2021 Was the Year of Supply Chains. Get Ready for the Sequel.

From container-ship pileups at West Coast ports to the Ever Given’s viral weeklong blockage of the Suez Canal to shortages ranging from the quirky (cream cheese) to the catastrophic (semiconductors), the supply chain has never been as top of mind as it was in 2021. Case in point: The best-performing industrial stock on the S&P 500 as of Friday was Old Dominion Freight Line Inc., a provider of less-than-truckload logistics services.

There are some encouraging signs that port operators, logistics providers and manufacturers are slowly making progress in clearing the logjams and that the supply-chain stress has plateaued — albeit at a high level. Drewry’s global benchmark freight rate for a 40-foot shipping container climbed 2.3% this week but is down about 11% from the September peak. The cost of shipping goods along the busy route from China to the West Coast has bounced around more, but that, too, is down almost 30% from the highs, according to data from Freightos.

Nearly 100 ships are anchored outside the twin ports of Los Angeles and Long Beach or idling farther offshore, well above normal levels. But the bottlenecks on the dock are improving; the number of long-lingering containers has dropped by about half in the past six weeks, Port of Los Angeles Executive Director Gene Seroka told Bloomberg Radio this week. Railroads are picking up their cargo within about two days, down from 13.5 over the summer, he said. Truckers are taking longer, but dwell times — a measure of how long the container waits before a driver can pick it up — have also shrunk in recent weeks, Seroka said. Availability of durable goods has improved; there are still shortages, but empty store shelves aren’t as common, particularly among the largest retailers, Sanne Manders, chief operating officer of Flexport Inc., said in an interview. It no longer takes six months for a bicycle to get delivered, for example, he said. Walmart Inc. and Target Corp. have said they have plenty of inventory for the holiday season.

And yet, as I have written frequently, these improvements are a promising milestone on the road to recovery but don’t mean that the problems are magically fixed. About half a million containers are waiting on the ships outside of Los Angeles, burning up working capital for companies — or worse, leaving them without inventory they need for the holiday season, Manders of Flexport said. Before the pandemic, it would take about 45 days from the time cargo was picked up at a factory in Asia for it to depart the West Coast ports by rail or truck for a warehouse; today, it takes 105 days, he said. Ocean freight rates are supposed to drop as the holiday shipping push fades, but they are still near record levels.

Carrier Global Corp. is “still paying a lot for electronics, logistics costs remain high, and it’s causing some factory disruptions,” Chief Executive Officer Dave Gitlin said at a conference earlier this month. 3M Co. warned at the same event that it would come in at the low end of its fourth-quarter organic growth forecast, citing supply-chain challenges and a slower-than-expected recovery in elective health-care procedures. “There are green shoots and some signs of progress that we’re starting to see,” C.H. Robinson Worldwide Inc. CEO Bob Biesterfeld said at another conference, citing the decline in ocean freight rates, better rail performance and more fluidity at the ports. “But we’ve got a long ways to go.”

Part of the problem is that the supply chain is extremely complex and improvements simply take a while to work their way through. Someone recently explained it to me by invoking the boa constrictor in “The Little Prince” that’s attempting to digest an entire elephant: that doesn’t happen overnight. Another issue is that a big driver of the supply-chain challenges in the U.S. has been consumers’ insatiable appetite for stuff, and that is showing little signs of easing. Volumes at the Port of Los Angeles are up 22% year-to-date through October compared with the same stretch in 2020 and up about 15% compared with 2019. The expected spending shift away from goods to services as pandemic lockdowns eased hasn’t played out as expected. Consumers are spending on restaurant meals, airline tickets and entertainment again, according to aggregated credit and debit card data from Bank of America Corp. But they’re still spending heavily on furniture, home improvement projects and general merchandise, too: Card purchases in these categories were up 34%, 39% and 17%, respectively, in the week ended Dec. 4. relative to 2019 levels.

This creates an interesting paradox. The warehouses surrounding the ports are chock-full of inventory, which is contributing to the the gridlock because there’s limited space for newly arrived goods. But those inventory levels are low relative to expected sales. And as retailers try to plan for that demand, they’re adjusting orders to prioritize top sellers. That’s one reason some products can be shipped to the customer’s front door fairly quickly while others take two months and why the local Costco Wholesale Corp. store may be full but a specialty retailer is out of that one specific item you want, Manders said. “People just expect that sales will keep going through the roof,” he said. Companies “would rather have a supply chain issue than miss out on a sale. This is the beauty and the beast of capitalism,” he added.

The obvious concern is that this optimistic view of continued demand doesn’t play out and companies get stuck with a glut of inventory instead. Black Friday and Cyber Monday sales fell slightly short of estimates, but whether that’s a reflection of consumers shopping earlier because they were worried about the supply chain or an indicator of weakening demand as inflation starts to bite is still up for debate. Flexport’s Post-Covid Indicator still shows a strong bias for goods over services. A continued boom in consumer spending is in some ways a good problem to have, but it means the logistics industry will have to keep stretching existing infrastructure to meet elevated demand. The long-term solution to the logjams is to invest in upgrades at the ports, including rejiggering designs to allow for bigger vessels, adding terminal and yard space and more cranes and building up inland facilities and access points. “The infrastructure bill will help, but the timeline is 10 years, not 10 months,” Manders said. “Even though we might get out of the worst of this bottleneck, long term, we have to solve it because the growth keeps going,” he added.

As we learned all too well over the past 18 months, there’s no shortage of potential disruptions in the short term that could throw the whole system out of whack again. It remains to be seen whether the recently discovered omicron variant of Covid-19 proves more virulent than earlier iterations. Even if it doesn’t, China has held firm to a Covid-zero policy and proved it’s willing to shut down ports to stamp out cases. A repeat tied to omicron would have wide-reaching ramifications across the ocean that could linger for months. More tangibly, the International Longshore and Warehouse Union’s contract for the West Coast ports expires next summer. These negotiations have a history of turning contentious, leading to productivity declines and lockouts. This time should be no different, with workers feeling empowered by widespread labor shortages and employers feeling greater urgency to invest in automation to deal with the deluge of cargo.

Bloomberg