Fulfillment IQ Team
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Did you know that in 2021, supply chain disruptions cost businesses worldwide an average of $184 million annually? This number is even higher in the United States, where the estimated average annual cost shot up to $228 million. And this is just the surface of the supply chain crisis we are currently facing.
It’s not just about the cost but also the opportunity cost. Think about it; $184 million dollars could have been spent by businesses on product development, research, marketing and other core functions. To top it off, the supply chain snarls brought about by Covid-19 have only added to the economic hardships.
If you have been keeping up with the news, you might be aware of the shipping containers stuck at the West Coast ports. You might have heard of how there’s a shortage of truckers in the logistics industry. You might have also heard how the prices (of everything) are rising. Now, you might be tempted to blame it all on Covid-19 but that’s not the root of the problem. Like many other issues, the pandemic only exacerbated the existing flaws in supply chain and logistics.
And at the heart of all this, is the biggest problem we are facing – a shortage of goods.
Supply Chain Crisis Phase #1: Pre-Pandemic
The Downfall of Outsourcing
The problems in the supply chain and logistics industry can be traced back to pre-pandemic times when companies in North America outsourced production of several common, low-cost goods to China and other Asian countries with low labor wages. By the early 1970s, the U.S. had outsourced production and assembly of more complex products too. Although most U.S. imports come from China; Mexico, Canada and other European and Asian countries are also important links (and sources of goods) for the U.S.
Such a complex web of supply chain requires companies to employ a combination of trucks, planes, trains, ships and warehouses to transport and then store inventory. With the addition of so many layers to the production, assembly and distribution process, supply chain and logistics has grown more complicated over time.
The Issues with Lean Manufacturing
But the complicated chain is not the only issue. Around the same time in the 1970s, the concept of Lean Manufacturing emerged in the production plants of the automobile manufacturer, Toyota. The concept is also called Just-in-Time Manufacturing or the Toyota Production System. If you don’t know what any of these terms, don’t worry; we’ll break it down for you.
Just-in-Time manufacturing is a production philosophy which focuses on the complete elimination of waste, whether it is excessive inventory or wasteful activities. Although there are several principles that govern just-in-time manufacturing, companies mostly zeroed on one – eliminating excessive inventory.
In a bid to cut costs, companies began to reduce stock levels drastically. They didn’t account for surges in demand as they were relying on the seamless functioning of supply chain and logistics. And now, this is the second link in the chain that sent the dominoes crashing.
The U.S.- China Trade War
Back in 2019, the U.S. Trump administration imposed heavy tariffs on $250 billion worth of goods imported from China. The latter retaliated by imposing tariffs on $110 billion worth of American products. The goods primarily affected by the tariffs were telecommunication equipment, computer circuit boards, processing units, metal parts, processing units, computer parts and more. Suffice to say, the U.S.- China trade war led to a shortage of critical components required in the manufacturing of consumer durable goods in the States.
The U.S.-China trade war created an opportunity for other Southeast Asian countries, especially Vietnam, and Mexico to become the main exporters to the U.S.
Supply Chain Crisis Phase #2: The Effects of the Pandemic
Then came the Covid-19 pandemic. Many companies, especially in Asia (production hubs such as China, Korea, Taiwan, Vietnam) and Europe (industrial giants like Germany) where most of the goods are produced, were forced to shut down to reduce the spread of the virus. While in other companies, operations were affected as employees were falling sick. Needless to say, this caused a production slowdown. Companies also began laying off employees at an alarming rate. Result? The spending power of these individuals dropped.
Responding to the waning production levels and the decreasing number of people with dollars to shop, shipping companies cut their schedules as they anticipated a significant drop in demand to move goods around the world. If you haven’t guessed it yet, this was another mistake that sent the house of cards tumbling.
The Increase in Demand
As anticipated, spending on restaurant meals, travelling and other similar experiences dwindled but the demand for electronics, gym equipment, home appliances and office furniture shot up as people all over the world resorted to online shopping. The pandemic pushed people away from in-store, and towards online shopping. The rise in demand was further encouraged by the stimulus checks and recovery measures that the government implemented. The demand forecasts that kept the wheels of production running predictably and accurately weren’t of use anymore.
Demand was at an all-time high, but the well-oiled supply chain machine that helped fulfil it, was breaking down link by link. In early 2020, as the pandemic ravaged the world, the demand for PPE kits (personal protection equipment kits) increased across all countries. China, the biggest manufacturer and exporter of PPE kits, began sending ships filled with PPE kits to all corners of the world including the ones it didn’t have much trade relations with. These ships, after they were unloaded, lay empty as these countries didn’t have many goods to send back to China.
As sending back empty ships was expensive, shipping costs increased too. It got steadily difficult for companies to find space on cargo vessels or find one that fit their budget. However, around this time (Q2 of year 2020), China slowly but surely began to regain its pace of production. It began pumping out goods – all the electronics, appliances and equipment consumers in North America were demanding – at breakneck speed. The outcome? Although sufficient goods were produced to meet the consumer demand, there was a dearth of shipping containers in China to export the goods to the people who demanded it.
The Shipping Container Problem
Eventually, as China got its hands on an adequate number of container ships to export goods, another supply chain storm began brewing at the sea. The number of container ships travelling to and anchored at the Los Angeles and Long Beach ports – two of the biggest and busiest ports in the U.S. – began increasing. Amidst all this, Ever Given, one of the largest container ships in the world, got stuck in the Suez Canal on March 23, 2021 resulting in a 6-day global delay in the movement of more than hundreds of container ships.
What’s more, the incident froze up $10 billion in trade a day. Some of the ships were rerouted, thus increasing the time it would take them to reach their destination. So finally, all these issues piled up until they presented themselves as a logjam of container ships at the U.S. West Coast ports. Ships had to wait in queues of up to 100 vessels or more for 3 weeks on average to be unloaded.
Labor & Talent Shortage
Now you might be wondering, why couldn’t these ships be unloaded at other ports? Well, the answer to the question lies in the fact that over the last two decades, international shipping has been relying more and more on extremely big ships. And these big ships cannot fit at the other, smaller West Coast ports.
And now let’s come to the question of why oh why was it taking so long to unload these ships? To state it simply and succinctly; there is a shortage of truck drivers and warehouse workers in the U.S. Although this problem started earlier, it was accelerated by the pandemic.
A host of reasons – such as aging demographics that is retiring from the workforce, difficulties in recruiting and retaining female drivers, age restrictions, pay issues and infrastructure issues – contributed to the shortage of truck drivers. And to be fair, the quarantine and vaccination mandates as well as closure of trucking schools imposed due to Covid-19 didn’t help either. The American Trucking Association estimates that there was a shortage of 61,500 truck drivers before the pandemic and by the end of October 2021, this number stood at 80,000 – that’s a 30% increase.
No wonder goods are not reaching retail shelves on time!
In addition to labor, supply chain is facing a shortage of talent too. Forbes reported that the retirement of baby boomers in key positions, the requirement for changing skill set among new recruits, outdated hiring process and cost-cutting measures have all resulted in a shortage of supply chain pros needed to manage this complicated web of disruptions.
The Shortage of Chassis
The shortage is not limited to supply chain labor and talent alone. Another problem overwhelming the supply chain is the shortage of chassis – trucking trailers used to ferry containers from dockside terminals – at the Los Angeles and Long Beach ports. Normally, the 115,00 chassis available at the ports are enough to move thousands of containers. However, the heavy influx of imports has created an imbalance. The chassis shortage coupled with a shortage of dockworkers and truck drivers at ports has put a major spanner in the movement of goods from the ports.
The Wrath of Nature
And if shortages of labor and equipment wasn’t enough, supply chain issues were further worsened by natural disasters occurring all over the world. In 2020, 22 such events resulted in $96 billion damages. Take a moment to digest that!
The pandemic, combined with natural disasters, proved to be the cocktail mix that magnified the disruptions to the supply chain. The wildfires that ravaged California, the tornadoes that affected the Southeast and the Atlantic hurricanes all wreaked havoc on logistics.
Similarly, the floods in Canada, Europe and China have all contributed towards the issues in supply chain.
Supply Chain Crisis Phase 3: Beyond the Pandemic
The Growing Problems in China
China was able to come out victorious in the battle with Covid-19 largely due to the boom in its manufacturing and export of goods. However, as of September 2021, the country is facing a growing power crunch. As a result, there have been blackouts in households while factories have been forced to cut production despite growing demand for goods globally.
The power crunch is majorly driven by two factors – the rising prices of energy as well as the government’s mandate to reduce carbon emissions. Confronted by these two forces, Chinese industries have limited their energy consumption and hence, cut production.
Now we are inevitably experiencing a delay in the supply of goods and essential components such as computer chips.
The Russia-Ukraine War
The Russia-Ukraine war is adding to the strains on an already battered global supply chain. The fighting has shut down factories, blocked transportation, caused shortages around the world and resulted in a steep increase in inflation.
Food prices have already skyrocketed. As Ukraine and Russia together account for a third of the world’s wheat exports, 19% of its corn exports and 80% of the world’s sunflower oil, countries across the globe will experience soaring food prices and a shortage of these commodities. Moreover, the majority of these items are transported through the Black Sea which is currently closed, adding to the food shortage concerns.
Russia and Ukraine account for over 40% of the world’s natural gas supply. And the war has only managed to send already high fuel prices even higher. The result? Transportation cost is increasing globally. Moreover, 22 containers are clogging the Russian-controlled Kerch Strait. Shipping companies like Maersk are suspending shipments to and from Russia. Asia and Europe have had to reroute flights around the Russian airspace. All of this is adding to the hike in freight and shipping costs worldwide.
Not only food and natural gas, there will be a shortage of essential metals like palladium, nickel and cobalt which are mined in Russia. These metals are used in the automotive sector as well in batteries, semiconductors and other components. With the war, companies are having issues sourcing these materials. especially palladium. Volkswagen had to shut down its production plants in eastern Germany as it couldn’t get wiring systems produced in Ukraine.
When Will Supply Chain Issues End?
Although port congestion is easing and the scarcity of goods seemed to be resolving at the start of 2022, supply chain issues are far from over. Especially as the latest turn of events has sent fuel prices skyrocketing and caused a shutdown of major shipping routes. If experts are to be believed, these issues will take months, or even years to resolve.
How to Fix Supply Chain Issues?
Now that we have a summarized overview of the current supply chain scenario, it might not seem that difficult to come up with ideas to solve this problem. Some of the obvious ones that stand out include:
- Shifting away from lean manufacturing or at least budgeting for additional buffer inventory
- Bringing production back onshore / Near shoring
- Increasing visibility across the supply chain through Artificial Intelligence and Blockchain technology
- Managing labor shortage with technology
- Building redundance in your supply chain strategy
- Evaluating insource vs outsource key supply chain functions
Although these might seem like viable solutions to the current supply chain issues, they are too simple to resolve the quagmire of complexities that the supply chain is. Afterall, not every company is a Walmart or Amazon which can charter its own ships and plans to meet shipping demands.
However, there are certain steps all businesses can take to mitigate the risks they are facing. This includes accounting for additional inventory to meet demand surges, steadily building a strong distribution network, building long-lasting relations with suppliers and logistics partners, and ensuring the production of essential components is onshore or as close as possible.
No one can predict when the supply chain issues will end, however we can do everything in our power to ensure we make it as resilient as possible.
Fulfillment IQ Team
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