Descartes Datamyne Gives Exclusive Interview on Current State of Ocean Cargo Supply Chains

While there’s no shortage of demand from consumers, there continues to be shortages of labor, equipment and shipping capacity to meet their expectations. Supply chain disruptions, port congestion and rising shipping costs could continue to be challenges through the end of the year, a prominent ocean cargo expert maintains.

Shippers might as well forget about planning for a “peak season,” industry analysts contend. Due to ongoing pressures from e-commerce and post-pandemic demand, ocean carriers are operating at crisis-driven velocity for the foreseeable future.

While there’s no shortage of demand from consumers, there continues to be shortages of labor, equipment and shipping capacity to meet their expectations. Supply chain disruptions, port congestion and rising shipping costs could continue to be challenges through the end of the year, a prominent ocean cargo expert maintains.

Chris Jones, executive vice president of industry and services for the consultancy

Supply Chain Management Review: Do you expect U.S. consumer demand to be high during Peak Season?

Chris Jones: The potential is there for consumer demand to be high because we are in a situation where the general feeling is that COVID-19 is seemingly in check. The economy is rapidly reopening and, as a result, people increasingly want to get back to normal – and that means going out to shop, travelling, dining in restaurants, attending entertainment and sporting events, and so on. With these types of consumer activities increasing, we could see higher demand for goods and services but potentially lower inventories, which will cause prices to rise.

SCMR: What impact will inflation have on demand, if not controlled?

Jones: The Federal Open Market Committee just raised its inflation forecast to 3.4% for the year so we don’t think that it will go out of control. In addition, strong jobs growth is predicted into the fall. These two critical data points suggest that it is unlikely that inflation will impact demand. If anything, the global shipping crisis will impact demand as consumers put off purchases of items with very long or uncertain lead times.

To go even further, the impact of inflation on demand for U.S. imports is interesting. To get a gauge of any impact, we should look to the last period of major inflation: August of 2008. During that period, the consumer price index rose 5.4% as compared to the 5% in May of this year. The expectation would be that demand for imports would decrease; however, if we look at the trade data from 2009-2010, we see a substantial increase in volume:

SCMR: Will ocean carriers be able to sustain the current high-rate structure?

Jones: Current projections indicate that the current situation will continue through the first quarter of 2022. This means that ocean carriers will likely be able to maintain their current sky-high rates throughout peak season and beyond. This is mainly due the ongoing issues of port congestion, equipment and labor shortages, combined with the high demand for goods and reduced inventories.

After we work through the current backlog, rates will likely start to reverse as demand for commodities eases. As we move towards the midpoint of next year, our expectation is that the congestion will alleviate, and we will begin to return to normalcy.

SCMR: Do you expect shippers to leverage volume for favored status?

Jones: Not any more than is already happening. Traditionally, shippers that could guarantee higher volumes would be preferred by carriers and have lower rates. The logic here is simple: carriers need to fill their ships with cargo; if a single shipper can fill most of a ship, then life is simpler for shipper and carrier alike.

However, what we are on the lookout for in the coming years is a shift in the “favored/preferred” dynamic. For decades, high-volume, major retailers have set the baseline for shipping rates and, obviously, have that “favored” status among carriers for their ability to fill cargo ships.

While there is no indication that this relationship will change drastically overnight, the rise of ecommerce and particularly Amazon quietly entering the equation back in 2016 means the ocean freight industry is going to see some overhaul in the coming years. Specifically, it’s increasingly possible that it will not be the major preferred retailers setting the baseline for ocean rates, but Amazon and its ability to provide a single supply chain from factory to the customer’s doorstep.

SCMR: What about service? Can carriers deliver on their promises, or are they overwhelmed?

Jones: Carriers are most certainly overwhelmed. They are operating in atypical conditions, including the fact that ports, warehouses, labor and land transport are all overwhelmed themselves. Can they deliver on their promises? Hard to say one way or another, but it is fair to say that their customers know these are highly unusual times and that everyone is doing the best they can. Next year we may see a return to normal in terms of service.

SCMR: How likely will shippers opt for air cargo if ocean carriers can’t manage schedule integrity?

Jones: Unless it is an absolute emergency or if a given air shipment is economically viable, it is unlikely that shippers will forgo ocean for air. Because shipping by air commands a premium rate, the preference of shippers will be to continue going through sea lanes and endure the delays, but they will want to set appropriate expectations with customers so that they can plan accordingly.

SCMR: Will global supply chains remain clogged for the rest of the year? What is the solution?

Jones: The current backlog will likely remain at least to September or October. After that and based on the assumption that COVID-19 is now in check, we will potentially see an improvement as the high demand for goods starts to ease. Because every part of the supply chain is affected, the best solution might be to chip away at the backlog and work our way back to more normal levels.

The main issue with slowly working our way back to normalcy is two-fold: the first is the ongoing congestion and the slow rate of returning to “normal”. The second is the expected ramp-up of imports during peak season. We expect the current backlog to remain until September/October while also anticipating a major increase in import volumes as U.S. importers prepare for the holidays.

Another issue is the current inventory-to-sales ratios for retailers in the U.S. Right now, that ratio is around 1:1—the lowest it’s been in decades according to the Federal Reserve Economic Data. What this means is that we’re almost at the point where retailers don’t have enough inventory to meet current consumer demand. This is going to result in an increase in imports, which will compound the issues surrounding current port congestion as well as the upcoming peak season spike.

The longer-term solution for U.S. importers is to examine the resiliency of their supply chains. This topic has come up repeatedly over the last several years due to other major disruptions (none, of course, as momentous as COVID-19). With the most recent COVID-related disruption being the congestion at the Shenzhen port, the long-standing strategy of China Plus One for U.S. supply chains may no longer be the most effective.

SCMR: Ports and terminals are congested too…should shippers avoid bottlenecks on the U.S. West Coast by sourcing from the East and Gulf Coasts?

Jones: In some cases, but many will continue to experience the delays we are seeing today. It’s also possible that other ports are facing somewhat of a similar situation as the West Coast ports. Understanding the reasons for the bottlenecks on the West Coast (e.g., lack of port staff/workers, increased volume of goods being imported) is important since similar factors may already be—or will soon be—impacting other ports.

Additionally, the costs of shifting your supply chain to operate through East Coast/Gulf ports is likely going to be far more prohibitive than the congestion/delays experienced on the West Coast. Ultimately, the congestion is not an issue for shippers that will be solved by trying to move to a different port. There are also other considerations that are limiting port availability and adding to bottlenecks. For example, with congestion at the Ports of LA and Long Beach, the next obvious solution—if it were a simple matter of moving to another port—would be to shift up or down the coast to the Ports of San Diego or Oakland. That is not, however, an option as these ports simply don’t have the capacity.

This is not to say that diversifying suppliers is not an important consideration; however, rapid, reactive supply chain shifts are not sustainable. Long-term proactive strategies are needed to both get through the current congestion and to mitigate disruption in the future.

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