2022: A Pivotal Moment For Supply Chain Management
Our livelihoods – food, jobs, energy – depend on functioning and resilient global supply chains. Unfortunately, the uncertainty caused by the progress of the COVID-19 pandemic from region to region has made it difficult to resume business on a global scale.
COVID-19 was the catalyst for this widespread series of supply bottlenecks, but these constrictions have affected nearly every sector of the economy – from shipping and trucking to manufacturing and storage as well as making evident some significant adverse effects on the environment.
As the pandemic begins to ease, it is becoming clear that while it may have catalyzed the economic issues, it did not cause them. Fueled by the e-commerce boom, container shipping freight rates are reaching record highs and transport capacity is being held up in congested ports. This represents a double shock for the economies of large and small countries alike. And, just as the air around some major cities cleared of pollution when the COVID-19 lockdown took hold, the breakdown of supply chains has made evident the environmental impacts of “business as usual” as it has been.
Human society, including the global economy is not a collection of self-contained blocks like the world regions in the game of Risk. One of the most difficult lessons of the last hundred years or so has been the realization that the world is a system of interdependent subsystems. One of the rules of systems is that anything that happens in one part or subsystem affects the whole system, often in ways that are hard to predict.
Effects on Supply Chain Management
So, while we can isolate the global supply chain as one subsystem, to do so risks ignoring the relationship between the supply chain and, for example, the environment, international conflicts such as that between Russia and the West over Ukraine.
The United Nations Conference on Trade and Development (UNCTAD), established in 1964, has a twofold focus on helping developing countries participate more equitably in the global economy and supporting developing countries’ using trade, investment, finance, and technology for inclusive and sustainable development. According to UNCTAD’s latest Review of Maritime Transport, in addition to disrupting the delivery of much-needed vaccines and critical food supplies, the supply chain crisis may hike global consumer price levels by an additional 1.5 percentage points as a result of increased maritime transport costs,. The impact on prices in SIDS is five times higher, with 7.5 percentage points additional consumer price inflation. This is an example of the impact of one sub-system (the pandemic) on another (the economy of developing nations).
On the demand side, growing e-commerce and economic stimulus packages have put additional pressure on carriers, ports and inter-modal transport providers. On the supply side, the pandemic has slowed down operations at all levels.
A container now spends 20% more time in the system for a typical door-to-door trade transaction, and ships, trailers and containers are stuck in congested ports. This means that we need more transport capacity and equipment for the same volume of trade – these two factors can be expected to have significant negative effects in both the economic and environmental sectors. Congestion is hurting trade and threatening our sustainable development aspirations. In the short term, only improving the performance of these systems can alleviate it.
The supply chain crisis was caused by backlogs across major supply chain hubs. It will almost certainly continue, negatively affecting trade and reshaping trade flows across the world. The ongoing geopolitical tensions among some of the major economies may result in renewed trade confrontations, with important repercussions for global supply chains as countries could move production to locations that are closer, geographically, and politically. In addition, agreements such as the African Continental Free Trade Area and the Regional Comprehensive Economic Partnership are expected to influence global trade patterns. Regional trade within Africa and within the Asia-Pacific area is expected to increase, but also by diverting trade away from other routes. These are popular “conventional wisdom” approaches, but they ignore impacts on other systems. They are the equivalent, in a popular phrase, of “rearranging the deck chairs on the Titanic.”
Zachary Rogers, Ph.D., Assistant Professor of Operations and Supply Chain Management at Colorado State University, said in a lecture at Arizona State University. “We’re not actually seeing that supply chains are failing. I think, in many ways, we are seeing sort of a heroic effort in the face of this unprecedented demand that we are dealing with right now.
“Partly we’re dealing with this demand because we are trying to catch up from a hole we got in, and partly because Americans have a lot of money in their pockets right now. … People aren’t going on trips, they aren’t going places, they are spending all their money on goods.”
With more cargo container ships than ever sailing into American ports to feed this demand, the U.S. needs more infrastructure to load and unload cargo, more space to store products, more trucks and trains to transport goods across the country, and more factories.
Supporting each of these processes presents its own issues, though: loading and unloading cargo requires both machinery and workers, and more storage space requires investment in land adjacent to shipping and e-commerce centers. Truckers are in short supply, fuel costs are rising, and a semiconductor shortage is stalling the production of new trucks. Moreover, manufacturing faces delays because of oversea factory shutdowns related to COVID-19.
Diversification of the Shipping System
Rogers also said the United States is lagging behind on diversification of its shipping system, which he called a requirement for the modern era. “We’re doing all of this with this old infrastructure. And this speaks to, for supply chains that good is the enemy of great. We’ve been able to get through, and so we’ve been dealing with suboptimal routes and capacity for a long time,” Rogers said. “COVID is really the wake-up call that we need. With COVID, it’s not just a virus to immune systems … in many ways it has acted as a virus to supply chains. … But if you survive it, you come out of the other side stronger.”
In addition, each of these processes has concomitant negative impacts in other subsystems. Manufacturing more machinery using current methods can be extremely carbon-negative. Converting open land to shipping and eCommerce centers means less open space available for soil absorption and runoff, and increased prices feed inflation.
These bottlenecks in the supply chain have created one of the largest price increases to consumer products seen since 1990 – a 6.2% increase over the past 12 months for all goods, according to the Bureau of Labor Statistics’ October consumer price index.
Rogers offers the following three-part solution:
- Diversify national imports by opening up large ports in Florida, Texas, and the East Coast.
- Return the manufacturing of critical goods to the U.S.
- Transition the nation into a more self-reliant and efficient position through trade treaties with Central and South America for manufacturing and shipping.
Rogers’ recommendations could go a long way toward alleviating the problem on a system-wide basis. Opening more ports to importing would relieve the pressure on two of America’s largest seaports, the Port of Los Angeles and the adjacent Port of Long Beach, which are experiencing delays in shipping, with trucks waiting for long periods to load and leave. Opening ports in other parts of the country would shorten supply lines, with environmental benefits in terms of less fuel use, less exhaust, etc.
Rogers went on to say that the US is lagging badly on diversification of its shipping system, which he considers a requirement for the modern world. He noted that we are using old and outdated infrastructure because it is “good enough,” but routes and capacity are suboptimal. “COVID is really the wake-up call that we need. With COVID, it’s not just a virus to immune systems … in many ways it has acted as a virus to supply chains. … But if you survive it, you come out of the other side stronger.”
To Rogers’ other recommendations, John Manners-Bell, CEO of Transport Intelligence, a supplier of market solutions to the global logistics industry and Visiting Professor at the London Guildhall Faculty of Business and Law, says global supply chains, post-COVID-19, will irrevocably change. “Globalization has really been about sourcing things from China,” he says. “Now, companies are very much thinking about diversifying their supplier base. A lot more are thinking about sourcing more from either their own countries or from countries that are much closer.”
“Transportation risk”, Bell says, “has been growing for many companies for some years but has come into focus because of COVID-19. Geo-political issues such as the trade war between the US and China but also security concerns as well. You can easily see in the future that the world will start to break into supply chain regions.” Some will be China-focused while other routes will be close to Europe and the US. In other words, there will be increasing diversification, moving toward greater emphasis on suppliers in the Western world.
The supply chain crisis can be viewed as a foreshadowing of what a climate crisis would look like if left unchecked. A global climate catastrophe will dwarf the impacts of the pandemic. Its consequences will be felt especially by developing economies that are already suffering relative economic losses three times greater than high-income countries due to climate-related disasters.
UNCTAD’s latest Trade and Development Report calls for a transformative approach to climate adaptation, with green industrial policies to drive growth and job creation along more resilient and greener value chains. A green industrial policy would proactively identify the areas that present the most significant constraints to climate adaptation investment, channel domestic and foreign investment to these activities and monitor whether these investments are managed in such a way as to sustain decent employment and to increase long-term climate security and productivity. The diversification of supply chains along with the lessening of dependence on China will go a long way toward both easing the economic and social impact of supply chain issues and the impact of supply chain-related causes on the environment.