What Different Economic Indexes and Data Points Can Tell Us About the State of the Supply Chain

By Tim O’Connor

Since the pandemic began, companies in every part of the channel have been looking for ways to manage sudden shifts in product availability and rising costs. Manufacturers have responded to supply chain volatility and inflation by adding surcharges to the cost of equipment and supplies. The surcharges are intended to offset the fluctuations in manufacturing materials and transportation costs, but they can add unpredictability to a distributor’s bottom line. With so many cost increases and new costs being implemented, distributors are eager for the return of a steady business environment. But it remains unclear exactly when that will happen, even as the economy’s rebound continues.

The only certainty right now is that prices are going up. Inflation rose 7.9 percent between February 2021 and February 2022, according to the U.S. Bureau of Labor Statistics, representing the largest 12-month increase since August 1982. The picture doesn’t improve on the international scale, as the World Bank projects global inflation to remain about 2 percent above its pre-pandemic rate for the rest of 2022.

Fortunately, economic indexes and new tools developed by economists and supply chain professionals are providing greater insights into inflation and its impact on the health of the supply chain. Examining those measurements can help businesses better understand how the supply chain is behaving and prepare their organizations for variations.

Measuring Supply Chain Disruption

When studying the state of the supply chain, economists have traditionally looked at individual aspects of disruptions. How many factories are shut down? How backed up are seaports? Are there enough truck drivers to deliver goods and equipment? But few measures provide a wide-ranging view of the supply chain. Recognizing that shortcoming, the Federal Reserve Bank of New York proposed a new barometer in January 2022, the Global Supply Chain Pressure Index (GSCPI).

The index is distinctive in that it integrates data from 27 variables, including global shipping rates, purchasing manager index surveys, cross border shipping rates, delivery times and the cost of air transportation for freight, among other factors. Importantly, because the GSCPI is measured by using existing metrics, the Federal Reserve Bank of New York was able to calculate historic data dating back to 1997. This provides the index with a historical comparison, allowing users to understand how today’s measurements fit into the larger supply chain narrative over the last 25 years.

The findings are not surprising for anyone who has dealt with a delivery delay or had trouble sourcing a vital piece of equipment in the past two years. The index stood at 3.31 for February 2022, down from the all-time high of 4.50 in December 2021, but still near record levels (a value of 0 represents historic average amounts of global supply chain pressure). It should be noted that the pre-COVID-19 high for the index, 1.72, came in April 2011 following the Tohoku earthquake and tsunami in Japan, which was nearly three points below the end of 2021.

While a useful starting point for supply chain discussions, there has been criticism from the supply chain community that the GSCPI wasn’t quite matching up with what has actually been happening. For example, the initial report showed that there was a decline in supply chain pressures from December 2021 to February 2022, even as other indicators, such as container costs and freight prices, remained higher.

“Where I give the federal reserve credit is they started a conversation, which I think is wonderful, but I think there was more of a need to validate things,” says Jason Miller, an associate professor of logistics at Michigan State University. Miller says the Federal Reserve Bank of New York’s methodology was off for various statistical reasons and that there are better data sets out there to measure some of the variables the organization wanted to capture. Most notably, Miller believes that the GSCPI is heavily influenced by one of its components, the Purchasing Managers’ Index series for delivery times, which showed a large increase during the early days of COVID-19 but doesn’t accurately represent the factors that are disrupting supply chains now.

Miller developed an alternative measurement, the Michigan State University Supply Chain Pressure Index. Rather than compiling variables from a worldwide representative group of supply chain indicators, Miller’s index tackles supply chain disruption from the understanding that manufacturing facilities are unable to operate at full capacity, and are therefore unable to meet heightened demand. He pulled data from the U.S. Census Bureau’s Quarterly Survey of Plant Capacity Utilization (QPC) on why plants were operating below full capacity and then weighted those responses according to plant size for three data series: insufficient supply of labor, insufficient supply of materials and logistics/transportation constraints.

“It provides a much better sense of what’s going on and it behaves a little more intuitively because it declines in 2020 and skyrockets in most of 2021,” Miller says of how the index’s behavior matches real-world results.

Taken together, the three groups capture the most common contributors to supply chain disruption. Miller chose 2018 as the reference year for the pandemic, setting the standard value at 100. Using his methodology, Miller determined that the global supply chain pressures were up 13 percent in Q4 2021 compared to Q3 2021. While that is a slower rate of increase than in Q3 (a 17 percent increase) it nonetheless showed that supply chain struggles were worsening at the end of the year.

That trend tracks with data from the QPC about the struggles facing equipment manufacturers. The Q4 2021 QPC report found that facilities producing commercial and service industry machinery had a 72.2 percent utilization rate and were averaging 58.4 hours of operation each week. That was a slight decline over the Q3 numbers of 75 percent utilization and 66.4 hours of operation each week.

With the index still rising, Miller is skeptical that troubles with the supply chain will plateau much this year. “I think it will take until the second and into the third quarter before things start improving,” he says.

 

Record-Low Delivery Speeds

While Miller and the Federal Reserve Bank of New York may be looking at different data points for their composite indexes, both incorporated the impact of logistics and shipping delays. Unfortunately, lengthy shipping times remain a sticking point for the supply chain, which has suffered from significant labor shortages and a large backlog due to COVID-19.

Flexport’s Ocean Timeliness Indicator can provide insight into how long those trips are taking. The series is updated weekly and measures the average time it takes along the two biggest trade lanes, Asia to North America and Asia to Europe, to ship freight from the point at which cargo is ready to leave the exporter to when it is collected at its destination port.

As of mid-March, the Ocean Timeliness Indicator measured 109 days for Asia to North America shipping and 116 days for Asia to Europe. That’s way up from pre-pandemic times, when westbound traffic was about 60 days in December 2019 and Transpacific shipping was at 50 days. The trend has been steadily rising since summer 2021 when both trade lanes were at about 85 days on average.

Those increasing shipping times have naturally led to less reliability for on-time deliveries. According to the Global Liner Performance report published by Sea-Intelligence, a supply chain research and analysis firm specializing in container shipping, schedule reliability across 34 different trade lanes was the worst ever in January 2022. Year-over-year, schedule reliability was down 3.8 percent for the month with the average delay for late vessel arrivals at 7.38 days, marking the sixth consecutive month with the delay figure above seven days.

Longer transportation times also mean higher transportation costs across the entire supply chain. The average cost to ship container freight stood at $9,488 in mid-March, a 577 percent increase since the pandemic began in March 2020, according to Freightos, a global container freight index. Even looking back only a year, costs have more than doubled from $4,300. Looking at North America specifically, the cost of shipping a container from East Asia to the West Coast was $16,024 and to the East Coast $17,359.

The same trend can be found in trucking. The Cass Freight Index found that freight rates were up 37.2 percent year-over-year in February. However, the pace of the increases appears to be slowing. November 2021 saw the largest month-to-month jump in rates, 6.4 percent. Since then, the increase in rates has fallen every month, with February rising by only 1.8 percent. Still, Cass believes freight rates will grow another 23 percent by the end of 2022, matching 2021’s increase.

That expectation is echoed in a Morgan Stanley report on the global supply chain that anticipates trucking capacity won’t increase until 2023. “We expect to see some supply chain relief in the first half of 2022 but expect this relief to be only limited and temporary,” Ravi Shanker, transportation and airlines analyst, said in the report. 

Equipment Pricing on the Rise

The United Nations Conference on Trade and Development projects that global import price levels will increase by 11 percent on average if freight rates remain at their current high levels through 2023. It now takes longer and costs more to ship goods and materials to factories in the United States, which means manufacturers are forced to increases prices, oftentimes unpredictably.

Between February 2021 and February 2022, the producer price index for professional and commercial equipment sold by wholesalers increased 6 percent, according to data from the U.S. Bureau of Labor Statistics. That’s a little below the 7.9 percent increase in CPI. However, the picture becomes more severe when looking at certain equipment categories. The metal cookware, cutlery and flatware category, for example, jumped 10.5 percent in the same timeframe. But perhaps the biggest increase was seen in commercial refrigerators and related equipment, which is up 34.5 percent in the past year – representing the biggest jump in the category since tracking began in 1979.

“It just tells me right then and there you’re going to have to figure out ways to pass that on to customers,” Miller says of the price increases occurring in the foodservice equipment and supplies industry. Surcharges seem to be one way that is happening, with some dealers reporting surcharges from manufacturers as high as 30 percent.

Economic Outlook Foggy

These price increases resulting from higher costs are now risking global economic recovery from the COVID-19 pandemic. A January 2022 report from the World Bank Group projects that global growth will decelerate from 5.5 percent in 2021 to 4.1 percent in 2022 and 3.2 percent in 2023 in part because of continued supply bottlenecks.

“The bottlenecks that have propagated through global supply chains have led to a surge in the backlog of orders for traded goods and to record high shipping prices, which at their peak in October 2021 were six times their 2019 levels,” the report said. “At the same time, inventories have been depleted by businesses seeking to meet the rebound in demand.”

The situation is only being compounded by Russia’s invasion of Ukraine and the subsequent implementation of sanctions by most Western nations. As Cass notes, Ukraine supplies half of the world’s neon gas, a substance used for laser lithography in semiconductor manufacturing. As a result, the war stands to further the chip shortage that was already impacting equipment makers. Additionally, cutting off Russian oil imports is decreasing the supply of available crude oil and increasing costs at the gas pump, which may make ground transportation even more expensive.

But it’s not all bad news. While there is still much uncertainty over how a stressed global supply chain and corresponding inflation will play out, there are some signs that the picture could improve this year. In December, the International Monetary Fund (IMF) noted that the inflation rates that are alarming most businesses and consumers are actually close to policy targets in most economies. This gives hope that monetary policy actions can bring inflation back in line with government goals, the IMF said, adding that long-term inflation expectations in the United States have increased but remain near historic averages.

The IMF attributed part of the United States’ higher inflation rate with the country’s status as the fastest recovering economy among large, advanced economies. “It is in such countries, where economic activity has rebounded more quickly to pre-pandemic trends, that core inflation has risen sharply relative to levels before the crisis,” the IMF said. “This relationship between recovery strength and core inflation, while far from perfect, suggests stronger underlying inflationary pressures in countries where demand has recovered the fastest.”

Although inflation is expected to remain elevated, the IMF believes it could start coming down later this year. “Assuming inflation expectations stay well anchored, inflation should gradually decrease as supply-demand imbalances wane in 2022 and monetary policy in major economies responds,” the organization said.

Revising Strategies For the Future

Fortunately, manufacturing output does appear to be improving. Raw data from the Federal Reserve Bank of St. Louis shows that industrial production of commercial and service industry machinery reached its highest level in February 2022 since December 2018.

With stock becoming more available, dealers will start looking for ways to guard themselves against future supply chain shortages. That may require some revised strategies and processes. Miller recommends dealers take a deeper look at the upstream supply chain to anticipate where those failure points could occur during a disruption event. One of the issues during COVID-19 was that even in cases where distributors were attempting to diversify their supply chain by sourcing similar equipment from different manufacturers, those manufacturers were getting their materials and components from the same Tier 2 suppliers in China. As a result, they were still affected by the same shortages and delays. “Unfortunately, there’s really not much that can be done right now because everyone is looking for the same refrigerator,” Miller says. This means dealers will have to look for manufacturers who are sourcing product components from places where they are available. “The big thing moving forward is to talk to the equipment manufacturers themselves and ask what their upstream supply chain for the components looks like.”

In the future, as stock becomes more available, its important dealers reconsider the balance between just-in-time manufacturing and safety stock. Much of the criticism over the past year has been aimed at just-in-time manufacturing, an inventory management strategy that attempts to improve workflow and efficiency by aligning the delivery of goods with the production process, reducing inventory costs and allowing businesses to be more responsive to market changes in normal conditions. But Miller explains this criticism overlooks other factors that create stockouts – events that cause inventory to become exhausted. “A lot of the assumptions we make have been violated during the pandemic,” he says.

Instead, Miller recommends companies reconsider how they treat safety stock. To avoid stockouts, distributors and manufacturers could build up their reserve inventory of critical components and products. Doing so will protect against sudden disruptions or unexpected changes to lead times, ensuring that production will continue and customers can purchase what they  need.

A well-maintained safety stock can buy companies time to adjust to unexpected changes in the supply chain. During that adjustment period, looking at economic indexes can help them to develop new strategies and solutions for managing volatility in product availability and rising costs.