Supply chain stability remains elusive, notes new report from ASCM and KPMG

The supply chain remains in a state of flux, with some areas seeing positive momentum whiles others suffer from employment and rate drops. Overall, it is still too early to identify exactly what the post-pandemic supply chain will look like, but a new report released today from the Association for Supply Chain Management (ASCM) and KPMG, sheds some light on the direction it is heading.

“The overall market continues to resolve toward a pre-pandemic norm. However, there are some noteworthy differences — in particular, reshoring and nearshoring effects on ocean and air freight,” the groups wrote in the latest KPMG Supply Chain Stability Index. “Concurrently, transportation labor needs are shifting from seaports to land ports as U.S. supply chains reduce reliance on China in favor of regional trade partners.”

The Stability Index is segmented into three areas—freight, labor, and inventory—and the overall uncertainty is keeping the index elevated, at around 1.7 for Q1, down only slightly from Q4 2022’s 1.88. A reading of 1 indicates normal stability. It approached 2.9 in the middle of 2022.

“There are some variables that are showing a high level of instability,” Douglas Kent, EVP of strategy and alliances for ASCM, told Supply Chain Management Review. “[It’s] nearly twice as unstable as pre-pandemic.”

Kent says the index is improving, but he doesn’t see an immediate return to normal.

“One of the things we have to look at is not just the numbers, but just the variety and number of these disruptive events occurring,” he explains, noting the increasing number of cyberattacks, port labor strife and climate concerns such as the Quebec wildfires that disrupted Northeast transportation networks last week as issues that continue to pop up.

“I think if you take a look at some of the bigger macro trends that are occurring, it’s going to be elevated for a while,” Kent says. “We are seeing gradual improvement, but it would be safe to say we are not returning to normality - pre-pademic normal - anytime soon.”

Freight

Inbound ocean freight rates from Asia dropped 27% in the quarter and air freight fell 50% according to the Freightos Baltic Index. They are now at pre-pandemic levels.

The Stability Index’s ocean freight prices decreased 10% during the period. It was noted that the China Plus One strategy (the practice of diversifying business operations and supply chains to include countries other than just China) is driving more reshoring and nearshoring.

“As many supply chain organizations seek to boost resilience by diversifying their networks, reliance on China has dropped; Mexico and Canada are maximizing this opportunity,” the authors of the Stability Index noted.

Mexico has overtaken China in U.S. import volume by 15% during the first quarter while Canada overtook it by 5%. More goods are also staying on U.S. shores, with outbound ocean and air freight volumes declining. Outbound ocean shipments to Europe and Asia dropped 26% and 6%, respectively. Outbound air freight to Europe grew 5%, but air freight to Asia dropped 15%. Even so, truckload rates in the U.S. fell 13% during the quarter and intermodal rates declined 12%.

“Mexico and Canada have become bigger importing partners than China,” Kent says. “Our dependence on China is lessened. Much of that is the China Plus One strategy improvement that is happening now.”

But Kent says that strategy could fuel additional instability in other areas, particularly a challenging labor market.

Labor

The supply chain continues to face labor challenges. Reshoring is having an impact here as well, the authors of the index note.

“Transportation and distribution job openings remain relatively volatile, with large and frequent swings throughout the past three quarters that are double the magnitude and frequency of those that occurred pre-pandemic,” they noted. “Most recently, the unemployment rate in this sector bottomed out at 3.7% in October 2022 and has slowly increased since then to 5%.”

Kent says as more items enter the U.S. from Mexico and Canada, the need for more personnel in those areas is increasing. Job openings in these areas are increasing, he says.

“Even though I de-risk by moving from China to Mexico, there are [unintended consequences that must be addressed],” Kent says.

On the manufacturing side, job openings continue to decrease, down 11% in the quarter and continuing a 12-month downward trend that has seen openings fall 30% since the second quarter of 2022. Unemployment in the sector reached its lowest level in 14 years in December, but has grown slightly since then, although employment is still 42% higher than pre-pandemic levels.

“The reshoring trend driven by geopolitical concerns with Asia, especially China and Taiwan, and government mandates such as the CHIPS & Science Act and Inflation Act, will drive more job openings,” the index authors wrote.

Kent cites the CHIPS act as a potential disruptive event. While the goal is to bring more semiconductor manufacturing (as well as overall manufacturing) to the United States, he wonders if the country has the workforce in place to take advantage. 

“As we build out domestic manufacturing, do we have the workers to do the work? Are we prepared for that?” he asks.

Inventory

Some of the challenges in freight markets are being driven by inventory levels. Retailers bulked up their inventories in 2021 and early 2022 in response to shortages seen during the height of the pandemic. Manufacturers, traditionally relying on just-in-time inventory strategies, faced similar challenges in getting materials.

Those trends are now changing as both groups rethink just-in-time strategies and seek to rebalance existing inventories. The wholesale inventory-to-shipment ratio is near pre-pandemic levels, the authors said, with the retail ratio moving in that direction as well.

Unfilled manufacturing orders grew by 8% in the quarter, indicating a return to a pre-pandemic range ofr manufacturing schedule adherence, the authors said.

“Manufacturers are working to achieve inventory efficiency by balancing consumer expectations with inventory affordability,” they wrote. “Many companies are still using buffer inventory to create resilience against volatile customer demand, with the inventory-to-shipment ratio increasing to twice the pre-pandemic level.”

Retailers have been increasing sales of existing goods and deploying a combination of order cancellations and delays on future goods to try and achieve a balance. The authors noted that the resulting hit to profits is “spurring cost-cutting initiatives, such as downsizing the workforce and closing locations.”

Outlook

Looking ahead, Kent reiterated his position that supply chain instability is likely to remain for some time. He noted that, while the push for nearshoring/reshoring has been ongoing, the numbers in Q1 still surprised him a bit.

“The volume switch from port shipments from imports coming from China going to Mexico/Canada was surprising,” he says. “That is the first occurrence of that happening in 20 years. Doing the math backwards, that was the first time we had decided the U.S. wasn’t a great place to manufacture because it was cheaper in China.”

Kent notes that freight costs have “been pretty good, particularly for ocean shipments,” and the availability of capacity is good overall. But, looking at siloed data points can paint a different picture of the overall risk environment. While unemployment is starting to tick up, talent availability remains volatile, and the country is one port closure, a ship getting stuck in the Suez canal, a wildfire or hurricane, or geopolitical event away from increased volatility.

“There’s not much predictability in any of this,” Kent says. “What we do know is that overall, certain types of disruptions are on the rise, cybersecurity is one of those … probably another one having a similar trajectory is disrupted events related to climate change. This is a massive problem, not the least of which is the wildfires. Why is this the case? There are a number of possible answers depending on what disruption you are looking at.”