New shipping legislation targets supply chain bottleneck

Legislation aimed at curbing the power of the container shipping industry, which has seen prices increase tenfold during the pandemic, breezed through the House Monday and could head to the Oval Office for a signature as soon as this week. 

The administration is hoping the law, which is designed to slash the bargaining power of container shipping companies and their industry alliances, will address a critical bottleneck in global supply chains — an issue economists widely believe is a key factor driving inflation.  

But experts caution that supply chain fixes for inflation can be elusive and that tinkering with the logistical channels that deliver bargain manufactured goods based on cheap labor from Asia can have unexpected consequences. 

Supply chains over the last few decades have been pared down to minimize costs associated with storage, inventory and labor. These “just-in-time” or “lean” supply chains are cost-efficient specifically because they don’t bother developing and maintaining the infrastructure that can accommodate big swings in demand. 

“Because we’ve had reliable and affordable global container shipping, people say, ‘OK, we’ll just build these global supply chains based on lean methodologies, so we’ll just have less inventory, less cash tied up, and we’ll have fewer mistakes in the pipeline,’” Willy C. Shih, a professor of management and operations at the Harvard Business School, said in an interview.  

“The problem with that is, when all that smooth flow of material doesn’t work, then you end up getting caught short, which is what we saw during the pandemic when we had these huge shifts in demand. A lot of the things people wanted weren’t in stock, and everybody was scrambling.” 

As a result, many business operations specialists are now recommending not just increased warehousing but entire structural reforms to their supply chains that include onshoring of component facilities and the development of domestic industry. 

“The rapid decay of a decades-old model of supply chain reliability and efficiency is a key feature of CEO agendas,” management consultant Knut Alicke and others wrote in a May note for McKinsey & Co. “If a crisis on the scale of the pandemic occurs, the absence of a back stock of inventory or materials can seriously threaten supply chains. Many of today’s most pressing supply shortages (semiconductors, for example) occur in supplier sub-tiers where manufacturers have little visibility.” 

“Some potential measures to mitigate risk include finding new suppliers, redesigning networks, resetting inventory targets, keeping safety stocks, and sourcing locally or regionally,” they added. 

But a shift back to more traditional, geographically centered business operations comes with its own set of risks for businesses, as the disappointing earnings of big box stores Target and Walmart recently showed. 

Target fell short on earnings because of excess inventory, announcing last week it’s “planning several actions in the second quarter, including additional markdowns, removing excess inventory and canceling orders,” the company said in a statement. 

“Retail inventories are elevated,” Michael Fiddelke, Target’s chief financial officer, said to The Associated Press last week. “And they certainly are for us, in some of the categories that we misforecast.” 

The effort to avoid forecasting errors like the one made by Target is where the whole idea of just-in-time supply chains comes from, according to Harvard’s Shih.

“One of the reasons we’ve gone to lean production and just-in-time production and minimal inventory is because people have a hard time getting forecasts correct,” he said. “For example, I’ll order all this stuff, and if I have the wrong style shoes or the wrong style garment that doesn’t sell, if I have a lot of inventory in the pipeline coming at me, then I end up marking it down or scrapping it.” 

Lower prices are exactly what policymakers are trying to deliver for consumers, just ones that don’t jostle the expectations of investors.

So while boosted inventory may be a popular concept in supply chain management in the short term, the mark-downs and stockroom purges associated with a well-fortified supply chain may not fundamentally be in line with profit maximization.  

Whether Congress’s new shipping law will bring down prices for consumers, while reassuring big business that container shipping is preferable to pipeline restructuring, will play out over time. But in the near term, it shows just how critical the shipping sector is to the ailing global economy. 

“There are nine major ocean line shipping companies that ship from Asia to the United States. Nine. They formed three consortiums. These companies have raised their prices,” President Biden said Friday, speaking at the Port of Los Angeles. “They raised it by 1,000 percent. That’s why I called on Congress to crack down on the — they’re foreign-owned — the foreign-owned shipping companies that raise their prices while raking in just last year $190 billion in profit, a sevenfold increase in one year, a sevenfold increase, $190 billion.” 

Shipping companies have hit back at the U.S. government, calling representatives’ claims a “mischaracterization.”  

 “We are appalled by the continued mischaracterization of the industry by U.S. government representatives, and concerned about the disconnect between hard data and inflammatory rhetoric,” the World Shipping Council, an industry trade group, said in a Monday statement, following the passage of the bill.  

“The 22 (not nine) international carriers that serve the American people, industry and government on the Asia-United States trade are part of the global supply chain that has built this country. … The increased rate levels we have seen over the past years are a function of demand outstripping supply and landside congestion, exacerbated by pandemic-related disruption,” the group said. 

Global shipping aside, trade between Asia and the U.S. is what keeps so many low-cost goods stocked on U.S. shelves, according to Shih.

“That is really what’s kept inflation in check over the last 20 years, is when we really moved a lot of production to low-cost countries thanks to low-cost container shipping,” Shih said. “So now as people talk about, well it’s time to reshore more, it’s time to move stuff closer, just remember that’s what’s kept inflation in check.”