How the Supply Chain Broke, and Why It Won’t Be Fixed Anytime Soon
With the recent FOMC minutes revealing that the Fed is ready to taper, thanks to the persistently high inflation much to the disbelief of central bankers who until now reckoned that the supply constraints driving high prices were likely to be transient in nature. In this explanatory piece in the New York Times, Peter Goodman jogs our memory back to how it all started in the pandemic and more importantly breaks the bad news about why the global supply chain is unlikely to be fixed anytime soon.
NYT begins with a confession: “We didn’t even have a logistics beat before the pandemic. Now we do. Here’s what we’ve learned about the global supply chain disruption.”
“The disruptions go back to early last year, to the beginning stages of the pandemic. Factories in parts of the world where a lot of the globe’s manufacturing capacity sits — places like China, South Korea and Taiwan as well as Southeast Asian nations like Vietnam and European industrial giants like Germany — were hit hard by the spread of coronavirus cases. Many factories shut down or were forced to reduce production because workers were sick or in lockdown. In response, shipping companies cut their schedules in anticipation of a drop in demand for moving goods around the world.
But Americans took the money they used to spend on such experiences and redirected it to goods for their homes, which were suddenly doubling as offices and classrooms. They put office chairs and new printers in their bedrooms, while adding gym equipment and video game consoles to their basements. They bought paint and lumber for projects that added space or made their existing confines more comfortable. They added mixers and blenders to their kitchens, as parents became short-order cooks for cooped-up children. The timing and quantity of consumer purchases swamped the system. Factories whose production tends to be fairly predictable ramped up to satisfy a surge of orders.
The steep surge in demand clogged the system for transporting goods to the factories that needed them. At the same time, finished products — many of them made in China — piled up in warehouses and at ports throughout Asia because of a profound shortage of shipping containers, the standard-size steel boxes that carry goods on enormous vessels.
In the first phase of the pandemic, as China shipped huge volumes of protective gear like masks and hospital gowns all over the world, containers were unloaded in places that generally do not send much product back to China — regions like West Africa and South Asia. In those places, empty containers piled up just as Chinese factories were producing a mighty surge of other goods destined for wealthy markets in North America and Europe.
Because containers were scarce and demand for shipping intense, the cost of moving cargo skyrocketed. Before the pandemic, sending a container from Shanghai to Los Angeles cost perhaps $2,000. By early 2021, the same journey was fetching as much as $25,000. And many containers were getting bumped off ships and forced to wait, adding to delays throughout the supply chain. Even huge companies like Target and Home Depot had to wait for weeks and even months to get their finished factory wares onto ships.
Meanwhile, at ports in North America and Europe, where containers were arriving, the heavy influx of ships overwhelmed the availability of docks. At ports like Los Angeles and Oakland, Calif., dozens of ships were forced to anchor out in the ocean for days before they could load and unload. At the same time, truck drivers and dockworkers were stuck in quarantine, reducing the availability of people to unload goods and further slowing the process. This situation was worsened by the shutdown of the Suez Canal after a giant container ship got stuck there, and then by the closings of major ports in China in response to new Covid-19 cases.
Many companies responded to initial shortages by ordering extra items, adding to the strains on the ports and filling up warehouses. With warehouses full, containers — suddenly serving as storage areas — piled up at ports. The result was the mother of all traffic jams.”