Tag Archives: Supply Chains

Breaking The (Supply) Chains, by Nick Colas

Posted on October 5, 2021 | Leave a comment

Much of the current supply chain problems are rooted in just-in-time inventory management. From Nick Colas at DataTrek Research via zerohedge.com:

“Supply chain disruptions” has become a catch-all phrase to explain product shortages and inflation. But how exactly does that work, and why is this problem taking so long to fix? For Story Time this week, Nick uses his 30 years of experience analyzing the US auto industry to explain what’s going on. It all comes down to “lean manufacturing”, which started in Japan after World War II and caught on worldwide in the 1980s/1990s. The pandemic has created systematic challenges to “lean”, enough that structural inflation is a threat.

Here is a story about how supply chains work and why they are so snarled just now. Yes, a grimy topic compared to some of our others, but important and my personal history as a long-time (30 years) auto industry analyst gives me a unique perspective on the issue.

To understand how global supply chains operate the way they do today, you really need to go back to Japan just after World War II.

The country, defeated and impoverished, desperately needed to restart its industrial base. It did so by producing what it could with a minimum of capital. That meant, for example, no capital-intensive vertical integration; there were parts suppliers, and then there were final assembly companies. It also meant keeping the supply chain tightly integrated to maximize throughput.

This spawned a new production model, now commonly known as lean manufacturing, and Japan’s auto companies led the way in its adoption.

Parts like exterior metal stampings and interior trim like seats and dashboards all arrived at automotive final assembly plants from suppliers within a few hours of when they were installed in a vehicle moving down an assembly line. Also, vehicle designers thought not just about how a vehicle looked or drove, but how it would be assembled. They designed for ease and cost of manufacturability and long-run quality as well as for consumer tastes.

For decades, this process was mostly unique to Japanese manufacturing.

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“Not Transitory” – US CEOs Warn Inflation Is “Unprecedented” And Becoming Structural, by Tyler Durden

Posted on September 21, 2021 | Leave a comment

Business CEOs have a pretty good idea of what’s going on with prices. From Tyler Durden at zerohedge.com:

Some of the biggest names in business virtually attended the annual Morgan Stanley Laguna conference last week and warned about the complex nature of soaring inflation.

Much of the discussion was centered around the soaring cost of raw materials, labor, and logistical nightmares. Corporate leaders from 3M Company to Trane Technologies to General Electric Co., among others, all warned about increasing inflationary pressures, according to Bloomberg.

3M’s Chief CFO Monish Patolawala shocked attendees by calling inflation “unprecedented.” He said the impact of higher commodity prices and soaring freight prices would impact its 2021 earnings.

Trane Technologies Plc’s CFO Chris Kuehn told a very similar story: “Unprecedented is the word we’d use around the inflation side.”

At the virtual event, Morgan Stanley analyst Josh Pokrzywinski joked that everyone could check the word “unprecedented” on their 2021 bingo cards.

But what has become an increasing concern, pointed out by General Electric’s CEO Larry Culp, is that inflationary pressures are “increasingly getting structural in nature.”

David Petratis, CEO of lock maker Allegion Plc, said inflationary pressures might stick around two to three years. He said his company is preparing for more persistent inflation, adding “it’s not a transitory situation.”

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Supply Chain Shipping Hell: ‘Just Get Me a Box’ Says Logistics Manager, by Mike Mish Shedlock

Posted on September 18, 2021 | Leave a comment

Shipping containers stacked high on container ships have become the symbol of international commerce. Now that trade is grinding to a half because of container supply constraints. From Mike Mish Shedlock at mishtalk.com:

Two years ago, the cost for a 40-foot container to transport goods from Asia to the U.S was under $2,000. Today it’s as much as $25,000.

When I saw this Bloomberg headline I thought it was about cardboard boxes. Instead, ‘Just Get Me a Box‘ is about shipping containers.

It’s mid-August, and logistics manager RoxAnne Thomas’s phone won’t stop pinging. Her faucets, sinks, and toilets are waylaid near Shanghai, snagged in Vancouver, and buried under a pile of shipping containers in a rail yard outside Chicago.

“Every step of the process, there’s still backlog,” said Thomas, 41, in one of several interviews from late July through August. “The beginning of the supply chain in China—I don’t think that’s going to get better for a year.” And the outlook more broadly? “A year and a half before things are truly back to normal.”

Although the pandemic has shuttered factories and shaken supplies of raw materials, Thomas’s chief challenge is freight, and it starts with what used to be cheap, plentiful commodities: shipping containers.

Two years ago, a 40-foot container cost less than $2,000 to transport goods from Asia to the U.S. Today the service fetches as much as $25,000 if an importer pays a premium for on-time delivery, which is a luxury.

“The fear is we’re ordering all this stuff for demand, and the demand is going to fizzle out before the product gets here,” Thomas says. With summer winding down, the big test of the global trading system’s resilience might still be ahead.

Bloomberg also reports Commodity Shipping Rates Post Biggest Daily Gain in a Decade

Average rates for giant Capesize bulk carriers — which can carry products like coal, iron ore and grains — jumped by $6,700 a day on Monday, the most since 2010, as owners continue to benefit from strong demand for raw materials. The rally extended Tuesday, pushing the daily rate to almost $53,700, the highest level in 11 years, Baltic Exchange data show.

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Peter Schiff: Too Much Money; Not Enough Stuff

Posted on September 16, 2021 | Leave a comment

Too much money, courtesy the Federal Reserve, chasing to little stuff, courtesy the massively overblown Covid reaction, produces rising prices, colloquially known as inflation. From Peter Schiff at schiffgold.com:

For the first time in nine months, the government CPI data came in under expectations. Prices rose by 0.3% last month, just below the 0.4% projection. Year on year, the CPI was up 5.3%. Core inflation, stripping out more volatile food and energy (for those of you who don’t eat or use energy) was up 0.1%. Core inflation is up 4% on the year.

In his podcast, Peter Schiff took a deeper dive into the numbers and explained why this doesn’t prove inflation is “transitory.” He also drilled down to the root cause of rising prices – too much money chasing not enough stuff. Given the current monetary policy, that doesn’t appear set to change anytime soon.

Focusing on the headline number of 0.3%, a lot of people were relieved because we finally got a cooler than expected inflation read. In the minds of many, it also validated the Federal Reserve’s narrative that inflation is “transitory.” But as Peter put it, “One month does not transitory make.”

First of all, 0.3% in one month, in-and-of-itself, is still a lot of pricing pressure. Because if you annualize 0.3, well, that’s almost 4% per year. So, if we got this ‘good number’ 12 months in a row, that’s a 4% gain in consumer prices, which is almost double what the Fed claims it wants, which is a rate slightly above 2%. Well, 4% isn’t slightly above 2%. It’s almost double 2%. So, this is not a great number in-and-of-itself.”

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The U.S. Economy In a Nutshell: When Critical Parts Are On “Indefinite Back Order,” the Machine Grinds to a Halt, by Charles Hugh Smith

Posted on September 14, 2021 | Leave a comment

For want of a nail . . . From Charles Hugh Smith at oftwominds.com:

A great many essential components in America are on ‘indefinite back order’, including the lifestyle of endless globally sourced goodies at low, low prices.

Setting aside the “transitory inflation” parlor game for a moment, let’s look at what happens when critical parts are unavailable for whatever reason, for example, they’re on back order or indefinite back order, i.e. the supplier has no visibility on when the parts will be available.

If the part that blew out is 0.1% of the entire machine, and the other 99.9% still works perfectly, the entire machine is still dead in the water without that critical component. That is a pretty good definition of systemic vulnerability and fragility, a fragility that becomes much, much worse if there are two or three components which are on indefinite back order.

This is the problem with shipping much of your supply chain overseas: you create extreme systemic vulnerability and fragility even as you rake in big profits from reducing costs. Speaking of costs, let’s look at the costs of having a large, costly, complex mechanism sitting idle in a non-functioning state due to some broken element for which there is no substitute available. Whatever productive capacity the mechanism, process, etc. had is now stuck at zero.

Buying a new replacement is extremely costly, and that’s not always available for all the same reasons that parts and components aren’t available. Finding someone to fabricate a new component is not easy due to the wholesale transfer of manufacturing moxie and capability overseas.

You might be able to find someone to weld a replacement strut, but try finding someone to fab a new bicycle derailleur or better yet, a multilayer semiconductor chip. What about 3-D fabrication? Doesn’t that solve this problem? If the part can be “printed,” yes, but there are limits on what can be 3-D fabbed. You can’t 3-D fab a complex thermostat or controller, for example. You can’t 3-D fab a rubber gasket, either, or a great many other bits of petrochemical-based manufacturing.

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99.9 % of What you Need Equals Zero, by Nickelthrower

Posted on September 9, 2021 | 1 comment

As if the lockdowns weren’t bad enough, the monetary response to Covid is killing even more small businesses. From Nickelthrower at theburningplatform.com:

As of the last census, 444,000 Americans owned a small business that was involved with manufacturing. These small businesses employ about 3% of the total workforce. Of course, you’d have a much greater chance of running into a doctor (985,000), lawyer (1,300,000), or real estate agent (1,300,000) than someone the produces things. That means that just 0.0013% of our current US population finds themselves in the same position that I find myself – the owner of a small business that manufactures real-world items.

Manufacturing real-world items require real-world inputs. As for myself, I need steel for the housings, epoxy and dyes for the knobs, aluminum for the face plate, copper for the circuit boards and wire, plastics, diodes, resistors, capacitors, LED’s, relays and on and on and on and on right up to and including various semi-conductors.

Luckily for me, I invested a decade and put in place a system where everything from hand-wound transformers to the cable harnesses materializes within a few days of each other and then the precision tools that I designed can be assembled, tested, and shipped. To make sure this system works, no one that supplies me anything gets paid until the finished product ships and I have the tracking numbers because, well, that is when I get paid.

When working, this just-in-time way of doing business is a wonder to behold. Watching how quickly it all fell apart is also a wonder to behold. 99.9% of what you need is zero.

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The Monstrous Flow of Free Money and the Shortages, by Wolf Richter

Posted on September 2, 2021 | Leave a comment

The insane fiat debt binge since the Covid outbreak began is causing massive distortions in the economy and financial system. There will be consequences. From Wolf Richter at wolfstreet.com:

Free money destroyed the pricing mechanism, and demand has soared despite much higher prices.

The shortages are not at Costco or Safeway, though they too might run out of a few weird items here and there. But other retailers are complaining about them, including apparel retailers and shoe retailers – yup, it took five weeks for my running shoes to arrive after I ordered them online, when normally I’d get them in a day or two.

There are shortages cropping up in different types of equipment and appliances and electronics. There are reports of shortages of certain types of fasteners and all kinds of doodads that you’d normally take for granted.

The shortages are all over the auto industry, driven by the global semiconductor shortages that keep getting dragged out and are now expected to abate maybe, hopefully, possibly in 2022.

It isn’t that there aren’t any new vehicles out there, but there are not enough of them. Inventories have been depleted in a historic manner. And customers are buying vehicles as soon as they come off the car carrier, or they order them and wait patiently till they arrive.

There are now huge storage areas around auto manufacturing plants were automakers store vehicles that are essentially ready to go but are still missing a component or two because some chips couldn’t be made, and when those components arrive, they’ll be installed and the vehicles will then be sent to dealers.

These semiconductor and component shortages have shut down auto assembly plants in the US and around the world for weeks at a time, all year long.

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Doug Casey on the Real Story Behind Collapsing Supply Chains and What it Means for You

Posted on August 19, 2021 | Leave a comment

It would be surprising if any SLL readers were surprised to learn that governments are behind collapsing supply chains. From Doug Casey at internationalman.com:

supply chain disruptions

International Man: The COVID hysteria and the shutdowns have caused supply chain disruptions. Central bankers and the media were quick to pin the blame for soaring inflation on these disruptions.

It seems like sophistry—a fallacious argument with the intention of deceiving. What is really going on here?

Doug Casey: Government officials always want to be seen as smart and action-oriented. Whenever anything untoward happens, they like to step up and pretend to be saviors.

Today’s public thinks that the government not only can but should run the world. The COVID hysteria is a custom-made excuse for them to do so. Unlike people who produce actual goods and services, however, government employees can only take other people’s property and tell them what to do.

Because the essence of government is coercion, they can solve problems only by creating more problems, and new problems provide excuses for more intervention, making the government look even more necessary.

COVID will go down in history as more than just another mass hysteria. It’s likely to be classed as an episode of mass psychosis. It’s the Salem witch trials times a million. It is even bigger than the Great Cultural Revolution in China. The public has been convinced that a dangerous—but relatively minor—virus is going to wipe out the planet, and now, on top of the virus, we have to deal with experimental vaccines, which are likely to be made mandatory, either directly or indirectly.

Vaccine mandates amount to lighting a stick of dynamite in a nitroglycerine factory. That’s true politically, economically, and perhaps medically.

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America Has Lost the Trade War with China, and the Real Pain Has Yet to Begin, by Charles Hugh Smith

Posted on July 24, 2021 | Leave a comment

It’s hard to dismiss the suspicion that Chinese business, at the behest of the Chinese government, might try to make life difficult for American business. From Charles Hugh Smith at oftwominds.com:

Corporate America sacrificed national interests in service of greed, and so did the U.S. government.

As we all know, the source of Corporate America’s unprecedented explosion in profits in the 21st century is the offshoring of manufacturing to China. If you doubt this, please study the chart below of corporate profits. Apologists claim many excuses in an attempt to evade the central role of offshoring production to China, but they all ring hollow: no, it wasn’t increasing productivity or automation or Federal Reserve magic, it was shipping production to China and other low-labor-cost nations.

Whether we like to admit it or not–mostly not–the American economy is entirely dependent on manufacturing in China. America’s short-sighted obsession with increasing profits to fund buybacks and golden parachutes for corporate insiders and vast fortunes for financiers has led to a dangerous dependency that has handed China tremendous leverage, which China is now starting to make use of. (And why not? Wouldn’t the U.S. start using the same leverage if it could?)

A long-time U.S. correspondent who prefers to remain anonymous for obvious reasons recently shared his experiences with parts shortages and price increases from previously reliable suppliers in China. Here is his account of the disruptive shift in the supply chain of essential parts from China to the U.S.

China is laying siege to the USA by slowing down production and delivery of goods. It doesn’t take much to hang up US production, just one missing item can do it. So much stuff is sourced through China they can affect all supply chains. Semiconductors are just the canary–because the chains are so long and complex, and specialized materials are required, etc. But it is happening everywhere.

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“No Resistance” to Price Increases, by Wolf Richter

Posted on July 21, 2021 | Leave a comment

With the exception of global bond markets and their central bank props, the inflationary psychology is taking hold. From Wolf Richter at wolfstreet.com:

The Restaurant Industry Reacts to a Messed-Up Economy Plagued by Shortages & Transportation Snags.

These reports are coming from all directions, from small mom-and-pop operations to large corporations: Input costs are surging, wages that companies have to pay to attract workers are rising, transportation costs are surging amid driver shortages, supply chains are tangled up and there are delays and bottlenecks, and suppliers suddenly can’t deliver because they’ve run out of something, and companies are furiously juggling these issues, and they’re raising their prices to make up for those higher costs, and there is no resistance to these higher prices.

Consumers mostly just pay whatever – when before, higher prices would have entailed the loss of some customers and some revenues, which might have forced companies to back off those prices.

Chipotle Mexican Grill was the latest company to confirm this phenomenon of higher costs and higher prices, and no resistance by consumers to higher prices.

It had raised prices by 3.5% to 4% in order to deal with higher labor costs, and so far, there has been “no resistance” to higher prices, CFO Jack Hartung told analysts during the earnings call today.

Turns out, those price increases, originally designed to pay for higher labor costs, will now be eaten up by higher raw material costs and the costs associated with the staffing shortages at suppliers, Harting said, adding, “It shouldn’t be a surprise to anyone that Q3 is going to be challenged by several industry-wide issues.”

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