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3 major ways our supply chains are broken: S&P

·4 min read

U.S. supply chains have suffered major damage due to the combined factors of the coronavirus pandemic, short-term corporate planning, and underinvestment in logistics, a new report from S&P Global Research found.

In a series of three reports released Monday, Panjiva, the supply chain research unit of S&P Global Market Intelligence, detailed the outlook for supply chains for the third quarter of 2021 and beyond.

“There have been two major signs of disruptions to supply chains in North America in the first half of 2021 and they will likely unwind during the second half of the year,” the report found.

The first sign, the report explained, is the surge in consumer demand seen in elevated retail sales and a fall in inventories. Retail sales increased 15.7% in May 2021 from May 2019, before the pandemic. And although U.S. imports have increased in an attempt to meet demand, they have “not been enough to support sales on the basis of falling inventory-to-sales ratios.”

The inventory-to-sales ratio indicates this has been the case, as in the U.S. retail sector, in which it fell from 1.47 in April 2019 to 1.07 in April 2021. In order to rebuild inventory, the report adds, increased shipping activity may need to persist even if demand falls in Q3 and Q4.

This aerial photo taken on June 22, 2021 shows cargo containers stacked at Yantian port in Shenzhen in China's southern Guangdong province. - A backlog at Yantian port - China's largest container terminal - caused by a Covid-19 outbreak among port workers will take several weeks to clear, the world's biggest shipping firm said on June 21. - China OUT (Photo by STR / AFP) / China OUT / The erroneous mention[s] appearing in the metadata of this photo by STR has been modified in AFP systems in the following manner: [June 22] instead of [June 21]. Please immediately remove the erroneous mention[s] from all your online services and delete it (them) from your servers. If you have been authorized by AFP to distribute it (them) to third parties, please ensure that the same actions are carried out by them. Failure to promptly comply with these instructions will entail liability on your part for any continued or post notification usage. Therefore we thank you very much for all your attention and prompt action. We are sorry for the inconvenience this notification may cause and remain at your disposal for any further information you may require. - China OUT (Photo by STR/AFP via Getty Images)
This aerial photo taken on June 22, 2021 shows cargo containers stacked at Yantian port in Shenzhen in China's southern Guangdong province. - A backlog at Yantian port - China's largest container terminal - caused by a Covid-19 outbreak among port workers will take several weeks to clear, the world's biggest shipping firm said on June 21. - China OUT (Photo by STR / AFP) / China OUT / The erroneous mention[s] appearing in the metadata of this photo by STR has been modified in AFP systems in the following manner: [June 22] instead of [June 21]. Please immediately remove the erroneous mention[s] from all your online services and delete it (them) from your servers. If you have been authorized by AFP to distribute it (them) to third parties, please ensure that the same actions are carried out by them. Failure to promptly comply with these instructions will entail liability on your part for any continued or post notification usage. Therefore we thank you very much for all your attention and prompt action. We are sorry for the inconvenience this notification may cause and remain at your disposal for any further information you may require. - China OUT (Photo by STR/AFP via Getty Images)

The second sign of disruption is a “shortage of components for the industrial manufacturing sector, though macroeconomic data suggests the challenges are focused on specific products.”

The automotive industry was cited as a prime example of a disrupted supply chain stemming from manufacturing strategic decisions. The semiconductor shortage, caused by a plethora of factors, greatly reduced supply capabilities for materials necessary for manufacturing automobiles.

The pandemic had perhaps the most obvious impact on supply chains. Lockdowns prevented the flow of goods at every step in the supply chain, leading to severe disruptions in the manufacturing process. The spread of the virus led to additional risks in almost every industry.

Vaccine rollouts have been a significant step in the right direction on this front. “Persistent recovery requires the continued rollout of COVID-19 vaccines globally,” the Panjiva report noted. “While significant progress has been made in most developed economies with domestic production — such as in the U.S., the U.K. and EU, as well as countries supplied by Russia and China — there are still low levels of vaccination in countries reliant on supplies from India.”

Lastly, the report touched upon the fallout arising from the underinvestment in logistics. “Supply chains have had to deal with the stress of elevated demand against an essentially fixed supply of logistics services during the first half of 2021,” Panjiva explained.

Interestingly, the report notes that many ports have “continued to operate at peak levels during what is normally the off-peak season.” Data collected by the department showed that average daily imports to U.S. seaports reached 93,300 twenty-foot equivalent units (TEUs) per day in June, a level very close to the October 2020 peak season record-high of 94,100 TEUs per day.

“If container shipping rates are to return to normal and supply chains are to operate at sustainable levels,” the report said, “it is critical that existing backlogs at ports are cleared before the next peak-season wave.”

Recent trends show signs of optimism for the future of logistics. “Following three years of underinvestment in logistics both by incumbent players and new entrants, there has been a flood of private capital and capital raises recently,” the report noted.

Notable examples include a $200 million investment in Shipbob Inc. led by Bain Capital Venture Partners LLC at an implied $1.0 billion valuation, as well as a $240 million SoftBank Corp investment in Forto GmbH at a $1.2 billion valuation.

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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