When I was studying for my Private Pilot certification, I learned about phugoid oscillations. Most airplanes that are disturbed from level flight will go through a series of diminishing oscillations until they reach level flight again (if no controls are moved and the trim isn’t changed).
An aircraft that will eventually stabilize itself from minor deviations has aerodynamic stability. Most aircraft are built to be aerodynamically stable. If the pilot stays hands off, the plane will right itself from minor deviations.
Supply Chain Oscillations
We may be seeing something akin to phugoid oscillations in the congestion at ports. Port congestion is peaking again in California and is also building on the east coast.[1] California port congestion last peaked in the first quarter. The congestion was eventually capped by vessel supply. As those vessels were delayed in their normal rounds, other temporary vessels have been added. Now there is another round of congestion building.
If the ports and vessels were a closed system, the surges would eventually even out to a new “level flight.” But the supply chain is interconnected. When flow is disrupted in one node, other nodes are impacted. Surges in containers coming from California led to containers stuck in Chicago when capacity to transfer to trucks and rails east was overwhelmed.
What is happening with container ships is but one highly visible example of the disruptions that are occurring throughout the supply chain. Instead of seeing one simple system go through a series of oscillations until it finds stability, we are seeing waves of significantly increased demand moving through an extremely complex system. The complexity of the system means achieving a new stability will take much, much longer than if it was just a simple matter of containers and ports.
Aerodynamic Stability
I do believe that, on a macro level, the overall supply chain does have “Aerodynamic stability.” Overall consumer demand is what ultimately pulls everything through the supply chain. And overall consumer demand is fueled by how many people there are and how much disposable income they have with which to buy things.
How many of us are eating and what we eat hasn’t changed so much, even if where we eat may have. Nor is there much difference in how many people need other consumer goods or appliances. And there’s an upper limit on how many home improvement projects we can all do, so even demand for lumber will eventually crest. In the end state, total flow through the supply chain should be about the same as it used to be.
The current supply chain bottlenecks are driven primarily by the recovery from prior shutdowns, exacerbated by ongoing sporadic shutdowns around the globe. Consider how long it takes an airport to recover after a major weather shutdown. Most planes were already booked near capacity, so there is little extra capacity for the backlog of passengers, and it can take days to return to a normal flow. The global supply chain is much more complex than an individual airport, so it will take much longer to get back to a normal flow.
Inventory Trends
The U.S. Census Bureau released a report this morning on Manufacturing and Trade Inventories and Sales as of June 2021.[2] While business inventories were up 6.6 percent from June 2020, sales were up even more.
The above graph from the Census Bureau shows that inventory as a percent of sales spiked briefly at the initial shutdowns, but has since been below where it was before the pandemic. This suggests two things to me:
- Businesses’ inventories are still limited by their ability to get materials they need (I get anecdotal support for this from clients I work with).
- The current bottlenecks throughout the global supply chain are driven by businesses trying to get what they need for current operations, not for building inventories.
Total business inventories have not increased YET. When we eventually come out of this to a new steady-state, business inventories will have increased. The events of the last two years have taught us all that we need more nimbleness in our supply chains. Some of that nimbleness will come from increased inventory. A look around to see the number of warehouses being built reinforces that view.
The increased inventory at businesses will extend the surge in demand through the supply chain. However, in the final steady-state, the pull from consumer demand will be about the same. We will eventually reach a consistent flow that is like what we had before COVID-19.
So please be sure your seat belts are buckled, and your tray tables are put up. There is still a lot of turbulence ahead before we reach a smooth and level flight.
[1] California congestion nears new high, East Coast gridlock worsens, American Shipper, Senior Editor Greg Miller, August 16, 2021. https://www.freightwaves.com/news/california-congestion-nears-new-high-east-coast-gridlock-worsens
[2] https://www.census.gov/mtis/www/data/pdf/mtis_current.pdf