By: Faheem Mohammed
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Supply Chain disruptions, geo-political conflicts and lingering effects of Covid variants all converge to challenge the recovery process by businesses embroiled in economic recessionary environments compounded by high demand.
What is driving this scenario, and what does the future look like in the face of this environment? GCMAM explores this issue with Strategy Consultant & Business School Faculty Faheem Mohammed.
Businesses in the global marketplace have been battered over the past 2 years from a never-ending succession of challenges. And the obstacles have been as diverse as they have been constant.
The steady march deeper into global trade continued into 2020, barring attempts at reversing the China-centric manufacturing model championed by Trump and others seeking increased jobs in their economy. And the supply chain was blossoming. Gradual increases in online purchases (to date still only accounting for 15% of global retail trade) meant scalable, manageable growth.
The entire chain proved willing participants in the order. From Merge-in-Transit structures and inventory-reduction measures, to flexible partnerships and technology integration, the focus on efficiency and cost-reductions were consistent in its pursuit and its trend.
That was until the Covid pandemic. The initial disruption to Chinese manufacturing, followed by its spread throughout the world, paled in comparison to the shock of the lockdown and quarantine restrictions adopted throughout. From then to now, we have seen a number of challenges arise which we forced to grapple with.
Spiked demand from consumer hoarding of key goods and a shift to online shopping was an immediate and recurring feature, from toilet paper (symbolically), followed by masks and sanitizers, computing devices and durables, through to baby formula and fuel in the more recent iterations. Datassembly reported stock-outs of grocery items to average 31% in April, as high as 40% in some states of the US. And alongside these were higher prices for available stock: 9% on grocery items in March y.o.y., 18% on baby formula, 56% on eggs, in some instances.
Supply to meet the increased demand was constrained (of course) by factories having to shutter their facilities to comply with lockdown requirements. And in the face of scarcity, prices begin to rise, as they did. Just to be sure the situation was complex enough, the need for increased safety demands and associated costs, and delays, of cargo handling and sanitization was added to create the right conditions for bottlenecks and delays in the shipping chain. As if to crystallize these challenges into a physical form everyone can appreciate, the Evergreen’s blockage of the Suez Canal for a week (which disrupted global trade for months) impacted 400 ships moving in both directions.
For businesses, this meant not only setting up / developing the online distribution and sales channels on the customer end, but also finding suppliers and securing orders (at volatile costs) – and getting it landed on the procurement side, all of course while having to manage staffing and (in most cases new) work-from-home arrangements. What this translated into was disruptions throughout not only the operating value chain within organisations, but upstream along the entire supply chain as well – a healthy dose of stress for anyone involved.
Factor Market Upheavals
Not surprisingly, labor issues began to emerge to add to the challenges faced. The labor market was assailed by the competing effects of provision of grants and other government benefits to persons affected by salary-loss; the conveniences of working from home; the scare of infection on re-entering the workplace; persons pursuing alternative / ancillary revenue sources; or persons having to deal with unstable family issues or wading into substance-abuse territory; to the widespread rejection of hastily developed vaccination mandates, we saw the labor market seethe in manufacturing and supply chain sectors. Anti-vaccine rallies and convoys throughout Europe and North America became visible and disruptive, further limiting throughput and increasing lag times. Add to this the shift in manufacturing to nearshore or onshore destinations, and the labor market shortage is set to perpetuate in major destinations globally.
Labor shortages, and the accompanying delays in moving cargo through the ports and other key points, had the effect of restricting the availability of containers with shippers having to pay top dollar to secure sufficient capacity, even while dealing with increases in carrier rates, in some cases by as much as 4-5 times contract rates. By one estimate, shipping costs have increased by a factor of 10 in the past 2 years (and as a result eroding the cost benefits of offshore manufacturing).
To ice the cake, Russia’s military action in Ukraine, regional instability and the resulting imposition of restrictions and sanctions on products meant restricted fuel and wheat supply, and increased costs for available stock. With both being factor inputs into many industries globally, and these happening alongside the resurgence of lockdowns in some countries from the new Omicron variant, meant even more disruption to production and supply.
The mismatch of soaring consumer demand and reduced supply, constrained capacity in containers and at key points in the supply chain, labor and raw material shortages, fuel price increases and on-again off-again lockdown restrictions in different countries all contributed to increasing costs today.
Generally, price and provision of goods would be a function of raw materials, labor and logistics. And although the supply chain issues are healing – slowly – in today’s context, the increase in costs and shortages across all three components suggests that effects would linger for some time to come – throughout the remainder of the year, according to projections across most economies.
Response by Businesses
How do we respond in the face of this plethora of issues? Much of the conversations have focused at the level of the economy or country strategy, with a skew to socio-political and globalization strategy considerations. At the firm level, we have seen – and are seeing, firms adopt strategies to ensure their logistics remain robust and effective, even at the expense of time and cost efficiencies. These of course would be contingent on the time view of operations.
Stock inventory: Some firms are reversing the minimization of inventory, and building up stocks of inventory to meet demand. Additional warehousing and handling costs would be second to having products available to sell.
Diversify suppliers: With the vulnerability to which we were exposed over the past two years, some firms are seeking to diversify their suppliers to mitigate the risk of reliance, and ensure their supply chain can continue to respond to changes in factors.
Expand production locations / Onshoring: a seemingly longer-term trend is the shifting or extension of production capacity to alternative locations – developing economies with low wages or a different risk profile from established players. Tesla, for example is exploring Indonesia as one of its production centres. In a similar vein, Ford is seeking to shift battery production to USA.
What these mean for the global supply chain in the medium to long terms are difficult to predict. The implications of economic and political jousting, the individual effects and interplay of technology and labor, emergent supply models and methods towards net-zero impacts, all would feature in what the resulting environment would look like. What we can be sure of is, as Katherine Tai, the U.S. trade representative, said at the Milken Institute Global Conference, “A more resilient, a stronger, more sustainable future is one that is going to look different and feel different.”
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