Supply chain panel examines root causes

Commerce Bank this month hosted a deep dive discussion on one of the hottest topics in business today: supply chain woes.

The Kansas City, Missouri-based bank, which has a downtown Grand Rapids location, on Dec. 1 hosted a virtual panel discussion entitled, “The State of the Supply Chain: Current & Future Impact” featuring three experts invested in different aspects of the issue:

  • Christopher S. Tang, distinguished professor at University of California, Los Angeles’ Anderson School of Management, Edward W. Carter chair in business administration, senior associate dean for global initiatives and faculty director of the UCLA Center for Global Management
  • Patrick Ottensmeyer, president and CEO of Kansas City Southern, which has railroad holdings in the U.S., Mexico and Panama 
  • Jack Fraker, vice chair and managing director of CBRE Capital Markets, which monitors industrial real estate availability, including warehouses

The panel was moderated by Kevin Barth, director of the commercial line of business for Commerce Bancshares, and Bob Holmes, chair and CEO of Commerce Bank St. Louis region and Eastern region and leader of Commerce Bancshares’ Capital Markets Group and Equipment Finance Group.

Dan VandenBosh, vice president, commercial and health care banking, at Commerce Bank in Grand Rapids, spoke to the Business Journal after the panel discussion to share a West Michigan perspective.

The problems

Tang — who is a global supply chain scholar with multiple published books on the subject — said these days he feels somewhat like the Maytag Man, whom everyone ignored when their washing machines were running fine and who is in high demand now that they’re all broken and no spare parts are available to repair them.

He defined the global supply chain as “a network that connects all the way from the raw material suppliers to the manufacturers to the ports, to go through the logistics to the customs to the warehouse to the distribution center to the retailers to the consumer’s hand.” He said from the consumer’s perspective, supply chain boils down to product availability and pricing. Manufacturers and retailers, he said, care about whether the supply is meeting the demand in a timely fashion and in the most cost-efficient manner. The supplier and the logistics providers, however, are thinking about whether they can get the products moving and get the cash to keep their operations going, he said.

While port blockages arguably have been getting the most media attention, with hundreds of cargo ships waiting in line at the Los Angeles and Long Beach, California, ports, for miles out into the ocean, Tang said the ports are only one link in the logistical chain, and the current crisis has multiple causes and pain points.

His “forensic supply chain analysis” of key suspects causing the problem included the following six elements:

  1. Consumer demand shifted from services to goods during the pandemic.
  2. Supply from Asia lost its reliability due to pandemic-related economic shutdowns.
  3. The ports are at capacity because so many goods are being shipped.
  4. There’s a truck driver shortage, exacerbated by many truck driver training schools closing during the pandemic, and there’s a semi-truck chassis (or rig) shortage, too.
  5. Rail yards are full, and when they do transport their goods, often there’s nowhere to put them on the receiving end, because…
  6. Warehouses also are full.

Possible solutions

Ottensmeyer echoed Tang’s thoughts about the key issues and added the labor shortage also is a key component of supply chain bottlenecks.

As a railroad man, he said one thing his company is doing that he hopes will alleviate rail transport congestion is its upcoming merger with Canadian Pacific Railway, which will expand its North American footprint and connect ports in a half-dozen coastal areas of the U.S., Canada and Mexico.

On a larger scale, Ottensmeyer said many have high hopes that the U.S.-Mexico-Canada Agreement (USMCA) will assist with nearshoring production and lessening North America’s dependence on Asian suppliers, although in its first 18 months, the trade agreement experienced delays in implementation due to COVID-19, closing borders and the U.S. presidential administration transition.

On the other hand, Tang said President Joe Biden’s administration has emphasized bolstering the supply chain more than any other administration in U.S. history, commissioning a review of the entire supply chain, appointing John Porcari as a ports envoy, proposing multimillion-dollar port infrastructure investments and tasking U.S. Department of Transportation Secretary Pete Buttigieg with getting the supply chain back on track.

Citing a quote from Federal Reserve Chair Janet Yellen, who said on CNBC recently that the White House is involved in a “wealth of interventions,” Ottensmeyer said it would be more accurate to call them “a wealth of good ideas about interventions,” because they haven’t been implemented yet.

“One of my former bosses, a favorite quote of his was, ‘You can’t just pull capacity out of your pocket.’ All of these things take time, and short-term interventions are going to be very difficult to alleviate the issues that we’re seeing, because the investment that’s required for transportation, infrastructure, warehouse capacity, the labor issues — all of those take time,” Ottensmeyer said.

In the meantime, suppliers, manufacturers and retailers are shifting from a “just-in-time” to a “just-in-case” approach to inventory management, thinking that having more inventory on hand will ensure they don’t miss sales opportunities while waiting on the global supply chain, Ottensmeyer and Commerce moderator Barth said.

Ottensmeyer added another solution to alleviating the supply chain will come in the form of inflation; as prices rise, demand in turn will fall.

The real estate side

Fraker is the global head for CBRE’s industrial and logistics sector, and his comments focused on the unprecedented squeeze on industrial real estate due to skyrocketing consumer demand for goods.

“These are the major fundamental metrics that we’re seeing in the U.S. today, and every single metric up here is an all-time record — all-time highest average lease rates (and) all-time lowest vacancy rates in the nation,” he said.

In the third quarter, CBRE reported an average industrial real estate availability rate of 6%, an average vacancy rate of 3.6%, a net asking rent of $8.92 per square foot and a net absorption rate of 291.9 million square feet year to date — the highest level since 2016 — with a record 449 million square feet currently under construction.

The demand for new construction for the logistics sector — thanks largely to the e-commerce boom — is greater than the supply, which means that 36% of all industrial and logistics (i.e., warehouse/distribution) buildings being developed today are leased before completion, Fraker said.

“We have a metric internally here at CBRE that for every $1 billion increase of e-commerce retail sales, there’s an additional 1 million square feet of distribution space required,” Fraker said. “We’re expecting to almost double e-commerce in the near term, and that’s going to create a tremendous amount of distribution center demand.”

Fraker said the rising costs of steel, concrete and other construction materials, as well as increasing land costs, may hamper industrial builders’ ability to keep up with new construction, but on the other hand, pre-leasing demand from tenants and rental rate increases may be able to fund the costs of new speculative developments by investors.

Local take

Commerce Bank is seeing many customers experiencing unprecedented shortages of goods and raw materials, but for West Michigan health systems — the industry that employs the largest number of workers in the region — the focus is on the talent shortage.

“It’s not just the nursing staff, which is a huge issue; it’s across the board,” said VandenBosch, a VP at Commerce’s Grand Rapids location.

VandenBosh said Commerce Bank is working to alleviate the labor shortage by helping health systems automate processes such as accounts payable and accounts receivable. He said on the commercial side, local businesses and manufacturers are doing exactly what the panelists said: shifting from a just-in-time to just-in-case inventory management approach, trying to stockpile goods against future shortages.

“At Commerce Bank, we’re just trying to really understand our clients’ needs and trying to adapt with changing market environment and be a resource through our different products and services,” he said.

The full Commerce Bank “State of the Supply Chain” webinar is available to view at bit.ly/CBsupplychainwebinar.

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