GM and welcome to So What: a fresh perspective on an emerging risk that will add to your grey hairs.

Let's dive in.

839 words - 3 mins, 31 seconds read time

TL;DR

• Container prices remain at record highs

• This affects global shipping of all goods with an impact on supply chains and prices

• This looks set to continue through 2022 and maybe into 2023 so companies should plan accordingly.

• This also reinforces the dangers of globalization and just-in-time inventory which need to be reduced.

Nutritional Information

Today's post contains 100% of the RDA of your supply chain intake

Shipping Is Expensive

The cost to move a shipping container around the world shot up as supply chains re-engaged in 2020 after a year of suppressed demand in 2019. Prior to COVID, the cost to move a 40' container was around $1,700, consistent with the longstanding $1,500-2,000 range suppliers had become used to. Prices have dropped to around $7,500 today which eases pressure but is still 3-3.5x higher than pre-COVID prices.

Why So Expensive?

Reduced output from China from early 2019 to early 2020 reduced the amount of goods shipped worldwide which suppressed container prices to around $1,300. However, as China emerged from lockdowns, demand in the US and elsewhere rose and output grew but, at the same time, supply chain capacity was significantly reduced. Several factors contributed to this massive increase but two big ones were:

• During COVID, new containers weren't being built to replace old containers so there were fewer containers available in total.

• Reduced throughput at ports around the world stranded both empty and full containers meaning fewer containers available to ship new goods.

So the increase in demand coincided with a significant decrease in the availability of containers to move the goods. So the supply of goods should have met the demand side but the issue was a lack of container supply. This shortfall was dramatic that container prices shot up to over $10,000 by mid-2021.

Flexport Logistics Pressure Matrix Through June 2022 (link)

That's an enormous increase in the cost of ocean shipping, so much so that it imbalances the economic calculations that made globalization work: offshoring manufacturing to a country with lower wages provides a big advantage if the same good can be sold to a population with a higher income. But there's a catch. The other part of the equation is that this arbitrage only works if the cost of transport is also low. Low wages plus high shipping costs negates the benefit of offshoring driving costs up. Moreover, as supply chains become clogged, goods become stranded which can again increase costs or even bring things to a complete standstill. And remember that this is not just affecting the supply of iPhones: the US ran out of PPE and some pharmaceuticals during the early stages of coronavirus because these were mainly supplied by China.

So What?

In short:

• Shipping goods anywhere is very expensive.

• Supply and demand may be in balance but goods are stranded.

Offshoring, particularly with just-in-time inventory, no longer makes as much economic sense and poses a significant supply chain risk. (Note this was always there but it had been ignored while everything was working.) These are all major topics with significant, yet different, ramifications for everyone so there's no simple 'therefore, do this' prescription. However, there are some general things to consider.

Assume shipping prices will remain high for 2022

Pressure on all elements of the global supply chain remains high and labor disputes and zoning issues on America's West Coast continue to slow the throughput of goods, keeping containers stranded.

Pressure on all forms of transport rose in early 2022 by significant increases in oil prices following the Russian invasion of Ukraine which has also stranded vessels behind the Russian blockade of the Black Sea. (Most notably, this has driven up wheat prices at a time when there are significant food shortages around the world. Which I wrote about here.)

So there's no end in sight and businesses should assume that shipping prices will remain high through 2022 and maybe in 2023 although high inventory levels in places like the US will help ease supply chain pressure so this is not a chronic, long-term challenge.

Examine Your Supply Chain

Therefore:

• Examine your supply chain and that of your suppliers, to determine where you're susceptible to shocks.

• Monitor events that could trigger interruptions to help with advanced warning of interruption.

• Hedge your supply chain by balancing low-cost yet fragile suppliers with higher-cost, more costly options.

• Move away from just-in-time inventory and adjust operations accordingly.

None of these issues are insignificant or easy to manage but the shocks we've seen to global supply chains suggest that the globalization model needs adjustment and the sooner businesses adapt, the better.

I'd love to know what you thought. Use the poll below and leave a comment.