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Top Source of Supply Chain Stress? Volatile Freight Costs and labor shortages

28 Mar 2023

By Benny  Lim.     Photo:Amaury Michaux

The global supply chain over the past three years has been plagued by drastic swings in demand, resulting in rising and falling container prices, congested ports, and cargo backlogs that have devolved into empty containers and blank sailings.

 

But despite the stressors that triggered this instability, logistics has been the main catalyst of supply chain turmoil. In fact, logistics accounts for 71 percent of the variability within the supply chain, with freight costs and labor being the primary factors. For example, logistics includes drivers such as ocean freight rate, intermodal rate and logistics and manufacturing job openings. In one example of ocean freight’s impact, 44 percent of North American ports struggled at the bottom third in container port performance. This drove companies to use fast but expensive air freight, which carries the highest carbon footprint amongst all logistics modes. The price and number of U.S. inbound flights from Asia had an outsize impact on stability—more so than air freight from any other region.

 

A similar trend emerged in trucking, where rates and volumes have the biggest effect on domestic shipping. Since 2008, the trucking industry has experienced a 2 percent year-over-year increase in price. In the past two years those prices increased by more than 45 percent, much of it being escalated by the Russia-Ukraine conflict and its impact on fuel commodity prices. During the same period, transportation job openings grew in response to ongoing shortages of truck drivers, which further compounded the stress on logistics operations.

 

But as it pertains to intermodal freight, the analytics attributes stress to higher rail prices, not volumes. Rail freight is known for efficiency and scale, but the tradeoff is speed and flexibility as it requires more days in transit and lacks options with origin-destination (OD) pairs and schedules. Hence, shippers chose the customer responsiveness of truckloads over the cost efficiency and lower carbon footprint of rail, even in the face of inflationary pressure.

 

While capacity is mostly back to where it was before the pandemic, supply variability has almost more than doubled in magnitude on an annual basis for the past two years. Supply is largely driven by the commodity and material costs required to produce inventory. While supply chain globalization and continued efforts to diversify have helped U.S. companies reduce expenses through low-cost sourcing, now businesses are dependent on their offshore supply investments.

 

As such, this volatility has turned that dependency into vulnerability, disrupting supply lines for commodities and raw materials. It doesn’t help that U.S. economic activity in the manufacturing sector contracted in February for the fourth consecutive month, following a 29-month period of growth.

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