Bullwhip or Just Bull?
Are shipping lines pricing themselves out of business? Blame the bullwhip effect, a distribution channel phenomenon in which demand forecasts yield increasing swings in inventory. Let’s take that idea a bit further.
Financial pressures on publicly traded companies drive short-term policies that please The Street analysts to satisfy investor expectations. Yielding to those pressures sometimes runs counter to long-term company and customer benefits, especially when you raise prices tremendously.
And examples abound of capricious actions by U.S. and/or foreign governments that give the global business community fits and starts, and then fits and stops.
Both factors have motivated companies to take a strong hard look at considering locating supply and production close to where the bulk of the buying market is. Inbound Logistics has focused on the benefits of reshoring or nearshoring for more than the past two decades. During that time, many companies took action. Many others did not.
Recently, there has been more talk in boardrooms about reshoring and nearshoring and even more action—pandemic lessons learned. But those fundamentals were there long before the virus and the chip shortage, despite the strong and compelling siren song of "cheap labor."
But now, transport lift rates from low-cost labor regions to the consumption markets have risen dramatically. For some, those increases have eclipsed the low-cost labor benefit. In January 2021, the average price of a 40-foot Shanghai container was $4,535. In January 2022? $5,431. In Ningbo, $3,359 in January 2021 versus $5,633 in January 2022, and in Qingdao $4,509 in January 2021 compared to $5,349 in January 2022, according to Container xChange data.
Are shipping lines riding bull market pricing now, forgetting they are motivating a whipping as global reshoring and nearshoring dents future growth? Yes. And it’s all because of the high costs of shipping, says Stefan Pierer, CEO of Pierer Mobility, in a recent Bloomberg report.
"The logistics costs to ship stuff from China to Europe currently are 10 times what they were before the pandemic, and they won’t fully come down again," he says. "To ship products around the globe, given those costs, you need a continental supply chain. We will change the system."
When you add the explosion in transport lift costs to the other motivations, there is clearly a bull market in reshoring and nearshoring as global supply chains reconfigure. But financial pressures on companies are strong. As things normalize, and transport prices come down, will reshoring be long-term company policy or just another example of the bullwhip effect?