In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Zach Zacharia about what has been a disruptive year for the global supply chain, and what the latest Lehigh Supply Chain Risk Management Index (LRMI) suggests are the biggest risks facing supply chain businesses in the first quarter of 2022.
Zacharia is an associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh. LRMI was developed in 2020 by the Center for Supply Chain Research at Lehigh University and the Council of Supply Chain Management Professionals.
He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation. Read the complete podcast transcript.
Jack Croft: Before we dive into the LRMI for the first quarter of next year, I'd be curious to get your perspective on what you see as some of the main things that went wrong for the supply chain in 2021.
Zach Zacharia: I think the number one issue is labor. When people were able to work from home or they were required to work from home and when the government gave subsidies so people could continue to work from home or choose not to come back to work, that was a significant shift in the economic pattern. [Companies] had to look at things like better pay, better working conditions. They couldn't so easily use the threat of firing someone because there were so many people anxious to get jobs. So that changed the dynamic quite a bit.
The labor area of the economy has shifted tremendously over the last year, and that has ramifications throughout the supply chain. Clearly, supply chain disruptions are becoming much, much more normal. Suppliers are not getting enough parts, they're not getting enough labor to produce the parts. And that's also sort of reverberating throughout the supply chain. And another factor I'm sure you're aware of is there's a huge logjam of container ships in the Port of Los Angeles.
This morning, I looked, it has now reached 101 ships waiting to unload. And these are gigantic container ships holding thousands of 40-foot containers. Just think of one 40-foot container and how many bicycles or how many Christmas toys or computers or more sophisticated items could fit in a container and just imagine that they're all stranded. And some of the executives have told me that the price now for shipping containers has gone three, four, five times what it used to be, and the lead times have increased tremendously from what something used to take 23 days to ship from China over to California, it still takes the same amount of time, but now unloading can take weeks. So this may take [until the] second quarter, definitely past the first quarter, to clear this kind of a logjam. So this is a huge issue.
Croft: For the first quarter of the new year, Economic Risk is rated at the top by supply chain professionals at 88.36. That's the highest risk index number we've seen for any category in any quarter since you launched the index almost a year and a half ago. So what does that tell us and how concerned should we be about economic risk?
Zacharia: Economic Risk being high is critical. When there is higher risk in the economy, then you can see that there is increased pressure on inflation, there is higher labor costs, fuel costs are increasing. Clearly, there has been an increased demand chasing after too small capacity. As I mentioned with the cargo ships logjam, lead time is significantly increasing.
So companies are also keeping extra inventory. Companies are looking at bringing some of this manufacturing back to the U.S. So Economic Risk being so high suggests to everybody that inflation is a factor that people are getting very concerned about. Labor issues, border delays, commodity price increases, all of these things are factors that are of concern if you're working in business here in the U.S.
Croft: Grouped very closely behind Economic Risk are Transportation Disruption Risk and Supplier Risk, both checking in at about 85-plus. So let's take those one at a time. The risk index for [Transportation Disruption] is actually the only one in the top eight in this report that is trending downward from almost 88 in the fourth quarter. So how much of that has to do with just simply moving past the holiday shopping crunch? And does that downward trend offer at least a glimmer of hope for the new year?
Zacharia: That's a very interesting point. We went from 87.8 last quarter to 85.5. But realize that 85.5 is still very high. Looking over the past year, that is the third highest risk value ever. So let's be clear. Transportation is still a very significant risk. However, more supply chain professionals are concerned about the economy, inflation, labor, energy costs. Transportation risk, one of the big factors of that is the truck driver shortage, and it's very real. It's simply going to get worse as more people are used to staying at home and products are getting delivered to your house. So there is that increased demand for truck drivers, but there isn't as much capacity.
Now, one of the things [that] has become very, very apparent is that the way we are paying our truck drivers is not necessarily conducive for people staying in the industry. There is a sense now that we might have to shake up the way that they get paid because the vast majority of the truck driving companies — some estimates, it's about 550,000 or so [companies] and about 98%, 99% of that group has 10 to 20 trucks. So these are extremely tiny companies. And the truck driver, they get paid by the mile. Therefore, if they sit at a dock to wait and get loaded, they don't get paid. And if they don't have a new load as soon as they land, that's again time that they do not get paid.
We have to relook at the economics of this kind of process. There is some question about getting that to become a little bit more equitable. And maybe we can improve those opportunities so that we get more people to stay in the truck driving industry.
Croft: Right up there with Transportation Disruption risk is Supplier Risk, which is also above 85 on the index. So what does supplier risk entail and what does that tell us about what we should be looking at in the first quarter?
Zacharia: Supplier risk, just like the word implies, has to do with safely and easily getting products from your supplier. Clearly, everybody in the supply chain is feeling the stress of not having enough labor, not having enough parts, and many of the raw material suppliers are getting parts from outside the country. There is the jam of containers and now companies are really looking at what can they do to fix their supply chain and they're looking at ways to try and bring back some of that manufacturing. But again, when you try and bring back manufacturing, where's the capacity? The executives that I talk to say that suppliers want to bring some of that work back, but they don't have enough laborers to do the work that they're currently involved in. So it's a bit of a Catch-22.
Croft: Since the new year is normally a time of hope and possibilities, are there any trends you see that give you reason for optimism as we prepare to embark on 2022?
Zacharia: Absolutely. I think that companies are getting better at managing risk. They have more policies in place. Companies are also getting more flexible with their workforce. They are looking for ways to improve the working conditions that they have. They're looking for ways to retain their employees so that their employees are more productive. There is the sense of this [federal] infrastructure bill is going to bring a lot of jobs and perhaps, in turn, bring some money into the economy and improve the economy. And I've always, always been struck by the American psyche for innovation. We are excellent at coming up with new solutions that we have no idea how quickly they're going to happen. I'm very optimistic that these are problems, but we recognize that supply chains have problems, [and] I am confident that we're going to find new ways to solve those problems to enable the economy to continue humming and for all of us to do even better in 2022 than we did in 2021.