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By Dean Croke, DAT Solutions
At the start of the pandemic, supply chain expert Daniel Stanton—a.k.a., Mr. Supply Chain—warned of a "bullwhip effect" on inventory levels.
The bullwhip effect is when even small changes in demand cause big changes in the need for materials or parts further up or down the supply chain.
Stanton, a logistics consultant who offers educational programs online, said the bullwhip effect began to wind up last April as consumers stuffed their pantries, service economies closed and U.S. manufacturers sent workers home and throttled back production.
The whip cracked again last summer with consumers spending vigorously on furniture, appliances, electronics, recreational equipment and other products that make life more palatable as we shelter in place.
Businesses placed supersized orders to compensate for the time it takes to obtain supplies from factories and transportation companies. In some cases they ended up stockpiling far more inventory than they wanted, and the bullwhip effect rattled their supply chains again.
Today, consumers continue to spend, service businesses are opening, imports are surging, manufacturing is gaining steam and no one wants to be caught short.
That's why shippers are paying exorbitant prices to make sure their freight gets where it needs to be.
Take, for example, bed sheets.
Dan Deigan, a logistics expert and sales coach based in the Toronto area, said one of his clients recently paid $9,600 to move two 40-foot containers (FEUs) of bed sheets from China to Florida.
The trip took nearly twice as long as expected and cost almost double the typical rate.
Deigan said the two FEUs of bedsheets were ready to ship on Dec. 16, but tight capacity on the transpacific shipping lane resulted in the containers being "rolled" from one vessel to the next until slots were finally made available on Dec. 29.
The ship made the 21-day crossing to the Port of
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Long Beach on schedule but sat at anchor for 14 days along with 46 other vessels due to congestion. By the time the containers were unloaded and ready to move inland, the client had just five days to get them to Florida. With intermodal no longer an option, the containers were posted to the spot market as truckload freight. The rate for a sleeper team to make the 2,500-mile trip was $3.59 a mile—about $9,000 per container.
Deigan's client lost around $10,000 on this shipment in order to keep the customer happy and meet contract service levels. Already, the client is having to place larger orders in advance to guarantee production at factories in China, and hold more inventory here in North America. It's the bullwhip effect in action.
Is there an end in sight? Current U.S. retail inventory levels are near $645 billion, $40 billion less than in March 2020, according to the U.S. Bureau of Economic Analysis.
"If we do a back-of-the-envelope calculation estimating retail freight at $6,000 per ton, we still have a tremendously large volume of inventory still to be replenished," said Jason Miller, a supply chain economist and associate professor at Michigan State University.
$40 billion in retail inventory equates to about 6.6 million tons or approximately 300,000 truckloads of retail freight. That's a lot of freight to move at a time when capacity is already tight. It's time to get crackin'.
Dean Croke is the principal industry analyst at DAT Freight & Analytics, which operates in the industry's largest load board for spot truckload freight, and a data analytics program based on $126 billion in annual spot and contract freight transactions. For information, visit dat.com.
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