Computer chip shortages, rising prices for some groceries, and a run on bicycles. Reports of supply chain disruptions caused by the COVID-19 pandemic fill the news. To help make sense of what's happening and what to expect, Anne Danahy talked with Brent Moritz, an associate professor of supply chain management in Penn State's Smeal College of Business. He's also a faculty affiliate of the Laboratory for Economics, Management and Auctions, and the Center for Supply Chain Research at Penn State. And he has held positions in manufacturing operations and supply chain management, including in Mexico, England and Germany.
Here is their conversation.
Anne Danahy
Brent Moritz, thank you for talking with us.
Brent Moritz
Great to be with you. Glad to be here.
Anne Danahy
We've been reading and hearing about thousands of giant shipping containers stuck in limbo at ports on both coasts. How big of an issue is this?
Brent Moritz
This is a substantial issue. This is really unprecedented on a global scale. We've never seen this many shipping containers backed up in Los Angeles. That many ships at anchor outside of the Twin Ports in Los Angeles. But it's also a global problem. This is happening at ports all over the world. The biggest shipping port in the U.K. is substantially backed up. There's backups in China. So it's not just a U.S. problem.
Anne Danahy
The cargo adrift at the ports isn't the only thing that's behind the supply chain disruptions right now. There's a lot of factors, is that right?
Brent Moritz
There's many factors. And some of it is COVID-19 related. Some of it is supply chain related, sort of indirectly. And perhaps I could just start out by saying, you know, we've got three big factors. We can talk about demand changes. We can talk about supply shortages. And we can talk about the global nature of what's going on here, which is really quite unusual.
Anne Danahy
Yeah. Tell us about that. Those three factors and how they're playing into this.
Brent Moritz
Sure. So if we start with demand, if we think that at the start of the pandemic, we saw shortages of things like masks, ventilators, everyone was talking about shortage of gloves and other PPE. That's really because we had an unusual spike in demand. Now, if we think about other stuff that made the news, toilet paper, for example. Toilet paper, the underlying demand for toilet paper did not change during the pandemic. However, if you think about where people used and consumed toilet paper was very different. Think about how much toilet paper was used and consumed in restaurants, hotels, travel, workplaces. Suddenly, all of that is being now consumed or bought for home use. And we didn't have supply chains that were designed to get that toilet paper into consumers hands at the retail level. When so much of it came from, let's just say the wholesale or institutional level.
Anne Danahy
And then you were talking about the three factors, and was the third factor that the that this is global in nature?
Brent Moritz
Yeah, for sure. Usually, when we have a disruption, it tends to be local or regionalized. You can think of things like a hurricane hitting the U.S. Gulf Coast, for example. Or an earthquake, hitting somewhere. Tremendous disruption and dislocation, but it tends to be regionalized. Even now, like if you see a hurricane hitting a region, the rest of the U.S. will send in trucks to fix the electrical grid, for example. The unique nature of COVID-19 is that it is hitting the entire world. And there's no backups, there's no ways to reroute the entire world supply chain, at least in the short term.
Brent Moritz
That we know about right now. So we are seeing the pictures of the ports. And we're reading about what's happening lots of different places. What does all this mean for typical person in central Pennsylvania?
Brent Moritz
Well, that's a big question. Broadly speaking, because of the disruptions that we're seeing, we're seeing price increases happening in a lot of ways. Just to give some perspective, several years ago, the cost to ship one of those 40 foot containers that we see in pictures in the ports of Los Angeles was running about $1,500 to go from Asia to the U.S .West Coast. Right now that's about $15,000, or even more in some cases. So that's a 10-fold increase in the shipping cost as opposed to normal. All of those costs have to get borne somewhere. And so the shipping costs are going to cause price increases to the consumer. And there's not really a good way around that.
Anne Danahy
So when the coffee costs $2 more a bag or there's reports that the price of turkey is going up, and people need to prepare for that for Thanksgiving. That's one of the factors in that. Is it known yet — I mean, or it seems like there's a lot of dispute or discussion about whether this is going to be long range, or whether this is going to be a short term we can we're going to see higher prices, or do we need to kind of get ready for long term inflation?
Brent Moritz
Well, again, it's going to be a little bit different depending on what product you're talking about. And food and turkeys is not really a global commodity. It's much more of a U.S. commodity, for example. Things like electronics, though, that is coming from across across the globe. And we have a substantial chip shortage right now that it is hitting all manner of consumer electronics. We see it dramatically impacting the automotive business right now. That there's a huge shortage of chips right now. Those are things that are hard to fix in the short term, just because we do not have capacity in our global semiconductor business to make all the chips that we need. So that's that's one thing. When you're talking about foodstuffs, we suggest turkeys or you know, the Thanksgiving basket. Some of those are down to local labor kinds of things where we don't have enough workers in our processing plants. We don't have enough workers in our transportation hubs, to ship products from, from producer to the supply chain. So those are all issues that are working together and a bit of a Gordian knot, if you will, of lots of things happening at the same time.
Anne Danahy
Yeah, I mean, that's a perfect segue to the question of what's behind this? So if you have fewer electronics, OK. Is that because they're producing less? Or is it just because they're getting stuck at ports? Or is it all the different factors working together?
Brent Moritz
It's many factors working together. Electronics is a bit of a special case, because really, there is not enough capacity right now. For the dramatic increase in demand we've seen, for all manner of consumer electronics. And even if you look at cars, there's so much so many more electronic systems on there. All of those require chips that a decade ago or two decades ago, just were not there. So that's a pretty substantial increase in demand for those and then not enough increase in supply. But back to your question. There are fundamental shortages of basic materials in all sectors of the economy. You can go from things like palm oil, right now that's used in foodstuffs, is in short supply. Plastic resins are in short supply. Natural gas is in short supply. Aluminum, aluminum billet, is in short supply. And that's causing issues all the way through producers that use those basic materials. Think of how much stuff we use and consume, that has plastic in it. Or that has metal in it. Those prices are going up. And those are going to get passed all the way through to the consumer.
Anne Danahy
Do we know why we're seeing this problem right now at this level? So the pandemic has been going on for a year and a half. And as we were talking about earlier, initially, there were these shortages of certain types of products. And that was kind of short range. And then now all of a sudden, the news is filled with all of these supply chain disruptions and images of the ports filling up. Why are the ports filling up now?
Brent Moritz
Well, just to give a little perspective on that, one of the things is that we've seen a big shift in demand. As particularly in the U.S. As we went into the pandemic, individuals were spending a lot less on experience items. We've not been going on trips, we've not been going on vacations. We're not eating out as much. We're not going to move to the movies as much, but we have a lot of money to spend. So through stimulus funds, through other support, there's still a lot of money to spend. And individuals are spending that on goods. Depending on which category you look at, between 2019, so two years ago, before the pandemic and now. We're seeing demand for goods up between 10% and 20%. So if you compare like August 2019 to August of 2021, we're seeing about 15% increase in demand for those goods. Many of those goods are coming through our ports. Are coming through our logistics and transportation system. And there is not a lot of spare capacity there right now.
Anne Danahy
So kind of a cumulative build up. We were home for a while. A lot of people thought, OK, this is just going to be short term. It'll be a couple months, you haven't canceled your vacation plans yet. And then it goes on. And that's when people start doing home improvement projects and whatnot. And it changes the whole ordering dynamic.
Brent Moritz
Sure. And individuals are spending a lot of money on goods, broadly speaking. Now, again, it's not, that may not be the case for every individual. And I want to be sensitive to that here as we talk. It's not the case for everybody. But if you look at the U.S. economy as a whole, we're spending more on goods than we have in quite some time. And it's particularly picked up in 2021, where we're spending more on home improvement items. We're spending more on patio furniture. We're spending more on gifts for our kids and electronics. A lot of folks have upgraded computers and screens and all manner of in-home electronics. All that has to get produced, shipped and distributed, which is what a supply chain is.
Anne Danahy
So what could all of this mean for the holidays? Should we all start ordering now or no, that could actually just make the problem worse? Should we start thinking about other gift options? If we have different things that we want to get for people, we need to have a kind of a plan B?
Brent Moritz
Well, I would say be flexible would be one piece of guidance. And then the other thing might be, look for alternatives where it can be. Or recognize that what normally you could easily get, might take you a few weeks to get. You can see that, for example, in home appliances right now. There's a long backlog for fulfilling home appliances. Just a month ago, my neighbor needed to replace their stove, kind of an emergency basis. Their stove broke. Well, they were told that you know what normally you could get in a few days, or a week, suddenly was five weeks to get a new stove. And it's like, well, that's because our supply chains are stressed. We don't have a lot of excess capacity there. And so you know, be flexible, plan early. If you can buy something early, if it's available, go ahead and buy it. But then also recognize that the model you may want in stock, might not be there. Can you find another one that's similar? That's going to be thing you can you can do right now.
Anne Danahy
Do we know how long this will continue? There are reports that it could go well into 2022. What would need to start happening, as you talked about with this knot, what needs to start happening, to start to untie, to loosen the knot?
Brent Moritz
Yeah, this one is going to take some time to be addressed. And again, barring any other, you know, some other variant of COVID or something coming on. Who knows if that happens. But these are long term structural kinds of issues where the global supply chain, global distribution channels, will need more capacity. We'll need more capacity in our ports, in our railroads, in our warehouses. Right now there's a shortage of truck drivers in the U.S. People talk about between 80,000 and 120,000, truck drivers. You know, those things are gonna take some time to work through the system. Given the backlog we have at the ports and the backlog we have all through our distribution, it's going to take months, at best. Best case to clear this backlog, I would expect you know a minimum of mid-2022 before we start to see some some of those changes, getting back to more normal-ish. But there's a whole host of factors that is difficult to predict.
Anne Danahy
Right. And you mentioned the truck drivers. There's some positions, including truck drivers, that the businesses are having trouble filling. So some people were negatively affected, lost their jobs, either temporarily or permanently because of the pandemic. But some jobs they're having trouble filling. Could there be permanent changes if fewer people want to go into those industries? If fewer people want to be truck drivers?
Brent Moritz
Well, there's a number of factors in labor shortages across the U.S. economy. You can see that in fast food restaurants or other restaurants not having enough help to to open fully staffed. Lots of places have now hiring signs at all levels of the economy. In the case of truck drivers, it's a huge challenge. There's lots more job openings than there are people who are interested in going into those. Now some of those jobs, if you go work for Walmart, as a truck driver, you get paid more. You can get paid more as a truck driver working for a company like Walmart than you can as a K12 Teacher. It's a good job. You're talking between $60,000 and even up to $100,000 a year with full benefits to be permanently employed as one of the Walmart drivers. Now, they have a great reputation there. And obviously, not everyone is going to make that in the trucking industry. But it is tough to get people to go into certain certain jobs.
Anne Danahy
Right, because it pays a lot, that obviously makes it an attractive position. But at the same time, you'd have to be willing to have that. It's a lifestyle decision.
Brent Moritz
Yes.
Anne Danahy
And that makes it tough.
Brent Moritz
Yeah, clearly, there's some downsides to that. And people understand that. And so that's one reason it's a challenge, you're away from home quite a bit. And that's not the job for everybody. So there's a number of factors going going into that. This is a complex issue. It's not going to be easily solved in the short term because you can't can't quickly add capacity. Even if we had truck drivers right now, sometimes there's a shortage of trucks. In certain parts of our supply chain, we have a shortage of containers. Other parts of our supply chain, we have too many empty containers. And those are challenges that are unique to supply chains and are not particularly easy to fix.
Anne Danahy
If you're just joining us, this is Take Note on WPSU. I'm Anne Danahy. And we're talking with Brent Moritz, an associate professor of supply chain management at Penn State, about supply chain disruptions. Was what's known as the "just in time" ordering a factor? This idea that businesses have these sophisticated inventory systems and they aren't going to have a lot of backlog, a lot of stocking up to have ordering just what you need just in time. Is that a factor in this? And will that change?
Brent Moritz
Well, I think a lot of companies will be reconsidering their supply chains. Just in time has been a great benefit, in the sense that if you can provide good customer service levels, and do it with less inventory, you can reduce cost. That's one reason firms like Walmart or Costco have been so successful and people like shopping there is they have held the line on price increases of goods and done it at an efficient manner. And you know, very successful businesses. But they don't do that with massive amounts of extra inventory. There's no global warehouse of toilet paper, for example, for a pandemic. Because those are functional products. They're low, typically low margin items. So you want to be super careful about saying, "well, let's just add more inventory." Because inventory is expensive, and it's got to be stored somewhere as well. So when we're facing a shortage of capacity, suggesting that we should add more inventory is not necessarily the solution. To put a finer point on it, right now in Los Angeles, around the ports, I've seen some reports that have said that the warehouse capacity is at 98 or 99% full for some of the warehouses just inland from the ports of Los Angeles and Long Beach. Well, if those are full, it makes it really hard to move goods from the port to those warehouses. All of these factors are coming together. That's one reason I expressed it is a Gordian knot, if you will, of lots of things that are hitting at the same time.
Anne Danahy
Has all of this changed how you're teaching your students this semester and what you're going to be teaching them about supply chains coming up?
Brent Moritz
Well, it certainly it's provided a lot of great examples. When you have a ship stuck in the Suez Canal, you can talk about what's going on with shipping. And when you can talk about other disruptions it's made it very timely. Now when you say you're a professor of supply chain management, or even my students say they're studying supply chain management, everyone has a story to tell about their supply chain experience. It's been great for our students because the demand for supply chain jobs is up. All companies are realizing we need more supply chain talent. And frankly, the companies that have made those investments over the last decade or two are faring through the pandemic far better than the ones who've, let's just say, underinvested over time, both in human resources and some of the information technology and systems to track their supply chains.
Anne Danahy
Because they have people experts on board who are able to react more quickly to what was happening?
Brent Moritz
Yeah, they can react more quickly. They can know where their goods are more quickly. If they have better information technology with that. They understand their supply chains better. And they're able to reroute. So firms like Home Depot and Target are way ahead on the shipping curve, as opposed to some other retailers. Some of those firms have actually chartered some of their own ships to make sure their containers get from Asia, to the U.S. in a timely manner. They didn't used to do that. But firms like Home Depot and Target, were talking about that, in February and March of this year, before we were seeing all of this in the news. And so that's one reason they are better positioned to deal with this disruption.
Anne Danahy
And for smaller businesses, who can't afford maybe to have a supply chain expert it's probably a whole different story?
Brent Moritz
Yeah, it is a huge challenge for small businesses right now. In terms of getting the goods, getting the component parts that they might normally use. You're not going to have a whole supply chain team. But nonetheless, the issues are very real. I don't have a lot of broad advice to give those folks other than to say it's a huge challenge, and probably an unrecognized challenge to some of our leaders right now. The small businesses facing challenges of getting enough workers to staff the front end of their business or the production lines, that's a challenge. But then getting raw materials or component parts, if they're producing something, that's another challenge.
Anne Danahy
If the shipping costs don't come back down to what they were, if there's a permanent increase, could that lead to long term changes? I mean, just thinking about in this country is so easy to get whatever you want. You can get it at a low price. You can go to the Dollar Store, you can go to Walmart, wherever. Is there any forecast for long range changes in that?
Brent Moritz
Well, I would expect that the shipping prices will return to more normal levels. We're not going to see this level of elevation. But they're going to be higher than they were three years ago. Now we won't see quite the same level of let's just say, ridiculously high shipping costs, but they're going to be higher for a variety of reasons. So those costs will have to get born all the way through the economy. So shipping costs are up, costs of all of those raw materials, those underlying components that we talked about. The basic materials that go into our foodstuffs and into our plastics and into our metals. All those are up. Those are going to take some time to work through the supply chain, that's for sure. Those are not going away or at least going away quickly.
Anne Danahy
Before coming to Penn State, you worked directly in supply chain management here in Mexico and in Germany. Have you ever seen anything like this?
Brent Moritz
No, I spent about a decade working in manufacturing in the automotive sector before heading on to do my Ph.D. and then subsequently joining Penn State. I've never seen anything like this. Particularly the global nature of this disruption is truly remarkable. We have taught our students about disruptions before. We've seen disruptions in strikes. We've seen disruptions with like the Fukushima Daiichi earthquake and tsunami and nuclear disaster in Japan. So supply chains are used to major disruptions. But they tend to be regional. This one is so unique because it is hitting the entire world at the same time. And there's no playbook for that.
Anne Danahy
Do business planners need to start thinking about now about how they're going to respond to the next pandemic? Is that something you're talking to your students about? That when they graduate and go out and work in the field that they're going to have to get ready? If not another COVID-19 pandemic, but something like that?
Brent Moritz
Yeah. So we've been talking about that. There may not be another COVID-19 pandemic. I certainly hope not. But it's certainly going to be one of the most memorable ones. And I think that's going to be for the next several decades. People are going to say, well, what if we get another COVID? What happens then? And that's going to cause some interesting conversations in terms of what kind of supply chains do we want. If we know that our supply chain is going to be more costly in terms of shipping, or it's going to take much, much longer than we expect to produce something, let's say in China, and get it to our consumer, does that make local manufacturing or more regional manufacturing more attractive? In the short term, we're not going to be reshoring things let's say from China or the far east. Over the long term, over the next decade, next two decades, individuals might say, you know, we better have a second source of supply. Remember what happened when we had the COVID disruption? Remember how that was when we couldn't get something or it was stuck sitting on a ship in Los Angeles harbor for weeks and weeks, and we just couldn't get it? Those kinds of questions will hopefully cause firms to look at how do we make investments in resiliency? How do we make investments in second sources? How do we make investments in our people? So we know, we know we've got the right people who can help us manage through that. All those things are questions that firms are asking, or that they should be asking, as they look to set their strategy over the next few years.
Anne Danahy
And I just want to go back to one other question we talked about before was the impact locally. Any final thoughts on it or advice to people, as we do get ready for this to continue into 2022 here in Pennsylvania? And what they should get ready for?
Brent Moritz
Well, get ready for some more empty store shelves. Now, when that happens, it's not the fault of the store manager or the store employee if something's not on the shelf. So when you go in there, and you want to get something and it's not there, the employees are doing their best. And there's lots of people that are affected by this. So you know, be patient and understanding, I guess would be one piece of advice. Be prepared to say, "Hey, that's OK. Let me see if I can look again or look for something similar." I would also say start early. If there's something you know you want for a special gift for someone and it's on the shelf, go ahead and get it. And that's going to put your mind at ease as you do. The other thing I'll say is, broadly speaking, expect higher prices. Expect higher prices. We're seeing it in gasoline and fuels. We're seeing it in food quite substantially. The major food companies have been putting price increases out in part because their costs are going up all the way through. So be prepared for that and expect that. And plan for it.
Anne Danahy
Brent, thank you so much for talking with us and sharing your supply chain expertise.
Brent Moritz
Anne, it was a pleasure. Glad to be with you.
Anne Danahy
Brent Moritz is an associate professor of supply chain management in Penn State's Smeal College of Business. He's held positions and operations and supply chain management at several companies, including international experience working in Mexico, England and Germany. To listen to this and other episodes of Take Note, go to wpsu.org/takenote. I'm Anne Danahy, WPSU.
