The U.S. supply chain is based largely on a platform known as “just in time,” where goods are delivered to retailers in some cases hours before they are needed. The system lowers distribution and warehouse costs and ladles efficiencies on the economy.
Until it doesn’t.
In the wake of the COVID pandemic, the supply chain’s check engine light began to flash to the point it’s now glowing a bright incessant red. Ports are backed up, so trucks can’t deliver to retailers and warehouses. Orders are delayed. Shelves can be sparse for certain goods. There are dire warnings that even Santa Claus may be affected.
In order to make a market work in a capitalist economy, the forces of supply and demand are equally relevant. What happened in the context of COVID’s shock to the economy not only affected the supply side but it changed households and businesses with regards to the basket of goods and services they demand. —Chris Jones, president, Florida Economic Advisors
How to deal with both immediate and long-term supply chain issues was the subject of the closing general session of NCSL’s Legislative Summit.
“It’s a capacity issue,” said Susan Gardner, senior director of the Georgia Ports Authority. “Goods sit on the port longer. We have longstanding imports on terminals for more than a month because the warehouses are full. We’re working with importers to find off-dock spaces for stage and encouraging big box companies to move imports off the dock.”
Estimates of how long the system will be clogged vary.
Former U.S. Transportation Secretary Ray LaHood believes the system will be loosened by the first quarter of next year. But Chris Jones, president of Florida Economic Advisors, said he doesn’t expect significant improvement until the second half of 2022.
Federal Relief Up, Consumer Spending Down
Federal money pumped into the economy during the pandemic spurred a situation where consumers, restrained by COVID restrictions, were spending far less money on out-of-home services including restaurants, bars and movies, and more on durable goods.
“In order to make a market work in a capitalist economy, the forces of supply and demand are equally relevant,” Jones said. “What happened in the context of COVID’s shock to the economy not only affected the supply side but it changed households and businesses with regards to the basket of goods and services they demand.”
Jones said the current bottleneck of goods waiting to be delivered exposed an inherent weakness in the just-in-time model. “As much as it’s created benefits for all industrial economies, we’ve found its Achilles heel. If you get an unexpected surge of demand … and you have no cushion, no warehouse space to deal with excess inventories with those surges, you have a problem.”
The infrastructure bill moving through Congress will provide hundreds of billions of dollars to address some of the issues, LaHood said.
“States have millions of dollars in projects just waiting to be funded,” he said. “With all the projects pending, you’re going to see a lot of money going out to the states.”
Gardner said the port in Savannah, Ga., which is dealing with a 20% surge in demand, had hired 300 people in the last eight months, but added that infrastructure improvements, such as traffic around the ports, were crucial.
“One thing we’re really pushing is rail to get truckers off the road… We can get crates off the ship and onto the rail in one day, but rail has to have staffing as well,” she said.
Wisconsin Assembly Speaker Robin Vos, who moderated the panel and is the owner of a food distribution company, raised the issue of a lack of trucks to move goods around the country once they arrive at ports.
“There is a real effort to recruit more truckers with higher wages and more benefits,” LaHood said. “The problem is, you become a trucker for one of these companies, and you’re working two weeks on, then maybe a weekend off. For people to say, ‘People don’t want to work,’ some of it is the job requirements. It’s a real serious issue with trucking companies.”
Jones said the supply chain issues can have tremendous impact globally.
“It’s not unique to us,” he said. “China and Mexico are facing supply chain issues. Continued constraint to deal with surges in demands can be millions if not billions in lost output. In the U.S., 70 cents of every dollar of gross national product comes from consumer spending. If the products aren’t there, it can have a negative impact on GDP.”
Vos raised the idea of more goods being made in America to help alleviate the problem.
More domestic production, Jones said, only works if high-quality products can still be cost-effective for the customer.
“Because of our position as the wealthiest industrial economy in the world, our labor force is paid higher, and it’s a challenge,” he said. “The way we’ve been able to overcome it has been through technological innovation. But it’s hard to get organizations to buy into the notion that they are going to source everything domestically if they know they can go offshore and get that product provided at 50% of the cost.”
Mark Wolf is a senior editor at NCSL.