Schafer: Our supply chain problems have a simple explanation: we always buy products
In any stories you might read about struggling supply chains, you will be assured that the reason is really complicated.
The list of factors goes on and on – from shipping container shortages and train terminal bottlenecks, to manufacturing plant closures and spillover effects (whatever they are).
These things really do happen and they help explain an empty store shelf or a ‘out of stock’ notice when shopping online, but even executives can think about it too much.
It’s not that hard. There remains a panic of low-end buyers among US consumers and the business world cannot be expected to keep pace.
It started with the COVID-19 outbreak in early 2020, when people stayed at home to curb the spread of the deadly new coronavirus. They spent their money on things to make their bubbles more comfortable, like patio furniture, exercise equipment, and home office supplies.
Sales of services, such as salon visits or air travel, have plummeted.
These behaviors, once just a reaction to the pandemic, could now mark a fundamental shift in the way Americans spend their money.
Retail sales rose again in September – by about 15.6%, excluding cars – according to the US Census Bureau. This continuing upward trend “defies expectations of a pullback amid pervasive supply chain problems,” as a CNBC article put it.
Big box stores were a trusted source of essential household items at the start of the pandemic, as evidenced by sales results from Minneapolis-based Target Corp.. By comparable sales – the best measure of apples to apples – sales increased more than 24% in the second quarter of last year.
Growth has since slowed down, but just really strong instead of stunning. During the quarter of this year that ended on July 31, the company’s comparable sales climbed nearly 9%.
And it’s not just at Target. U.S. consumer spending on goods in the second quarter of this year increased by about 18%, adjusted for inflation, compared to the last quarter of 2019, just before the pandemic. Spending on services is still declining.
At the other end of the consumer goods supply chain are China’s manufacturing hubs where the massive surge in demand has not been a universally good thing.
Scott MacDonald of Edina based Mac and Mac, Inc. represents manufacturers to retailers, including customers in China. Last week he explained to me many problems faced by Chinese managers with sales growth of 30% or more.
The costs of materials have increased a lot, on the one hand. A common plastic used in many consumer products costs around 60% more than before the boom. One of its manufacturers has 115 separate suppliers, and 92 of them have recently increased their prices.
In China, manufacturers are facing blackouts. Authorities are using power restrictions, MacDonald’s clients told him, to reduce the boom’s distorting effects on the Chinese economy as a whole.
It might then be tempting to attribute our supply chain problems to globalization. But supply chains are nothing new.
Probably 40 or 50 years ago, a manufacturer of any size outsourced the work, purchasing materials, parts, and sub-assemblies from a network of suppliers.
The principles of running an effective supply chain haven’t changed much, but the distances have certainly changed. It is a two-and-a-half to three-week journey between China and the San Pedro Bay Container Ports in Los Angeles and Long Beach. This great ocean has become a big bottleneck.
As a result, the shipping costs have soared almost out of sight.
Before the pandemic, a Chinese manufacturer reportedly paid around $ 5,600 to ship a full 40-foot-long “high cube” container from China to a customer’s loading dock here.
Now, MacDonald said, it will cost around $ 32,000.
Shipping companies give space to those who are willing to pay more. One of MacDonald’s customers had his containers removed from the ship at a port of call midway to America because another company was willing to pay more for the space.
The cost of shipping some products, an artificial Christmas tree in one case, now exceeds the price a business charges customers. This is why many retailers are raising consumer prices. A sofa made by one of Mac & Mac’s customers has gone from $ 699 to $ 799 to $ 1,199 at Menards.
Then there’s a series of cascading hassles that compounded the delays, like container ships anchored offshore for weeks with no place to dock. Or Union Pacific’s decision to no longer transport sea containers in Chicago because the railroad had nowhere to store the voids.
And of course, there was a shortage of truckers even before the pandemic.
US retailers may seem confident that they will find a way to deal with this because they really think they can, but they are unlikely to have seen anything like it before.
This situation reminds me of a story told in a now classic business book called “The Goal”, first published almost 40 years ago.
“The Goal,” written like a fictional page turner, has to be one of the strangest management books ever published.
The main character of this novel is a factory manager with problems, big and small. He has a smart friend to advise him. Yet, with his team, he really understands it for himself. A moment of clarity for the factory manager came as he led a Scout trek.
One scout, Herbie, was slow. Other children moved forward and then had to wait. The process – a chain of children, spread out along a path – had a constraint, and that was Herbie. Eventually, they figured out how to lighten Herbie’s pack and they all settled down to move efficiently at her pace.
This is the story executives might want to tell about stressed supply chains. There’s just a bunch of herbs popping up, and we know how to lighten the load or get around them.
But what would have happened to this little troop on the trail if they had had to do the whole hike and jog? It wouldn’t have been just a kid who struggled to keep up.
That’s what we have here now, one supply chain after another being forced to run instead of walking.
When asked what the long-term solution was, MacDonald hesitated for a second before answering.
“Retail prices must skyrocket,” he said. “And then the consumer stops spending.”