I would be very surprised if you wouldn’t have heard about Supply Chain Crises by now. We all know that Covid has impacted world in a large scale, but not everyone knows how savvier the situation really is.
And a lot of it is connected to the global supply chain and to how we do business worldwide. If we are not to act fast, we might face global economic crises way worse than in 2008. Are we ready to let go of the comfort that we have gotten oh so used to? In this article I will outline the business/supply chain problems that world is facing today and how we got here.
WHERE ARE WE AT?
The impacts from Hurricane Ida on the petrochemical industry has put additional stress on an already fragile supply chain. Logistics with intermodal containers and motor carriers is a challenge for planning deliveries of materials.
Companies and suppliers deals with an unprecedented number of hurdles to meet increasing demand.Record-long raw materials lead times, continued shortages of critical materials, rising commodities prices and difficulties in transporting products are impacting all segments of the manufacturing economy.
Pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential.
Global supply chains are still recovering from the whiplash caused by the city lockdowns governments imposed in 2020 to contain spread of COVID-19. Initially, lockdowns in China shuttered factories, which stalled much of the supply side in global shipping. Then lockdowns prompted a surge in demand, as people ordered electronics and gadgets to facilitate working from home.
PORTS ARE BEING CHALENGED
Many other scattered disruptions—such as China briefly closing shipping ports in August and June to prevent a COVID outbreak, and The United States, which suffers from a shortage of truck drivers needed to unload goods at the port. It all has hampered the shipping industry’s ability to address issues in its shipping schedules.
According to Bloomberg, 77% of the world’s ports are experiencing abnormally long turnaround times. Scores of ships remain anchored off the coast of U.S. and Chinese ports, idle, and waiting for space to dock.
The turmoil has pumped seaborne freight costs to record highs, rising over 300% year on year as of August, encouraging some exporters to hold off on shipping goods with low profit margins. Shipping costs are abating, roughly halving between September and October, but docks won’t be able to work through the logjam of ships anytime soon.
Companies and their supply chains struggle to meet demand due to difficulties in hiring and a clear cycle of labor turnover, as workers opt for more attractive job opportunities. Disruptions from COVID-19, primarily in Southeast Asia, continue to have an impact on many industry sectors. Demand remains at strong levels, despite increasing prices
WHAT USED TO WORK, NO LONGER WILL
The most companies have chosen to manufacture the goods in low-income countries to save money on production and labor costs. Then later ship the goods to the required destinations. And it has worked well – until now. With the rise of a pandemic this model now gives us a thousand new problems that non would have foreseen a couple of years back.
For example, the demand has increased to an even more abnormal extant. The supply curve has not only been failing to match the demand curve, but it has also gone the opposite way. Long story short- it’s a perfect storm.
REAL TIME DATA HAS NEVER BEEN MORE CRUCIAL
The data on supply and demand has been fluctuating daily, what is right one day, might look completely different the next day! For example, the trade data. Within the last 2 years it has experienced first 13% decrease in imports and then 21% increase, making the numbers higher than before. That might not seem huge in a financial regard, it is however an extreme change in the realm of supply chain. Hence the crisis right now. Same with GDP, the fluctuation has been massive. That all to say that real time data has never been more crucial.
Expectations are that the inflation will increase up till 10-15 % within the near future. Which means that the smaller/ medium size businesses will most likely not survive the change and the bigger, already leading companies, will take over the difference in market shares. The world hasn’t seen the inflation level that high since 2008, and not even then. That means we are facing economic crises like never before, alongside with the pandemic.
TOO MUCH STOCK
One more problem of the current supply chain is the that over 50% of shipments right now are of empty containers. Since shipment process takes so much time, warehouses are getting filled with stock, just waiting there to be distributed. And with warehouses being completely full, the production must come to at stop at some point. Which eventually will lead to a shortage of goods.
The warehouse capacity currently is used all the way to 98%. Let me say that again – the total warehouse capacity across the globe is being utilized 98%! Which has also costed the warehouse rent rise almost by 10% in period of 2021. It is more expensive to rent and make warehouses. And since we have no warehouse space to spare, there will only be longer and longer wait times on products. Unless we lower the amount of product range.
YET WE ARE SHORT OF EVERYTHING
In some parts, sectors, geographies we have large shortages for manufacturing goods. And it is not even due to the pandemic. Pandemic complications are like a cherry on top of that. One of the high priority shortages in my opinion is the power shortage in the factories and labor shortages (mass resignation in USA September).
Many electronic components and assemblies shortages showing up (due to) port issues, lack of containers and other issues. Problematic, but nothing completely shut down yet.
Labor availability is one of the most significant supply challenges for companies, with raw materials just behind. Plastic resin, polyurethanes, small-volume steel purchases and electronics, carbon steel. Traditional in-house machining now has to be outsourced due to a lack of experienced machinists.
The shortage of goods has created a panic buying phenomenal which is not going to go away. It is a vicious circle. More people panic buy, more demand grows, higher the shortage increases and there we go again. We just can’t get from tier 3 to marketplace rapidly enough.
Tier 1 – Partners that you directly conduct business with
Tier 2 – Where your Tier 1 suppliers get their materials
Tier 3 – One step further removed from a final product and typically work in raw materials
WHAT’S THE PLAN THEN?
As for now, there are no agreed plan to fix this problem. One of the solutions is to rise the inflation (like mentioned above) on goods (especially the manufacturing goods) since the supply is low on capacity. But that will only solve the financial end of the production companies. But for consumers it will increase the strain. Another option is to turn manufacturing fully local. That means switching to local suppliers, creating production sites closer to the consumer, to eliminate the problem of the long delivery wait. If we agree to do that in a global range, that will solve the supply and demand imbalance, but will also increase the production costs enormously and therefore also the prices of the product.
Alongside that it will also create new problems: the raw resource uneven global placement, decrease in international trade. Complete restructuring of global way of doing business as well as the fact that it might take a long time to adapt the new method. This would also result in extreme increase of the labor shortage that we already face worldwide.
But we already knew that. So, what is the new optimal solution that we can implement immediately? It seems like no matter what all options result in whack-a-mole. You fix one problem, but that just creates 10 new problems. Perhaps, we are forced to take consumer choice out of the consideration? As it right now, supply capacity simply can’t keep up with the consumer’ demand, even without the current shipping issues. We don’t have the resources to continue consuming the way we have till now.
OKAY, LETS WRAP IT UP
The situation right now is pretty grim and the predictions says that the worst is yet to come. That’s why we have to talk about it. In order to come up with solutions of how to come back from this, we need to start talking. Put our heads together and change what has to be changed. I have done my share of research and talked with great minds in supply chain industry and I believe we can dig ourselves out of this mess. We just might need to change the world first. But on that, next time! Are you intrigued?
WE HAVE TO GET USED TO THE FACT THAT SUPPLY CHAIN WILL NOT GET BACK TO ‘NORMAL’ OR TO WHAT WE ARE USED TO. IT IS TIME TO BUILD NEW, MORE DURABLE AND EFFICIENT SUPPLY CHAIN. AND WITH THAT CHANGE ALSO THE TYPICAL BUSINESS MODEL THAT WE ARE SO USED TO.