Planet Money - Two indicators: supply chain solutions

Episode Date: January 26, 2022

Two stories about people trying to overcome supply chain challenges. We follow a ship that is forced to get creative to bypass clogged ports, and we visit a warehouse that is running out of space. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Hi everyone, this is Darian Woods from The Indicator, Planet Money's daily economics podcast. The world is deep into the supply chain apocalypse at this point, and frankly all signs suggest we have a long way to go before we're out of the woods. before we're out of the woods. If you're one of the many people still waiting on that new couch or car or a pair of skis, you might be wondering why things are still so broken. I mean, the ski season is halfway through at this point.

So we're going to be looking at two crucial choke points that explain the slowdown, ports and warehouses. And we look at what it would take to unclog those choke points. After the break, Dustin Dwyer from Michigan Radio brings us our first story about one possible solution to our national port clog problem. We are joined today by Dustin Dwyer from Michigan Radio. Welcome. Hey, Darian. Good to have you here. It's great to be here. So I wanted to come on to tell you about this journey I heard about.

And I brought a globe with me. I love it. All right. So we start at Shanghai, China. Yep. Right on the coast. You're going to go all the way across the Pacific Ocean on your little imaginary cargo ship. Yep. And you're going to head like you're going to go to Los Angeles. But as you know, the port of Los Angeles is backed up.

Okay. We've got to find an alternative port to go to. Alternative route. So go south. And you know where the Panama Canal is. Oh, yeah. So you're going to take that. Once you get through that, you're going to head up the east coast.

But don't stop. Go past Miami, past Savannah, past Baltimore. Go even past Boston until you get to Nova Scotia. Right. All the way to Canada. Yep. Okay. So then hang a left there. You see that little waterway, the St. Lawrence Seaway, which heads to Montreal. You're going to take that. Okay. We're getting into some pretty narrow territory. Keep going past Montreal. You're going to come into Lake Ontario. You're going to see Toronto.

Hey, Toronto. You know Niagara Falls? I know of it. Yeah. You're not going to go over Niagara Falls. You're going to see Toronto. Hey, Toronto. You know Niagara Falls? I know of it, yeah. You're not going to go over Niagara Falls. You can't actually go up it. Right. So instead, there's another canal. Yeah, I would imagine so. So then take your boat into Lake Erie.

And here, I should tell you, this journey, this long journey, is the journey of the Happy Rover. It's a container ship that I found out about. It took this trip back in November. All right, so not your typical journey. And you're saying that the Happy Rover took this journey to avoid the mayhem at the West Coast ports. Exactly. And I was there on the shores of Lake Erie

waiting for the Happy Rover with a guy named Klaus Sorensen. He works for a shipping company called Spliethof. Is this us out here? Yep, that's her. That's her. Yep. We are standing in Cleveland. Cleveland in November, which is freezing,

and I am standing out on the dock in the wind. Right downtown, this is right next to where the Browns play, not far from the Rock and Roll Hall of Fame. This is the Port of Cleveland. I'm standing there with Klaus Sorensen, and the Happy Rover is finally of Fame. This is the port of Cleveland. I'm standing there with Klaus Sorensen, and the Happy Rover is finally pulling in. It's backing into the dock. On the deck of the ship are these maroon shipping containers that they have to unload. You got one. Only took him 40 days.

So Darian, standing right next to it, I have to say this ship, the Happy Rover, looks plenty huge to me. It's, like, bigger than a football field. Okay. But, like, still compared to, like, one of those huge ocean container ships, it's, like, nothing. And the reason it's so small is because it's got to go through all those canals and the Great Lakes. These canals were built before the wave of containerization took off in the 1960s, i.e. putting things into containers and standardizing them with these big metal boxes. When you did that, products could be

loaded and unloaded more quickly at the ports, and ships could be built to carry more and more containers. So all around the world, container ships were getting bigger and bigger, but the canals in the Great Lakes, they were the same size. So even though the Great Lakes does a lot of shipping, the idea of containerization of these standardized containers with their massive economies of scale, that just skipped over the Great Lakes. Until now, Klaus says. If rates are low, it makes no sense.

If rates are high, then you can find a way for it to make sense. Rates are high right now because of the backlog and the bottlenecks, especially on the West Coast. And so with that extra financial incentive, you get the journey of the Happy Rover ship all the way from Shanghai to Cleveland. But even that journey was a long time in the making for the Port of Cleveland and for Klaus's company, Spliethof. They basically made a bet on this years ago before anyone knew that there was a crisis coming in shipping.

Because you can't just make a phone call and all of a sudden this port that wasn't taking containers before now can take containers. There are regulations. And one of the biggest is that the Department of Homeland Security, they have to be able to scan every single container that comes into the port.

And buying a scanner, that's not a cheap proposition. We're talking like hundreds of thousands of dollars. So if you're operating a port and you think, well, I'm not probably going to make that much money off of this container business. Why buy the scanner anyway? Why invest? But Cleveland did. And now other ports in the Great Lakes are following that lead. The Great Lakes St. Lawrence Seaway System is an underutilized asset. I do think it's capable of being used as a relief valve for these global supply chain pressures. This is Deb DeLuca. She leads the Port of Duluth, which is the largest port on the Great Lakes. It's also the farthest inland. It's more than 2,000 miles from the ocean. And she says it's mostly raw materials moving through Duluth's port right now, like grain, fertilizer, and the biggest one, iron ore. Deb says those

things are really the heart of Great Lakes shipping today, and they will be for a long time to come. But she says there is room for container shipments to grow. So as of this year, Duluth became the second Great Lakes port after Cleveland to be able to accept container shipments. You know, it's always a balance of service and price, correct? And I do think that the cost can work. Okay, so Dustin, just a bit of a reality check. I mean, we're not expecting the Great Lakes shipping routes to replace the ones to LA and Long Beach, are we? No, okay, fine, fine. Even in the wildest dreams of Great Lakes enthusiasts like myself, these ports could only handle a tiny

fraction of what even the East Coast ports can. But there's still a real opportunity here, and it's not necessarily for these shipments that would take the long way from China like the Happy Rover. Consider shipments from Europe. This year, Klaus's company, Spliethof, had the Great Lakes' first dedicated, regularly scheduled container ship route, and it ran from Antwerp, Belgium to Cleveland. I mean, we're still getting calls today. How are you doing this? How do you get in here? Well, you know, we have to have a geography lesson. Luckily, I had one at the start of the show. Yeah. So get that map back out. But this time, come from Belgium and trace that route.

And Cleveland is actually not that much farther than any of the other East Coast ports. From Antwerp to Baltimore and Antwerp to Cleveland, the distance is within 100 miles. People are astounded to hear this fact. So yeah, the distance is actually very close to being the same. So if things are backed up at those East Coast ports, it can actually make more sense to ship to Cleveland. So much so that this year, Klaus says they had containers arriving on boats coming into Cleveland that were

then loaded up on trucks or trains or whatever and sent back over land back to the East Coast. And next year, maybe other Great Lakes ports will join them, like Duluth. There is a lot of potential here. There's about a trillion dollars in annual trade between the U.S. and the E.U., with hundreds of thousands of containers arriving on the Atlantic coast every year. So some of that could go to the Great Lakes. For some of the year, right? I mean, there is the polar bear in the room, winter. Which I've been skillfully ignoring this whole time, Darian. That's right. So there is a lot of ice in winter and these shipping lanes are actually closed every winter for months.

Which is, I'll admit, a minor inconvenience. It might be. But Klaus tells his customers, plan in advance, try to ship more than you think you need early in the season. But yeah, it's an issue. Okay, so it's not as if Cleveland's going to suddenly disrupt the entire way that global shipping operates. This won't be, say, bigger than Baltimore. Fine, fine. Sorry to rain on your parade. I'll back off on my Great Lakes enthusiasm just a bit. But look, it could be a big deal for Cleveland and for Duluth and for people really anywhere in the middle of the country who want to get their shipments in quicker.

and for Duluth, and for people really anywhere in the middle of the country who want to get their shipments in quicker. So maybe the next time a global supply chain crisis hits, the Great Lakes will be here to relieve some of the pressure. After the break, we look at another reason your new PlayStation 5 or refrigerator might be caught in purgatory. Warehouses. Our second story about supply chain choke points comes from Alina Selyuk from NPR's Business Desk.

Hey, Alina. Hello, hello. You're here to take us on the world's most industrial adventure ride, I hear. I am calling it Warehousing World. Fantastic. Oh, I hear it. You hear the sound of a seatbelt clicking on an, I don't know, a forklift, maybe? I guess we're riding a forklift today.

Yep, yep, yep. So put on your earplugs. We are going on one of Disney's loudest and most juddering theme park rides. There are shelves and conveyor belts and robots and literally everything you've ever bought in your life, Darian. Your computer, your phone, your desk, your carpet, the ceiling tiles. That's Doug Keirsey. He's the president of Dermody Properties, which owns warehouses used by some of the country's largest retailers. It all came out of the greater distribution network.

Or not coming out these days, I guess. It's not coming out as quickly as we would like, is it? The supply chain crisis. And warehouses are a key link in the supply chain. They're moving goods from manufacturers to store shelves. This country has more warehouses right now than ever, and yet they are overflowing. They're running out of space. It's like nothing we've ever seen.

I've been doing this for 38 years. It's unprecedented. And a lot of this, of course, has to do with the pandemic. Skyrocketing consumer demand for goods, production challenges making those goods, bottlenecks transporting them. Definitely. But there's also more to the story that long predates the pandemic. A ride begins in a pre-pandemic world a few years ago.

Our business runs generally at about 93 to 96 percent occupancy nationally. Even in the great financial crisis, it dipped below 90% only briefly. So there's not a lot of slack in the system to begin with. Warehouses pretty full even before the pandemic. And to be clear, when Doug says like 96% occupancy, that doesn't necessarily mean it's just, you know, packed with actual stuff. It just means that space has been claimed, maybe like a department store paid rent to reserve that space. So even if it sits empty and another store needs some space urgently, that space is not available. Okay, so it sounds like they're running the system at a pretty tight rate. Definitely. Warehouses already were busier than ever. In fact, the supply of warehousing space has been kind of barely keeping up with the demand for warehousing space for

years. If Americans are known for one thing, it's buying a lot of stuff. We shop a lot. And if you think about what it takes to supply that space to keep all of that shopping stored, making new warehouses is not a quick thing. And the kind of warehouses that are now in huge demand are also the trickiest ones to build. Say 10 years ago, our business, the business of developing logistics real estate, was really a business of, hey, let's go find the next cornfield out in the exurbs. Go align ourselves with the next interchange on the freeway. And that's where we'll build a big building. So here we are on our adventure ride. We're watching warehouses rise out of the ground alongside highways.

We start way out of town in the exurbs. But now our ride scoots closer and closer to the city because that is where the hottest warehousing market is now. Right. I mean, a lot of people are now quite used to having their stuff delivered within a day or two. So retailers want to store their stuff closer to people so that they can actually offer faster shipping. So instead of building a lot of big buildings way out the exurbs, our customers now are saying we want urban logistics locations and we want close in suburban locations. We want more and smaller, more adaptable buildings. And it's taking a while for the business to adjust itself to that new reality. Think about how huge of a change that is. Cities and suburbs are expensive. They're more crowded.

And of course, we know residents have a lot of opinions about buildings in their neighborhood. They want their shopping to get there quick, but they also don't want to live next to a giant windowless warehouse a lot of the time. In California, one city tried to impose a 45-day moratorium on building new warehouses. And so in recent years, stores have been pretty judicious in how much inventory they want to keep at a warehouse at any given moment. Space is money, literally. So they've been choosing to only stock items right before they expect to sell them. So like major supplies of shovels right before a snowstorm or extreme amounts of hot dogs right before the 4th of July.

When the pandemic hit, everything, all of what we've been seeing so far, got turned upside down. Our adventure jolts to a stop right here. We're halting. All right, I'm lifting up my safety bar. We're halting right alongside the rest of the world as the pandemic begins and things start closing. Factories, ports, but also stores. People are cutting back on shopping and so stuff begins piling up. And then when everything reopens, you get a rush of more stuff flooding in. Warehouses are already sort of full. And now they're really, really full.

That's Zach Rogers. He's a supply chain management expert from Colorado State University. And you can see every month for the last 18 months, there's been less available warehouse space than there was the month before. It's actually sort of a heroic effort in a doomed cause, kind of. This is where you get the jammed up supply chain story. Not enough warehouse workers, truck drivers, rail cars, and the main thing, you know this one. A lot of shopping I've heard, but you know, you can't go out as much and do things in crowded, unventilated spaces. So we are filling that hole by buying stuff. In an average year, online shopping might grow 10 or 15 percent. In the first pandemic year, it jumped over 40 percent and only kept going. So companies see that and they start

importing at record levels month after month after month. And they're doing it to bring stuff into the U.S. as much as they can while they can, because they've seen what factory and port disruptions can do, whether they're here or in China or in Malaysia. They don't want to risk this happening again. Essentially, you kind of see this doomsday prepper mentality in all of these companies where normally they've been as lean as possible. And so they're swelling their inventory levels up in anticipation

of demand because we're not sure about how quickly we can do transportation. And that, in turn, is totally flooding warehouses. And so we see the warehousing world explode. Rents in some markets double in a matter of a year. Usually a new building takes almost a year to sell out. Now people like Doug Keirsey are selling space in buildings that aren't even built yet. They're cranking up warehouses as fast as they can. It was actually the only type of commercial construction that boomed through the pandemic. But remember the high-tech space that everyone wants in cities and suburbs? That's super limited.

Doug Keirsey told me at one point he had to do something unheard of. Turn away an old client as three companies vied for the same warehouse, one million square feet. It had sat vacant and suddenly three tenants urgently wanted in. I mean, that sounds like a nice problem to have. Except for the part where he's now got some extremely unhappy clients. And for the part where this problem's ripple effects are expected to stretch far into this year. So, you know, a rollercoaster. Thanks very much, Alina, for that very insightful rollercoaster ride. A little bit frightening, but I ended in one piece. If you liked this episode of Planet Money,

you should subscribe to the Indicator podcast. There is a new episode every week. It explains one fascinating aspect of the economy, all in 10 minutes or less. And if you want to stay in touch, you can email us planetmoney at npr.org. You can find us on Facebook, TikTok, Twitter, or Instagram. We are at Planet Money.

The original Indicator episodes were produced by Brittany Cronin and Viet Le with help from Isaac Rodriguez and Gilly Moon. They were edited by Kate Concanon. This episode of Planet Money was produced by Dave Blanchard and edited by Jess Jang. Planet Money's executive producer is Alex Goldmark. I'm Darian Woods. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation,

for helping to support this podcast.