Author: Chris Demetroulis
That cooktop for your new kitchen was supposed to be here last February, and you're still waiting. You need a part to repair your hot water heater, and it's stuck on a ship waiting to be unloaded for weeks. The semiconductor chip that manufacturers need is backlogged until well into 2022. Key U.S. shipping ports have weeks-long backlogs of cargo ships waiting to dock and be unloaded. You don't have to be neck-deep in the transportation and logistics industry to understand that the supply chain — the system and network that makes and delivers goods and services around the world — is in a major state of disruption. The dependent network of manufacturers and their suppliers; the cargo ships and containers, trains and trucks that deliver them; the warehouses that house inventory; and the stores that sell product are under nearly unprecedented stress. What exactly is going wrong, and how did we get here? And more importantly, how will manufacturers, transportation companies, and suppliers right the proverbial ship? Read on.
How did we get here?
The disruptions began when the pandemic led to shut downs of key manufacturing capacity in early 2020. China, South Korea, Taiwan, Germany and others were hit hard by COVID-19 cases and forced shut downs or reduced capacity that lasted for weeks or, in some cases, months. Shipping companies, in turn, reduced their schedules in anticipation of reduced consumer goods spending — a logical but ultimately unhelpful strategy. Without being able to go out and spend on restaurants, sporting events and travel, consumer spending shifted heavily to goods. Post-pandemic orders for goods exceeded 2019 numbers by an average of 17% (Slate, 2021), in direct contradiction of shipping companies' expectations of reduced demand. Consumers continued to purchase goods, but purchased considerably fewer services during the pandemic (Slate, 2021). This imbalance in consumer spending has put enormous stress on the supply chain, driving a global imbalance of products and equipment. Think: Everyone wanted an exercise bike, but few needed new dress clothes. Hotels were empty, but everyone wanted a new, "hygge" duvet cover.
Irregular container traffic exacerbated challenges of equipment availability problems. Containers full of, for example, personal protective equipment, were suddenly being sent to areas that historically don't send much product back to China. Masks and hospital gowns were sent in huge volumes to regions such as West Africa and South Asia and many remain there to this day (New York Times, 2021). Of those containers that did make the roundtrip, many were sent back to Asia empty due to high demand for containers, further driving up shipping costs. At the same time, U.S. exports to China and other Asian countries decreased due to new administration trade policies. That export imbalance left some U.S. product stranded. The lack of containers exacerbated the problem for stalled U.S. product shipments back to China.
How consumer habits are adding strain
How have changing consumer habits exposed the supply chain to new strain? Historically, global supply chains are only designed to operate at peak capacity for a few months of the year, and ordinarily, that peak time constitutes the lead-up to the holidays. After this peak period, there typically is an off-peak time, during which ports, ground transportation and warehouses work through the backlog of goods. In essence, they catch up and prepare for the next peak season. But, the pandemic caused a 19-month "peak-season" with no end in sight. This is good news for the economy, but bad news for the increasingly strained supply chain. What are consumers buying? Spending has not increased evenly in all categories. For instance, industrial goods orders have increased. Soaps, cosmetics and other consumer goods have decreased (Slate, 2021). What does all this mean for the supply chain? As imbalances in consumer spending continue into 2022, we expect these imbalances to drive further supply chain challenges well into 2022. In short, we don't yet see a light at the end of the tunnel.
Results of a disrupted supply chain
As a consequence of the supply chain disruption ripples, shipping costs have spiraled. The cost per container to ship goods by ocean has gone from $2,000 to $25,000 per container over the course of six months (Bloomberg News, 2021). The staggering price increases are creating more competition to negotiate goods onto a ship, and increasing costs to consumers. Companies are looking for other modes of shipping goods as an alternative, such as chartered air freight conveyance. This more costly transport method also drives up prices for the end consumer. Costs to transport goods over land are also on the rise, due to a number of factors including new energy policies. As with other shipping costs, these too are passed directly on to the consumer.
What's ahead?
There are additional factors at play that could continue to worsen supply chain problems. These include worker shortages, which are made more acute by continued stay-at home orders due to state and local regulations. Vaccine and other governmental mandates impacting workers, if implemented, may also layer on challenges to worker shortages in certain industries, such as transportation. To a lesser extent, government assistance may also complicate worker shortages. The risks and challenges of the U.S. economy's deep reliance on foreign supply chains — primarily China — for medical supplies, pharmaceutical, automotive and technology products came into sharp focus during the pandemic. This reliance is unlikely to change anytime soon, but there is some momentum and policy attention to diversifying the supply chain and manufacturing more in the U.S., particularly goods such as semiconductors and batteries. Of course, this isn't something that can happen overnight. Moreover, the U.S. lacks the capacity and infrastructure to manufacture in mass. There isn't a quick fix to supply chain woes. Since there are many factors that affect the supply chain, it is important to consistently evaluate your company's exposure to the various risks facing to your business. By continuing to diversify your business and address supply chain risks, you can lessen the risk of costly disruption to your business.
5 questions to ask about your own supply chain
Given the significant supply chain disruption that began in early 2020 and shows few signs of getting back to normal, it's a good idea to examine your organization's current supply chain risks and consider whether you can reduce risk or strengthen operations for an agile, effective supply chain going forward.
- How is my organization mitigating external supply chain risk?
- Do we have the right mix of suppliers geographically to prevent over-reliance on one region in the event of business interruption?
- How is my organization planning to minimize worker shortages or flex our talent pool?
- Do we have adequate business interruption coverage?
- What can we do to add agility and flexibility to our operations and supply chain?
Sources
Goodman, Peter. (2021, October 22) Retrieved from New York Times: https://www.nytimes.com/2021/10/22/business/shortages-supply-chain.html
Oak, Eric. (2021, October 11). S&P Global Market Intelligence. Retrieved from S&P Global: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/september-shows-slower-import-growth-holiday-trends-emerge-66975050
Murray, Brendan. (2021, September 17). Bloomberg News. Retrieved from https://www.bloomberg. com/professional/blog/supply-chain-hell-turns-every-shipping-container-into-a-fight/
Weissmann, J. (2021, October 25). Retrieved from Slate: https://slate.com/business/2021/10/supply-chain-shortages-retail-united-states-explained.html
