Online holiday orders are streaming in, but supply chain chaos is causing panic this season.
There are 77 container vessels waiting in California, San Pedro Bay. That's a record high, but some of those ships are unscheduled container charters
with no docking appointment.
The ports of Los Angeles and Long Beach announcing they'll fine shipping companies for each container they leave on the dock starting the first of
November.
The trucker shortage in the U.S. is at an all time high: 80,000, according to new data released this week.
But Amazon has made some unusual, big moves to avoid the worst of it.
Los Angeles, 79 vessels sitting out there up to 45 days. Amazon's latest venture that I've been tracking in the last two days: it waited two days in
the harbor.
For years, Amazon has chartered its own cargo ships, a tactic that retailers like WalMart, Home Depot and Costco are trying this season.
Amazon is also making its own containers, doubling down on workers and warehouses, even leasing long-haul planes for the first time to expedite
high priority goods from China to the U.S.
They've been anticipating this. So they've been taking steps since 2020 to alleviate the issues that other retailers are going to have. So Amazon will
not be as impacted as other retailers. But they're not immune to this.
Amazon has seen a 14% rise in out-of-stock items since the start of the year. And prices on the site are up an average of 25%.
The consumer has been feeling price increases in everything that they're purchasing. I mean, ultimately, when there's an increase in the cost of
transportation, it gets passed down to the consumer.
We talked to former Amazonians, maritime lawyers and supply chain experts about all the bold but costly ways Amazon is trying to skirt the shipping
delays plaguing other retailers this holiday season.
Across every node of the complex, winding shipping journey, Amazon has been investing tens of billions to control as much of the process as possible.
The more Amazon controls each node, the less it has to pay outsiders like UPS and the U.S. Postal Service to ship its goods, and the less vulnerable
its goods are to delays impacting the rest of the industry.
Amazon always understood: they didn't want to be the largest retailer, they wanted to be the largest logistics company.
Amazon spent more than $61 billion on shipping in 2020, up from just under $38 billion in 2019. And Amazon is now shipping 72% of its own packages up
from less than 47% in 2019. And the more Amazon ships, the more data it gathers at every potential pain point of the process.
They're watching what's going on on an hourly basis, globally. So when anything changes in terms of a cost increase of one mode of transportation
versus another, then Amazon has the ability to say, you know what, shipping a container is so high, it's actually cheaper now for us to fly product via
a cargo aircraft.
Let's break down the complexities of the supply chain by looking at the journey of a holiday gift ordered on Amazon. Months or weeks before your
order, Amazon uses data to predict what will sell and where, and orders those items early, at bulk prices, often from China. There Amazon packs the
bulk orders into shipping containers and orchestrates the best journey across the ocean, based on the value of the goods and where they need to
go. This step is referred to as first-mile. Most often the shipping containers are loaded onto massive 14,000-container cargo vessels, the most
cost effective option, sharing space with goods from up to thousands of other companies. About 40% of the time, the vessels are headed to the ports
of LA or Long Beach on a journey taking between 25 and 40 days right now, at least 10 days longer than normal. Once there, they typically sit for
days, and right now, up to months, waiting for available dock space and workers. Once there's availability port workers unload the containers onto
trailers or chassis, which are also in short supply, then move the containers around on port property until they're ready to be picked up by
one of Amazon's 50,000+ semi-truck trailers or contractors and brought that middle-mile to one of its 260+ fulfillment and other facilities. It's
stored here until you place an order and one of Amazon's 260,000 global drivers, or its partners at UPS or the Postal Service, pick it up for that
last-mile delivery.
The first real bottleneck happening in this process is where to put the bulk orders of goods for their journey across the ocean. A decade ago
containers were in such oversupply that excess boxes were repurposed as houses and entire business parks. Now containers are so scarce that the
price to ship one has gone through the roof.
Prior to the pandemic, it would cost about $1,200 to ship a container from China to Los Angeles. Today, it's about $20,000 for just one container.
One of the reasons that there's a shortage of containers is just the imbalance of where trade is. And so if you have a lot of imports coming in,
you're moving those containers from the port inland, and one of the challenges is then getting those empty containers back.
So Amazon is making its own 53-foot containers in China, using a company called CIMC, which makes similar containers for Walmart. In early October,
hundreds of Amazon's own containers arrived at the Port of Houston on the Star Lygra.
Amazon has produced probably somewhere in 5,000 to 10,000 of these containers over the last two years I've been tracking it. When they bring
these containers in to U.S. soil, once they unload them, guess what? They get to be used in the domestic system, in the rail system. They don't have
to return them to Asia like everyone else does.
By them creating their own containers, they are essentially guaranteeing that that equipment is going to be available for them.
Lauren Beagen was working at the Federal Maritime Commission when Amazon first registered with the agency in 2015, the first indication it was
exploring its own ocean freight business to give it more control over the shipping journey of certain goods.
What if we had Tickle Me Elmo this year? Guaranteed you wouldn't be able to find it anywhere because that would definitely fall victim to the
congestion that's happening out there right now. But that would be an example of something that would give you a competitive edge if you were to
be able to provide that good faster.
Amazon wouldn't disclose details of its ocean freight program, but says it's increased ports of entry by 50% this season, expanded network
partnerships and doubled container processing capacity.
Amazon and other retailers are getting creative with ocean freight, from repurposing old vessels and chartering their own, because congestion at the
busiest U.S. ports is at record levels.
This is really taking a lot of capacity off the market because you have fewer ships available. Why? Because they're sitting so long to be unloaded.
One solution is to simply call at a less busy port. But to control the route, a company needs to charter its own vessel. So that's exactly what
Amazon has been doing, for years.
You can pull into much smaller ports, the Port of Everett, Washington, for example, or Houston or New Jersey: those ports that have the lowest
congestion and the fastest offload times.
Amazon's been experimenting with chartering vessels since 2017, quietly acting through a Chinese subsidiary as a global freight forwarder, helping
move goods across the ocean for its Chinese sellers who pay to be part of the Fulfilled by Amazon program. Internally, Amazon dubbed this project
"Dragon Boat."
They're doing over 10,000 Containers per month of the small- and medium-size Chinese exporter. Amazon's volume as an ocean vendor - that's
right, you heard me correct, they're considered an ocean vendor - would rank them in the top five transportation companies in the Trans Pacific.
This season, a handful of other major retailers - Walmart, Costco, Home Depot, IKEA and Target - are also chartering their own smaller vessels to
bypass the busiest ports and get their goods unloaded sooner. And sometimes repurposing ships usually meant for other jobs.
The real purpose of these vessels when they were built was not containers. It was really lumber, chemicals, grain, agricultural products. But because
of the ingenuity and creativity and lack of space, Amazon and many other smart people have quickly figured out how to convert some of these
multipurpose vessels to containers.
John Esborn has been in the supply chain business for 40 years, streamlining logistics for Wayfair and now Perch, an Amazon aggregator.
You've got those fringe vessels that used to be $10,000 a day. They're now $150,000. And you can't do like a one-month lease. Everybody's got a
captive audience now, right? And so now you've got to lease that thing I've heard for as much as four years.
To understand why extravagantly expensive deals to charter smaller, older vessels makes sense right now, let's talk about different size container
ships and why some ports are backed up while others aren't. A traditional 20-foot container is referred to as a TEU or 20-foot equivalent unit,
although most containers used today are 40 foot, equivalent to two TEUs. Cargo vessels are measured by how many TEUs can fit on board. Ultra-large
container ships bringing goods to the U.S. from Asia can carry up to 20,000 TEUs and they're primarily limited to ports on the West Coast because they
can't fit through the Panama Canal. Although freight rates are at a record high, prices are lowest on these big shared vessels, making them popular.
And only certain ports can handle vessels that size. That's why 40% of shipping containers entering the U.S. pass through the ports of LA and Long
Beach, causing a backlog. Smaller cargo ships that can fit through the Panama Canal carry as little as 1,000 TEUs and cost about double the price
of moving cargo on the larger shared vessels. But the flexibility to dock and unload quickly at any number of ports may translate to on-time
deliveries.
When leasing a ship that can only carry about 1,000 containers, you're actually paying twice as much to move your containers. But what choice do
you have as a retailer?
You don't want to be the person that doesn't have goods on the shelf, right? You don't want to be the CEO that's explaining to Wall Street that
you made that decision or didn't have those goods. So we're moving our hottest-selling items this time of year that also bring the highest
margins.
For those high margin goods, there's another way Amazon is bypassing ports altogether. Since 2016, Amazon has been building its Amazon Air cargo
fleet, saying it'll reach 85 leased and owned aircraft this season. They fly out of 42 U.S. airports, totaling at least 164 flights per day, with
some additional flights out of Canada and Europe. Now amid the current challenges, Amazon is reportedly looking to lease at least 10 larger
long-haul planes that can hold 25% more volume and have traditionally been used to fly across the North Pacific, getting goods from China to the U.S.
One of the converted Boeing 777s can carry 220,000 pounds of cargo, equivalent to the cargo that can fit inside about 5.5 fully loaded 20-foot
containers. Most of the small 1,000-container freighters being chartered by Amazon and others can hold 180 times that, with the biggest cargo ships
carrying more than 3,600 times what the planes can hold.
Wouldn't it be easier just to move all that product, say from Asia to the U.S. in a cargo plane? No, it can cost over a million dollars in certain
cases to lease and fly a cargo plane. It's a very, very expensive endeavor.
They were flying hot tubs, which is crazy. I mean, can you imagine hot tubs on freight aviation? The demand was so high that they were able to mark up
the goods enough, people were willing to pay the extra surcharges for that cargo movement.
Another strain on the supply chain that's gotten costlier is manpower.
We've been hearing a lot about the great resignation, with a lot of jobs going open and unfilled. So I think companies are looking to get very
creative in attracting labor. That might be signing bonuses, higher pay.
To fight the worker shortage, and a reputation for relentless workload and breakneck speed, Amazon says it's offering sign-on bonuses of up to $3,000
to all the 150,000 seasonal workers it's hiring this year. Last year, it hired 100,000 seasonal workers.
That 50,000 increase in employees this year over last year is probably people to do the unloads. You know, they've got these containers coming in
the last second, man, they want to unload those goods and get them on the shelves in the fulfillment centers as quickly as possible.
The seasonal workers are unloading and loading, picking and packing at more than 250 new facilities Amazon says it's opened in the U.S. just in 2021, a
clear indication that it planned far ahead for the final bottleneck in the supply chain backlog: warehouse capacity.
Their goal is this: be within 10 to 15 minutes of 100%, or at a minimum 90%, of the population in the United States to where they can make
deliveries to basically all the customers and deliver just about anything.
While Amazon may be well positioned to avoid the worst of it, the global supply chain remains vulnerable to future backlogs and shortages.
Okay, here we go.
In November, President Biden signed into law a $1.2 trillion infrastructure bill that aims to help, with $17 billion for improvements at ports and $66
billion toward freight and passenger rail over the next five years. In October, he also unveiled a plan to run operations at the ports of Los
Angeles and Long Beach 24/7.
In total, that will almost double the number of hours that the port is open for business from earlier this year.
It's wonderful to have 24/7 as one of the solutions, but what does that mean? I mean, now it just means that the next part, maybe the warehouses,
are going to be overflowed with all these goods that are coming in.
24/7 port operations and chartering private vessels also worsens another related problem: the massive amount of carbon created by all this
congestion.
When you have more smaller ships carrying only 1,000 cargo containers, you're generating much more emissions from having more smaller ships, that
frankly have less efficient engines than these massive cargo ships.
One solution may lie in greater collaboration.
At any given time, there are tractor trailers moving back and forth on highways that are only a quarter loaded. And right beside it is another
truck and trailer going to the exact same location. If you combined supply chains, if you collaborate, you would be removing thousands of trucks from
the road.
Two of the country's biggest importers of goods by container ship have already started collaborating on the last-mile portion of their supply
chain. Home Depot is outsourcing its same- and next-day deliveries to Walmart in New Mexico, Texas and Arkansas. As for Amazon, shipping for
third parties is already part of its strategy to keep scaling its massive logistics empire.
One of the next phases that Amazon could potentially get into is actually selling container space to the Fords, the GMs, the Chryslers of the world.
What Amazon's going to do is say, look at the capacity we have. We have planes that are only going to be 25% full or 50% full. We will sell that
capacity to our competitors, to other companies. That then pays for the operational costs. It's really smart on Amazon's part how they've been
doing this.