US straightens supply chains after months of inflationary groans

US straightens supply chains after months of inflationary groans

Costs are beginning to fall across U.S. supply chains, easing inflationary pressures even as importers fear further Covid-19-related disruptions in China could cause further problems.

Rising logistics costs, which companies have largely passed on to customers, presented one of the greatest business challenges of the pandemic and helped fuel a historic rise in consumer prices from early 2021 through mid-2020. This year. Congested ports, a shortage of lorry drivers and limited warehouse space that left some stores short of stock defined last year’s Christmas retail season.

This year, those problems have started to fade. Wholesale transport and logistics prices are falling after peaking last summer. Some members of the Federal Reserve discussed “easing supply constraints” as they assessed inflation at their last monetary policy meeting, according to the minutes.

Smoothing supply chains in the United States reflect lower shipping demand due to slowing consumer spending and shrinking manufacturing activity, as many retailers shipped goods earlier than expected. usual to avoid repeating last year’s delays.

Line chart of the U.S. producer price index for transportation and warehousing industries showing logistics costs stabilizing

According to Freightos, the freight data company, spot rates for shipping cargo from Asia to U.S. West Coast ports have fallen 87% over the past year, to a level of only 7% above the same period of 2019.

The cost of air freight, which many importers were forced to rely on last year as ports were overwhelmed, has roughly halved in 12 months, while DAT Freight & Analytics reports spot rates for closed trailers “dry vans” by which many goods are transported by truck fell by a third.

“What has characterized the last two or three months is that demand has slowed, capacity has opened up and therefore prices have come down,” said Simon Geale, executive vice president of purchasing at Proxima. , a supply chain consultancy.

To further ease the pressure, Congress and President Joe Biden intervened last week to end a threatened strike by freight railroads, which business groups say would have cost the US economy 2 billions of dollars a day.

“Lower supply chain costs should help improve inflationary pressures, assuming companies pass them on,” said Brian Whitlock, senior research director in Gartner’s logistics team.

“There are still headwinds in the truck industry [such as] labor costs and equipment availability, but that’s also normalizing, so I think in 2023 we’re going to see a really good balance in everything,” said Scott Sureddin, Managing Director of DHL Supply Chain. North America, a leading logistics provider.

However, wage inflation since the start of the pandemic appears to be more durable. Sureddin, which employs nearly 50,000 people in 515 warehouses, said DHL’s hourly wages had risen by $3 to $5 an hour to an average of $20.

His company will only hire 12,000 seasonal workers this year, down from 15,000 in 2021, and has deployed 2,000 robots, down from 1,500 a year ago. Since wages have gone up, “the return on investment from automation has improved,” Sureddin said.

US companies, including Apple, have pointed out that a cloud still hangs over their supply chains: the risk that protests across China against Beijing’s zero-Covid pandemic response could trigger a spike in infections or further disruption. of manufacturing.

The iPhone maker, whose Foxconn-owned factory in Zhengzhou has been the scene of protests, warned last month that its shipments would be “significantly reduced”.

Premier, a company that manages supply chain logistics for thousands of U.S. hospitals and healthcare systems, had not yet seen any change in supplies from China, said Mike Alkire, its director. general, “but there will be disruptions, I can just tell you that”.

Raw material supplies for pharmaceuticals, resins and contrast media used in medical imaging were still vulnerable, he said. Given a labor shortage in areas such as trucking, he added: “I still think we’re going to feel a lot of inflationary pressure in the supply chain for some time. “

Michael McAdoo, co-head of the Boston Consulting Group’s business and investment practice, said clients were beginning to realize that their supply chains needed to be redesigned to withstand repeated shocks. He cited past geopolitical developments, from Britain’s Brexit to Russia’s invasion of Ukraine, as examples of shocks.

“[They] have to be ready to deal with all of those things,” McAdoo said. “Geopolitical considerations are no longer the icing on the cake. They are the cake and people factor that into their decision making. »

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