T-shirt Landed Cost and Suez Canal
If you read the previous editions of “Covid-19, or why is my Kettlebell so expensive” or “Who Moved my Toilet Paper,” you may want to read “How will the Suez Canal Blockage impact the cost of my Hoodie.”
I'm not sure if your bingo card for 2021 included the term Suez Canal blockage, but it’s clear this is an interesting year to be a supply chain person like me. Teaching supply chain management since 2020 feels a little bit like watching disaster porn (not a word I used in class or writing. But there is always a first).
You probably read that 30% of the containers go through the Suez Canal. You read that 10% of global commodities go through the canal. That the impact on the economy is 400M dollars per hour. By the time you are reading this, the ship seems to be afloat and on its way, but the question still persists:
When something like that happens, what does it mean for YOU?
T-Shirt Landed cost
One of the issues with all of these big numbers is that they make no sense. I don’t mean that they are not correct, but they are too amorphous.
To make more sense of these, I am going to introduce a simple metric: T-Shirt Landed cost or TLC (I know, it’s Total Landed Cost), which is going to track the costs from the moment the raw material was purchased until you could wear it.
Imagine tracing the steps and costs from the moment the firm purchased the raw material, the different production steps (including labor), shipping, custom, duties. Everything. End to End costs.
While I said T-shirt, I am actually going to try to look at the price of a hoodie. You will never catch me alive wearing a hoodie outside the comfort of my own backyard, and some of you might be surprised to know that I do own one. But Covid convinced me that I need to own a few of these.
A more prosaic reason to use hoodies is that a few years ago, the NY Times had an interesting breakdown of the cost of a hoodie, comparing the US vs. China:
While the costs have probably changed since the article was written, I am not sure this is the important part. I am not trying to claim for accuracy in this post but rather provide a framework to think about the question of impact and make this assessment more tangible. In this case, you can see that the shipping cost was $1.7 out of the $31 of the total landed cost. The price of this product was of course much higher at 80$. You can see where this is going.
The first question you have to ask is whether the hoodie is on the Ever Given. The short answer is that I don’t know (of course, it’s an imaginary hoodie, to begin with), but I do know that the ship has consumer products. We know it carries bikes shipping to Rotterdam (for example).
For this hoodie, three components may be impacted: the shipping cost itself, the cost of holding the inventory, and customer service (and with it lost sales):
Shipping costs: let’s say that the delay will be of two weeks; the impact on the actual cost is going to be limited.
Inventory holding cost is primarily the opportunity cost of having the “cash” held in the ship rather than being invested. Since we are in an era of all-time low-interest rates, the financial holding cost is limited.
Lost sales are definitely a possibility. But given the transparency of the issue, I do not expect firms to lose significant sales.
The overall impact is minimal.
The ripple effects
But the main point is not so much for products on this ship, but rather the ripple effects on supply chains and products. So, let’s try to understand the impact on a hoodie that is about to be loaded on a ship (or already on board a vessel going towards the Suez Canal).
Let’s try to understand the impact on shipping costs. Let’s make the egregious assumption that all of that comes from shipping on the ocean (and not the trucking to the airport, etc.). This is not the case, but it will allow us to approximate it.
At this stage, most of the shipping routes that are impacted are between Asia and Europe. So, let’s say that our hoodie is on the way from Shenzhen to London. The price of shipping a 40-foot container from Shenzhen to London port pre-Suez canal was $2,219, which means that the cost per unit was around $1.47 if we assume that a container can carry about 1500 hoddies. Not all that different from the $1.7.
For oil tankers, the price of shipping has doubled. Let’s assume that this is correct. The difference is going to be $1.7 per hoodie. Quite small. Even if you buy a 15 dollar T-shirt, this will be a relatively small impact on the shirt. There might be an impact on lost sales, but I do not think these are significant.
I am sure you heard that ships that are not yet in the Suez Canal might decide to take the route through the Horn of Africa. The impact here has the potential to be significant since it not only adds to the waiting time but adds shipping costs.
The travel around the Horn of Africa adds $300K of shipping costs. EverGiven carries 20,000 containers, which means that the container’s impact is going to be $15 of additional shipping cost, adding a cent per hoodie. A cent.
The additional time may have an impact, as well as the lost sales. But I would argue that at this stage, these are not significant concerns.
The Long Term Impact
The long-term impact is still hard to assess. The world is awakening to post-covid, with a potential increase in demand and supply for more products and highly disrupted supply chains. Prices of container shipping between Asia and Europe have already quadrupled from the year before. Given the congestion in the Suez Canal, we are also going to see empty ports for some time, and then heavy congestion delaying product even further. We may see a shortage of containers which going to make delays even longer.
But the reality is that the last year has shown us that supply chains are more resilient than we think. The price of Kettlebells went up by a factor of 20 because we experienced both a demand shock and a supply one: people working and exercising at home, coupled with limited supply capacity. Most products that suffered from these issues went back to the original prices. As the article said: Covid will stretch supply chains. It will not break them. The Suez Canal blockage will do the same.
Now, I hear about the fact that we need to blame Just-In-Time for everything. No. Blame yourself. The more price-sensitive you are, the more likely you are going to suffer from this.
But this brings me to another point: if the product you are buying is so sensitive to shipping cost, it means that labor, R&D, raw material all are a small part of it. Maybe you should assess some of your life choices.
Unless it’s a commodity.
One type of product that may be impacted in the medium term: wood pulp. What do they make with wood pulp? Toilet paper.