Wednesday, February 27, 2013

Sequestration effects on the US supply chain

No doubt the US government needs to do a bit of fiscal trimming however; the process for automatic across the board cuts to government agencies set to begin March 1 may be a major shock to a fragile economy if indeed it occurs. Some economists have noted GDP may slow by 0.4% this year from about 2% to 1.6% as a result of these automatic cuts. With total cuts amounting to about $1.2 trillion over the next ten years, it is anybody’s guess to what the effects may bring.

The cuts are to be split 50-50 between defense and domestic discretionary spending. For the supply chain industry, this means cuts to such government agencies as the Department of Health and Human Services’ Food and Drug Administration (FDA), the Department of Transportation’s Federal Aviation Agency (FAA) as well as to the Department of Homeland Security’s Customs Border and Patrol (CBP). Many other agencies will also see financial cuts that could negatively affect the supply chain industry.

For logistics providers providing services such as temperature-controlled warehousing and distribution, fiscal cuts could mean delays in inspections, certifications and recall notifications which  could endanger the safety of the pharmaceutical and food supplies.

According to the Federal Aviation Agency, the mandatory cuts could possibly mean eliminating some airport control towers all together and eliminating overnight staffing at other control towers. This would impact air cargo carriers such as FedEx and UPS who utilize night flights to move a good bit of cargo.

Like other government agencies, along with spending cuts, the Customs Border and Patrol will face mandatory furloughs beginning in April. Entering the country whether along the Mexican or Canadian border, a port or airport will result in a longer wait. According to the CBP, cargo release wait times at border entry points will double from the current two hours to about four to five hours.

March will be quite interesting on Capitol Hill. Not only is sequestration likely to occur March 1 but the six month government budget extension expires March 27. It’s possible the government will combine both issues and come to a resolution prior to March 27 or it will face the possibility of a government shutdown come March 28th. Either way, get ready as the US supply chain will not only get longer but more complicated. Indeed, the infamous misquote from the movie “All about Eve” holds true in this political scenario for supply chain practitioners, “Fasten your seatbelts, it’s going to be a bumpy ride”.