Global supply chain challenges we still face in the wake of pandemic will only become worse as the latest global incident ripples across international and domestic transportation networks for months to come.
Before the Suez spectacle unfolded across the world’s media in March, the international freight-shipping environment faced a capacity crunch, high rates and slowdowns on the West Coast ports. Many companies have already been considering strategic changes to their supply chains, including their inventory management philosophy.
Now that traffic is moving again through the shortest route between Europe and Asia, let’s examine how this ocean transportation disruption unwinds for North American shippers moving freight in the months ahead.
Ocean Transportation Rates, Capacity in Q2
Rates have not contracted at all through the first of the year. Ocean shipping saw 12 consecutive general rate increases starting in June and ending in October. Rates have remained high ever since – even through the traditional drop in demand between the end of peak season and the Chinese New Year.
Much of this is due to an ongoing capacity crunch. The logistics funnel is feeling the impact of domestic challenges for rail and extremely high demand on drayage, especially for the West Coast ports. Conditions there improved slightly, but just as we saw light at the end of the tunnel with 18-20 vessels in line to unload container shipping halted in the Middle East.
Now the port problems extend to the East Coast. Shippers will struggle to find bookings for April and May arrivals, especially as retail based BCOs (beneficial cargo owners) are claiming significant capacity through the canal into Houston.
In the immediate term, we could see upward pressure on ocean rates. Some have already reached “fall-out-of-the-chair” levels. Plus, with less available capacity on the ocean side, there is a big demand on air freight for shippers and importers that cannot wait on a delay. That will drive a spike in air freight rates in the near term, illustrated by an uptick of $3 per kilo over the past few weeks.
Capacity Challenges Beyond Shipping Containers
Not all of the capacity problems are about containers shipping on the water.
It will take weeks if not months for ships slowed in the Suez to arrive at destination. The larger problem: all those vessels are already booked into peak season. If one vessel is caught up in the Suez or the West Coast situations, and they are put three weeks behind, that trickles down into the rest of the sailings.
To be clear, I am still bullish on the ocean transportation market. Ocean carriers are making record returns on high rates. But we should all know, vessel operators do not like the operational challenges any more than the BCOs. The next 10 weeks are critical in bringing the industry in order prior to peak ocean shipping season in 2021.
Some predict there is a two-month window where the industry can catch up with itself. That prediction assumes nothing else happens before late summer. As we have learned in the past 18 months, there are few assurances as far as once-in-a-career calamities are concerned.
International Trade Compliance is Still on the Radar
U.S. Customs and Border Protection (CBP) is very active right now and operating in a revenue-generating mindset. Trade enforcement officers are proactively examining the ACE Portal. They are trying to find situations where a shipper is manipulating the Harmonized Tariff System to limit the impact of tariffs and duties.
Meanwhile, there does not appear to be any immediate movement on trade relations with China, or with China 301. Your compliance protocols require the ongoing scrutiny applied during the previous federal administration.
With the extraordinary amount of activity coming through the ports, CBP faces similar capacity challenges to BCOs, vessel operators and port operators. The difference: trade enforcement officers have technology to help which is always powerful.
Adapting to Disruption in Ocean Transportation
Problems in the Suez Canal add another big supply chain disruption on top of the COVID-19 whiplash, which is still causing massive challenges. Of course, supply chain disruptions come in different categories. COVID was a one-time event. In some ways, the Suez was, too.
When multiple “one-time events” come in quick succession, however, many companies begin thinking about their broader supply chain strategy. One glaring learning from the pandemic: an over-dependence on the import supply chain, particularly with China, have become unbearably problematic.
Import volatility has pulled inventory management into the spotlight. International just-in-time planning for inbound materials became part of a very leaned-out supply chain for many companies. Some of those organizations are reassessing their inventory approach, realizing you cannot sell it if you do not have it.
Erring on the side of caution, moving an organization from just-in-time inventory to a just-in-case buffer inventory brings its own challenges. Our warehousing partners are not only at capacity but also reluctant to acquire more space. They fear the next disruption around the corner – or the ever-growing area that is e-commerce.
We are still feeling that bubble. COVID caused us all to start shopping online. Now that health risks are receding, convenience and consumer habits will only build the e-commerce retail channel that grew 32.4 percent last year compared to 2019.
That presents a puzzle of balancing inventory build to limit cost and operational needs against the prospects of e-commerce growth and developing the volume of inventory required to service digital sales needs. The last thing you want is a customer visiting your site only to find you are out of stock. Two clicks to your competitor is simply too close for comfort.
Mitigate the Risk of Ocean Transportation
In the long-term, costs rule most transportation planning strategies. The past 18 months have taught us that other factors need to be in focus as well. That is why Transportation Insight initiates broader supply chain conversations with our customers. Controlling cost while effectively managing the movement of your freight across your end-to-end supply chain relies on numerous factors.
We take the larger picture into consideration. We help shippers evaluate the transportation environment and determine the right go-forward strategy that controls cost and protects service. That may mean analyzing options for re-shoring or near-shoring. It may also mean leveraging deep data analysis to help you identify the inventories of materials or finished goods that are most critical to the success and growth of your organization.
And with the uncertainty of e-commerce, we focus on providing hybrid-digital solutions that evolve alongside your business to meet your needs as they change.
For a deeper dive into transportation management for the months ahead, register for our Q2 Transportation Trends webinar. It features forecasts and analysis from our multi-modal experts in truckload, less-than-load, small parcel and international ocean transportation.