The Cost of Delivery Delays

TL;DR

This paper models how increased delivery delays and supply disruptions from global sourcing impact U.S. manufacturing inventories, prices, and output, explaining recent trends despite shorter import distances.

Contribution

It introduces a stochastic delivery time model that explains rising inventories and delays, reconciling empirical trends with supply chain risk considerations.

Findings

Delivery delays increased by 21 days from 2018 to 2024.

Delays contributed to a 2.6% decrease in output.

Delays caused a 0.4% rise in prices.

Abstract

Since 2018, there has been a consistent decline in the distance traveled by U.S. manufacturing imports, reaching a level not observed since 2008. This trend is the result of the substitution away from imports from China and towards imports from closer countries. At the same time, U.S. manufacturing inventory-to-sales ratio has continued to rise. These trends are at odds with the literature, which finds that reductions in the distance of imports are associated with a decline in inventories. We argue that a rise in delivery time risk, driven by longer and more frequent delays and supply disruptions, can reconcile these trends. We do so in the context of a model of global sourcing with stochastic delivery times and inventories. Firms trade off the lower price of farther inputs with the increase in exposure to demand volatility and longer delays. In response, firms increase their inventories. Yet, as delivery delays rise, firms need to carry more inventories per unit of the input used. We calibrate the model for the period from 2018 to 2024 using data on the increase in tariffs for inputs from China, and the rise in inventories over sales. We find an increase in delivery delays for foreign inputs of 21 days across the period. The rise in delays and tariffs had an output loss of 7.3% and a price increase of 1.8%. Of these, the rise in delivery delays alone generated a 2.6% drop in output and a 0.4% increase in prices.