One of the lasting images of the pandemic period is of ships carrying goods from Asia stuck off the coast of California. The images prompted a burst of heroic federal action and the term “supply chains” became embedded in the public consciousness.
As with many things in the US, the pandemic images have receded into memory. But supply chain issues and the inefficiencies of our logistics sector persist, complicated by a surge in work-from-home and shop-from-home behavior as well as the reshoring of production driven by national security concerns and climate imperatives. And now, on top of these seismic shifts, we are encountering a rising conflict in the Red Sea and drought challenges facing the Panama Canal.
Supply chains matter and we ignore them at our peril.
As a foundation-setting exercise, it is helpful to revisit the most recent report of the Council of Supply Chain Managers and Professionals. The CSCMP 2023 State of Logistics Report made a series of remarkable, though mostly unreported, findings:
- In 2022, U.S. business logistics costs reached a record $2.3 trillion, representing 9.1% of national GDP—the highest percentage of GDP ever. Ten years ago, by contrast, business logistics costs were estimated to be $1.31 trillion or 7.8% of GDP.
- Of the $2.32 trillion in business logistics costs in 2022, $1.39 trillion was for transportation; $759 billion was for “inventory carrying costs” which include both capital and operating expenditures for warehousing and for distribution; and $166 billion was for intermediation (i.e., third party logistics, freight consolidation and forwarding, and related information platform charges).
Several macro trends are driving this uptick in logistics costs:
- While consumers are returning to in store shopping, e-commerce sales remain robust. In 2022, the U.S. e-commerce market grew by 8%, to $1.03 trillion. It is now 14.5% of the entire U.S. retail market.
- Reshoring and nearshoring have gone from tantalizing possibilities to structural realities. According to the Kearney Reshoring Index, American imports of Mexican manufactured goods have grown by 26% since spring 2020.
These macro numbers are manifested on the ground, via actions large and small. Distribution centers, facilities that are mostly out of sight and out of mind, are on the rise. Producers, wholesalers, distributors and fulfillment companies are making a big bet on building more and bigger centers. City streets and suburban thoroughfares are increasingly clogged with delivery trucks or lone couriers, a new kind of just in time economy that is wreaking havoc on our fragile infrastructure and quality of life. Rural areas that act as staging grounds for the shipment of goods are fundamentally altered.
Changes in consumer behavior, of course, are one thing; the location of supersized industrial plants is another.
It’s the latter that we believe needs some concerted focus and soon. As research has convincingly shown, the first wave of reshoring is disproportionately decentralized, located in places far from urban and suburban communities. Many mega factories designed to produce electric vehicles or chips are landing at the periphery of metropolitan areas or beyond, challenging the ability of stakeholders to connect all the necessary dots and realize the full potential of this resurgence for firms, people, and places.
Our industrial transition appears to be driven by an Invest First, Plan Later mentality. The federal government has, in essence, left it to manufacturers and states to justify location based on plant size and land costs. This may be because the producers have claimed that the quickest way to get a facility built is based on their Asian designs and a real estate and cost logic which consistently favors greenfield sites over brownfields.
The result is that the location of announced manufacturing facilities receiving federal support does not match up with the intermodal transfer points available in the current US freight network. Much of that output will be light-weight and high value (e.g., chips, PV cells, medical electronics), and therefore is likely to be shipped by the two most expensive means: air express and trucking. For heavier output, such as inputs to batteries and finished batteries, rail would be justified, but currently not available at most locations; therefore, there will be increased costs for first and last mile accessibility by inputs and for shipping to distribution. It goes without saying that mass transit for workers in these new industrial sites is virtually non-existent.
The implications of this are enormous. It’s close to axiomatic that the larger the facilities and investments, the lower the opportunities for local business growth and wealth building. Whether the opportunities are in real estate, housing, retail businesses, construction industries, trucking and transportation, or customized job-shop manufacturing which is more labor intensive than those mega-facilities (e.g., metal finishing and forming, circuit board and chip testing, specialized packaging, plastics molding, specialized biologics and chemical formulation), the supply chain includes such small manufacturers who themselves are suppliers.
The implications will also be expressed both in higher costs and greenhouse gas emissions as well as in economic leakage. The locations of federally supported clean tech industries and their supportive systems are bypassing the places where most residents live. This doesn’t say don’t engage in industrial policy; it does say do it more productively, under some sort of planning guidance and accountability. Economic development doesn’t just happen; it takes intentionality and purpose, and industrial development even more so.
There is a better way.
To its credit, the Biden Administration is collaborating closely with key companies and private sector leaders to strengthen the functioning and resilience of our logistics system. One of the myriad federal actions designed to increase supply chain resilience is the DOT-led FLOW (Freight Logistics Operation Works), an industry forum for public and private stakeholders to share real time data to build a common understanding of the national logistics system. This data exchange informs the measure of cargo traffic demand against infrastructure and equipment supply in the nation, providing more accurate indicators of supply chain health and helping to optimize network capacity.
These are welcome and critical steps which set a strong foundation for additional action. Here are a few ideas.
At the core, some sort of policy on controlling supply chain costs deserves serious consideration. The EU, for example, incentivizes the use of Extended Producer Responsibility, a form of life-cycle assessment that’s used to justify less intensive inputs to finished products, which could come from lighter-touch packaging, total re-engineering of the supply chain, a spatial clustering policy, such as what originally helped planned industrial parks with supportive services take off 100 years ago, and current concepts of eco-industrial parks, waste sharing, freight consolidation (what we might call container and vehicle sharing), and various circular economy strategies.
Another approach, like redefining the cost of housing to include transportation, would be to disclose end-user transportation, inventory and related costs as a percentage of both household and business expenditures. This could be as simple as assigning an agreed upon weighting of business logistics costs as a fraction of expenditures for various goods and services or as complex as what was done to use location efficiency to assign housing and transportation costs, respectively. In either case, this would start to daylight the issue of the invisibility of these costs and could also be done in parallel with forthcoming uses of consumption research to disclose off-site “Scope 3” greenhouse gas emissions, goals for which were adopted by the UN International Maritime Organization in 2018 and are under consideration by both national and international accounting standards organizations and in the US, the Securities and Exchange Commission.
Better scoring could be amplified by top-down and bottom-up strategies. The US Department of Transportation could put real muscle behind its Office of Multimodal Freight Infrastructure and Policy. More capacity could help drive a National Freight Strategic Plan by 2025 (when it is due via Congressional mandate) that would catalyze industrial growth that is simultaneously productive, inclusive and sustainable. Created by the Fixing America’s Surface Transportation (FAST) Act in 2015, the National Freight Strategic Plan forecasts freight volumes in five-, 10- and 20-year periods, identifies major trade gateways and national freight corridors, and identifies bottlenecks on the National Multimodal Freight Network (NMFN).
As a complement, the nation needs an urban and metropolitan strategy for making economic and environmental strategies more effective, inclusive, and responsive enough to make a difference. The tool so far is a foot-on-the-spending-accelerator, sort of like driving a car without a windshield, mirrors or a dashboard.
On the planning side, the federal government could task MPOs, State DOTs and other key agencies and intermediaries with aligning manufacturing location decisions with the existence of industrial land and supply chain infrastructure. A recent Environmental Defense Fund report on Decarbonizing Long Haul Freight, for example, concluded that short line railroads could be the spark for place-based and corridor-based clusters of industrial services. The fact of the matter is that most metropolitan areas have vast industrial land available in cities and older suburbs that are already rail served. This strategy is also supported by the National Transportation Decarbonization Blueprint released by DOT, HUD, EPA and DOE in 2023.
The Bipartisan Infrastructure Law, for its part, specifically grants authority for Metropolitan Planning Organizations to set goals for economic development and requires that these be integrated with goals for transportation and for housing. BIL also requires states to set goals for GHG reduction from transportation, and a final regulation on this provision was adopted and released on November 27, 2023, establishing a consistent framework for transportation emissions accounting by both states and MPOs.
The philanthropic sector must also engage. Imagine a Partnership for Sustainable Industrial Communities that funds a select number of metropolitan areas to align infrastructure and industrial investment. Such a Partnership could unlock the full creative energies of multiple sectors and stakeholders and pioneer innovative practices and policies that could fuel the next round of federal and state policies.
The Challenge Ahead
This is not a new problem in the development of public policy; for over a century the federal government has recognized and struggled with the means of “avoiding shortages” especially during times of war, recession and depression, and during public health emergencies such as the so-called Spanish Flu of 1918. The authority invoked during the recent pandemic, the Defense Production Act of 1950 along with lesser-known tools intended to ensure adequate supplies, had its roots in the efforts to maintain a strong defense posture while not standing in the way of economic recovery, in that case on the eve of the Korean War, very much akin to the recent situation.
The recent appropriations for infrastructure, manufacturing and GHG reduction have so far been scored on “how much,” that is, on measures of gross impact to the US economy, without netting out indirect costs and spillovers. One of those spillovers is the sprawl of distribution centers and mammoth new factory campuses far from centers of shipping, population and workforce, and from existing suppliers.
At the very least, “where investment and growth is happening” is as important as “how much.” A principle in the 1991 transportation law is that planning should precede budgeting and spending, not the other way around, or in the terms stated above, “Plan, Then Invest.”
This remarkable period – a global pandemic followed by rapid reindustrialization and decarbonization and shifting patterns of work and commerce – has elevated the long-neglected logistics sector and associated supply chain challenges to the highest level in the modern era. This is a time for clear and innovative thinking and action, within government and across sectors. Our efforts here have just begun.
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Scott Bernstein is Founder and Emeritus President of the Center for Neighborhood Technology, & Board President of the American Council for an Energy Efficient Economy.