Disruptions in supply chains continue to be a major issue as the world recovers from the COVID-19 pandemic. However, the pandemic is not the sole issue anymore with the Ukraine war, chip crisis, Chinese lockdowns, and many more other factors coming into play, supply lines are as unreliable as they can get.
The global overview of the supply chains in the past 6 months
From the sourcing of raw materials to the final destination of the end customer, the pandemic has affected all parts of supply chains. However, there are so many other drivers of this crisis that we cannot classify COVID-19 to be a major one anymore.
The disruptions stemmed by the pandemic are continuing to affect all regions of the world as flows of consumer goods into key markets such as Europe, South East Asia, North America, and India are restricted as a consequence of major ports and airports shutting down (Mainly in US, China, and South Korea). These disruptions are causing a great impact to supply chains as goods are piling up in warehouses which ultimately impacts ships heading to the ports through slowing down or diversion as they arrive. Hence, difficulties arise for businesses limiting their access to import products and restocking their inventories.
While the bottleneck in the Longbeach port in Los Angeles is easing, the improvement does not necessarily lead to a solution. The port in L.A. was under high pressure due to the overwhelming number of ships arriving. Unloadings were taking up to two weeks which is equivalent to making the trip to China from the port, meaning the vessel is ultimately losing the time needed for the trip back. And currently, the pressure has moved from the US to China. Throughput levels of containers have dropped by 25% month-on-month and total cargos shipped dropped by 30% in Shanghai. According to ING, stationary times for containers are soaring caused by the factories closing down in the region and difficulties in inland connections. Even when a cargo container is cleared, it is taking, on average, 100 days for the goods to reach the ports of the US and the UK. Below you can see a graph illustrating the share of ships waiting at important global ports as a percentage of global capacity. The graph clearly shows how the pressure has shifted from the US ports to China.
Input and labor shortages can also be considered to further exacerbate the current situation. Germany, aside from Europe in general and the US, is in desperate need of truck drivers with potential workforce immigration being granted permits and eventually citizenships since reports show a shortage of 60-80,000 HGV drivers. In addition to that, sharply increasing prices of commodities already make it a challenge for manufacturers to calculate and make accurate predictions for the year in order to commit to prices for deliveries. According to Kiel Trade Indicator, 11% of goods globally are waiting in container ships, with most of those located in China (May 2022). As a consequence of these factors, average transport rates remain at elevated levels, contributing to the already elevated prices for producers and consumers, on top of the rallying energy prices. The graph below represents the percentage of goods waiting on container ships globally;
We are witnessing perhaps permanent shifts in the trade flow of goods which is most importantly caused by the war in Ukraine. Trade flows are already reshaping major changes are expected in the permanent supply lines as time goes on as market players who used to make purchases from Russia are currently in search of alternatives. Other countries may step in and take advantage of the elevated prices, creating new supply lines and making them efficient enough to become major ones. In grains and energy commodities, there are already re-routing attempts as disruptions in the Black Sea continue. For example, food prices have risen massively over the past months with April having a 30% increase from that time last year, and agricultural exporters can take advantage of this situation and increase their export capacities. India was one to do so however, the rising prices are also a conclusion of a shortage in supplies and they had to ban wheat exports to have sufficient supply for their population. The graph below represents the reliability scale of sea transport schedule reliability over time;
Studies show that primary goods such as agricultural commodities can be easily substituted or redirected, however, that is not the case for manufacturing supply chains and energy imports as they are more hesitant to relocate, making it more difficult to make these substitutions.
What is predicted for the future, easing or stagnation?
The world is still facing under-capacity problems, dominated by the supply side. Looking at the global supply chain pressure index, we are slightly below the historically high levels. There is considerable easing in pressure levels, yet, “back to normal” still seems far away. The easing is caused by the softened demand from China, Europe, and the US as industries are also disrupted by supply chains and the ever-ongoing chip crisis. Nevertheless, the existing backlogs are sufficient to keep the supply chains under high pressure for the second half of this year. Below you can see the Global Supply Chain Pressure Index (taken from Federal Reserve Bank of New York, last updated June 2022);
Self-sufficiency is becoming a more and more debated topic, as trade dependence is bringing tremendous amounts of difficulties with it. Globalization has benefited this world, economies, companies, and individuals to extents that cannot be emphasized enough, however, it seems that regions do need a backup to suffice their own population’s needs. Although in the short term, the supply chain pressures are likely to remain elevated, that may not be the case in the long term. The lack of self-sufficiency and the environmental impacts of global trade will push governments and companies to shift to more regional operations seeking to mitigate the risks of potential world events causing further disruptions and decrease their emissions.
Leaders of governments and industries are in process of strategy definition and improving their resilience in these unprecedented times by boosting domestic capabilities in order to decrease their relative dependence on global supply chains. Companies must work on re-evaluating their supply chain flows, storage capacities, distance margins, and many other factors to mitigate the risks that come with the unpredictable circumstances of today.
Manufacturers are more interested in risk factors as the key decision point of their operations rather than their prices, leaving behind the days of buffering inconsistencies in supplies with excessive inventories at low-cost purchases.
There are several potential considerations that we have found for companies to tackle these key challenges that the world is facing;
- Flexible and adaptable operations can overcome and mitigate the damages of unpredictable events such as the pandemic and war, to overcome the difficulties in trade flows.
- Increasing the use and investment in technologies. Although this may be a contrary action to the rising unemployment, it is certainly very beneficial to the efficiency and reliability of company operations.
- Supply chain networks and fleet management must be capable of responding to the changes in the world. Alternative routes, sales channels, and production lines must be set before crises occur to disrupt operations.
These are unprecedented times for both governments and the private sector. Changes are necessary, dependence on foreign lands and even far distances domestically can cause significant issues. We believe that this is the start of a new era in supply chain management where the systems are going to be more flexible and adaptive to the circumstance of the moment because that is what the past years have shown us, the existing chains and strategies are not as sustainable in turbulent times.
References
- Global Supply Chain Pressure Index. (n.d.). Newyorkfed.org. https://www.newyorkfed.org/research/policy/gscpi#/interactive
- McLoughlin, B. (2022, May 24). Supply chain disruption is far from over | HERE. http://Www.here.com. https://www.here.com/company/blog/supply-chain-disruption-2022
- Patterson, I. F., Joanna Konings, Rico Luman, Warren. (2022, May 13). Supply chain pressure to persist through 2022, leading to permanent changes in trade. ING Think. https://think.ing.com/articles/supply-chain-pressure-to-persist-through-2022
- Rockefeller, B. (2022, May 18). Global Supply Chain Pressure Index: May 2022 Update. Liberty Street Economics. https://libertystreeteconomics.newyorkfed.org/2022/05/global-supply-chain-pressure-index-may-2022-update/
- Six key trends impacting global supply chains in 2022 – KPMG Singapore. (2022, March 24). KPMG. https://home.kpmg/sg/en/home/insights/2022/03/six-key-trends-impacting-global-supply-chains-in-2022.html
