Monday, November 8, 2021
UNT System HR brings you UNT World experts with this periodic and always timely installation called "Ask An Expert." So, let's ask...
EXPERT: Wesley Randall, Ph.D., Dean of New College on the campus of UNT at Frisco, and a Professor of Logistics, has a passion for new types of project-based curriculum that ensure career-ready students, but a type of education that is overlaid with a respect for humanities that help students understand their why, know how to be the best version of themselves, know how to be authentic and present, and know how to bring out the best in others -- students who not only understand return on investment, but also return on society and return on the environment. Dr. Randall and his team have the goal to create these degrees without prerequisites and make them more accessible to adult learners and transfer students. Dr. Randall said the innovation he learned in supply chain has helped him build a team the is providing new educational value propositions that resonate with students and stakeholders. With 30 years of expertise in supply chain and logistics, he was a no-brainer to seek out when we began to wonder exactly what the heck's going on with the supply chain disruption and what it means for us as consumers. Dr. Randall doesn't disappoint as he tackles our questions with a remarkable thoroughness and clarity you'd be hard-pressed to find in any news article or nightly news report. He takes us deep inside this massive problem just as the holidays are around the corner and millions of Americans might have to get used to shipping delays and higher prices.
Q: What are the reasons behind the supply chain disruption?
Dr. Randall: This is a symptom of a system that is too lean. But I will come back to that. Let’s start with the more immediate cause of these symptoms, driven by COVID-19, but not yet the disease itself. At risk of getting corrected by our friends at the UNT Health Science Center, maybe a metaphor might go like this: I recently had spinal surgery. The reason I had the surgery was because of increased pain and reduced arm strength. That was caused by severe arthritic changes. But what caused the arthritic changes? Hmm, probably genetics and 20 years in the military.
Q: So why are ships backed up?
- There is a severe truck driver shortage. If there is no place for the customs-cleared containers to go, they may as well stay on the ship. This has been coming for a long time. COVID exasperated this. We have known that the amount of folks that were seeking and maintaining qualification for over-the-road transportation runs was dwindling. This was foreseeable. What to do? It's unlikely that companies would make significant investments today for infrastructure, training or equipment that won't pay off for years. Maybe this was a place for state governments to inspire and resource our community colleges to help students achieve their CDL (Commercial Driver's License). This won't be a quick fix because this is about education and training -- that will not happen overnight.
- There is a lack of capacity at the warehouses. The distribution system is jammed. Things froze during COVID. Capacity was taken off-line. Now things are flooded. If you have ever seen a major logistics and supply system up close and personal at a distribution center or warehouse, the only thing worse than running out of specific supply is to have a jammed warehouse. It just stops, kind of like throwing stuff in your closet. One day I realize I just have to stop, pull all this stuff out, go through it, give a good bit away to those less fortunate and then figure out what I really need.
- There is an imbalance in supply and demand that further jams the supply chain. The rule of forecasting is they are always wrong. Dr. Terry Pohlen in UNT's G. Brint Ryan College of Business can give an entire class on this, to include all the way to forecast -- I know because I took that class. There were many things I learned. But what every one of his students remember is the forecast is always wrong. (He is also an amazing teacher, just as an aside). So COVID made it very hard to match supply with demand. We all recall the toilet paper stock outs early on. Home toilet paper was scarce. People were saying, but why? People aren’t going to the restroom more often. True, but they weren’t going to the restroom at their work or the mall. So, while there wasn’t any home toilet paper, there was a heck of a lot of containers of industrial toilet paper. I know, I have a big box in my guest room. Will probably be donating that soon.
- There is massive imbalance between the port capacities in China and the United States. Shanghai can handle more than 100,000 Twenty-Foot Equivalent Units (TEU) daily. Our biggest port, Los Angeles can handle 25,000 TEUs. Overall, China has 446,000, that is an incredible amount. The U.S. has 62,000. And while China uses this capacity to ship to ports all over the world, the U.S. is a large part of that, and we had the income to command those TEU’s once the faucet was turned back on. There is an imbalance between what we can command and what we can accept. As you can tell, this is going to be the theme.
- Labor, both at the off-load and at the origin. Again, this has been coming. We know logistics and supply chain has been a place for growth. We see our students getting great jobs. We know there is demand at all labor levels. As this surge occurs, things back up because there isn't people to load or offload.
- Next, there is a lack of capacity in terms of not only the supply chain labor, but also the equipment that that is used to place the containers on once they are off-loaded from the ships. We see these on trains all the time, the containers sit on what is a flatbed that a truck can just hook right up to. It's brilliant. Again, out of balance. The massive incoming supply is met with frustration because the flatbeds the containers are loaded on get stuck at the destination. The system works really well until it doesn’t.
- They only way to overcome these infrastructure constraints is for our federal and state government to team up with business (a public-private partnership) and make a massive investment in distribution. This is an area where Texas shines. Some incredible foresight, but more on that in a minute.
Q: Is the supply chain issue causing consumer hardship in terms of higher prices on
goods and is it affecting particular goods and products or across the board?
Dr. Randall: Yes. Prices are going up. We know supply is correlated with demand. If supply is constrained, and demand is not constrained, prices will go up until there is a new equilibrium. I was recently talking to someone very familiar with the shipping crisis. They were saying that they are seeing prices spike as high as 10 or 15 fold. This means what should be a $2,000 cost to ship from China to the U.S. is now $20,000 to $30,000 and increasing. Companies will find some efficiencies, they always do. But, ultimately these costs will be passed on to the consumer. It seems obvious that prices for things that are imported will go up. But consider what we just discussed — every part of the supply chain is jammed and costs are increasing. Those same rail cars needed to ship from L.A. are needed to get your new Jeep from Michigan to Alliance Texas. Unless something is locally grown or sourced, chances are prices will go up. And even there, such demand will command a new premium even if the costs do not increase.
Q: With the holidays coming, are we looking at shortages of goods in stores? And how
will it affect online purchases?
I am really good at discussing what happened and helping analyze the situation. Less good at forecasting the future. Fortunately, at work I have an incredibly wise and talented team that knows much more than me about higher ed. They help me forecast and create strategies. It seems to me that prices must go up and there will be shortages. At the same time, the American economy and American businesses are incredibly resilient and agile. They are responding to all of the issues above. As prices increase, capital will move to supply those new prices. That capital will be in the form of increased capacity. That may be rail cars, trucks, driver pay, locally sourced goods. That means there will be investment and new capacity. Could that happen before Christmas? I don’t know. I will say we will be doing our shopping early and we will also be continuing to examine our own consumerism as we have during COVID. This will impact in-store and online purchases. The case may be that the big online retailers have the capital and the ability to quickly stand up additional supply chain capacity. Brick-and-mortar have struggled with capital reserves. They may be less able to respond, but I am not sure. This crisis highlights the criticality around discussion associated with infrastructure at the federal and state levels.
Q: Gov. Abbott recently put out a tweet offering up Texas ports to alleviate the congestion
off the coast of California, suggesting it takes two weeks to “sail” to Texas. Is
this a legitimate solution?
Dr. Randall: This is a massive problem. While it is bigger than the Port of Houston, the Governor has a very good point. And Texas is well-prepared to do more than its part. During August, the Port of Houston hit its highest capacity ever: 320,086 TEU. That is roughly 10,000 TEU a day. That’s pretty impressive, nearly twice that of Oakland (California) and on par with Seattle/Tacoma. I am sure Houston will continue to exceed those numbers. Additionally, Texas has created massive public-private partnerships like the one at Alliance Texas. We call these inland ports. Containers can come off a ship in L.A., bypass customs, get on a train and head straight to Alliance where BNSF has a massive rail yard. The coordination is excellent. Further, Alliance has the capability to work with customs on site to get these containers cleared. I have long been amazed at the success of Alliance. I believe more than 50,000 people go to work at the various companies at Alliance. In July, I got to see the success of Alliance up close. I had ordered a new Jeep. I had perfect visibility into when my new Jeep hit Alliance, was off-loaded from the train, got on a truck, was matched with a driver and headed to the dealer. Two days, not weeks. Further, the entire process from order to manufacturer to delivery was right at eight weeks. Pretty impressive. Says something of local manufacturing. Jeeps are still assembled in Michigan.
Q: How will this issue finally get resolved, and once it does, will prices drop?
Yes, the supply chain will balance. Prices will likely return to normal. From a pure capacity perspective, they may actually drop. To burn through the back log will take more capacity than needed once we hit a steady state. We call this the bow wave effect. Like the waves that are before a boat, that increased capacity will result in decreased prices and some of that capacity will be taken offline. I am hesitant to assert that prices will drop though because I am not an economist. There are monetary factors and fiscal policy beyond that supply chain that I do not have the expertise to discuss. You talk about resolution. I want to say this will happen again in the next decade. This leads me back to the root cause, the cause of the imbalance. Recall my story about the cause of my need for spinal surgery being 20 years in the military and genetic predisposition. There has been a 20-year chase to "lean out the supply chain." That is a very profitable practice. There are all sorts of buzzwords around that. The problem is that a very lean supply chain has very little resiliency. That lack of resiliency; our supply chains are fragile, they lack agility and responsiveness when significant unforeseen events happen. The supply chain becomes overwhelmed. We see such things happen every decade. Think back to the tsunami in 2011 that left 22,000 dead. There was a significant disruption to the supply chain. For certain goods, efficiencies mean there are very few suppliers. I am told this is the case in the microchip market. There are a handful of chip manufacturers. If something happens to one of these multi-billion-dollar factories our entire supply chain will shut down. So the question becomes when does capacity, and lack of resiliency, become a vital interest to the United States? Clearly, the disruption has made these questions a topic of discussion. And that’s great. Before COVD, I bet if you had asked any supply chain professional, will there be a massive disruption in the next decade, they would have said, "yes, certainly, we are too lean."
These questions are now being asked: Should we be using public funds to offset the cost of construction to build a chip plant inside the U.S.? I think so. The root of the success at Alliance was an amazing public-private partnership. Should we be considering our trade policy and how that affects offshoring a reshoring? A modern car has about 15 hours of touch labor during the assembly. Even at $50 or $60 an hour, that’s $600 to $800 per car. How do we generate trade regulation and economic incentive so that it brings work back? And once we do that, how do we continue going back into the supply chain to get the assemblies and sub-assemblies back? The case for offshoring was made in the 70s and 80s. During those times, the amount of labor as a percentage of the cost of manufactured goods was high. Today, the percentages are very low. We hear folks say, "will it matter? A manufacturing plant that used to employ 2,000 workers now only employees 400." Sure it matters, especially when we are discussing tens of thousands of manufacturing plants. The trick is getting over the hurdle to incentivize these manufacturers to build and modernize plants inside the United States.