David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 00:02
The Covid-19 pandemic showed us just how vulnerable supply chains are. Today we face many threats: shipping delays, a lack of workers, failing infrastructure, transportation rates that are out of control, cybersecurity threats. and of course, a worldwide pandemic that is still very much with us. But with each of these threats come opportunities. Welcome to this limited podcast series from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats.
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Today we focus on the threat posed by increasing costs. Here is your moderator for this segment, Supply Chain Quarterly's executive editor, Susan Lacefield.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 01:45
Welcome to the latest episode of Supply Chain Quarterly's podcast on the top 10 threats facing supply chains. Today, we are looking at the risks and challenges associated with rising costs, and to help us unpeel that onion is Zac Rogers, who is an assistant professor at Colorado State University. Zac has a really good read on the costs facing the logistics industry through his work with the monthly Logistics Managers' Index, also known as the LMI. Zac, for those of our listeners who are not familiar with the LMI, can you give us the brief elevator speech of what it is?
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 02:18
Absolutely. So, the LMI is something we started five years ago—this is actually our fifth-year anniversary—we started at CSCMP, yeah, so we're all very excited. And so essentially, the LMI is a change index, where we go and we talk to a few hundred managers every month—usually director level and above, so have a 20,000-foot-view of of the supply chain—and ask them about eight key metrics. We ask them about inventory levels and costs, and then for both warehousing and transportation, we ask them about cost, utilization, and capacity. And I always say is it going up, is it going down, or is it staying the same? And we use those answers, monthly, to create a diffusion index, wherein anything above 50 means growth. anything below 50 means contraction. It's very similar to to the PMI.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 03:04
Right.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 03:04
And actually, the reason we established the LMI is because really, you know, the PMI when they started that in the '60s, it was, it made sense to—let's look at manufacturing, and inventories and things like that, to measure the economy. Well, when we started this in 2016, we thought, we need to look at transportation and service levels, because the economy has really fundamentally shifted. Plus, we really capture both the upstream and downstream parts of the supply chain, so not just the manufacturing industrial side, but consumers as well. So we've been doing it for five years, and it gives us a pretty good read on the direction that the economy is going, because if you think about it, before you can buy something, we had to drive it there, we had to store it somewhere, we had to hold it in inventory. So it's a pretty good economic indicator.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 03:48
So what are the responses to the survey indicating. You know, costs are already high. Are they gonna rise even more?
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 03:56
It seems that way, you know. So, if you look at the overall index, in the most recent report that came out, it was a 73.8.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 04:04
Okay.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 04:05
And if you put the last three months together—so basically summer, June, July, August—the overall average is 74.4, which is the highest three-month moving average that we've ever had in the five months. So, if people listening to this thought, "Man, my supply chain seemed really expensive this summer"—it was! It wasn't just you. And a lot of that is driven by costs. For instance, warehousing prices were at an 88 in August. Now, the scale only goes up to 100, so 88's pretty high.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 04:34
Right.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 04:34
It was also that high in July. And it's the highest level we've ever had. July and August, back-to-back months, we had consecutive highest readings ever for warehousing. Now that's really interesting because warehousing typically is not that volatile, especially if you compare it to something like transportation. Transportation is up, it's down, it's all over the place. We're used to big swings. Warehousing prices, if you go back and look at the last couple of years, it's really been in like a 10- to 15-point band the whole time. It doesn't get too low, doesn't get too high. Well, what's happened is, we've had a capacity crunch now for so long. Warehousing capacity has been in a state of contraction for now 12 consecutive months.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 05:13
Wow.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 05:13
And really, there's only one month of the whole pandemic—of the 18 months of the pandemic, it contracted for 17 months. And it was at a 50.5 in August of 2020. So, just like just barely—someone built five warehouses outside of Atlanta, and it just barely went up.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 05:30
Right.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 05:30
But it's been negative since then, and so what's interesting is, we're starting to see warehousing prices move quickly in a way we'd normally see transportation prices move. And part of the reason for that is really, it's just exhaustion in warehouse networks.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 05:45
Okay.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 05:46
So, it's been contracting and contracting and contracting for a year, and really a year and a half, and we're starting to see the marginal, increase costs of less capacity go up and up. So essentially, for every bit of capacity that we don't have, it's becoming more and more expensive. You know, I kind of compare it to, a supply chain right now is, you know, when you're in college—I'm around college students all the time, I teach them—you know, I can tell, you know, sometimes they're up all night, right? Because studying for one test. And you can stay up all night one night in a row and probably be mostly fine. I mean, I can tell they don't look totally right, but I can tell they're mostly fine. But if you do that for a week, you're not going to be fine.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 06:30
No, you get psychotic.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 06:30
And that's essentially what's happening with supply chains right now.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 06:33
We have pyschotic supply chains.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 06:34
Yeah, we—it's like we've been up all year, essentially, and we're really starting to get tired, and you're seeing that stress on capacity really reflected in prices.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 06:46
Okay, so what can supply chain managers do to mitigate these costs? Is there anything they can do, or are they just got to ride it out?
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 06:53
Well, what do you think about having Christmas in February? Do you think? Skip the lines? No, I think that, really, it's got to be strategies where you play to your strengths, and you know, there's no way to avoid some things, right? Like, okay, we know, the cost of a container right now is $20,000, going from China to the West Coast, which, you know, is about 40% of the value of the goods in the container, where normally it should be 4%, so there's a problem. We know that things are slower. And essentially, we see firms kind of shifting between a couple of different strategies.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 07:33
Okay,
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 07:33
If you look at someone like a Best Buy, Best Buy decided, Well, we're just going to stock up like crazy and carry way more inventory than normal, so that hopefully, we don't miss many orders and we can really fill demand in Q4. You saw Toyota do the same thing. You know, Toyota actually outsold GM in Q2 for the first time ever in the U.S., because they stocked up on—
Susan Lacefield, Executive Editor, Supply Chain Quarterly 07:55
[Indistinct]
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 07:55
Yes, exactly. The most JIT [just-in-time ] company on the planet decided, Let's not do JIT.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 08:00
Right, that says something.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 08:01
Yeah, it really does. They're always one step ahead of us, those guys at Toyota. And so, some companies have sort of done that, where, "Okay, we'll build up and build up and build up." Other companies have tried the cost-cutting methods. It doesn't seem like that has worked as well, though. Now, is building up inventories, you know, forever sustainable? Probably not. You know, we eventually, you know, we've gone from just-in-time to just-in-case. I think probably we'll settle somewhere in the middle, right?
Susan Lacefield, Executive Editor, Supply Chain Quarterly 08:31
Right.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 08:32
Right now, we're sort of at the other extreme, the other end of the spectrum, where people are ordering more than they need, because they know, "Okay, well, it's going to be 60 days for it to get over here, it's going to wait for nine days off the, in the San Pedro Bay...
Susan Lacefield, Executive Editor, Supply Chain Quarterly 08:45
Right.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 08:46
"I'm just gonna place a double order, because who knows when my next order is going to come in?" Eventually, that will, that will slow back down. And really, what we're seeing now is companies experimenting, and really trying to calibrate their strategies for this sort of new reality. You know, we went into the pandemic with really [these] sort of pre-Covid ideas about how things work—about how quickly a ship could get here from China, about the cost of the container, about how quickly a rail car could get across the country and not be stuck in Chicago...
Susan Lacefield, Executive Editor, Supply Chain Quarterly 09:14
Right.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 09:15
all of these sort of ideas, and so we build our supply chains in these assumptions, and now those assumptions have changed. And so we are, right now, dealing with the post-Covid world with pre-Covid supply chains, and eventually we'll get to the post-Covid supply chain and be calibrated in a way where we can deal with the new realities.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 09:35
Great. This has been a fascinating discussion, Zac. I really appreciate you coming down and talking to us at CSCMP Edge about what's going on in the...
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 09:43
Well, I mean, you guys are strategically located right next to lunch. This is great.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 09:47
Right. Well go enjoy your lunch, and for our listeners out there, go and subscribe to the podcast.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 09:53
Absolutely. Thank you very much. And again, the-dash-L-M-I-dot-com.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 09:58
Okay.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 09:58
All of our reports [are] at the-dash-L-M-I-dot-com, including the old ones that I kind of don't want anybody to look at.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 10:04
Right? It's a good it's a good case, a good look at what's changed.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 10:08
Absolutely, yeah. Thank you.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 10:10
Thank you.
David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 10:12
Thank you for joining us for this podcast from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats. We encourage you to subscribe wherever you get your podcasts.