What an adult tricycle says about the world’s supply chain bottleneck
Catrike has 500 of its three-wheeled bikes in its workshop in Orlando, Florida, almost ready to ship to future dealers. Recumbent trikes have been waiting for months for rear derailleurs, a small but crucial part that is built in Taiwan.
“We are sitting on a $ 2 million inventory for a $ 30 coin,” said Mark Egeland, general manager of the company.
The business issues provide a window into how supply chain disruptions are shaking businesses in the United States and around the world, driving up inflation, delaying deliveries and exacerbating economic uncertainty.
It’s unclear when the growls will go away – and it is possible that they will get worse before they get better. The holiday season is fast approaching, U.S. businesses are running out of inventory, and coronavirus outbreaks continue to shut factories around the world. The demand for goods remains strong as households use the money saved during months spent at home to buy sports equipment, sofas and clothes.
This could keep the pressure on global producers of goods and the transportation routes that serve them, even as consumers begin to shift spending toward dinner parties and theater tickets – a change that many analysts hoped would help the chains. supply to return to normal.
Crucial questions for economic policymakers are how long the problems will last and to what extent they will impact consumer prices, which have risen sharply this year, both due to data quirks and bottlenecks. ‘strangulation. Federal Reserve officials routinely say they expect faster price gains to be “transient,” but they are careful to point out that supply chains are a major source of lingering uncertainty. which doesn’t tell how fast the quick wins will fade.
“I’m less in this ‘transitional’ camp,” said Phil Levy, chief economist at Flexport, which tracks ocean shipments and helps importers plan so their parts can come in on desired dates. “And more in the ‘we have reason to worry’ camp.”
Container costs have skyrocketed. Earlier this month, container shipping rates from China and East Asia to the U.S. east coast topped $ 20,000, compared to around $ 4,000 a year ago. year, according to data from freight tracking company Freightos. These attractive high prices cause ships to abandon other routes, causing the problem to spread. And shipping problems have been exacerbated by the associated imbalances: Ships are retreating in ports and, as demand for goods increases in the United States, empty shipping containers have not been able to get back to China quickly enough. .
Some suppliers consume higher production and transportation costs. Full Speed Ahead, which produces cranksets for Catrike, saw its expenses increase as the demand for raw aluminum increased. Shipping costs are also four to five times what they were a year ago, said Mark Vandermolen, chief executive of the company.
Full Speed Ahead has passed on “very little, if any,” of these cost increases to customers, he said, and he hopes “to keep prices as long as possible until they are no longer sustainable “.
But not all of Catrike’s suppliers have absorbed the rising costs, and whether higher prices for components make consumer products more expensive – actual inflation, as conventionally measured – depends on the how companies like Catrike and the dealers they work with decide to adapt.
Catrike increased its prices by $ 200 earlier this year, its first adjustment since 2010, to cover costs. But the company is at a “sweet spot” where it outperforms its competitors in offering affordable products, so it would rather leave prices stable now, Egeland said.
He’s also cautious: Catrike hasn’t printed the prices in their new catalog, in case the hike in spending makes another increase necessary.
The Fed – which has primary responsibility for keeping inflation stable – has made it clear that it is content to look beyond a recent rise in inflation. If companies raise prices once or twice amid reopening challenges, the central bank can tolerate this as a one-time change.
Officials would be more worried if the price increases continued for months or years. If this happens, consumers and businesses could expect consistently higher prices. They could demand higher wages and a cycle of inflationary increases could start.
It will take time to find out if the bottlenecks will cause more permanent damage. Supply chains are still badly scolded. The time it takes for parts for one of Catrike’s suppliers to arrive by sea in North America from a factory in Indonesia has dropped to three months, and sometimes it takes four – double what he was taking before. Flexport estimates confirm that the problem is widespread along this sea route.
For Full Speed Ahead, average transit times have dropped from about a month to seven weeks.
“There have been bottlenecks at, I would say, every step of the supply chain,” said Vandermolen. “Even though these are small bottlenecks, it adds up throughout the process.”
Egeland believes it could take 12 to 18 months to sort out issues between Catrike’s suppliers, he said, and he doesn’t think the company will ever return to the lean type of manufacturing process – with limited stocks – which she used before.
“It will be a hybrid until we are comfortable,” he said. “It’s probably the new normal.”
Consumer businesses, suppliers and transportation companies were unsure whether permanent adjustments needed to be made to cope with what could be temporary disruptions. And if they decide to grow, it takes time.
Companies are boosting their shipping capacity by more than 20%, but much of that won’t take effect until 2023 or later, based on new fleet orders tracked by Ocean Shipping Consultants. The White House wants to improve the port’s capacity – which could lower shipping costs and therefore lower prices in the long run – but that, too, is not a silver bullet.
In the meantime, the arrears are piling up.
“It’s there for the rest of the year, and it will only get worse because of the Christmas season,” said Ryan Petersen, CEO of Flexport.
Levy, the company’s economist, suggested that around the Chinese New Year in early February – when factories and shipping typically experience a lull – was probably the first thing that could start to normalize.
It might also help if, as stimulus check money is spent in the United States, consumer demand for goods begins to cool further. Retail sales data for July, released last week, showed the first signs of lower demand for furniture, cars and clothing.
And the future rests in part on the coronavirus. Nada Sanders, professor of supply chain management at Northeastern University, predicted that the highly contagious delta variant would most likely delay a return to normal until at least 2023. Since many parts of the world still have large unvaccinated populations, hot spots around the world could lead to more factory and port closures, she said.
“There’s no question we’re going to continue to see saves,” Sanders said.