Will the supply chain crisis ever end? I spoke with Phil Levy, chief economist of digital supply chain company Flexport, on Sept. 13. He offered a broad perspective on hopes for normalcy during uncertain economic times. The interview has been edited for length and clarity.
Q: The supply chain crisis has been quite a ride. Where are we now in the recovery?
A: One of the challenges of forecasting what comes next is we don’t have a well-established template for a major modern pandemic. Two big indicators I would point toward are consumption patterns and shipping times, which I think is a little simpler and more dependable than looking at some of the ocean price arguments, although I think they correlate pretty well in this case.
If you look at how long it takes to get goods across the Pacific — not just sailing time but from cargo-ready date to destination port and pickup — pre-pandemic you’d be talking 45 to 55 days. At the worst of the shipping crunch it was more like 120 days. Now we’re at about 86 days and it’s been dropping fairly steadily. That would suggest that if it’s not all the way back, it’s kind of partway in between. But it’s moving back toward pre-COVID norms.
Q: And consumption patterns? During the pandemic people bought things because they couldn’t go to restaurants or travel.
A: The preference toward goods is still there, but it’s easing off in a very strange way. This is one of the enduring puzzles of this whole time. It’s easing off for non-durables but much more slowly for durables.
When you have the Fed talking about transitory inflation pressure, part of the rationale was a very plausible theory that when people go out and buy things that last three years or more, if you do two years’ of buying at once, that surge is probably going to be followed by a dip. If you were going to buy a sofa next year but bought it this year, well next year we should see fewer sofa purchases. I can’t argue with that logic. We just haven’t seen the data.
Q: What are some possible explanations?
A: Sometimes it feels like we’ve put the pandemic behind us, and sometimes it doesn’t. So you go through changes in behavior because of that.
Also, one of the big questions we have is, “Do we return to normal?” People’s behaviors are determined by their environment. Suppose the environment reverts back to the way it was before the pandemic. In one version the answer is yes: When the environment reverts, they revert. The other version is no: People are creatures of habit. If you make them do something new for two or three years, even if conditions go back to before, behavior doesn’t go back. Maybe they used to go to the bakery every day, but now they’ve gotten into the bread machine. Maybe instead of going to the gym they work out at home. Those are examples of people sticking to those habits. So two open questions: Will the environment revert? And if it does, will people’s behavior revert?
Q: What lessons has the crisis taught manufacturing CEOs and supply chain managers?
A: I don’t think there’s a simple answer, like, “You should source from three or five places, not just one,” or “You should carry significantly higher inventories.” Each of those things is effectively buying an insurance policy. You’re insuring against a shock. If you source from one place and it shuts down, you’re caught. If you source from five places and one of them shuts down, you’re not so caught. True, but it’s much more expensive. One of the solutions being discussed is that you should “on-shore” or “near-shore.” That will make us less vulnerable. I don’t see the evidence for that. We have domestic shocks as much as we’ve had international shocks.
So you have to do a balancing act: How much am I willing to pay to have confidence? The more you can react quickly and have really good control over your supply chain, you’re in a stronger position.
Q: That’s an argument for using supply chain technology.
A: This is going to sound like a Flexport sales pitch, but there’s an advantage to having visibility into your supply chain, knowing where your stuff is, and being able to be agile in response to various shocks.
Read the complete Issue 21 of ChainMail here.
Enjoying this story? Subscribe to ChainMail, MxD’s newsletter on breaking supply chain news, trends, and updates.