To Diagnose the Supply Chain Logjam, Use “the Rule of 1.5”

A recent segment of CBS-TV’s 60 Minutes took viewers onsite at the Port of Long Beach and also at the offices of a toy importer in Chicago. At both locations, the story was the same: a massive backup that has delayed overseas imports from arriving at their stateside destinations.  

“There’s so much cargo arriving from Asia, that some of it has been diverted to other ports in the country,” 60 Minutes correspondent Bill Whitaker says in the segment. “It’s led to an epic traffic jam that no one seems able to untangle and it’s revealed deep flaws in America’s supply chain.  

“What started as a shop-from-home binge during the pandemic has had lasting effects,” he continues. “Retailers warn these holidays will be marked by empty shelves, higher prices, and lost jobs unless the backlog is cleared.” 

However, Adam Roth, EVP of industrial services at Chicagoland-based NAI Hiffman, would dispute the timeframe implied in that 60 Minutes segment. “People have been saying that this issue is all because of e-commerce and COVID, and that’s really not accurate,” he tells Connect CRE.  

He adds that “the system was fragile to begin with.” The disruption of factory shutdowns amid the pandemic, supply-chain recalibration to lower cargo volumes and then the surge in production and demand caused “a backup and a chain reaction, throughout the entire supply chain. It’s a driver issue, it’s a chassis issue, it’s a container ship issue, it’s a volume issue.”

A veteran of both the logistics industry and industrial real estate, Roth cites “the rule of 1.5” in discussing the relationship between the two industries. That is, anything that affects the transportation sector, for good or bad, will impact industrial real estate approximately 1.5 years later. 

As examples, Roth cites a pair of 2017 changes in the trucking and rail industries. For trucking, the electronic logging device mandate was put in place, “and that took out 8% to 10% trucking capacity overnight,” he says.  

Simultaneously, the rail industry implemented PSR, or precision scheduled railroading. “The rail industry was reducing the points they serviced and consolidating in areas where they had critical mass. As the railroads are doing that, they’re increasing the length of haul on trucking. Meanwhile, trucking just had 8% to 10% of their capacity taken away by electronic logging devices.”  

Another 2017 regulation for the trucking industry, the establishment of the Drug and Alcohol Clearinghouse, further eroded the industry’s capacity when it went into effect in January 2020—coincidentally or not, about 1.5 years prior to the onset of the supply-chain backup. 

While Roth says the global backup will eventually be resolved, he cites three options for alleviating an issue that was a long time coming. “Number one is intermodal,” he says. “Well, intermodal is metering the volumes because of the surge in business, so that option at least for the time being is off the table. 

“The second option is to add more locations. That’s in Chicago and throughout the country. It puts you closer to consumers and reduces your length of haul. That’s what we’re in the middle of now, and have been for awhile. So a cheaper option is taking more space instead of transportation.” He anticipates that the ratio of transportation costs to real estate costs will only grow more lopsided in favor of real estate.  

The third option for reducing length of haul, which Roth says is just getting underway now, is “producing locally, or farm to table where you can, bringing manufacturing back not necessarily to the U.S. but back to North America. As the international supply chain becomes more unreliable and more expensive, and both are happening at an extreme scale right now, domestic manufacturing and technology become more competitive.”

Watch the 60 Minutes segment here, courtesy of CBS-TV.

Adam Roth will be among the featured panelists for Connect CRE’s upcoming Connect Industrial Midwest webinar, “If You Build It, Will They Come? ,” available on Dec. 1.