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What is Really Causing the Supply Chain Issues?

Learn about what is really causing the supply chain issues, and what we can expect to see in the future.

Episode 156: If you manufacture or sell heavy-duty parts, you know that it has been difficult to get all the parts you need to serve your fleet and commercial vehicle owner customers. The supply chain issues are real, and they are having a big impact.  

In this episode, we discuss what is really behind the supply chain issues, and what we can expect for the future.

Jason Miller headshot. In this episode, learn about what is really causing the supply chain issues, and what we can expect to see in the future.

My guest today is Jason Miller, an Associate Professor of Supply Chain Management at Michigan State University. 

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Transcript of Episode:

Jamie Irvine:

You are listening to The Heavy-Duty Parts Report. I’m your host, Jamie Irvine. And this is the show where you get expert advice about heavy-duty parts that keep trucks and trailers on the road longer while lowering cost-per-mile.

If you manufacture and sell heavy-duty parts, you know that it’s been difficult to get the right parts on the shelf at the right time. There has been a lot of issues with our supply chain and serving commercial fleets and getting them the parts they need to keep their trucks on the road has been an uphill battle. The supply chain issues are real, and they’re having a big impact on the truck industry, which of course is part of the supply chain. So it’s almost like a double-edged sword. My guest today is Jason Miller, the Associate Professor of Supply Chain Management at Michigan State University. And I am very excited to talk to him about what is really driving the supply chain issues and what we might expect in the future. Jason, welcome to The Heavy-Duty Parts Report. So glad to have you here.

Jason Miller:

Thank you so much for having me on.

Jamie Irvine:

So let’s get into it. Recently you published some very interesting LinkedIn posts about all of these issues. You know, I wanted you to come on the show to help us to gain just a better understanding of what is causing the issues and where it might be taking us in the future. So you mentioned in one of those posts that retail sales have been abnormally strong since June of 2020, what’s driving that?

Jason Miller:

Yeah, so really in retail sales specifically here being retail, essentially excluding motor vehicle and parts dealers. And just the reason for that is that’s sort of its own piece of the puzzle. And if you think about imports, we’re not really importing that much for the motor vehicle and parts sector. So just thinking about sort of everything else, retail, other than motor vehicle and parts, it’s really just been a story of people trapped in their homes. So you can’t spend on services. You combine that with a lot of stimulus money through the first cares act, expanded unemployment. And then the two rounds of stimulus checks that hit in 2021, deferred student loans, the child tax credit moving up earlier, and you just have a recipe for very, very, very strong demand for goods. And we’ve seen with sort of the most recent data that it seems that retail sales, once we adjust for inflation are finally starting to get back towards the pre-COVID trend. But even for the December data, we’re still about 6% above where we would’ve expected to be sans COVID.

Jamie Irvine:

So here in Canada, we had a CERB payment, very similar to your stimulus package that created the same result here in Canada. So you made the differentiation between retail and like what we’re in our industry, where we think of heavy-duty parts for vehicles. A lot of our parts do come from overseas, but when you just look at retail, what you’ve been talking about, I do understand that that’s one of the economic indicators that economists look to to see whether or not the economy is going to perform well. If retail is up, then usually that means the economy is performing very well, but all of this extra spending and having people all locked down with the pandemic, how did that impact the supply chain? Like just go into a little more detail there.

Jason Miller:

Yeah. So the biggest challenge at least we had in the U.S. was the fact of many of the items that people were buying, you know, furniture as an example. So much of that is imported. And so it essentially caused a surge of demand for imports that started flooding the U.S.. And the reality is that the import supply chain isn’t built to be able to withstand a prolonged 15 or 20% year over year increase in imports, which is what we started to see come the back half of 2020, all through 2021. And it just starts snarling things up. And so on the import side, the excessive demand started then leading, you know, to the snarls, which start contributing to more disruptions. And then you start getting the snowball effect.

Jamie Irvine:

Part of that snowball effect is on the heavy-duty parts side for commercial vehicles, you know, separate from retail. We’ve had such a hard time getting parts that I have heard stories of trucks being down for weeks because of a sensor that people just can’t get. Well, that truck then is not transporting goods to help with the supply chain. So when you talk about the snowball effect, I get that. In some of these LinkedIn posts that you were talking about, these issues, you talked about the long-term trend line. So what is that? And are we going to get back to that in 2022?

Jason Miller:

Yeah. So in terms of the long-term trend line, I always like to think really 2017 through 2019 were fairly normal, you know, years for the U.S. economy. So when you look at things like retail sales, they perfectly follow just a linear, upward trend a little bit, because we have a growing population, so we’re gonna expect retail sales to increase it. It would seem that we have to get back towards that trend for the simple reason that now in the inflationary environment we’re in is people’s actual buying power. So we call real personal income is actually dipping down below where that trend line was. And you we’ve got very good evidence that as real personal income went up, people started buying more products from retailers. And so as we start seeing that go down, there’s almost no doubt that we should see retail sales start to wane. And like I said, probably I think by the middle of 2022, we’ll be sort of back towards that trend where we would’ve expected to be.

Jamie Irvine:

Right and the adjustment in interest rates, if interest rates go up, part of the reason that we would do that is to try to cool inflation because even just making money a little more expensive, it does cause people to spend a little less. Is that correct?

Jason Miller:

Yeah. I really, this is gonna be one of those instances where I think people are gonna be surprised that we’re not gonna see inflation slow nearly as much as folks think. And that’s because of a dynamic that hasn’t been talked about much and that some prices are very what we call flexible. They change very quickly. The classic example, being gasoline prices, right? West Texas intermediary goes up, you know, this month, guess what’s gonna be up next month. Gas prices. A lot of other prices though, are what we call sort of sticky and rent is a classic example. And when you look at what has driven inflation in the U.S. in 2021, it’s been the flexible prices. It’s been your foods and everything, energy related, but now what we’re gonna start seeing is those stickier prices that have been slower to adjust.

There’s good evidence. We’re gonna start seeing that move up. So I’m expecting rental prices to increase very strongly in 2022. And that makes up a third of the consumer price index. And so I’m expecting that what we’re essentially gonna see is still high inflationary numbers, but it’s gonna be from a different source of inflation. And for those of us who own houses and are maybe locked into fixed rate mortgages, it’s not gonna hurt us as much, but for the individuals who are renting, it’s going to be much more painful experience, because you’re gonna be tacking that additional cost on top of higher fuel prices, higher food prices.

Jamie Irvine:

Let me ask you something then if, if you were like on the cusp of being able to buy real estate right now and get locked into like a five year fixed, is that a good move?

Jason Miller:

I mean, not being a real estate expert, take what I’m about to say it with a grain of salt, but I would certainly say it would not hurt to be locked in. I mean the best time to do it was obviously last year, if you could get locked in at that point in time. But I mean in the U.S. right now, we’re starting to see mortgage rates tick up and that does not bode well for the housing market. And even there’s been a lot of discussion about, oh, there’s a housing boom going on. When you look at the data on new housing stats we’re not in a housing boom, this is nothing like the early and mid part of the two thousands where we really did have a housing boom.

Jamie Irvine:

Right. Okay. So we’re recording this February 2nd right now the variants have not been as severe. It looks like this variant BA one and BA two could possibly push us into an endemic stage. We’re not quite there yet, but let’s just assume, I mean, at some point it has to go that way when it does, what is the expectation on supply chain?

Jason Miller:

So I think once we get to endemic COVID so, and especially not only in the U.S, but also China. Right now east Asia is sort of the wild card that we don’t know how far along they are with this situation. Once though we do get to endemic COVID I definitely see things starting to straighten out. I mean, I still keep thinking by the end of the third quarter of this year, it should really start to be straightening out fairly well. You know, we’re starting to see hopefully you, some things will smooth out, imports will be down. That’ll allow that supply chain to get unsnarled, semiconductor production and imports will be up. That’ll allow the automakers to produce more and essentially cool the incredibly heated prices for used vehicles right now that exist. And so my sense is that the economy by the end of 2022 looks a lot more like the economy in 2018, early part of 2019 than the economy of 2021, which is really sort of a consumer fueled retail space, but still, you know, manufacturing activity was below certainly well below 2018 levels.

Jamie Irvine:

We’re gonna take a quick break. We’ll be right back. Having issues with your commercial equipment? You need ATA’s Technology and Maintenance Council also known as TMC. TMC develops recommended practices, addressing the most pressing technology and maintenance issues affecting commercial vehicle fleets. You can join TMC for just pennies a day. And when you do, you’ll get access to thousands of pages of technical information and you can attend events like the upcoming 2022 Annual Meeting and Exhibition March 7th through 10th in Orlando, Florida. For more information, check out TMC at TMCtrucking.org. Don’t have a heavy-duty part number and need to look up a part? Go to parts.diesellaptops.com or download the app on Apple or Android to create your free account. Looking for high-quality fuel injection for heavy-duty applications? Having one supplier for fuel injection allows you to better serve customers by providing them with a complete line, which increases your sales and profitability. Learn [email protected]/aftermarket.

We’re back from our break. And before the break, we were talking about the realities of where we are right now with our economy, with our supply chain, what the real drivers behind the supply chain issues are. Jason, when can we realistically see a return to normal and will that normal look like something from the past that we will actually recognize, or is these inflationary prices and where we are today just the new reality, kind of decode that for us a little bit, please. And I am gonna hold you to your crystal ball. No, I’m just joking.

Jason Miller:

I think for 2022, there will still be inflationary pressures. Again we’re seeing it right now in the commodity space. The oil, the uncertainty about the Ukraine Russia situation is cascaded over into multiple of the agricultural markets. Wheat prices had been, they seem to be coming down a little bit, but soybean prices are darn near at five year highs right now. Or I shouldn’t even say five year highs, darn near back to highs from the 2012 period, sort of the food crisis. And so we’ve got inflationary forces still at work on the commodity side. Obviously oil is getting to levels we haven’t been at in 2014. We’ve got concerns for global aluminum output because very high electricity prices in some countries are causing aluminum plants, especially the less efficient ones to just shutter right now because they can’t produce their profit.

Jason Miller:

I still expect there to be some inflationary forces throughout the year. I think for the U.S., it will be a situation where it’s not gonna look exactly like it did pre-COVID. It’s the same way the U.S. economy, even in 2018, which was sort of the peak of manufacturing activity on the other side of the great recession, we still work 10% below manufacturing output from where we were before the great recession. We never have come back from that. I don’t, for example, I’m not sure how long it will take leisure and hospitality to come back from COVID, but it could be an extended period. So I don’t think the shock of COVID and the big scheme of things is that actually will be as pronounced as the great recession, which really sort of upended certain industries, furniture, wood products, et cetera. But it won’t be completely the same. That is for sure.

Jamie Irvine:

If you’re a manufacturer of heavy-duty parts for the trucking industry, or you’re a retailer, especially if you’re a retailer and a wholesale distributor right now, if you’ve got it in stock, you can sell it. And I I’ve talked to many manufacturers and, and distributors, and even though they’ve had difficulties getting parts, the parts they do have they’ve sold out and have had record sales. If you’re procuring parts and you’re thinking about inventories is now a good time to load up on inventory, should they be cutting back? Like what, what should they be doing?

Jason Miller:

So the number one thing I’d say about setting inventory levels is it should be a function of your demand. You know, if your demand’s going up, ideally you wanna add more inventory to maintain a fairly constant inventories to sale or maintain a target inventories to sale. I would say the good news is it seems like steel prices are starting to moderate finally. And so that obviously will then cascade over into the parts market and hopefully we’ll see the inflationary forces starting to decrease a little bit there. I should say, even the rate of price increases for those parts should not be going up quite as much as it’s been. I would say on the stocking up side, the big question I have is going to be, we have record backlogs right of trucks because of the slow down of production, what is going to happen once those vehicles do start being produced and they start to be delivered? Because the one issue I’ve always seen in the trucking sector is the supply always overshoots what we need to be, but it’s like a year late, right?

Jason Miller:

So 2019 was such a soft year for truckload freight because carriers added way too much employment in the latter half of 2018 and through half of 2019, relative to where demand was. And it doesn’t take much, all you have to have is a percentage point or two misalignment, and the market will completely change. And that’s what we saw in 2019. And I think that the wild card right, right now to me, is what happens when all of these newer vehicles get delivered. Does that start taking some of the older equipment out of operation and obviously older equipment needs a lot more maintenance and repair. So right now the lack of new vehicles is a Bonanza for the sellers of spare parts, because older machines need a lot more tender love and care. But once we start seeing those new deliveries, I could actually see in some ways that demand actually dropping a little bit as we start to essentially phase out some of the older equipment.

Jason Miller:

The other thing to keep in mind is for one of the concerns is so many independent owner operators have essentially purchased used vehicles at prices that are double where they were in 2019, right? These firms cost structures only can exist when you have $2.60 cent haul rates. That starts going back down to $2 a mile, I don’t see how you make a profit. And so that’s sort of the other question I keep having of, are we going to see once the market normalizes these carriers that came into existence with unsustainable high cost structures start to go out of business and that equipment start to either get sold off or the drivers decide I’m no longer independent. I’m gonna go lease myself to a carrier.

Jamie Irvine:

Three to five years from when the new trucks start arriving, it’ll be very good for aftermarket parts, but I have the same concern because all of a sudden you are going to have, because know of many fleets that have held onto equipment longer, because they just can’t get new equipment. So they had a plan, but they’re gonna get back on to that plan. Once the vehicles are available and all of a sudden there’s gonna be this rapid rise in used trucks that are so overpriced, nobody will buy them and that’s gonna be an issue. And so the only real option would be to sell those to vocations that maybe could convert them for like oil and gas or logging or something like that. You could take like a Kenworth that’s being used over the road right now and you might be able to convert it into a logging truck or something.

But even then if the prices really fall on the used equipment, it’s gonna be impossible to move and you’re gonna have to move that used equipment at a loss. That’s the only thing. So on the part side three to five years from now, we’re gonna have some record sales, but it could really cause some issues. And I’ve also seen where companies will say, well, let’s not sell the truck, let’s park it. Then we just use it for parts. And so then that does hurt the replacement parts side of the business because they’ve got an extra engine, an extra transmission, extra, whatever they need because they’ve got six trucks sitting in the yard. And I’ve seen that many times, especially in Alberta or in Texas where there’s a lot of vocation that happens quite a bit as there’s a lot of volatility in those, those markets. So from the long-term, you know, for younger members of our audience, they live maybe through the greatest bull run in history and they’re not used to bull and bear markets on average every five years. I’m a little older. I’m used to that. What are we expecting, are we expect thing there to be an end to the upswing? And could we see a recession on the other side of all of this or what do you think is likely to happen?

Jason Miller:

So that’s a great question. I think the upswing will essentially spot prices will be over by the end of the second quarter, if not even sooner than that. I think January of this year is a blip because of Omicron. I mean, you can even see that in DAT’s data that the load to truck ratios, the first two weeks of January were outlandishly high and they’ve started really coming down. And so I expect that market’s gonna turn, we’ve seen contract rates go up so much, that spot premium just isn’t there to encourage carriers to reject freight and start, you know, the spot market, feeding frenzy that exists. I don’t see the other side out though. Once we peak, it’s not, I think gonna be a sharp of a drop is we saw on the back half of 2018 into 2019.

And the reason for that is because in 2018 we had, you know, manufacturing output going gang busters in the U.S. for the first, roughly six, seven months of the year. And then it started dropping because of poor policies in the form of the tariffs that did not have their intended effect. I don’t see demand tapering off that quickly because we have the infrastructure bell. We have the need to restock auto inventory inventories, record farm prices are going to encourage farmers to invest in new equipment and replace old equipment. So I think that on a demand side, we’re looking fairly good from the industrial standpoint. So I think the market is it’s not gonna be a hard landing, but we have to expect, I would be beyond stunned if we’re entering 2023 and spot prices are above where they are right now. I just, I don’t see any scenario where that happens.

Jamie Irvine:

With all of this volatility, I’ve lived and worked through, many ups and downs. I worked through the.com crash. I worked through the great recession in 2008, 2009. And I actually launched a business in 2009 on the back of that and exited in 2016. So I took advantage of that. I’ve lived through the commodity prices dropping so rapidly and that had a major impact on where I live in Alberta in 2016. And now the pandemic, I do know that there’s lots of opportunity in these times of volatility. So where do you see the biggest opportunities for businesses of this pandemic?

Jason Miller:

Well looking, so the census bureau recently started actually publishing data on business formation statistics. And one of the big things they track is EIN number requests. So essentially tax IDs, and we’ve seen in every sector almost a doubling of EIN requests, whether it transportation, warehousing, whether it’s retail stores, you know, restaurants, which you would never think of in the middle of a pandemic that causes people to not wanna eat, but we’ve seen that. So the one thing that’s encouraging to me is there has been record entrepreneurship in the wake of COVID 19. I think a combination of money that was given out combined with many people, really reevaluating in their lives, what they wanted to do. And for the U.S., this is a wonderful thing because one of the big concerns we’ve been having is business dynamism, essentially entrepreneurship has been on the wane over the past 30 years.

We’ve seen that in multiple different government data sets. So I really think there’s opportunities out there. If you’ve got a good idea and you’ve got a market for it, I think there’s many, many, many different sectors. I mean, we’ve seen record new entry in the trucking sector as an example, which I always find intriguing, cuz I always hear these stories that, you know, nobody wants to be a truck driver. It’s like, well, nobody may want to drive for a very large carrier seemingly, but a lot of people wanna start new trucking companies because that’s the only way to reconcile what we’re seeing with all these different data sources. And so I think the one, the one caution I always have is people tend to get a little too euphoric about things. And so, you know, for anybody who’s thinking like, Hey, maybe I wanna start a new trucking company in 2022 and I wanna chase spot freight. My first statement would be the spot market’s gonna turn, we know it’s gonna turn. And 2022 is almost assuredly not gonna be 2021. That’s a big risk. Now on the other hand, if you know a shipper or a couple shippers, they want guaranteed capacity, you have a good relationship with them and you’re willing to basically start a company, but basically, you know, tailor yourself to them. I think it’s a wonderful opportunity.

Jamie Irvine:

Find a problem that you can create a significant change in the economic impact on a consumer or a business, and you’ve got yourself a business idea that you can run with. Jason, thank you very much for sharing your expertise on this. I do understand that a lot of this is data-driven and some of it is also just speculation of what might happen in the future. And as we all know anything’s possible. So I joke about holding you to the crystal ball, but I do appreciate you giving us insights into what’s going on. That’s been great.

Jason Miller:

Yeah. Thank you so much for having me.

Jamie Irvine:

You’ve been listening to The Heavy-Duty Parts Report. I’m your host, Jamie Irvine. And we’ve been speaking with Jason Miller, Associate Professor of Supply Chain Management at Michigan State University. To follow Jason Miller on LinkedIn, just go to the show notes of this episode and we will include a link to his LinkedIn profile. Jason, thanks again for being on the show.

Jason Miller:

Thanks again for having me.

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