Hardly a day goes by without someone asking me when “it” is going to end. “It” is the post-COVID supply chain reset. It is a tough solve, because for most industries both supply and demand have been disrupted. And unfortunately, the answer to the question can’t be distilled into simple sound bites because there are so many factors involved.
A significant dip in COVID will help reset economic activity. First, it will help shift consumer spending back into the service sector – helping to cool down some of the consumerism creating the heightened demand we are observing. Second, some analysts attribute current demand spikes to the infusion of government stimulus funds triggered by COVID. As these benefit streams end, economic activity should settle back to some level of normalcy, plus or minus the impact of any lingering structural alterations the virus may leave in its wake, such as the expansion in e-commerce or the rise of the work-from-home phenomenon.
Of course, this does not mean that everything will be the same as it was before. We have learned how to shop differently, from getting home takeout delivery even in far-flung suburban areas to having every type of consumer product — from lawn fertilizer to drywall screws — delivered to our homes. As both a supply chain professional and a reasonable exemplar of the American consumer, I consider the long-range supply chain implications of everything relating to my own personal consumption patterns. To me, the concept of post-pandemic normalcy is not some pre-COVID status quo but rather a return to supply and demand balance across the global supply chain considering our new constructs.
Here are the indicators to watch, which fall into three categories:
1. North American Supply Chain and Marketplace Metrics
The supply chain Indicators that ring true to me are a bit wide-ranging but generally speak to operating constraints in the marketplace, currently marked by too little of the right inventory, too many transportation constraints, and the pervasiveness of e-commerce as a significant driver of retail volume.
Retail Inventory to Sales: This ratio of inventory on hand to sales is published by the Fed and is normally in the 1.4-1.5 range. Since the onset of COVID, however, it has dropped to 1.1. Essentially, demand is up, and retailers have not been able to keep up nor stock up. As this level moves back into the 1.4 range it will mean we are approaching an equilibrium of demand to inventory at the retail level.
Container Pricing: Shipping containers are a finite resource, making this metric another key supply and demand indicator. The scarcity of containers is driving up pricing; right now, the cost to rent a shipping container moving from east to west has reached astronomical heights — about ten times normal. When this trend peaks, then eventually declines, it will indicate that the flow of goods is less hindered by this constraint, making it a leading indicator of a potential reset.
Port Backlogs: As the flow of goods from east to west normalizes, the backlog of container ships at anchor in the world’s ports will decline, reducing lead time for delivery and freeing up all the inventory currently “on the water.” It is estimated that nearly 20% of vessel capacity is currently tied up in port delays, making port backlogs a major constraint in the flow of goods. If resolved today, this backlog would unleash a surge of 30 to 45 days’ worth of inventory into the North American supply chain and release vessel and container capacity back into the global supply chain.
E-Commerce as A Percentage of Retail Sales: When COVID first hit the U.S., consumers quickly shifted to e-commerce for their everyday needs, doubling the existing growth rate of this retail channel. This statistical leap skyward led e-tailers to place anomalously large orders — to load up on inventory. In hindsight, few economic factors proved more disruptive in the initial, early-stage response to COVID. During the intervening months, the national metric of e-commerce sales seems to have roughly reset to the same growth plane it was exhibiting pre-COVID. This is an important trend to eyeball with regularity.