Catrike has 500 of his three-wheel bikes in his Orlando, Florida workshop, almost ready to be sent to upcoming dealers. The recumbent bikes have been waiting for months for rear derailleurs, a small but crucial part that is built in Taiwan.
“We’re at $2 million in inventory for a $30 part,” said Mark Egeland, the company’s general manager.
The company’s problems provide insight into how supply chain disruptions are rocking businesses in the United States and around the world, driving inflation, slowing deliveries and exacerbating economic uncertainty.
It’s unclear when the snarl will go away — and it’s possible they could get worse before they get better. The holiday season is upon us, U.S. companies are low on inventory, and coronavirus outbreaks continue to close factories around the world. The demand for goods remains strong as households use the money they have saved at home for months to buy sports equipment, sofas and clothing.
That could put pressure on global goods producers and the transportation routes that serve them, even as consumers begin to redirect spending towards dinners and theater tickets — a shift many analysts had hoped would help supply chains return to normal.
The crucial questions for economic policymakers are how long the problems will last and how much they will contribute to consumer prices, which have risen sharply this year due to both data quirks and bottlenecks. Federal Reserve officials regularly say they expect the faster price increases to be “transient,” but they cautiously emphasize that supply chains are a major source of lingering uncertainty, making it unclear how quickly rapid gains will disappear.
“I’m less in that ‘temporary’ camp,” said Phil Levy, chief economist at Flexport, which tracks ocean shipments and helps importers schedule so their parts can arrive on the desired date. “And more in the ‘we have reason to be concerned’ camp.”
Container costs have risen enormously. Earlier this month, container shipping rates from China and East Asia to the east coast of the United States rose above $20,000, compared to about $4,000 a year ago, according to data from freight tracking company Freightos. Those attractively high prices encourage ships to leave other routes, spreading the problem. And shipping problems have been exacerbated by related imbalances: Boats are pulling back into ports and as demand for goods increases in the United States, empty shipping containers can’t get back to China fast enough.
Some suppliers eat higher production and transportation costs. Full Speed Ahead, which produces cranksets for Catrike, has seen costs rise as demand for raw aluminum has increased. Shipping costs are also four to five times higher than a year ago, says Mark Vandermolen, the company’s general manager.
Full Speed Ahead has passed on “very little, if any” of those cost increases to customers, he said, and hopes to “maintain prices as long as possible until it is no longer sustainable.”
But not all Catrike suppliers have absorbed rising costs, and whether higher component prices lead to more expensive consumer products—actual inflation, as it’s conventionally measured—depends on how companies like Catrike and the dealers they work for decide to adapt. to suit.
Catrike raised prices by $200 early this year, the first adjustment since 2010, to cover costs. But the company is in a “sweet spot” where it outperforms the competition by offering affordable products, so would prefer to keep prices stable for now, Mr Egeland said.
Daily Business Brief
He’s also cautious: Catrike hasn’t printed prices in his latest catalog, in case rising costs necessitate another raise.
The Fed – which is primarily responsible for keeping inflation stable – has made it clear that it is content to look beyond a recent rise in inflation. If companies raise prices once or twice during reopening troubles, the central bank may tolerate that as a one-time change.
Officials would be more concerned if the price hikes drag on for months or years. When that happens, both consumers and businesses can expect consistently higher prices. They could demand higher wages and a cycle of inflationary increases could kick off.
It will take some time to know if the bottlenecks lead to more permanent damage. Supply chains are still badly entangled. The time it takes for parts from one of Catrike’s suppliers to arrive by sea in North America from a factory in Indonesia has risen to three months, sometimes four months – double what was previously required. Flexport estimates confirm that the problem is widespread along that shipping route.
For Full Speed Ahead, average transit times have increased from about a month to a maximum of seven weeks.
“There have been bottlenecks at, I would say, every point along the supply chain,” said Mr. Vandermolen. “Even if it’s minor bottlenecks, that just adds up all the time.”
Mr Egeland believes it could take 12 to 18 months to resolve issues with Catrike’s suppliers, he said, and he doesn’t think the company will ever return to the kind of lean manufacturing process – with limited inventory – it used to use .
“It will be a hybrid until we get comfortable,” he said. “This is probably the new normal.”
Consumer companies, suppliers and transport companies are unsure whether they should make permanent adjustments to absorb temporary disruptions. And if they decide to expand, it takes time.
Companies are expanding shipping capacity by more than 20 percent, but much of that won’t take effect until 2023 or later, based on new fleet orders being tracked by Ocean Shipping Consultants. The White House wants to improve port capacity – which in the long run could lower shipping costs and thus prices – but that’s not a quick fix either.
Meanwhile, the backlogs are piling up.
“This is here for the rest of the year, and it will only get worse with the Christmas season,” said Ryan Petersen, Flexport’s CEO.
Levy, the company’s economist, suggested that around the Chinese New Year in early February — when factories and shipping typically experience a lull — probably the earliest things could begin to normalize.
It could also help if, as the stimulus money is spent in the United States, consumer demand for goods begins to cool more. Retail sales data for July, released last week, showed early signs of declining demand for furniture, automobiles and clothing.
And the future depends in part on the virus. Nada Sanders, a professor of supply chain management at Northeastern University, predicted that the highly contagious Delta variant would most likely delay a return to normal until at least 2023. Since many parts of the world still have large unvaccinated populations, global hot spots could lead to more factory and port closures, she said.
“There is no doubt that we will continue to see shutdowns,” said Dr. sander.