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Here’s When North American Supply Chain Congestion Could Ease

New research echoes the consensus outlook that supply-chain disruption will be the name of the game through the middle of next year.

Some costs such as ocean spot rates should descend from their lofty heights, although Cowen & Co. analysts said prices aren’t likely to dip to pre-congestion levels. Expenses related to trucking, rail and warehousing are also expected to remain high. And Cowen analysts’ proprietary surveys indicate that shippers are holding more inventory than before the congestion backlog. For now, rates remain above average levels, and may not normalize before late January’s Lunar New Year.

“With trucking rates near historically high levels, rail intermodal contract rates in the high single digits, and extraordinary ocean container rates, the supply-demand imbalance remains clear. Our proprietary survey suggests that 49 percent of railroad shippers are holding more inventory, highlighting a reformed school of thought surrounding just-in-time inventory strategies,” analysts wrote in Cowen’s supply chain report.

While the Covid-19 pandemic—and rising cases overseas— worsened the problem, issues within the North American logistics network have been years in the making. Inherent volatility stemmed from a combination of underinvestment in infrastructure, susceptible inventory management and tariffs, among other factors. And even though port congestion and higher ocean freight rates made air freight a viable alternative, companies are also facing increased labor and equipment costs. Cowen’s report noted that a truck driver shortage is expected to intensify, citing American Trucking Association, which expects the current 80,000-driver-shortage will double by 2030. For now, many shippers—about 58 percent—have moved freight off the highway and onto more economical railroads.

The current problems stem from healthy consumer demand for goods that has upended the supply and demand dynamics, with Covid-19 shutdowns further exacerbating the stress. But retailers have also contributed to the problem in trying to get ahead of possible supply chain disruptions as they sought to cater to free-spending consumers. Instead of chasing the “just-in-time” model, many retailers switched to “just-in-case,” rushing more merchandise orders in earlier than usual and further stressing supply chains.

In the first three months before Covid hit the U.S., the average forty-foot container rate from China to the ports of Los Angeles and Long Beach was $1,400. That rose to its peak in September to well over $20,000 before dropping to $14,185 on Nov. 26, still well off its pre-Covid low.

But Cowen internet analyst John Blackledge noted that a large seller on Amazon and Wayfair said container prices ran anywhere from $25,000 to $35,000 per container for must-have and holiday items in October. “Regarding container contracts that our seller had in place, steamship lines are not honoring prearranged prices without heavy delay,” Blackledge said, adding that the vendor now takes 60 days instead of 30 to get a shipment from Asia to his Midwest warehouse.

“We have heard from industry contacts that low margin freight isn’t even moving,” the report said.

The good news is that cargo inflow has passed the Thanksgiving peak for incoming holiday inventory. “Ports will likely jump on every lull to work through this and should have the entire month of December to clear things,” the report said. However, the bad news is that ports may have just one month to play catch up. That’s because things could deteriorate a bit in January as the Asian Lunar New Year falls a week earlier this year. The calendar shift could drive shippers to pull shipments even earlier into January.

“Covid has undoubtably changed the way companies are thinking about their supply chain—now having to rethink logistics strategies that can protect against potential black swan events. There have been multiple schools of thought surrounding how companies can and will do this: diversify manufacturing in multiple countries, onshoring manufacturing, move away from just-in-time inventory techniques, [and] bring more of the supply chain in-house (large retailers chartering ships),” Jason H. Seidl, Cowen’s transportation analyst, wrote in the report.

Seidl said one discount retailer is looking into nearshoring by diversifying its vendor supply network away from Asia to Mexico to “derisk global supply chains.”

Strong positioning in the market and pricing power with shoppers, higher average unit retails, elite inventory management and omnichannel capabilities, along with scale and relationship strength with partners abroad and specializing in lower return categories” could better position retailers navigating strong demand with the pressure to offset costs.

Luxury and retail analyst Oliver Chen said that premium retailers are likely better positioned because of their ability raise prices without their customers batting an eye. Some in the sector have already increased pricing “at-least twice” this year without noticeably affecting demand, he noted. He believes Restoration Hardware, LVMH Moët Hennessy Louis Vuitton and Mytheresa.com are some of the best performing names in luxury retail. In addition, retailers that specialize in smaller products and higher average unit retail, such as apparel and accessories, tend to fare better than retailers selling larger items such as furniture and electronics.

Chen also believes that retailers such as Target, Macy’s and American Eagle Outfitters that invested in supply-chain technology are winning at placing the right inventory levels at the right stores. Target, Walmart and Kohl’s get points from Chen for using stores to fulfill online orders. And the really big retailers like Target, Walmart, Costco, Williams-Sonoma and Restoration Hardware also have the advantage of size because their scale means they can negotiate more favorable contracts and get their products transported faster. While chartering a private vessel may add supply chain costs, gaining greater control and speed more than offsets the near-term expenses.

Costco, Walmart and The Home Depot have secured their own vessels to get ahead of supply chain headwinds, and Costco last year acquired Innovel Solutions, which is now Costco Logistics, to help improve delivery times on many items from two weeks to under a week.

Retail and apparel analyst John Kernan said the improved margins have helped to offset inflationary supply chain pressures, both inbound and outbound, along with rising raw materials and labor costs. While he raised the possibility of risk should inventory levels rise and consumer demand falls, Kernan said the likely scenario would be that the supply chain normalizes through a “manageable soft landing,” which should mean that inventory will naturally “reach a parity with demand.”

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