Global supply networks will continue to struggle, well into 2022
COVID-19 and the severely disrupted logistics networks that followed have taken many manufacturers by surprise. What can we learn from this to better shape our future Supply Chains?
Over the past 18 months, many companies have had to drastically revise their sales forecasts due to the shutdowns in 2020. Rebooting globalized value chains has proven to be a daunting challenge, which has generated continuing capacity issues for producers and distributors across the globe. Transportation networks were also severely disrupted by a series of stop-and-starts during the pandemic lockdowns. Add to this the logistical upheaval caused by the Suez Canal incident and the faster-than-expected economic recovery, and it was only a matter of time before the world saw its Supply Chains severely disrupted.
Rising logistics costs
COVID-19 caused huge fluctuations in demand. The resulting disruptions in Supply Chains have put us in a situation of continuous logistical imbalance. Despite coordination efforts, delays at ports and inland distribution networks led to ever-increasing lead times, and logistics costs continued to rise.
Meanwhile, Western retailers and manufacturers are rushing to replenish stocks depleted during the pandemic. This will only increase demand for transport capacity. When demand exceeds available capacity, prices will inevitably rise as well. That is exactly what we are seeing happen. The Drewry World Container Index (WCI) – a measure of ocean freight rates (containers) on seven major sea routes – shows that container rates have increased by as much as 350% compared to pre-pandemic rates.
Unprecedented demand fluctuations and delivery delays
Shipment delays and a faster-than-expected rebound in global demand meant distributors and retailers wanted to get their shelves filled at all costs. This is partly a panic response, causing further disruption in global value chains. Key component manufacturers and basic raw material suppliers now face the incredible challenge of coping with unprecedented demand fluctuations and massive delivery delays.
Also, trade disputes between the US and China have led to a huge increase in demand from various technology sectors and severe supply shortages within the semiconductor and processor industries. For example, the huge demand for ubiquitous chips and microprocessors, combined with long delivery delays, is disrupting the production schedules of many consumer technology products, ranging from cars to electronic devices.
Huge economic impact
Car factories are now being forced to close for the second year in a row, last year because of COVID-19 lockdowns, now because of the disrupted logistics networks and an acute shortage of critical components. With no clear solution in sight, the industry is likely to produce around 3.9 million fewer vehicles than originally planned for 2021. The shortage of chips not only constrains production of current models but could also lead to delays in the rollout of some products in 2022.
The strain on global value chains is causing continued price increases in many parts of the business community, not just car manufacturers, but also suppliers of electronics, wood and metal are seeing severe imbalances in their global networks. This is driving up inflation around the world. Rising logistics costs and supply uncertainty are clear symptoms of a globalized supply network that failed to meet the challenges of 2020 and 2021.
Reshoring for greater resilience
Meanwhile, on the political level, a number of important initiatives have been taken which will influence the configuration of future Supply Chains. For example, in February, Joe Biden launched his Supply Chain Executive Order aimed at improving supplies to the US for four critical product groups: batteries, key minerals and ores, semiconductors, and pharmaceuticals. In June, the EU made public the details of its carbon border tax. These (green) fiscal instruments will play an important role in the gradual redesign of global networks.
If COVID-19 has taught us anything, it’s that it’s necessary to review Supply Chains at a strategic level. The longer a Supply Chain is, the more susceptible it becomes to disruption. Manufacturers dependent on overseas suppliers are already actively seeking partners closer to home. They want to spread the risk. Moreover, they are confronted with a number of global macroeconomic and political drivers. Shorter chains – with the necessary fallback planning – minimize the risk of costly delays on production lines. This also reduces lead times. In that context, rapidly evolving technological solutions, digitization, and automation with the help of robotics, as well as sustainability goals, can be important levers for active reshoring programs.