.S. east coast (after Newark, NJ). In Newark, year-over-year volumes grew almost 10% for the period ending in March 2021. East coast ports have been absorbing incoming vessels from Asia as shippers shift transit lanes to avoid the days-long delays at the Ports of L.A. and Long Beach, which receive about half the goods coming in from Asia. The Port of Savannah anticipates the high volumes will continue well into 2022.
But high volumes are only part of the problem. In many cases, shippers are delaying inland transport of goods from ports because they lack space in their warehouses. According to commercial real estate firm CBRE, average industrial asking rents grew 8.3% year over year in 2020 and 7.1% in Q1 2021. The rate increases are far higher in coastal areas where major ports are located (e.g. New Jersey and L.A. have seen rents grow 33.3% and 24.1% respectively). The high prices are reflective of the dearth in warehouse space that has been consumed in response to the e-commerce boom spurred by lockdown orders across the U.S.
6 Things Businesses Should Do to Reduce Disruption
Gain Visibility: Most businesses know their suppliers well, but know little about their suppliers’ suppliers. It’s critical to gain insight into how your suppliers are getting their product inputs and from where. The location of supplier inputs is critical not only because it allows you to identify if there is likely to be congestion along the transit route, but also because product inputs originating from sanctioned locations (such as China’s Xinjiang region) could result in goods being refused when they arrive in the U.S., creating an even longer delay.
Diversify Sourcing: Supplier relationships take a long time to establish and it may feel overwhelming to seek out a new partner, but putting all your eggs in one basket is risky business in a world in which lockdowns are sporadic and are often initiated with little or no notice. Establishing relationships with alternative suppliers, preferably ones closer to your core market, allows you to hedge your bets while also giving you the ability to reduce time in transit and potentially take advantage of preferential duty rates.
Secure Space: Warehouse space is extremely limited today. In fact, vacancy rates are in the low single digits. While new space is becoming available, it’s being eaten up fast. In Q3 2020, 97.4 million square feet of industrial space was developed but was eaten up almost immediately. At the end of 2020, more than 312 million square feet of warehousing space was being developed but more than one-third of it was pre-leased.
Plan (Way) Ahead: Securing storage space allows you flexibility in planning in advance. In a normal supply chain environment, peak season goods would be shipped to the U.S. in the summer months. In today’s environment, they may need to be shipped immediately after the previous peak season. But without space to store those goods, advanced planning becomes almost impossible.
Watch the World: Once you know where your suppliers’ suppliers are getting their inputs, keep an eye on COVID case numbers and vaccination rates. Are they at risk of a new wave? Are lockdowns being considered? Even if a lockdown hasn’t occurred, you may want to fall back on an alternative supplier for all or part of your next round of inventory if there’s danger of one occurring as lockdowns can be unexpected.
Find Hidden Cost Savings: Supply chains are often rife with hidden savings – from correcting misclassification of imports, to taking advantage of preferential duty programs (such as Free Trade Agreements), to claiming Duty Drawback for overpayment of duties on now-exempt but previously tariffed goods, to leveraging obscure mechanisms, such as the first-sale rule, to save on duty payments. These can help offset rising freight and warehousing costs, allowing you to maintain your competitiveness against big businesses that have greater capacity to absorb unforeseen costs.
The supply chain disruption caused by the COVID-19 pandemic has forced the closure of thousands of small businesses in the U.S. The survival of those that remain – particularly those reliant on international suppliers – will depend heavily on forethought, planning and a shift from a just-in-time to a just-in-case approach. While it’s impossible to predict the unpredictable, it’s is possible to plan for the worst even while hoping for the best. In today’s environment, the old saying that failing to plan is planning to fail never rang truer.
Jill Hurley is a U.S.-based director of global trade consulting at Livingston International. She brings a wealth of expertise in the development and implementation of import/export compliance programs, compliance audits, export licensing requirements, supply-chain security, the preparation, submission and oversight of penalty mitigation projects and assistance with U.S. trade remedies, such as anti-dumping and countervailing duties, and intellectual property orders.