Episode #10 - Coronavirus Affecting the United States' Supply Chain
The Industrial Advisors discuss COVID-19 (aka the coronavirus) and its impact on the United States’ supply chain with Tim O'Brien, Business Development at California Cartage and their colleague Todd Steffen, Vice President, Supply Chain & Logistics at Colliers International.
Matt McGregor: Hi, everybody. Welcome to the Industrial Podcast Show, Matt McGregor and Bill Condon, your hosts. Today, we've got a special topic, kind of an emergency podcast show that we put together very quickly with the growing concerns of the Coronavirus, but especially how it relates with supply chain. So really, what we're going to try to do in today's show is briefly take out the media hype, let's get rid of that. And we're going to tell you, are you going to get your diapers, are you going to get your pharmaceuticals, is there going to be toilet paper coming in via freight in the coming weeks, or should you, like a lot of people, jump in the Costco lines and get your supplies.
Matt McGregor: Briefly, it's really interesting how much this is hyped-up right now. People are on red alert. I've actually got a neighbor, Bill, that has bought two months of supply of everything they need, pulled both their kids out of school, one high school student and one elementary school student, and have now quarantined themselves in their house. They're not sick, and they're not coming out until this is over.
Bill Condon: Yeah, it's crazy. There are some videos over the weekend of some of the lines at Costco being out the door. People are freaked out about it, and so it'll be great to have the experts on here to talk about, is it real or what do we need to be doing here to prepare?
Matt McGregor: That's right. And specifically we have two guests that will help us, tell us, without any media hype, how the freight's moving in the world, and are we going to see a shortage, and when are we going to get back to normal levels, or are we going to see a shortage. So we've got two special guests. I'm going to introduce Tim O'Brien. Tim is with California Cartage Company, which is a division of NFI. They are a three oh sorry, a third-party logistics company, known as a 3PL. Tim's enjoyed over 25 years in the logistics industry, focusing on all aspects of supply chain. And he has worked for several Fortune 500 3PL companies. Welcome to the show Tim.
Tim O’Brien: Thanks. Good to be here.
Bill Condon: Great. I'd like to introduce Todd Steffen. Todd is the Vice President of supply chain and logistics here at Colliers. And I always tell people he is definitely one of the smartest guys in all of Colliers, and so it's great to have Todd. Todd, prior to being at Colliers, led supply chain for Newell Brands and Walgreens, led a lot of innovation for those companies. And I know firsthand how knowledgeable that Todd is on this topic. So Todd, great to have you with us.
Todd Steffen: Well, thank you very much, Bill and Matt, for having me on and Tim, good to be with you.
Tim O’Brien: Yeah.
Todd Steffen: It's a great time to be discussing this. I'm was in a conference last week of RILA which is the top retail industry leadership supply chain experts in the world and we had a session where this topic was brought up across 25 different major retailers and then I have dialed into two other supply chain executive groups. One with 70 companies, one with 50 companies. And we've had several bits of discussion on this. We've, we've taken a look at the trends just from a freight flow standpoint and you know, I will be happy to share our perspective today.
Matt McGregor: Great. And Todd, maybe we start with you. Are people are going to get their toilet paper and diapers is the freight? How is the freight moving in the world right now? Or are we behind what's the situation?
Todd Steffen: Yeah, great, great question Matt. So, so here's the situation. Coronavirus impact is going to be felt for months with regards to certain industries more so than others. The freight flows related. I'll tell you what really set us up for a kind of a perfect storm was obviously starting as early, as early January companies in China, manufacturing companies in China were ramping down, coming up to Chinese new year on January 25th so you already had several weeks of slow production and then you had obviously an extended period where people stayed away from the factories. China reported its lowest manufacturing numbers on record for the month of February. So, that tells you a little bit about just how much of a gap there is. I was on International Freight Forwarders on Friday on a call and they said the people are starting to return to the factories in China. The freight is starting to move cross border and much more so than it was in January and February with Chinese New Year and the beginning of Coronavirus impact.
Todd Steffen: So, there is a loosening if you will, of the freight from within China, but several industry supply chains, automotive probably leading the way will be feeling this effect for months in one form or another. Obviously, the ripple effects are going to be, there's going to be a pig in a python, if you will. Right? Because there are such a gap in a product being produced in China and now eventually, a good portion of that product is going to have to move through the supply chain. Just to give you two other numbers. The Chinese Seabourn import tonnage. Okay, so imports into China are down, essentially from last year's, I should say a seven year average. Not counting this year are down 25 to 40% that's into China. And, essentially that's mainly dry bulk iron ore and coal followed by energy.
Todd Steffen: And then exports out of China are down basically if, right, if the average, let's say after Chinese New Year, we had gotten back up to about 85% of normal export volume. We're only tapping 50% of the total normal volume.
Matt McGregor: Wow.
Todd Steffen: So really significant gaps. There've been over a hundred blank sailings from China and you figure eight to ten thousand TEU's per sailing. That's almost a million containers of product that haven't flowed out of China that normally would've been expected to. So, it's a really significant impact there, we'll say also on the crude oil exports. So, the top 10 exporting countries that are sending crude oil to China, those numbers are actually up. But, you got to keep in mind those shipments started 30 to 40 days ago expecting a normal rebound from Chinese New Year. And now obviously, there's a far less than normal response after Chinese New Year. So, but the whole concept of shutting down for Chinese New Year is being re-thought in light of this situation.
Matt McGregor: Not bad, well Todd, that's fascinating. I want to come back to you, and maybe ask specifically if there're products that you think are going to be the most vulnerable, but first I want to shift real quick. Tim, you and I were driving in the car the other day and you obviously worked for 3PL, so you're in and out of the port's system every day. Tell us, what's going on in the ports with knowing what Todd just said, with 50% production shortfall, what's going on in the ports and how is it affecting your business?
Tim O’Brien: Yeah, it's very good explanation by Todd as far as kind of the macro-level specific to us and the Pacific Northwest being a West coast Gateway port, we're going to be ones the along with LA Long Beach and our neighbors to the North volumes are way down and kind of to that dovetail, one of the things I was thinking of when I was hearing this is, when the manufacturing came back on the labor was slow in some cases to get back. I think we're going to feel that way as the lows in the trucking, the drayage, even the warehouse labor to do the work. When you have these lows people are going, they'll hang with you for a certain amount of time as far as temporary laborers and independent owner operators. But pretty soon they're going to be going to where the work is.
Matt McGregor: Right.
Tim O’Brien: So, the hope is that manufacturing and the volumes come back. We, I think we all agree that they're going to be lower, but one of the concerns specific to kind of our piece of the puzzle, which is kind of the middle of the supply chain, I was thinking of going to get the containers from the port and moving them through to the Midwest and the Southeast. The major concern I see is when you have labor, that you're slowing down and you have to say, "Hey, you can't come in today." But, when that pipeline finally hits, are those people and trucks and resources going to be there when you say, "Okay, great, this biggest turn back on, where are you?" That's a concern for 3PL.
Bill Condon: Yeah. And as, let's stay on that topic for a second. So as a warehouse operator, what do you do in a situation like this to try to mitigate risk?
Tim O’Brien: In a large, specific to our case. You've got a lot of temporary labor, so you kind of flex your labor, you obviously take care of your full time employees, but the temporary labor force in the Pacific Northwest is fairly good. It's nowhere near the scale of LA Long Beach. But if you say, "Hey, you can't work for a couple of days but hey, we've got something for you next week." The expectation might be when you call the staffing services, they're not there anymore. So now you've put all your time and training and processes in people that know the rules as far as safety and compliance and KPIs, they're not there. So then you're just reinventing the wheel as far as retraining folks. So.
Todd Steffen: Bill, this is Todd. Just keep in mind, I mean we're at this historic levels, right? Low levels of unemployment, almost full employment and in a lot of markets. So, the situation is just like Tim said, the labor's going to go where the work is and if the work is delayed because these freight flows are interrupted, those folks are going to be at risk of just not being available to come back.
Matt McGregor: That's a great point. Todd, I'm going to come back to you with that question, but first I'm going to get your opinion of this. I was talking to Casey Conway this morning. He's a national economist and he thought we're in the first to second inning of the Coronavirus, meaning we don't know what the future holds. And, he actually called it, which I loved was a self-induced panic recession. And he compared it to a shutting down the government with one exception is we controlled the on, off switch and we don't control the on off switch here. So, if you agree that this is a self-induced, potentially panicked recession, what supplies are we going to run out of, if you could pinpoint a few of those?
Todd Steffen: Yeah, I mean really anywhere you're seeing the drop in is containerized volume from China, but that's going to hit the headlines. But just keep in mind that China sources componentry and raw material input into other manufacturing processes. Even if people have moved their manufacturing to other parts of Asia and Cambodia and Vietnam seem to be a couple of areas. Indonesia, obviously some to India, those supply chains are still at risk, right? If they're getting any kind of componentry or input to that manufacturing process from China. And so, just keep in mind it's the more layers that they're out of the supply chain, the more risks there are. If some, even just one component of that leads back to China, there's a risk there. I've seen articles and some leading thinking on this is going to be a huge boost to reassuring our near shoring to Mexico.
Todd Steffen: And the fact that it's a five day trip to New York from Mexico for a container versus no far longer from China. And if these risks are either if you look at Chinese New Year or Trade War or Coronavirus induced, then you're going to look at people. People are really going to look at China with more and more skepticism with regards to putting all their eggs in that basket. So, I'm seeing a lot of momentum over the last three months, Coronavirus aside where companies are really reevaluating their extended supply chain.
Bill Condon: Yeah, that's a great point. And, it's something I talked to KC about as well. Tim, what type of product do you import? Where are you seeing the shortages across your supply chain right now? What type of specific products?
Tim O’Brien: We haven't seen it. It's starting to slow down, but the consumer retail goods is one, that we focus on. As an example, that one, the Chinese New Year, like it was mentioned, slowed the volumes down. Now, that just hasn't picked up. One of the things is that, the resources we use here in the Pacific Northwest they are Northwest Seaport Alliance. I've got some friends that interact with the ports in China, so we're getting news bulletin there. Long story short is a consumer retail right now the volumes are way down and it's very closely specific to us here, it's seeing when those manufacturing factories/steamship lines/ports really kick up and going. So, post-Christmas, retail's always kind of soft but it's not this soft.
Matt McGregor: Got it.
Bill Condon: And Todd, [crosstalk 00:14:30] just to back that, just to back that up, Matt, I was with 20 distribution retail executives last week and basically every one of them described the same exact profile with regards to their freight and the inventories that would normally be replenishing now after the holiday and that kind of thing. Everywhere from office supplies to fashion to automotive parts were severely impacted and everybody was fairly in the same boat.
Matt McGregor: That's interesting you mentioned reassuring, which in some cases maybe you could get up to speed quickly, but I would think reassuring is a longterm solution. I did hear of a facility in Augusta, Georgia that manufactured face masks that shut down about a year ago, due to the cheap labor in China is now rebooting and they're going to be online in about two weeks. But I would think that would be the exception of the rule. So reassuring is a longterm issue, but that's not going to cure toilet paper issue in the coming weeks. Right?
Todd Steffen: Correct, correct.
Bill Condon: So, what about the food supply chain? Is there an impact there that we should be worried about?
Todd Steffen: It may or may not be, obviously it depends on the origin of the food. But one of the other things to take into account is where is the capacity, right? Where's the capacity right now? And, when you look at the container source of containers, right? There's a flow that's expected in and out of China for containers. And, when you find that you've starved the flow of inbound, let's say to China because there weren't people there to offload them or, or whatever the reason. Now you've got equipment out of position, and obviously a domestic versus import is going to be the real driver as to whether there's going to be shortages there, but just overall you got to keep in mind it's not only the product, but it's the equipment to move the product. These containers all over the world that are being disrupted as well.
Bill Condon: Yeah, [crosstalk 00:16:45] go ahead Tim.
Tim O’Brien: Yeah, I think that's something that the general public when you read the when you hear the morning or afternoon news, that's something you don't think about is, this is a big game of Tetris and you've got to keep your containers in the right positions. They are definitely out of kilter right now. So, that's a critical component of the supply chain that folks okay, great. The manufacturing facilities ramp back up, but there're no boxes to move them to us. What do we do? You can't, there's no virtual machines that can transport them star Trek style to the United States.
Matt McGregor: Great point.
Todd Steffen: Yeah, 100%
Bill Condon: Yeah. Guys, it's interesting because we're starting to see a lot of companies cancel big conferences and things that require travel across the U.S. You guys being experts and talking with other expert's day in and day out. What are your thoughts on that? I mean, that has a huge impact to hotels to airlines to everything, but do you think that's an overreaction at this point or what's your take?
Todd Steffen: My take is that, it's not an overreaction only because people, I mean they have to put the safety and health of their employees at the top of the list. And I mean, you look at just TPM, right? The number of companies both on the international freight side of things as well as attendees, shippers, BCOs that have just canceled the whole thing. Right. With regards to their attendance. And these are normally thousands and thousands of people getting together to transact around the future international freight agreements. And just those discussions just did not happen. At least, in person they didn't, you look at international travel has been banned on by so many companies for not only just the next few weeks. Right. It's for the foreseeable future. One huge software company I just heard this morning, because I know somebody that works there, they banned all domestic travel and not to create hype or anything, but I mean these things are going on. And to your point Bill, the hotel industry and travel industry are going to have, they're going to feel the ripple effect of this for quite a while.
Matt McGregor: And Todd you mentioned how, obviously when they start canceling flights, the amount of time that it takes to get everybody on flights and back where they're supposed to go as a supply chain nightmare in itself. You mentioned that the containers are all messed up all over the world now. How do we straighten that up?
Todd Steffen: Again, it's going to be a prolonged reflow if you will or a ball of correction, it's not going to happen over night. And to Tim's point, I mean that's it's something that we're going to, as supply chain professionals, we're going to have to take our best thinking and resiliency and disaster planning and things like that and really take it to a global level. And it's something that hasn't, these volume effects have not been seen before. At least, in such a concentrated one, two punch with, with Chinese New Year and Coronavirus.
Matt McGregor: So, Tim and Todd, and in closing, if I could ask you guys, if you said to the listener you run out and buy one item, what would it be?
Todd Steffen: I would have to say just obviously the basics, right? Make sure you're stocked up on, on things. But, a lot of those things are domestically supply, but we don't know the effect and the impact on the domestic supply chains. Right. When you look at some of these cases that are popping up for sometimes unknown reasons, so obviously it's the basics that matters is what I would say. And, then anything having to do with hand sanitizer, any kind of sanitation and, or whatever the common medicines are that are being used to at least comfort during these situations.
Matt McGregor: Right.
Tim O’Brien: That, that would be my twist is something that's sourced internationally. If it was me for my daughter, it would be aspirin or ibuprofen or something like that. Some sort of medical supplies. But, to kind of go backwards in closing a little. The state, the question was asked is this kind of overkill as far as safety? Safety is number one. I mean, being in supply chain my whole life, if there's even a sniff of something that's going to happen it's always safety first. So, I can understand why TPM and lower attendance at RILA and, at end of the day, you need to take care of your people, because they're the ones that take care of you. And if there's, if it's going to be unsafe, then don't do it. So.
Bill Condon: Well guys, this has been very, very insightful. So, Tim and Todd, thank you for your thoughts on this. You guys are definitely thought leaders in the supply chain industry and this is obviously a very important and relevant topic. So, very insightful. Thank you both and we appreciate you taking the time.
Tim O’Brien: Thank you.
Matt McGregor: Thanks guys. Appreciate it.