Global Supply Chains are Everywhere, Including Waco, Texas

by Tim Feemster, CEO & Managing Principal Foremost Quality Logistics

You may wonder why there is an article about global supply chains in this quarterly magazine from the Greater Waco Chamber. After the COVID-19 pandemic, everyone knows the words logistics and supply chain as they have been very widely discussed in the press over the past six months, mostly because the supply chains for personal protective equipment (PPE), toilet paper, sanitizers, etc. have been broken by the pandemic and impacted every person reading this article. Your Greater Waco Chamber recognizes the importance of understanding global supply chains to the future growth of Waco. Almost every manufacturing or distribution firm that opens or expands an existing site in this area will likely be connected to a global supply chain.

Every item you purchase in a store or online has a supply chain attached to it and most of them have a global element. Currently, the Greater Waco region has manufacturing facilities in the following industries: aerospace, food and beverage, health care, auto parts, meat processing, construction materials, construction equipment, packaging materials, HVAC, steel, recycling, lawn and garden, furniture, electric motors, chemical storage devices, and housing materials. Around 12,000 people are employed in the 51 largest manufacturing sites, depending on the season. It is highly likely that you know someone who works at one of these companies or that you purchase products produced by these companies.

Most of the non-manufacturing distribution sites in the area are food & beverage, retail, industrial supplies, and ecommerce. More than 4,000 people are employed in the 24 largest commercial distribution locations. Again, you may purchase products handled by these companies for use in your home or the business where you work. The bottom line is that consumers “participate” in the global supply chain as endusers of items that are partially or totally produced or grown overseas and imported from another country. One interesting factoid is that all food purchased in the grocery store, and many nonfood items you buy, are required to show the country of origin. Next time you unload your bags from a shopping spree, note how many countries are represented in your purchases.

Now for some facts that will explain why we suffered from extensive product shortages during March, April, May and even some shortages still linger today. Remember that every item has two different supply chains: one designed for consumers and one designed for the food service or hospitality industry. Examples of these items are toilet paper, hand or surface sanitizer, disinfectant wipes, steak, fish, canned soup, etc. Many times, there is a separate supplier, packager and producer or farmer, who may be under contract with a foodservice supplier, supplying the “raw material” for items that are packaged for schools, restaurants, hotels, country clubs, fast food outlets, etc. These two manufacturing and supply chains produce similar items, but they are packaged on different equipment and in different sized containers.

As an example, toilet paper and Clorox products sold to food service suppliers is manufactured on different equipment than the retail counterparts. So, when the schools, hotels, restaurants, etc. were shut down and we ran out of toilet paper and Clorox products, the manufacturers idled the food service equipment because it could not produce and package the retail items.

The same is true for meat, produce, milk, fresh fruit & vegetables. How would you like to buy a 40-pound box of tenderloin steak, chicken breasts, or pork chops at your local grocery store? Many retail stores do not have the proper equipment or the skilled workers available to pack, weigh, and price individual retail packages from a 40-pound box efficiently. Plus, remember that Sysco Foods and other food service suppliers have this inventory, not H-E-B, Kroger, Walmart or other retail grocery stores. During the pandemic, you may have wondered why the food service suppliers were sending product to food banks while retailers were not. Food banks use volunteer labor to break down a giant box of toilet paper into bags and/or small boxes to give to the people in need. Access to this kind of manpower is not something retail operators could do efficiently.

Additionally, it didn’t make sense because most products designed for use in food service do not have individual barcodes making inventory and checkout a problem.

Given all the above complexity, let’s outline what a global supply chain looks like, who are the players, how it has and is changing, what is driving changes, the look and feel of today’s manufacturing and distribution facilities, what new hurdles have been identified by COVID-19, what this means for the recruitment of new businesses to the Waco area, and what are the main site selection criteria and the drive site selection in manufacturing and distribution facilities.

The supply chain begins when someone orders a product, like masks for healthcare workers. The purchase order is cut, which may have multiple different items from the same source. If there is a U.S. warehouse for the supplier, it arrives at the hospital or clinic in as little as four hours (but it can take up to several days). The supplier periodically replenishes items with a direct shipment from China; it may take up to 110 days to receive the items at the supplier’s facility in the U.S. This continues for years with some ups and downs, based on demand. In our example, the demand for masks increases during flu season and the supplier takes longer to deliver the masks but offers the healthcare facilities the option for airfreight shipping from the international source. The consumer, the hospital administrator in our example, then makes the decision to incur these additional costs. In theory, this only happens occasionally because demand for masks is fairly predictable based on the level of staffing and patients served daily.

During the COVID-19 outbreak, consumption of goods increased dramatically. The consumption of masks in the Waco area went from a few per healthcare worker per shift to 100 due to new regulations requiring a mask change between each patient with whom a healthcare worker interacted and the demand outstripped available inventory at hospitals in days, not weeks, and their suppliers’ facilities as well. Now the hospital staff is consuming 10,000 masks a day for 100 workers versus the 300 prior to the COVID-19 outbreak. Next, a hospital supplier reorders from the factory in China. However, there is no inventory because the pandemic in China has utilized all the masks there and the plant has been closed by government order or by the lack of healthy workers to keep it running.

Every time a container hits the port of Los Angeles or Long Beach carrying masks made two months ago, it is immediately dispatched on a team truck to the supplier warehouse, Dallas-Fort Worth for example, and arrives in between three and four days. The inventory is not enough to fulfill the giant orders suddenly pouring in. This example illustrates the breakdown caused by the COVID-19 outbreak.

You now know how supply chains do and don’t work from time to time. Let us approach the opportunities and reasons for the Greater Waco area to be successful in growing and attracting manufacturing and distribution companies.

First, Waco’s location is a big key to success. Several elements of great supply chains exist in the Waco area, including a great highway system linking Mexico to Waco and the DFW metroplex and beyond: North and South via I-35 & I-45 and East and West via I-10, I-20, & I-30. The highways allow imports from Mexico of anything destined for delivery to a manufacturing or distribution facility in Waco. The same applies to imports coming from the Houston seaport from around the world.

Second, Waco is situated between the major metros of Austin, San Antonio, Houston, Dallas-Fort Worth and more. These are mega populations that have driven the explosion that has happened with e-commerce over the last few years and especially through the pandemic. There is no doubt that this trend will continue well into the future as retailers focus on expanding their e-commerce capabilities, since population drives e-commerce deliveries. Waco’s location in the middle of these population nodes means that small package deliveries of e-commerce shipments in the cheapest cost category of ground delivery can deliver next-day to all of these mega population centers and more (over 23 million in population estimated in 2019) from Waco, Texas as exhibited in the outbound view map.

Last year, almost 58 percent of total supply chain costs were transportation related. Having a lower cost of transportation to deliver e-commerce goods this way gives the facility an advantage of a single facility in Dallas, Houston, San Antonio, or Austin to cover this single day parcel delivery zone via UPS. The explosion of e-commerce has driven major increases in industrial real estate development over the last 10 years. While the COVID-19 pandemic negatively impacted the U.S. economy at the start of the second quarter 2020, the demand for industrial space managed to increase throughout this unique time.

The accelerated growth of industrial industries in the U.S. maintained momentum throughout the pandemic, as industrial product, and big-box space in particular, remained in high demand. Vacancy, transaction volume and product under construction remained relatively flat across the country, while asking rents and net occupancy surged in the first half of 2020, according to the latest data from Colliers International. The pandemic induced growing reliance on e-commerce retailers for basic goods, fueled demand for industrial big-box product as supply chains continued to be right-sized, shifted away from “lean” inventory strategies that proved sound in the past. As evidence of the need for warehouse and distribution space, despite the global pandemic slowdown, net occupancy gains for bulk industrial space totaled nearly 79.8 million square feet at mid-year, up 51 percent over the 52.8 million square feet transacted at mid-year 2019. A total of 96.5 million square feet of new supply was added to the market, and an additional 170.7 million square feet of big-box space remains under construction.

Third, Waco is blessed with multiple target industries in the manufacturing and distribution space that rely on good supply chains to make them efficient and are expected to continue to grow in the future. These target industries are aerospace and defense, advanced manufacturing, supply chain management, and healthcare. Now, the challenge will be to recruit both new firms in this space, as well as existing suppliers of the manufacturing operations already there. If the pandemic has taught us anything, it is that avoiding disruptions are critical for a business to not suffer service interruptions. Shutting down a production line in a manufacturing operation for lack of parts is risky. It has happened all over the U.S. during this pandemic though, as we explained before and it was not the fault of the purchasing agent. Supplier manufacturing operations in Asia, China, Mexico, Canada, and Europe have shut down from time to time and consequently ceased shipping parts to the U.S. for use at local manufacturing sites. In many cases, these parts were sole-sourced and, once the U.S. manufacturer ran out of parts inventory, they could not start or complete production of an item. Since the pandemic has run so long globally and is now threatening to start a “second wave,” many manufacturing operations in the U.S. have suffered slowdowns or shutdowns causing layoffs of workers.

Fourth, Waco is blessed with large tracts of industrial sites already serviced by utilities and roads that can be built on quickly. The Greater Waco Chamber economic development team assists the local commercial real estate community by keeping an ongoing database (WacoProspector.com) of available buildings and sites and marketing the properties. The team leads the asset development and management of the Waco Industrial Foundation’s 1,800-acre portfolio at the Texas Central Park and the Waco International Aviation Park at Texas State Technical College Airport.

Fifth, Waco has adequate funding for incentives. These incentives are seldom cash grants; typically, they are structured to be a deferment of taxes that are not being currently collected. For example, think of the conversion of a farmer’s property being taxed as agricultural land versus an industrial/ manufacturing facility being taxed as an improved industrial property with the added value of the building as well. In most cases, the workers come from local household/communities and do not put additional burdens on schools, roads, or traffic. Even if they do move to the community, they will now be paying taxes on a home or through rent in an apartment. This benefits the community long-term because only growing communities will survive in the long-term. If a community’s population declines, the wealth in the community declines and the slow downward spiral of the community starts.

Also, grants for skills training allow workers to “move up the scale” and get better paying jobs that reward their newly acquired skills. Think of fast food, restaurant or hospitality workers being able to move up to distribution center workers, warehouse workers being hired as supervisors in the new company, or even current supervisory personnel becoming managerial staff. This upward mobility is all because the local economic development group teamed up with and funded a local educational system to offer skills training for new hires. This becomes a progression of new skills and even raises the wealth of the community, multiple workers at a time. With better paying jobs and more skills, the community is more attractive to company expansion and/or new companies that see this community partnership in place with specific examples of successes. Also, increased income usually means consumers buy more and local establishments gain in revenue and tax receipts.

Sixth, you might ask about reshoring existing manufacturing from other countries rather than having factories and distribution centers move from another state or expand here. Again, you must understand the entire supply chain to pull this off. Reshoring is a daunting task. As an example, let us examine electronics, like 5G wireless equipment, cell phones, TVs, laptops, etc. First, we must find somewhere to source the availability of raw materials (rare earth minerals) since most are not mined in the U.S. at this time. Second, the semiconductor and other component production as well as the raw material flows have moved to Asia. Without these three items, base raw materials, semiconductors and component parts, no cell phones, 5G equipment, TVs, etc. can be made in the U.S. without a global supply chain. Take the mining of heavy metals, a company, community and state will have to approve a site to mine and make the parts that use heavy metals, rare earth minerals. Mining heavy metals is a challenge because it requires power and water for manufacturing and cleaning the parts, disposing of wastewater, can cause air quality issues, etc. and does not require hiring very many people since automation will do most of the work. Additionally, building a facility is an exceptionally large investment, costing billions of dollars. In contrast, China is a world leader in the production of electronic components and finished goods and can capture a greater global share of revenue before the factory is built.

The same is true in the apparel business. Fabric production has moved to Asia, Mexico, and South American countries. The U.S. is no longer the largest cotton producer in the world. India is first, the U.S. is in second place and China is a close third. The U.S. could utilize the cotton grown here to make fabric, but that would require companies to build factories that are highly automated, cost a lot of money, and do not employ anywhere near the number of workers that our old fabric production facilities employed.

Overall, the more the community, the local economic development organization, the city workers, elected officials and the public understand how global and domestic supply chains work in support of local businesses, the better they will understand and support the addition of new companies to the area and the expansion requirements of the existing businesses in the community. Wacoans are fortunate that

Waco has a wonderful quality of life, good schools, plenty of shopping options, access to higher education, excellent interstate infrastructure, good weather, and a professional economic development organization that works hard every day to assist local companies with their needs and recruit nationally and globally to attract companies to the Greater Waco area. They have been successful in the past and given the continuing momentum of companies interested in moving to Texas in general, Waco should have a bright future for industrial facility and jobs expansion.

Seventh, the top players in the logistics space are identified in chart shown here. They are a mix of global and U.S. based companies. The overall list is in the thousands but here are the top firms according to Transport Topics a leading supply chain trade magazine.

Lastly, I’d like to request that next time you see a trucker tell them “thank you.” Without them, we would not have survived the past six months. Their ability to keep delivering critical PPE equipment, food, medicine, clothing, gasoline, e-commerce products and more has allowed us to have no panic around surviving. They, along with millions of our medical and grocery store workers, are an amazing frontline of essential workers putting their lives on the line every day moving freight and saving lives. Together, they are a critical part of our economic and pandemic survival and recovery.