Have you seen the images of empty store shelves lately? They’re all over social media and the news. You might think that it’s the result of people panic buying, but the problems run deeper than that.
Maybe you’ve seen some terms like “supply chain disruption” or even “supply chain collapse” lately. Or perhaps you’ve tried to book freight and found the cost of container shipping to be five times higher than what it was in mid-2020.
Toilet paper. Toys. Furniture. Bikes. Low-end laptops. It seems like a lot of random goods are hard to come by lately.
OK, let’s take a deep breath for a minute. Remember the immortal words of Hitchhiker’s Guide to the Galaxy: Don’t Panic.
Shortages raise a bunch of understandable and, quite frankly, scary questions.
Is this a COVID thing? A trade war thing? Who is to blame for the supply chain breakdowns we’ve been seeing lately? Is this even a real problem or just media hype?
The answer is complicated. That’s because the supply chain has been complicated for decades, and freight shipping even more so.
Now obviously freight shipping is a part of the supply chain as a whole. They are dependent, or perhaps codependent, upon one another. All it takes is a grain of sand in the gears, and the whole massive machine stops working.
So why just talk about freight shipping? Well, other parts of the supply chain are slow for prosaic reasons like labor shortages and factory closures. Freight shipping crams skyscraper-size boats into 33-meter canals, leaves employees drifting at sea for months with no pay, grinds to a halt when stackable boxes are in short supply, and does so while being damn near impossible to regulate.
Let’s just say I’ve been wanting to write this article since even before the virus because that’s how long this has been an issue. I procrastinated for a long time because it’s just such a complex topic. Yet all these problems just so happen to now be rearing their ugly heads in an especially sinister and obvious way. (Thanks for that, COVID.)
Go into this article with a sense of empathy. The system itself is the bad guy here. It’s the misalignment of incentives that leads to the unholy mess that we see today.
What you need to know right now
This is a really hot topic right now, so I want to get some basic facts straight near the top of the article so I don’t fan the flames of false fears.
- Disruptions are not evenly spread. One store can be out, and the one next door fully stocked. What you read online may very well not apply to your situation at all. The only real way to tell if you have a local problem is to go to the store and find out.
- COVID-19 is not the only factor here, but it was definitely a catalyst for the shortages due to the closure of certain factories and ports. But setting aside COVID, the system is way too vulnerable to all kinds of shocks, and you can’t blame the virus for that fact.
- You should have two weeks of household supplies on hand at all times. Food, water, and medicine. Nothing weird. You don’t have to go full doomsday prepper and it’s not TEOTWAWKI (the end of the world as we know it). Just don’t count on everything you need being there at the precise moment you need it.
Take these three things to heart and you will already have a more nuanced and practicable understanding of what’s going on than most people. Make sure you take the steps necessary to keep yourself and your household stocked and in good spirits first, and then try to understand the world’s problems next.
What is the supply chain?
Like I mentioned earlier, you can’t talk about freight shipping without talking about the supply chain first. The supply chain is a network of companies and individuals. It’s how a product is created and distributed to its end user.
This is easier understood with an example than a book definition, though. Take, for example, a laptop.
Everything in the laptop has to come from somewhere. The plastic for the casing, the computer chips in the processor, the lithium in the batteries, and so on. These basic elements – plastic, silicon, and lithium are raw materials. You can expand the term raw materials to mean anything which a company converts into something else.
Raw materials are then processed, often in a factory, so that they collectively become a product that can be sold to end users. Factories turn silicon into microchips, lithium into batteries, and plastic into laptop casing. Other factories turn batteries, laptop casing, and microchips into laptops.
Then those laptops have to get to the consumer somehow. Most likely, they were manufactured in China, so those laptops need to be shipped to a distribution warehouse somewhere. That might involve sending them in bulk by sea, air, rail, or road. Or, commonly, a combination of two or more.
This is a really complex subject, and my explanation is an abbreviated one. The most important thing to understand about the supply chain is that a long series of events is needed to make nearly everything you use. These events must be completed sequentially, and a slowdown at any step of the process necessarily slows down the steps that follow.
We’re seeing supply chain disruptions at every level from raw material shortage to factory closures to labor shortages. I’m just talking about freight shipping because it is the part of the supply chain process with the weirdest problems.
What is freight shipping?
Put simply, freight shipping is the physical process by which goods are shipped from one part of the world to another, in bulk. It is distinct from order fulfillment or mail delivery in the sense that massive quantities of goods are shipped together all at once.
About 72% of this is done by sea and inland waterways, with 18% being done by truck, 9% by rail, and less than 0.25% by air. This is because sea shipping is, by far, the cheapest of all possible options. That’s why I’ll be focusing on it for the rest of this post. But trust me when I say the trucking industry has its own problems too.
Business these days is run on a global scale. Raw materials are imported from one country to be processed in another and sold in yet another. Freight shipping is the bridge that connects all these disparate parts into a cohesive whole.
When freight shipping works well, this means that you, as a consumer, get to benefit from an enormous array of inexpensive goods. When it doesn’t work well, it means that businesses are stuck waiting idle until necessary parts arrive.
This is inconvenient, to be sure. But “decadent and depraved” sounds like an overstatement. To answer that, we must first answer a more general question.
What’s wrong with freight shipping?
How much time you got?
The recent stories we’ve seen in the news are really important. But much more important is the underlying causing of the individual news stories, and that is…
The rise of the just-in-time supply chain
Just-in-time manufacturing is a simple enough concept. The goal is to increase efficiency by keeping the bare minimum inventory and outputting the bare minimum of waste. Toyota used this in the 1930s, and their method went mainstream much later.
The 1990s, in particular, is when we saw just-in-time manufacturing grow to what it is today. It was around this time that free trade agreements also opened up the door for unprecedentedly global business operations. As a result, everyone was competing with everyone, and efficiency and cost savings became paramount.
This was really nice if you wanted cheap consumer products. It was not nice if you wanted a manufacturing job in the US. And, up until COVID-19, that seemed like the only real problem with our reliance on freight shipping and just-in-time manufacturing.
But when COVID-19 happened, ports shut down, as did factories and entire countries. Suddenly the semiconductor plant couldn’t ship new chips to the laptop manufacturing plant. These slowdowns build upon one another like drivers slamming their brakes when there is debris in the road.
Now you might think that freight shipping wouldn’t contribute so much to the problems of just-in-time shipping, but we know that traffic jams outside of ports show us that’s not the case. As it turns out, freight shipping has tons of chokepoints. There are a finite amount of ports and a finite amount of dockworkers. That’s understandable.
But it goes further than that! Container shipping requires shipping to be done in containers. This might sound tautological, but it’s a really important point. You literally cannot properly fit goods on ships without containers, and those were in short supply last year.
On top of that, a massive amount of global trade has to go through the Panama Canal and/or the Suez Canal. These are extremely narrow bodies of water that allow for passage between the Americas, in the former case, and between eastern Asia and western Europe in the latter case. This means that one single boat getting caught in a single canal can block $9 billion per day of global trade.
The Faustian bargain of just-in-time manufacturing
These problems are obvious by now, and freight companies, to their credit, are fully aware of them. But they also cannot easily change their ways.
This is the trouble with just-in-time supply chains for businesses in general. If you participate in the system, you run the risk of either causing delays and shortages or being the victim of them. If you keep safety stock on hand, split your inventory across multiple shipments, or otherwise take actions to reduce the risk of delays, you spend more money and end up having a harder time competing with those who don’t.
I call freight shipping decadent and depraved for a reason. The primary reason was to reference the old Hunter S. Thompson piece about the Kentucky Derby. The other reason is that to believe and act upon the belief that no shock could possibly disrupt your day-to-day operations is, in business, depraved. Particularly when your job is to transport food and medicine around the world.
But again, it’s not any individual worker who’s at fault. It’s not even an individual company or billionaire, though they are fun to blame and make mean-spirited memes about. It is the just-in-time system that everyone participates in because the incentive to do so is incredibly compelling, as are the disincentives to not do so.
Seafaring laborers have brutal jobs
So consider the following. Freight shipping is an industry where cutting costs and running efficiently is extremely important. In the case of sea shipping, it is also an industry which takes place largely in international waters, free from easy regulation by the state. All this adds up to make perfect conditions for a really awful job.
The Bloomberg piece “Worst Shipping Crisis in Decades Puts Live and Trade at Risk” does a great job of outlining exactly how brutal the job is and why it is that way. Here are a few choice quotes.
Seven of the 22-person crew had been on the ship for 14 months, beyond the end-date of their contracts and in breach of international maritime law, regulators and union officials said. They were owed $64,000 in back pay, and there wasn’t enough fresh food. There was also no valid plan to get them home to their families in Myanmar. They wanted off.
“We are like hostages,” said a crew member on the JY Ocean, a ship managed by Oceanbulk Maritime SA, a sister company to the Nasdaq-listed Star Bulk Carriers. By August, almost half of the 20-person crew had been on-board for more than a year, sent contract extensions and, they said, instructed by the captain to sign them. “It’s very hard to concentrate on your work when you want to be home,” the crew member said.
There are a few dominant players in the shipping industry, but much of the trade is made up of middle men upon middle men, connecting companies that have goods to ship with a vast network of owners, operators, staffing agencies and so on. Those layers make it hard to hold anyone accountable for on-board working conditions, says Richard Meade, managing editor of U.K. shipping researcher firm Lloyd’s List, or to solve problems when they arise.
Seafaring workers often come from poor countries with even poorer job prospects. Though very difficult, seafaring is safe and relatively lucrative, which can make it an amazing opportunity. But the risk of getting stuck on-board a ship with no escape for months on end is really, really high. And we all know firsthand just how difficult quarantine conditions like that can be even in your own home. Let alone lost at sea, at the mercy of both the elements and a Kafkaesque bureaucracy of unknown bosses.
But nevertheless, the industry runs on labor. Tired, haggard, worn-out, understandably distrustful labor. How much longer can that go on without serious consequences? It’s anyone’s guess.
Ports are horribly prone to backing up
Right now, we’re experiencing huge issues at seaports. Ports like Savannah, Georgia and Long Beach, California have a huge backlog of freight ships that need to be unloaded. But there isn’t enough space to put the unloaded goods. And sometimes there aren’t even enough workers to do the unloading!
It’s true that some of these issues are still the aftereffects of the initial COVID-19 problems from early 2020. Still, the fact remains that ports only have enough labor and capacity for a normal amount of cargo ships and a normal amount of goods to unload.
In our universe, COVID-19 caused initial production delays and then a rubber band effect where more goods had to be shipped to make up for lost time. But if there were no COVID-19, something else eventually would have spiked demand. It could have been a war, some kind of financial crisis, or even an amazing technological discovery. The point is: something this critical should not be running at capacity most of the time anyway. The system needs to have some level of resiliency built in.
Container ships are getting too big
It might sound like a really peculiar complaint, but container boats have gotten too big. Yes, seriously.
You might not think of it this way, but HMM Algeciras, one of the world’s largest container ships, is roughly the size of the Empire State Building. The reason for making ships this big makes a lot of sense on paper, especially if you take just-in-time manufacturing to heart. Bigger ships benefit from economies of scale because they can fit a greater number of containers on a single boat.
Now normally, I would be all about that. It sounds absolutely fantastic to be able to fit more containers on a single boat. But there are a lot of scary problems that come along with using such massive boats that further exacerbate the weaknesses of our current supply chain system.
First, larger boats are riskier. On the open seas, large ships can lose a truly enormous amount of containers due to weather events. It doesn’t help that freight companies are now allowing boats to stack containers even higher to free up port space. This is a great idea, but not one without risks.
And then there’s this…
The above is a diagram of the maximum size that container ships are allowed to be if they want to pass through certain critical canals, or as I like to call them: shipping chokepoints.
The Suez Canal can get as narrow as 200 meters and Suezmax ships can be as wide as 53.8 meters. That doesn’t sound like it would be a problem, until you realize that the ships can be as long as 345 meters, meaning that if they turn sideways, they can get stuck in the canal. It’s like the scene in Friends where Ross tries to move a couch upstairs, except with billions of dollars of lost revenue.
Then you have the Panama Canal, whose locks are just 33 meters wide. Hulking Neopanamax ships can be as wide as 32.31 meters. This leaves less than 70 centimeters of space leftover. That’s just 27 inches, which is smaller than most people’s waists.
You get the point. Needless to say, with so little room for error, it’s incredibly easy to imagine these skyscraper-size ships getting stuck again and again and again. This would then block trade, back up ports, and tie up limited shipping containers. This, in turn, can cause inflation which defeats the entire purpose of a super-efficient supply chain in the first place.
Even containerization itself is a problem
At this point, you might say, “OK, the problem is a mix of the just-in-time system, oversize boats, labor issues, and knock-on delays.” That’s correct and formidable enough in its own right, but there are still more nuances to this problem.
The modern intermodal shipping container was developed in 1955. Needless to say, the containers caught on and you can see them everywhere from seaports to freight trains. The typical shipping container is either 20 or 40 feet long, and 8 feet wide. They stack like cardboard boxes, which makes it much easier to transport goods around the world.
Truly, container shipping is one of the modern wonders of logistics. It’s the humble backbone of the supply chain, and basically everything you own shipped in one of these metal beasts at some point.
But as I mentioned earlier in the post, there haven’t been enough containers to go around, and it takes time to create new ones. This has caused all kinds of delays and has cost a lot of people a lot of money.
The trouble is, without containers, these skyscraper-sized boats become a lot less efficient. You can’t just pile up loose items on board – you have to box them or they don’t ship. Hence more delays.
72% of everything comes on cargo ships
It’s tempting to look at the problems which I’ve outlined above and say “well, this is primarily isolated to sea shipping.” But that’s just the problem – sea shipping is the primary way to ship goods across the world. It’s cheaper, generally more environmentally-friendly than alternatives, and for the time being, it still basically works.
If we get to a place where air shipping – the only viable alternative to sea shipping for long-distance bulk shipping – is able to compete on cost, then something is really wrong with sea shipping. And prices will go up accordingly.
Furthermore, we do not have even close to enough planes to ship goods without relying on sea freight. So really, our only option as a society is to make sea freight shipping work better. There is no escape hatch here.
Freight shipping is hard to regulate
Of course, saying we should make sea shipping work is easy. Making it work is a lot harder.
Sure, we should probably give freight companies incentive to treat workers better. And perhaps it would be a good idea to regulate the size of container ships and make sure there is a strategic stockpile of shipping containers somewhere.
But this gets at one of the nastiest parts of the entire freight shipping industry. Sea shipping takes place in international waters. The whole industry exists in a liminal space between countries. The primary way to regulate freight shipping is through nebulous maritime law.
In short, when things go wrong, it’s hard to hold any individual or company responsible. Without a clearly accountable party, it is impossible to effectively regulate the freight shipping industry. All of this works together to create an eminently favorable environment for really, really bad behavior.
What does that look like in practice? Consider the case of the Ever Given, which was stuck for six days in the Suez Canal in 2021. It blocked billions of dollars in global trade and created an enormous amount of bad press for the Suez Canal Authority (SCA). The SCA also had to do a lot of the work to free the stuck boat too.
But how do you hold someone accountable for a freakish situation like this? In this case, a settlement for about $550 million was reached between the SCA and the ship’s owners and insurers.
This might sound like an orderly way to solve a big problem, but it’s inadequate in many ways. For one, the seafaring crew were stuck at sea for months on end before the settlement was reached. For another, it doesn’t address the fact that ships are being made so big they barely fit into canals.
So who do you blame for a global industry that incentivizes the creation of ships too big to go through global chokepoints? I don’t know, but we better figure it out before the Suez Canal gets blocked again. Oh wait…
What can I do to protect my business?
Looking at something as hulking and unassailable as the global freight shipping industry, it’s tempting to give into despair. It’s tempting to think there is nothing at all you can do, and that you’re kayaking in a tropical storm.
But the truth is, you still have agency over your business and your day-to-day life. You can, in fact, protect yourself from the worst impacts of what I’ve described.
Understand where your goods come from
Knowing where the goods for your business come from is vital. You need actionable, accurate information that helps you make plans that insulate you from supply chain hiccups.
First, if your business primarily functions as a retailer, think about where the products you sell come from. Your best bet for preventing serious stockouts is to choose reliable suppliers and, more importantly, to carry a variety of stock so that one shortage doesn’t negatively impact your entire book of business.
If, on the other hand, your business functions as a manufacturer, consider where the component parts you use come from. If you make board games like I used to before starting this blog, you would want to make sure you can source cardboard, wooden pieces, dice, and other common game components.
Knowledge is power here. Pay attention to where your goods come from, and you can often spot critical points of failure before they are an issue.
Implement good inventory management practices
Of course, you can’t always prevent shortages from affecting your industry. You can, however, implement some inventory management best practices to try to insulate your business from wider problems. I wrote about this on a client’s blog, and here are the conclusions from that article:
- Find good inventory management software.
- Categorize your inventory by priority.
- Track all relevant data.
- Monitor your sales, including seasonality and the tendency for items to be purchased together.
- Get a feel for sales cycles.
- Be proactive about quality control.
- Make sure you have a good returns process.
- Order your own restocks instead of relying on software (at first).
- Conduct regular updates.
And perhaps more simply than all of these: always keep safety stock on hand. If it’s important to you, keep a backlog! All it takes to sink many businesses is a week or two of lost revenue, and you want to prevent yourself from getting into that situation in the first place.
You may think that understanding your own business supply chain and implementing inventory management does little to fix our world’s supply chain issues. Yes, it is true that your sphere of influence is limited when compared against freight shipping.
However, keeping some buffer on hand and knowing how to get what you need keeps your customers – be they businesses or consumers – from running out of what they need. You will be doing your part not only to protect yourself, but to protect others from supply chain disruptions as well.
In prior years, the siren call of efficiency might have been irresistible. To spend money keeping extra stock on hand would seem paranoid, or at least suboptimal. But the seas are changing now, and even stalwart just-in-timers like Toyota are changing their ways too. You may as well be an early adopter of the new and necessary.