In many ways, things have returned to normal in the aftermath of the COVID pandemic. Few wear face masks now, and the travel and hospitality industries have since recovered. But despite re-openings of ports and the return of dock workers in full force, global supply chain disruptions persist. Of course, these aren’t due to the pandemic, but instead are a result of other influences and geopolitical events. Depending on how things evolve, it’s quite likely things may get worse before they get better. Global businesses need to prepare for what’s ahead.
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In recent months, there have been a number of happenings contributing to global supply chain disruptions. Drone and ballistics attacks in the Suez Canal region have forced freighters to take different and longer routes. Climate shifts and droughts have also affected other key shipping channels in Central America. Bridge collapses and infrastructure problems have occurred. And labor threats and shortages are also causing current global supply chain issues in many countries. The result of these events is rising costs for businesses as well as backlogs within domestic supply chains. For this reason, it’s starting to feel a lot like the same supply chain strains associated with the pandemic. And it may be that these struggles will persist for the foreseeable future.
A New Tsunami Affecting Global Supply Chains
Events surrounding the Suez Canal related to current global supply chain issues have been well reported as of late. The Iran-backed Houthi rebels in support for the Palestinian cause have been targeted ships in the region. As they approach in the Red Sea, the Houthi are using sea drone ships with explosives and aerial ballistics to attack them. As a result, ships are choosing to travel around the tip of Africa, which is notably much longer and costly. In fact, only about 10% of the normal traffic is now traversing the Suez Canal. And since this is a major route between Asia, Europe, and the eastern U.S., this is resulting in significant global supply chain disruptions. The additional two weeks it takes to go this longer route has been a problem for many.
If this was an isolated event, then perhaps global supply chain disruptions would not be as profound. However, in addition to this, recent droughts in Central America resulting in shipping volume reductions through the Panama Canal. These have since improved, but they still are reminders of climate-related effects. At the same time, many regions are experiencing labor strikes or related threats. Port workers along the eastern and gulf coasts of the U.S. have recently threatened strikes. Rail workers in Canada are also talking about walking away resulting in rail backlogs in the U.S. and near Vancouver. Germany is experiencing similar port worker issues as well. These current global supply chain issues are combining to have major impacts on shipping.
The Effects of Supply Chain Pressures
The obvious impact of these current global supply chain issues relates to delays and backlogs. In some major ports, freighters are having to anchor for lengthy times outside. Ports in Rotterdam, Shanghai, Singapore, and Sri Lanka have had ships anchored for a week. These delays are resulting in product shortages for businesses and retailers. The trickle-down effect of this is noteworthy since companies waiting on parts and materials have to delay production. This is an even larger concern with the holiday shopping season right around the corner. Some companies are placing orders earlier than usual as a result of global supply chain disruptions. But this too adds to the problem. As more orders are placed, the supply chain becomes even more congested. And for rail and trucking systems that are unable to handle higher volumes, new problems arise in domestic areas.
Understanding that carriers had to deal with these same issues with the pandemic, many are responding in a similar fashion. In other words, current global supply chain issues are encouraging them to raise costs. Those contracted to provide carrier services are charging extra peak season surcharges or special handling fees. Those offering on-demand “spot” services, the prices are even higher. Instead of a container costing around $1,200 to ship from China to Europe, it’s gone up to over $7,000. And since an alliance between 3 major carriers serve over 90% of most global supply chain traffic, these rates aren’t about to go down. Plus, between product shortages and rising carrier costs, inflation is likely to rise further as well. Unless ongoing global supply chain disruptions resolve soon, the economics of the situation look bad.
Short Versus Long-Term Solutions
Based on the current global supply chain issues, it’s clear businesses and markets are at significant risk. Much of the reason for these risks relate to a lack of resiliency in the global supply chain. Duplicate routes, or even triplicate route alternatives, would help, but developing such resiliency takes time. Geography and geopolitical events also pose barriers to resiliency when alternate land and sea routes are lacking. Or when foreign conflicts and trade policy introduce unfavorable scenarios. From a longer-term perspective, multimodal transport as well as multiplicity in routes to same destinations is the key. But these are not feasible for the near term, which means businesses must adopt different strategies.
At the current time, some businesses are trying to preempt current global supply chain issues by ordering in advance. Expecting delays, they hope to still receive goods on time by using such an approach. However, this will only set in motion a vicious cycle creating worsening of backlogs and delays later. More effective approaches might instead involve better inventory and warehousing practices to accommodate global supply chain disruptions. While just-in-time inventory management may be preferred, shifting back to inventory holding may be necessary. Near-shoring and seeking out suppliers in close proximity may also be a strategy to reduce the impact of current global supply chain issues. And in-house operations might expand to accommodate a reduced reliance on the supply chain. However, most of all, companies need to recognize global supply chain disruptions are here to stay for now. And dealing with them will be an ongoing part of business planning.
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