The Global Supply Chain and the Bottleneck Archipelago

"Yes, sir, I know we're out of them. They've been shipped from Asia, sir; they're on their way... but it's taking forever. No, sir, I don't know why."

Most retailers have had to make the above statement dozens of times each day for the past six to nine months. Sadder still is that even American-made goods are also unavailable, because so many American-made products are dependent on components or raw materials from Asia.

To find our answer, we must begin with an understanding of the shocking changes in international transportation since World War II.

For almost four thousand years, ocean transportation worked the same way. From the Phoenicians to the Genoese, cargo was loaded on the decks of ships, case by case, crate by crate, barrel by barrel.

Over the centuries, these forms of packaging were improved; the quality of the ships themselves was improved. Eventually, pallets were swung on and off the ships by cranes... but it was still one pallet, one crate, one barrel at a time.

While he wasn't the only player in this transformation, McLean was the giant. During and after World War II, he led the transformation of the transportation industry, moving away from pallet-quantity carriage to container-quantity carriage, through the development and popularization of intermodal containers.

In this new world, cargo now moves in huge reusable steel boxes, much like the trailers hauled by domestic semis, with one key difference: detachable wheels. These "intermodal containers" - primarily sized at 20', 40' or 45' in length - can hold as much as 60,000 lbs of freight. They can be loaded just once, at the shipper's plant... and then can travel across the earth without being reopened until arrival at the consignee's doorstep.

The box rides on a detachable chassis for the truck move from the shipper to the railyard. A crane then swings it off the chassis and onto a railcar for the cross-country move to the seaport. It's then swung off the train and onto a ship, for the long transpacific or transatlantic voyage. Upon arrival at the destination seaport, another bank of cranes is ready to flip the box off the ship and onto a waiting train... for a mirror image cross-country trip in the destination country, to an inland railyard where it can be again swung off the railcar and onto a fresh set of wheels, for that final destination inland truck move (known as a dray) to the consignee.

This concept has enabled the explosion of global trade over the past 70 years, as ships can handle hundreds, or even thousands, of these containers. Measured in 20' Equivalent Units (known as TEUs), the new ships range from 3500 to 20,000 TEUs each. Imagine, 10,000 forty-foot long truckloads of product on a single ship. Before containerization, such volume would have taken months to load; today, such ships can be loaded and unloaded in two or three days, thanks to the magic of containerization and the technology of gantry cranes.

This intermodal network is constantly at work, 24 hours a day, all over the world. Thousands of ships are continuously in rotation, loading up, sailing, and unloading, with countless millions of containers en route every single day, going every imaginable direction.

Now, as efficient as this concept has been, it had the somewhat unexpected effect of changing the business of ocean transport. In the old days, a ship could be unconcerned about what happened on land. It would dock in a port, load up whatever cargo the origin country's shippers had ready to load, and then sail off to a destination, ready to unload everything and turn it over to the destination customers. The carrier only had to care about the sea. Inland transport was never his concern.

The challenges of inland transport to and from port used to be the business of the shippers and consignees alone.

Imagine the shock to the system when containerization arrived. The containership lines now have to contend with providing a container, on a wheeled chassis, to the inland origin point for loading, and then, the lines must similarly deal with the inland transport in the destination country, and the disposition of that container, once emptied, deep in the interior of another country.

Gradually over the decades, the lines learned to negotiate contracts with truckers and railroads in dozens of countries... and the lines have found a balance, understanding how many containers of each kind they would need, how many chassis, and how to transport the empties to where they would be needed, when there was an imbalance. And there is ALWAYS an imbalance.

When we think of international trade, the economists often speak of trade deficits, but their financial numbers - based as they are on value rather than volume and weight - rarely have much application to these matters. There are many ways to trade, from raw materials to physical goods to services. Some require shipping; others do not.

In a typical country-to-country trade lane, we may buy or sell a million dollars' worth of real estate, stock investments, movie licensing rights, automobiles, consumer goods, electronic components, and crude oil. The automobiles move on Roll-On, Roll-Off vessels (RO-RO vessels); the oil moves in bulk tanker ships. Even if the inbound/outbound trade is similar between a given pair of countries, even if the value of the containerizable cargo is similarly balanced, there is virtually no chance that the containerizable cargo will be of similar enough physical dimensions to take up similar numbers of containers.

So, there is always a severe imbalance. The lines have spent 70 years managing the movement of these boxes and the chassis that serve them. How many do they need of each, and where? If there's a deficit somewhere, how will they move the surplus empties from one country or region to the shipping point where they'll be needed for the next move?

The carriers need the container for the entire trip... but they only need the chassis for the relatively short timeframe (a few days at each end) when the containers are being moved by truck. Some moves don't use rail at all, some do. Those that do will need special railcars for carrying these containers. So how many of each do they need?

The carriers have done their best to stock the different types of equipment they need, not only the standard containers mentioned above, but also open-top and flat-rack versions (for top and side loaded products like heavy machinery), and 20' iso-tanks (a chemical tanker encompassed by a rectangular frame to give it the same handling characteristics as a 20' container).

The containership lines have had to build and manage fleets of millions of containers and chassis, all over the world... and they have had to work with railroads to ensure that there are enough railcars to handle the inland rail moves too.

The lines must be forgiven if they sometimes seem like they aren't concentrating on the cargo anymore. Today, their minds are on the movement, cost, positioning, availability and profitability of these millions of containers, chassis, and railcars that we all depend on to carry our goods around the world.

Throughout the era of containerization, the container lines have added ships, added equipment, added size. They have built ever larger ships to handle more and more import/export business. They currently add about six million containers a year to their available equipment pools.

It would only be reasonable for them to assume that the other participants in this mix had been growing their capacity as well... but they haven't.

For years now, the world's non-ship infrastructure, particularly the USA seaports and rail network, have been bursting at the seams. Several times a year, ships sit in harbors for several days, even a week or more, at America's major seaports like Seattle, Los Angeles, New York and Newark.

All of a sudden in 2021, it crossed a crisis point. The growth in volume has caused frightful bottlenecks at our major seaports and at our most important rail hubs. The ships are arriving too fast for the ports and the rail network to handle them.

By early September, 2021, most North American seaports had a continuous waiting line of a dozen or more containerships at anchor, waiting for a berth to dock in. 45 to 50 ships sit outside Los Angeles, not because the cranes can't unload them fast enough, but because there's no way for the trucks and trains to move these containers out as fast as they can be unloaded. The containers have to be dropped onto a chassis or railcar, checked and secured, before they can move on; nobody can move them out fast enough.

How bad is it? So bad that Seattle has announced that they must shut down a third of their gantry cranes, because they're running out of room to stack the containers they unload. The lack of space in many of our ports is indeed that severe.

At the inland rail hubs like Chicago, we often have twenty or thirty miles of railcars sitting outside town, waiting to be worked in our crowded railyards. Desperate for speed, the railroads unload the containers and stack them up, three, four, even five high, just to get the trains moving. Then the cargo sits for weeks, waiting for chassis to enable that final inland delivery move by truck.

And Peak Season - the annual fall period in which inbound ocean cargo is always overwhelming - hasn't really even begun yet. At this writing, reports are that Los Angeles arrivals will start doubling, to volumes that won't let up until at least Christmas, more likely Chinese New Year, 2022.

As one might expect, most politicians have been clueless throughout. Some far-thinking governmental entities deserve credit for doing well. As ships have grown in size, the Panama Canal has been widened to handle bigger ships. Metropolitan Los Angeles engaged in a huge project twenty years ago - the Alameda Corridor - to speed up container movement by both road and rail into and out of the Los Angeles port area (though they didn't think quite big enough; the Alameda project is now overwhelmed as well).

But most of the stakeholders in the United States have sat by, oblivious to the growth going on under their very noses. Look at Chicago, where many of our rail hubs are entirely encircled by highways, industrial parks, and residential areas, hemmed in so that no expansion is possible. Many of our metros should have been building new and larger intermodal yards on the outskirts of town, where available land would enable quicker growth. But no, our system is overloaded with volume, and no quick improvement is available.

Perhaps worst of all, the steamship lines have been calling for expansion and modernization at our seaports for decades, and the longshoremen's unions - the ILWU and ILA - have fought it at every turn. Every contract renegotiation has centered around the modernization and expansion of our ports, on all three coasts, and each time, the unions have been able to thwart the industry's efforts to handle the coming storm.

Too many people, for too long, assumed our current problems, which first became noticeable in the fall of 2020, are because of the Covid-19 disruptions. Sadly, it couldn't be further from the truth. The timing of this crisis in ocean transportation is far more coincidence than causation.

Today, the congestion at our seaports and railyards has caused dwell times of several weeks or more, at both the ports and railyards. This means that trans-oceanic trips that used to have 40-day transit times now have 120-day transit times, or worse.

In addition to taking three or four times as long for anything to get anywhere, this means that the carriers have to charge three or four times as much as they used to. Remember, they're now in the business of moving boxes; each box has a cost, and prices have increased in 2021 to match the facts on the ground.

Common sense would be to recognize that the container lines have been the heroes of the American economy for decades, and that we need to light a fire under the port authorities and rail yards. That's where the work is needed, as soon as possible.

But what are the politicians doing? They have introduced the Ocean Shipping Reform Act of 2021, a bipartisan bill that lays at the feet of the container lines alone the full blame for not only the high prices and slow transit times of 2021, but seemingly also blames them for having killed Cock Robin, sunk Atlantis, and wiped out the dinosaurs.

As World Shipping Council president John Butler said in a recent interview with The Loadstar, "If you've got 45 ships stacked up outside of LA and Long Beach, that can't even get into the berth... that's an indication that the bottleneck is in front of those ships, not caused by those ships."

The simple fact is, our inbound freight has outgrown our infrastructure at an incredible rate. This year, the LA/LB port complex - by far our biggest and most important port area - expects to see a 40% increase in container throughput compared to 2019, and most American seaports are seeing similar rates of increase. Frankly, none of them can handle it.

For starters, the Ocean Shipping Reform Act of 2021, which would do to transportation what the WWI armistice did to Europe, needs to die in committee. A more misguided bill is hardly imaginable.

While the problems it addresses are real - horrible transit times, awful prices, and nonmoving exports and imports - the "blame carriers first" mentality of the bill belies a complete ignorance of the industry.

While this is mostly a state and local issue, the emergency merits some federal involvement. Our seaports and railyards need expansion, for the common good. Federal waivers of usual red tape, to enable the railroads and port authorities to expand quickly, would certainly help. An offer of support from the Army Corps of Engineers might help too, in some cases.

But the most important thing we can do - as always - is to acknowledge reality. Ports and rail yards take years, not days, to expand. Land needs to be acquired and cleared; roads, track and buildings need to be built, cranes need to be bought and positioned, personnel and computer systems must be found and put in place.

This is a ten year problem, not a ten week problem. Anyone who tells you that ocean transportation will be back to the 2018-2019 levels of pricing and performance by next spring is smoking something that no state has yet legalized.

The only real solution is for the American people - both the individual buyer and the corporate world - to greatly curtail our purchasing from abroad, especially from Asia... most particularly, from China.

It's our massive purchasing from China, from components to finished goods, from raw materials to useless knick-knacks, that has landed us in this situation.

Any American will tell you that we have the most productive, most efficient workforce in the world. For all the advantages of low labor costs, low material costs, or low regulatory barriers that many other countries offer, the fact remains that we could make anything we need right here in the United States, outside of a few rare minerals and metals that can only be mined elsewhere. And the complete collapse of dependable and cheap international transportation will usually easily outweigh those one-time third world advantages.

During the Trump era, we thought that bringing manufacturing back and "making America great again" was optional.

Now, with transit times and transportation costs quadrupling, we are learning that MAGA is simply imperative.

An economy simply cannot survive if it can't predict when its shelves will be restocked. It's time to bring back manufacturing, bring back sourcing, and become an independent economy again...

...at least for the ten to fifteen years it will take for our transportation network to catch up.

John F Di Leo is a Chicagoland-based transportation professional and trade compliance trainer, writer and actor. His columns have been published in Illinois Review since 2009.

A collection of John Di Leo's Illinois Review columns on vote fraud, The Tales of Little Pavel, is available on Amazon...

...and John's brand new political satire on life in America in 2021, Evening Soup with Basement Joe, has just been released on Amazon as well. Both are available in either paperback or eBook.

https://www.amazon.com/EVENING-SOUP-BASEMENT-JOE-Months/dp/B09FS82JH9/ref=sr_1_2?dchild=1&keywords=evening+soup+with+basement+joe&qid=1631562688&sr=8-2

To central va...

I’m beginning to wonder if you can read.

Did you imagine from my article that I am a fan of overdone outsourcing, of closing American factories and moving manufacturing abroad, of high levels of importing?

I don’t think I’ve ever said a positive word about MBAs in any column I’ve ever written. Your anger and insults are misplaced.

In a dozen years of a weekly column, I have always called for buyers to look at the TCO (total cost of ownership) of purchases, and to recognize and respect the value of local/nearby vendors, and to properly weight the political risk, intellectual property risk, lead time risk, and transportation risk of importing components and materials.

Do you just pick on Republicans because you think it’s fun, without first considering that they might be on your side on a specific issue?

to central va...

Oh, yes, and on a separate note...

You said “...This is why we need tariffs to protect us from fools, like you.”

You make three assumptions here:
1. that I’m a fool (I just think that’s funny.)
2. that I oppose tariffs and you support them. (that’s just wrong; I like tariffs, primarily because they give us the carrot of an offer of duty-free status to make free trade agreements desirable).
3. that tariffs stop undesirable importing.

This last is the one I’ll concentrate on. As a revenue tool (since all countries must collect taxes somehow), tariffs can be a legitimate tool in the toolkit. Morally and societally, I’d rather tax imported luxuries than my citizens’ real estate or income, for example.

The problem with tariffs is that the price differences between countries are often so great that even a high tariff doesn’t always have much of an effect.

I believe we should have outright sanctions against a lot more countries. We shouldn’t be trading with China at all, for example. We had to go from four or five percent up to 30% on a lot of products, during the Trump years, in order to get many American companies to even consider re-sourcing away from China.

The piece price differential is just too great for tariffs to be the effective tool in a right-sourcing effort.

What we really need is for purchasing departments and CFOs to understand the real total cost of ownership - TCO - of their purchases, and to realize that this apparent cost savings in importing from China is actually overwhelmed by the damage it does to lead time, the cost of flying employees overseas for meetings and tests and verification builds, the risk of IP theft, and especially, the transportation cost when shipments need to be airfreighted because ocean is too slow.

It’s a culture change we need. A culture change that needs to begin in the business schools and the boardrooms.

Not every change can be effectively driven by government. Government can be a part of it (hence my compliments to President Trump for initiating those 25% punitive tariffs)... but it’s not going to do the trick on its own.

We need the American people to start being sensible at the office, and start finding new vendors closer to home.

JFD

Many of our metros should have been building new and larger intermodal yards on the outskirts of town, where available land would enable quicker growth. But no, our system is overloaded with volume, and no quick improvement is available. Perhaps worst of all, the steamship lines have been calling for expansion and modernization at our seaports for decades, and the longshoremen's unions - the ILWU and ILA - have fought it at every turn. An economy simply cannot survive if it can't predict when its shelves will be restocked. It's time to bring back manufacturing, bring back sourcing, and become an independent economy again...

My washer broke last week...(still under full warranty) ... the tech explained if the problem needed a part that was available the wait time would be about two weeks. If the part was not easily available the wait time to fix the washer could run into 'months'... I'll know soon. I'm guessing my 'part' is sitting in some container outside of Chicago - waiting to be railed to some warehouse somewhere...jit and all...

To central va:

You wrote “Labor is only 7-8% of the retail price of US manufactured goods 3% for 3rd world crap. So a small tariff really would level the playing field.”

Have you ever worked for a manufacturing company? You have absolutely no idea how decisions are made at a manufacturer.

Let me illustrate. Picture something simple, say, a washing machine. It’s made of sheet steel, powdercoat/paint, gaskets, power cord, dials, switches, timers, motor, water pump, and injection molded plastic parts.

Each of these parts has a different ratio between labor and materials. The washing machine manufacturer decides first what parts to make himself, and what parts to purchase, and then decides which of the purchased parts to buy domestically and which ones to buy internationally.

Many issues play a role in each of these decisions. the vendor’s piece price... the vendor’s lead time... the transit time and transportation cost... quality... how good we are at ordering ahead (that is, how often will we need to rush an order).

Your mention of an average labor rate in the manufacture of the finished product - which is hogwash, by the way - doesn’t play a role in this because the decision on each individual part is made independently of the others.

Every one that we outsource to a foreign country causes a loss of jobs here. So yes, it all matters...

But it’s also important to look at each individual part. A lot of these imported parts are half the price, or a quarter the price, or a tenth the price, of a similar part made in the USA.

Why? A mix of reasons... including cheap foreign labor, yes, but also including such things as illegal foreign subsidies (known to economists as ‘dumping’) and currency manipulation.

In addition, lots of crooked foreign companies will bid low on a part just so that they can get the ability to make that part - the real, legitimate approved part - for the US buyer... so that they can make twice as many (without telling their client) and sell them under their own brand as ‘knockoffs’ but at the same high quality.

Ever look at a fake Coach purse, for example, and say ‘my gosh, that looks just as good as the real one!’ well, there’s a reason for that. A lot of ‘fakes’ are made by the very same company, of the very same material, ripping off their own customer.

They don’t teach about these kinds of risks in business school, so buyers don’t realize what they’re getting into by providing their dies and molds to Chinese vendors. I think every businessman would be better off watching the Rodney Dangerfield movie, Back to School, fifty times, rather than going to business school... But anyway...

The point is, tariffs CAN sometimes make a difference, but not often. Businesses need to become independent of foreign countries for components, not because of a five or ten percent duty rate (we’ve seen that even President Trump’s 25% tariff stopped relatively few companies from sourcing from China)... but because they start seeing the big picture and regain some patriotism.

Only TCO and an understanding of history will save us.

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