Supply Chain Issues, or how I learned to love Charmin.

Politics and religion
21

So here’s where I really showcase my ignorance, is there a relatively easy, well, not “fix” but amelioration where legislatively we could ease the tax burden on manufacturers for having inventory on hand? My vague understanding is that you get taxed for inventory on hand as you cross over the taxation year threshold so most manufacturers and retailers try to empty out stock during that period.

I’m sure there are plenty of other reasons that drove the adoption of JIT manufacturing such as reduced requirement for storage space, but maybe there’s a simple way to incentivize makers to have a bit more cushion.

22

Wendover Productions explains the supply chain issues and just-in-time in easy-to-digest video form. The TLDR: many companies who are experiencing these problems aren’t actually following the full Toyota system, which calls for stockpiling components that can’t be easily/quickly replaced.)

23

I had heard recently that one of the stranger issues was that there’s a current imbalance of imports/exports, which lead to empty shipping containers themselves aggregating at certain ports. If you don’t have containers, you can’t load them up with goods to ship them, so you’re stuck waiting for some to be free.

Many empty shipping containers are moved from many other ports to the LA ports by train in the US, which just makes the problem there worse. From earlier in the year:

[going to go watch HumanTon’s video and see how redundant I am.]

24

I’ve watched Varoufakis saying there is no reserve transportation because it was more profitable to buy up cheap transportation futures and let price bubble than actually let services return to normal.
I’m not sure where to look up such things, but A) sounds about right, a good crisis should never go to waste, and B) if it’s this thing, yeah

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They shouldn’t last too much longer, though.

25

Six Sigma started as a statistical concept. No idea how it got mutated into this.

COVID causes a lot of chickens to come home to roost, and unfortunately, the Dems are going to pay the price for it in the near-term. Just hope this solves by late 2022, or at least 2024 to stave off disaster.

Normality from COVID, or new normality, is going to have to happen soon.

26

Here’s a WSJ podcast about this from a few weeks ago:

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28

This would surprise me. I don’t know of any annual tax on inventory. There is a wrinkle that you can’t deduct expenses for inventory until the inventory is disposed of — sold or written off — which probably creates some small incentive not to hold inventory, but the main drivers are 1) the cost of acquiring stuff now you won’t use / sell until later, and 2) the cost of storing that stuff you won’t use / sell until later. Obviously businesses don’t want to pay now for stuff they don’t need now, sitting on shelves they have to pay for now.

29

As long as idle capacity is the devil’s playground (thanks, unfettered capitalism!) we’re going to have issues where to-the-bone JIT organization of anything is going to fuck us (as a society) over.

The incentives are all perverse. Rabble, rabble, something something dance card.

31

AFAIK, unless US law is very different, you don’t get taxed on inventory, but on profits. Increasing your inventory doesn’t impact profits until it’s sold off (like @scottagibson says). It does reduce your treasury, and thus can lead to lack of liquidity, and incurs in storage costs, so you don’t want to have too much, but the level of inventory at a tax period threshold is irrelevant.

32

They are currently building so many warehouses in my area of PA, there is no shortage of places to store stuff, thats for sure .

33

Hmm, apparently its much more complicated, unsold inventory figures into calculating COGS, as well as being directly taxable in a few states:

Over my head, this is why I have an accountant.

34

I think that’s a convoluted way of saying what I said: you can’t book the cost of inventory / goods you haven’t used or sold yet, so they won’t help you reduce your taxable income, so there is some marginal increase in taxes associated with unused inventory. But the actual cost of that inventory is far higher than the tax benefit you’d realize from reducing your income by deducting that cost, so the real disincentive to hold inventory is the cost of acquiring it in the first place, and the cost of storing it.

35

Not really.

From your link:

Take into account selling the inventory will actually increase your net revenue (unless you operate at a loss) and thus increase your taxes (you then compute the cost of theinventory and the income from the sale. Your balance is impacted positively unless selling at a loss).

But I’m talking about Spanish accounting practices. The US might be different.

36

A good video, I wish it covered even the five months since it was made. Long story short, it’s complicated. The narrator wanted to blame it on JIT bit to be fair, there is still a LOT more to it. Labor has changed in a major way. The effects of COVID on all markets is going to be long lasting.

37

Ding, ding, ding. We have a winner. JIT and Six Sigma approach (which is not directly supply chain per se, but is a related business process efficiency driver) are direct causes of the issues today.

The JIT model relies on stability. Any hiccup in normal routine can have ripple effects. There is a bunch of academic papers on the subject, both real world observational and simulation based, to demonstrate how anything that causes disruptions in a globally integrated supply chain can have cascading effects. The more steps along the chain, the more brittle they are to disruption.

Here you can see a simulation from one such academic source (don’t need to watch the whole thing, I’ve queued up the simulation)

So you have multiple stages of interconnected logistics, and each has dependencies with others. Delays at the ports leads to increased container holding, which increases load and unload times, which causes ships to be in queues, and ships in port to wait for their cargo. The containers at the port reduce supply at the factories, as well as for domestic shipping. So factories produce but can not ship goods, and trucks and trains can’t move cargo because all containers are stuck waiting at ports. Which in turn means that the lumber yards have inventory that can’t be sent to mills because the trains are backed up waiting for containers to be loaded at a port 600 miles away, which increases lumber prices because they can’t produce lumber while waiting for the logs.

And now your house costs more to build because they couldn’t unload a container of kids toys from China.

38

I’m the CFO over at a small manufacturing company - and yup, it’s all about cash flow baby. You (normally) simply don’t want to pay in advance for anything that is going to sit in your warehouse for too long.

  1. Obsolescence
  2. Damage/loss/shrinkage
  3. Warehouse space/utilities/rent
  4. Personnel to manage it.

We pay most of our vendors in 30 days, plus variable amount of time between purchase and production/dispatch, then we are paid by our customers 30/60/90 days from date of dispatch/invoice. The more you can decrease that spread between cash outlay and payment the better.

Ideally we keep maybe a three to four week supply of inventory on hand for any of the generic products we make and then any specialty products are delivered a week before scheduled production. It’s not unusual for goods to be delivered the day we are scheduled to produce it - which may be a testament to efficiency, but just about noone wants to deal with the stress/risk of a shipment being delayed or having to skip an order because the materials didn’t arrive in time.

The supply chain issues are a blessing/curse. We normally have a 3 week backlog. Today we are officially booking our backlog into February. Costs have gone up, our prices have gone up, customers can’t seem to get enough of us. Customers are on the verge of being desperate paying stupid prices to convince us to squeeze orders in. Our own buyers are living week to week/day to day. We are on allocation with most of our largest vendors. Per our vendors, if everyone got along and agreed to buy just enough to get by each month we wouldn’t be having a problem; however, everyone is hoarding. You maximize your allocation whether you need the product or not (we are doing it too). Some people are paying stupid prices in order to “snipe” a roll of paper that was specifically allocated for another customer. Some vendors are blocking any new relationships in order to service their existing relationships. We have frenemies that made multi-million dollar machine acquisitions, but cannot find a vendor to sell them basic goods because they never had a previous relationship (ie - purchasing corrugated cardboard for packaging)

Labor is tough but getting better. I would say, on average, our cost of goods sold have increased about 15%. Freight is much worse - maybe 40-50%

Our freight aggregator says that going into the pandemic the US was already 100,000 drivers short. This will increase by another 100,000 every year for the next 10 years. They said something stupid like only 20k - 40k freightliners are being built every year?? They also stated that some trucking companies are paying 100k annually for new CDL drivers. Don’t know if any of that is true, but freight has been painful.

We don’t sell internationally and only occasionally buy equipment/parts internationally. We paid 60k for a small used machine from another factory in Sweden or Switzerland. Freight cost maybe 15k on the front end. There is a dearth of shipping containers in Europe. Took a month for a shipping container to be located, took a month for it to be delivered to the factory, took another month to truck it down to the coast, the shortest piece was shipping it across the ocean (2-3 weeks) to the East Coast. Took another 3 weeks to offload the boat at port - then the port got in contact with us and said it was going to cost us another 8k to offload the container due to shipping cost changes from the date we were originally invoiced (and paid months earlier). At that point it felt like a hostage situation, but we’ve been waiting on this machine for months already. We are really close to the coast, so it was delivered and installed within the week from there.

39

Scrax, I know it sucks, I want you to know this is the -exact- scenario for the company I work for. Not just our manufacturing here, either. It’s global. We have manufacturing in every major region and it’s becoming a nightmare. We’re playing a shell game moving where major manufacturing and sub assembly goes at this time to work around things globally as we can, but it’s pretty insane. All of that is driving up inventories for things we can get, etc. I’m VERY glad my job isn’t directly in those conversations.

We also have the same labor issues. It’s bad enough that we’re having near weekly job recruiting days at most of the manufacturing sites and incentives have gone way up for new hires.

All of this at work and seeing the effects personally has me a bit scared as to where we bottom out and start bouncing back. You can’t make things fast enough to meet demand, even if you did, you can’t get them to customers fast enough, etc.

40

It feels to me like what the pandemic really caused is for a LOT of issues that should have crept up slowly–and HAVE been creeping up slowly, but were largely ignored due to race-to-the-bottom capitalist philosophy, suddenly all got sped up dramaticallty and reached their ultimate impact at the same time. So instead of the shit slowly backing up the sewers, nobody fixed the plumbing for years and years, and now it is flying out of the sewers and hitting the fan.

Or in other words, this was ALWAYS going to happen. Its just in fast motion instead of slow motion.

41

It took nearly 2 months for them to fix my mouse infested car because they couldn’t get ahold of parts.