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The supply chain crisis is coming to an end — but 2 looming threats could reignite the chaos

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Port of Los Angeles and Long Beach Port Congestion — Los Angeles/Long Beach Harbor Tour 2021The line of ships off the coast of Long Beach is gone, but supply chains are not totally out of the woods.

Thomas Pallini/Insider

  • Holiday shopping went well, so you might assume supply chains are fixed.
  • Experts say though goods are flowing around the world much more smoothly, things aren’t normal yet.
  • Potential problems with labor and China could cause familiar disruptions to come back. 

Stores are full. Furniture deliveries are back on track. The line of ships off the coast of Long Beach is gone. At a quick glance, supply chains have healed and shopping seems back to normal.

“I think we can all breathe a sigh of relief, frankly,” said Flexport founder and co-CEO Ryan Petersen on a December market update webinar. 

Supply chains are running much more smoothly than they have in more than two years right now. But there are still risks looming that could disrupt them again.

Breaking down what factors make up the so-called “supply chain crisis” can explain what’s still off-kilter,  hint at when it might be back to normal — and how to tell. 

Freight is moving

The most dominant factor causing back orders and empty shelves was the increased transit time from Asia to the United States via ocean shipping. 

It’s a roughly two-week journey but at one point, shipping containers was taking 120 days going from a warehouse in China to a warehouse in the US. These delays meant in some cases, swimsuits and pool floats showed up in the fall and artificial Christmas trees arrived just in time for Valentine’s Day.  

“We hit a state over the last couple of years that was frankly embarrassing for anybody who works in logistics,” said Peterson. 

The unpredictable delays incentivized retailers to import holiday goods months ahead of schedule this year just to make sure they were in stock — a major reason store aisles were stuffed over the last few months. 

Pre-pandemic, transit times from China to the US was less than 50 days, according to Flexport. Now at the end of a volatile year, that number is around 75 days.

Drivers of inflation are slowly fading

Even if consumers have no idea what it costs to ship a 40-foot steel container from Asia to the US West Coast, they pay it: It’s included in the price of a product. And for the last few years, that price has been through the roof. 

Labor and materials costs play a role, but the cost to move goods around — especially on ocean-faring ships — was the most universal and extreme increase for many businesses during the pandemic.

At the height in September 2021, the oversea journey cost around $11,000. Today it’s $2,000 to ship a 40-foot container from China to the US West Coast, according to Freightos data. 

It will take time for that drop to have an effect on prices at the store, but in a few months, it should start to show up. 

“As rates come down, you’ll see our prices on items come down, too,” said Costco CFO Richard Galanti on a December earnings call.  

How much stuff is enough?

What could help bring prices down even sooner is how much stuff is in the country right now, as retailers have been rolling out massive discounts to move through their inventories.

A major indicator that supply chains have been off balance is the inventory-to-sales ratio, which is tracked by the US Census Bureau. This measure fell to historic lows during the pandemic when Americans were essentially buying things faster than the speed of imports. In June 2021, the inventory-to-sales ratio fell to 1.1. As of October it was 1.2, which is improved but still below 1.5, where it hovered 2019. 

A Cowen survey found that half of businesses plan to hold more inventory going forward after the difficulties of the last few years. So it’s going to be hard to tell when the inventory-to-sales ratio is settled at a new normal — but slightly higher than the 2019 level is a safe bet, which means there’s still inventory to build up in the country, despite appearances.  

Risks remain

If the supply chain is a stream, it’s only as fluid as its tightest bottleneck, said Jason Seidl, managing director of Cowen and Company. And there are still plenty of bottlenecks that could tighten next year. 

A railroad strike has been averted, but even without it, the railroads are understaffed, Seidl said. The International Longshore and Warehouse Union, whose members work the ports of Los Angeles and Long Beach, doesn’t have a finalized contract. UPS’s contract with its Teamster drivers expires in July 2023 and the union president has promised a tough negotiation and already threatened a strike. 

Then there’s China. COVID lockdowns were the reality supply chain managers have been contending with for years. But now that the country has lifted most restrictions, the spread of COVID-19 is another, perhaps harder-to-predict concern. 

What to watch now

Supply chains are made up of millions of individual decisions made by people. Until those people trust that goods will arrive on time and orders will go according to plan, supply chains can’t truly “get back to normal.” And those people still have reason to be wary of “unexpected shocks,” according to Flexport Chief Economist Phil Levy.  

The real indication that things are back to normal can only come as we move through the calendar. Supply chains have a natural seasonal rhythm. Grills, patio furniture, and Easter dresses come in spring. Back-to-school supplies arrive in summer. Toys and electronics boom in the fall. 

For the last three years, that pattern has been out of whack, explained Seidl. He predicted that it will come back at some point in 2023. 

“Am I anticipating a more normal seasonality as we move through 2023? Absolutely, ” Seidl said. For the last few years, goods have been flowing at an unusually frantic, constant pace. Today they’re slowed to a near halt since stores are stocked and buyers are cautious about the economy. A return to seasonal rushes and lulls, without massive, global disruptions, will be the sign that supply chains are “back to normal.”

Read the original article on Business Insider
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