Dive Deeper: Integrated Supply Chains and the Canadian Economy
December 11, 2019
On November 19, 2019, approximately 3,200 CN Rail employees walked off the job after failing to reach an agreement with the company on issues such as working conditions and drug benefits.
Ultimately, the workers and the company reached a tentative deal after eight days of negotiations and rail service resumed on November 27. Yet, the reverberations of the strike were and continue to be felt across the country.
Why was there such a widespread and immediate outcry from political and industry leaders? How could only eight days of disruptions have such an impact on the economy? Let’s dive deeper into the impact of integrated supply chains on the Canadian economy.
What are integrated supply chains?
An integrated supply chain facilitates relations with suppliers by managing distribution channels and logistics through a centralized operation, resulting in streamlined efficiency. Integrated distribution of goods optimizes the supply-side of resources through a centralized management of best practices, acquisition of goods, storage, and transport and delivery logistics. From the perspective of both the operator and distributor, this integration should result in cost savings and decreased distribution times.
In a supply chain, there is a process known as just-in-time manufacturing, which is a management strategy that aligns material delivery orders from suppliers directly with production schedules. The process lowers costs for the producer as there is minimal time between receiving materials and final production, allowing the company to save on storage costs and decrease potentially wasted materials. However, if the supply chain is disrupted, the entire process would stall. Just-in-time production is in contrast to just-in-case manufacturing that would store raw materials for longer periods, just in case supply chains were disrupted.
Integration in Canada’s economy
According to the Railway Association of Canada, around 70 per cent of all intercity surface freight and half of Canada’s exports are moved by rail. CN Rail transports over 50 per cent of all rail cargo in Canada and therefore plays a vital role in Canada’s resource distribution chain. Their integrated operations thus affect millions of Canadians and represent every industrial sector of the economy.
Bulk goods in Canada are predominantly transported via rail. Key resources such as hydrocarbons, mined mineral goods, lumber, and agriculture products are all transported by rail and cannot be easily or readily transported through alternative means. This is largely due to the increased cost and decreased efficiency of alternative methods such as truck transport.
With a large quantity of goods being transported through CN’s rail network, the strike has inflicted serious damage to Canada’s economy, placing a tremendous burden on businesses and countless jobs.
Many industries in Canada operate on a just-in-time process. In the event of a disruption, such as the CN strike, production doesn’t just slow down in one sector, it affects the entire Canadian economy. For example, grain elevators cannot accept deliveries from producers because they lack the storage capacity. This, in turn, creates shortages for shipping ports, which results in a bottleneck effect at ports and increases costs for grain companies, who have to pay for product storage and contract renegotiations. In an integrated supply chain, when one process is affected it creates a ripple effect throughout the entire value chain.
Effects of the CN strike
The strike limited CN’s operating capacity to 10 per cent for eight days, causing a litany of problems felt through the Canadian economy. Economists Brian DePratto and Derek Burleton at Toronto-Dominion Bank estimated the total cost of the strike to the Canadian economy.
According to their estimates, the strike, concluding on November 29th, has cost the Canadian economy approximately $2 billion in lost economic output. Importantly, these estimates do not account for the impact on commodity markets, which will be felt by countries that import Canadian goods, or the effects on individual households.
Table 1: CN strike could take a bite out of Q4 growth (Source: TD Economics)
|GDP Impacts, Constant Annualized Dollars||Real Dollar Impact||Impact on Q4 Growth (SAAR)|
|Strike lasting until November 30||$1.6bn to $2.2bn||-11 to -15 bp|
|Strike lasting until December 5||$2.3bn to $3.1bn||-17 to -23 bp|
When a disruption like this occurs, the reliance on such an integrated supply chain doesn’t allow for quick, pain free remedies. Canadian Pacific Rail increased their grain shipments 3 per cent from record setting October shipments, however, even these increases could only alleviate so much of the problem.
CN stated that their recovery operation is on track and has not experienced any significant setbacks, however, it will still take weeks before the supply chain is fully operational, leaving large sectors of the Canadian economy with significant headaches and bottlenecks for the near future.
Agriculture production is heavily reliant on rail transportation. With the strike occurring during the peak season for grain shipments and over 50 per cent of agriculture elevators managed by CN in the prairies, operations could potentially be paralyzed for days on end. The resulting paralysis could leave farmers with significant backlogs of goods, placing an undue burden on their operations. Nutrien, a major agricultural player and the world’s largest producer of potash, has already limited production by 200,000 tonnes, shutting down its mine on December 2nd for two weeks, resulting in the temporary layoff of over 550 employees.
It’s not only the agricultural sector that has been severely impacted by the strike but chemical and petroleum producers as well. CN transports approximately 180 000 barrels of oil and over $38 million in other chemical products per day. As a result of the strike, chemical companies have suggested they were prepared to halt production because they were unable to stockpile raw materials for more than a few days. Each day without rail service translates to significant losses in economic activity for the Canadian economy.
Ports from coast-to-coast have also experienced significant negative effects from the strike. With fewer goods coming in, ships had to anchor, causing ports to reach capacity more quickly. As services resume, it will take longer for ports to return to regular operations, having to remedy a backlog of inventory.
The overall effects of the strike are yet to be fully realized, but based on estimates and anecdotal reports, the costs will be felt across Canada, throughout all industrial sectors. Although integrated supply chains provide tremendous efficiency gains to the Canadian economy, in the event of a shutdown the economic impact is felt nation-wide. As CN returns to regularly scheduled operations, Canadians can breathe a sigh of relief, but the backlog of shipping demands could take weeks to resolve.
Railway Association of Canada. Canada’s Freight Railways: Moving the Economy. https://www.railcan.ca/101/canadas-freight-railways-moving-the-economy
Canada, Rail Transport. https://www.tc.gc.ca/eng/policy/anre-menu-3020.htm
TD Economics. Assessing the Potential Impacts of the CN Rail Strike. https://economics.td.com/impact-rail-strike
Canadian National Railway, CN Continues to Execute Recovery Plan. https://www.cn.ca/en/news/2019/12/cn-continues-to-execute-recovery-plan/
Financial Post, CN Strike Forces Nutrien to Temporarily Close its Largest Potash Mine. https://business.financialpost.com/commodities/agriculture/canadas-nutrien-to-temporarily-shut-its-largest-potash-mine-due-to-rail-strike-2