The global COVID-19 pandemic has disrupted the global supply chain. Shipping carriers and manufacturers alike have struggled after consumer behavior deviated from expert evaluations. While experts initially believed that the pandemic would cause a decrease in shipping, precisely the opposite happened with a spike in e-commerce. Demand for products like home hardware spiked while manufacturers struggled to keep up with inventory supply.
The global supply chain was unprepared for changing shipping patterns and consumer behavior. Manufacturers have struggled to acquire parts and materials for products, and the number of inland truck drivers has diminished. As a result of halted manufacturing, ports are congested, and empty shipping containers are in high demand yet fail to be in the locations where they’re needed most. Because of the unexpected impact of the pandemic, freight rates have spiked.
Below, we’ll first understand how to calculate freight costs before discussing COVID-19’s impact on freight shipping, manufacturing, the home hardware manufacturing industry and what lessons stakeholders in the global supply chain can take from the pandemic.
How Are Freight Costs Calculated?
Before understanding how the global pandemic has influenced freight shipping, you must first comprehend how freight costs are calculated. Understanding freight rates can help you correctly price your products and services to make a profit. Several factors influence freight rates, including mode of shipping, shipping weight, the distance of the shipment and the kind of good being shipped. However, the shipping rates your company pays entirely depend on your particular shipping situation.
Mode of Shipping
You might consider moving products through air transportation because of the current difficulties in transporting goods through a tractor-trailer or overseas shipping. While air transportation is much faster than other methods, shipping products via air is also much more expensive than truck, railroad or maritime transportation methods. You should also consider whether you’re using a shared container service or utilizing a full container, as the latter costs more than shared container solutions.
Shipping Weight
Products with higher shipping weights typically cost more to transport. The different weight classes are determined by the package’s density, or the product’s weight per cubic foot. Products that take up more space on a carrier tend to cost more, preventing space for additional cargo on the carrier. The shipping industry’s system is the hundredweight pricing model, where freight prices are calculated per every 100 pounds of product.
The National Motor Freight Classification Code assigns densities between 50 and 500, with 50 being the densest and 500 the least dense. For example, a package with the classification of 50 would be incredibly tightly packed sand, while that of 500 would be lightly packed down feathers.
If you choose to ship your products using pallets instead of crates, shipping costs are calculated based on weight. Less than truckload rates include those that are too large to be considered a parcel but too small to fill a tractor-trailer. Further, packages that are strangely shaped and cannot be stacked are also more expensive to ship, as they consume more space.
Distance and Time
Longer shipping distances typically result in higher shipping prices, as fuel prices, human labor and transportation time usually result in higher costs over more considerable distances. Regional or even national freight shipping will be cheaper than international shipping.
Typically, loads that must be transported fewer than 250 miles are considered short hauls, while mid-hauls usually span 250 to 400 miles. Typically, short hauls and mid-hauls have minimum or day transportation rates. Tweeners, also called overnighters, are loads that travel between 401 and 800 miles, and they typically take about one to two days to transport. These distances usually begin to have a rate that’s charged per mile. Finally, long-haul and extended long-haul transports include distances 820 miles and above.
Expedited goods typically cost more to ship. This option is usually available via air or road transport and results in goods arriving at their global destinations as soon as possible. Lead time refers to the amount of time you give to your transportation provider before a load departs. You should always plan your shipments, especially if you need to ship goods within a limited period.
Kind of Good and Supply and Demand
Special items that are fragile or especially valuable also typically cost more, as they usually require special packaging and extra insurance costs. Specialty goods also frequently need enhanced shipping containers, including those that contain specialty boxes or envelopes.
Supply and demand also impact international freight shipping costs. When something is in a high supply, there are ample materials, resources and transportation methods for a particular good or service. A lack of carriers and equipment results in a supply deficiency, which increases the cost of shipping goods.
On the other hand, demand refers to the total amount of goods consumers have requested and therefore must be transported. Like supply, demand also has a positive relationship with price — as demand increases, so does the cost of shipping goods.
COVID-19’s Impact on Freight Shipping
Even before the global COVID-19 pandemic, international trade faced tensions such as recession, the increasingly stressful relationship between China and the United States., Brexit, Indian tariffs and a trade dispute between Japan and Korea. However, the pandemic also exacerbated global supply chain issues when consumers raised the share of global retail trade for e-commerce by 3 percent between 2019 and 2020. And in the U.S., Adobe estimated in mid-2020 that it would have taken 4 to 6 years of growth for consumers to spend the same online.
While experts initially thought shipping would drop during the pandemic, most people switched exclusively to online shopping. Manufacturers worked to offset supply chain volatility by diversifying their supply chain through methods like re-shoring, near-shoring and line moves, and shipping container demand skyrocketed to unprecedented levels.
By the latter half of 2020, governments began to ease lockdowns and provide stimuli packages, while businesses started frontloading and building their inventory in anticipation of coming waves of the pandemic, leading to increased containerized shipping.
However, the tumultuous period at the beginning of the pandemic led to changing trade patterns and imbalances, as carriers failed to anticipate the new trade flows. Skipped port calls, or blank sailings, caused a disparity between supply and demand, and empty containers could not arrive at their proper destinations or were left behind. Blank sailings also congested ports, causing delays.
Increased Port Activity
Ports have experienced heightened activity during the pandemic. The Port of Los Angeles, one of the busiest ports in the Western hemisphere, had its highest-performing months in its 114 years of existence. Import volumes increased by nearly 30% between June 2020 and June 2021, while loaded exports decreased by 12%, the lowest amount of exports the port has experienced in 16 years.
The amount of empty containers has also increased by about half from the previous year due to high demand in Asia, with shipping vessels and cargo staying at the port much longer than before the pandemic. Further, some shipping lines across the country are refusing to send boxes to exporters to receive cargo in an attempt to transport empty boxes quickly back to Asia.
In the speed to send empty shipping containers back to China due to the country’s high export level to the U.S., some carriers have also refused to refill containers with U.S. exports heading east. Even so, companies located in China are struggling to get the boxes they need to send goods to the U.S. This, in turn, has caused U.S. manufacturing to struggle with recovery.
Trade routes to developing nations have experienced the most significant increase in freight rates compared to East-West routes, as longer routes require more ships and therefore have more stuck containers. For example, freight rates from China to South America were 443% higher than the median costs, while routes from Asia to North America’s East Coast rose 63% above the median.
Manufacturing and Trucking Issues
Further, container dwell times increased due to strained global supply chains from a lack of labor, halted manufacturing, limited truck space and drivers for inland transportation. Only one qualified driver is available per every nine open positions, and average truck prices have increased by $19,000 within the last year. Multinational corporations are desperate to attract drivers, as the lack of available trucks and drivers has led to price increases for necessities.
The manufacturing, distribution and shipping process requires precise planning, which is difficult with a plethora of unpredictable factors. Restarting global manufacturing has proved to be complicated. With halted manufacturing added to a lack of available empty containers, changing trade patterns and congested ports, freight rates have spiked.
Overseas Manufacturing Impacted by the Pandemic
The pandemic has thrown a wrench in the global supply chain, with factories in China closing before global factories followed. The pandemic has significantly impacted industries dependent on Chinese manufacturers such as medical devices, electronics, automobiles and defense. For example, automobile factories around the globe have struggled from a shortage of vital computer chips, which are primarily manufactured in Asia.
At the end of 2020, goods arriving from China experienced the most significant one-month price spike in three years. Imported industrial supply prices jumped nearly 30% between April 2020 and January 2021, and manufacturers have cited difficulty in obtaining essential materials like steel.
Just-in-time manufacturing is when manufacturers order parts as they require them to minimize the need for stockpiling. The benefits of using this practice include increased inventory space, cutting costs and quickly developing new products. However, closing factories have caused shortages of materials that manufacturers need, demonstrating how just-in-time practices can leave companies vulnerable to unpredictability in the global supply chain. Further, manufacturing, distribution and warehousing companies across the globe have struggled to attain a reliable labor force.
When manufacturing shuts down, the rest of the global supply chain also falters. For example, if manufacturers struggle to receive just one part they need to make a product, the production process is halted. As customers continue to order, manufacturing, assembly and transportation cannot continue, leading to a backlog of unfulfilled orders. Shipping problems and increased freight rates have also slowed manufacturing, as manufacturers anticipate their products’ inability to ship. For example, Mattel has already decided to make fewer toys this winter holiday season.
How the Pandemic Impacted Home Hardware Manufacturing
Demand for home hardware increased during the pandemic, as people have spent more time in their homes during quarantine. Therefore, many have been doing more home renovation projects to create home office spaces and boost their home’s aesthetics. Hardware stores have proven to be an unsung hero during the pandemic by providing Americans with essential products for their homes.
Between 2019 and 2020, the home hardware industry in the U.S. grew by 11%, compared to a 4% change in growth between the previous two years. Other manufacturers have reported 15 to 40% increases in sales during the pandemic.
Multiple reasons account for the massive growth of the home hardware industry during the pandemic. While many stores closed at the start of the pandemic, home hardware stores were considered essential businesses and allowed to stay open. Before the pandemic, homeowners typically chose to hire contractors for their home improvement projects. However, with lockdown restrictions and social distancing recommendations, more people have taken to DIY projects.
Many home hardware manufacturers are also trusted, valued community members. Customers trust that stores are taking measures to keep customers safe, and stores are giving back to the community. Many stores across the country have held fundraisers for local charities and businesses, donated time and supplies to renovate hospitals and donated facemasks and other personal protective equipment to their communities.
Despite the industry’s growth during the pandemic, many companies struggled at the start. While demand soared through the roof, supply was limited. Materials such as lumber, appliances, steel and doors and windows are now once again in short supply. Because of continued high demand, homeowners are currently experiencing raised prices and longer delivery times for building supplies.
As a result of the pandemic, many manufacturers have seen supply and demand from their customers’ perspectives. Manufacturers are now more conscious of specific consumer needs and are increasingly producing products that solve particular problems.
The New Reality of Manufacturing and Shipping
Although the global supply chain disruptions have resulted in delays and increased freight costs, manufacturers and freight companies can learn from the crisis. Lessons global manufacturers and shipping carriers have discovered include:
- Review their insurance policies to determine whether they consider an inclusion for infectious diseases.
- Monitor and appropriately respond to shifts in supply and demand by communicating with suppliers accordingly. Manufacturers must consider the current economic situation and which products consumers most need in the present moment. They must base these decisions on reliable data.
- Manufacturers whose customer base is in retail stores should consider how to expand online. They can also sell to distributors to attempt to offset losses from the pandemic.
- Re-evaluate just-in-time inventory practices, and consider expanding warehouse capabilities to facilitate stockpiling.
- Policymakers should monitor port calls and carrier schedules for port optimization.
- Ensure the supply chain is transparent and efficient by employing modern technology. Cloud-based GPS cargo tracking allows both fewer in-person employees and the ability to react to the unexpected quickly. Further, the pandemic demonstrated the necessity for the digitization of the shipping industry, including e-certificates for ships, online documentation applications and online payments. Manufacturers can also automate the most difficult processes to save time and money.
- Diversify supply chain locations. Dependence on one region is less stable, as demonstrated by widespread Chinese factory shutdowns at the start of the pandemic.
By re-evaluating current practices and making data-based decisions, both manufacturers and shipping carriers can better prepare for the unexpected.
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