Supply chain


Part 1 of 3 | Global Disruptions Before, During, and After COVID-19

Supply Chains Under Siege | Is there a way through the global maze?

Part 1 of 3 | Global Disruptions Before, During, and After COVID-19

The global supply chain, defined as the network and flow of goods between a company’s suppliers and customers, is experiencing a titanic disruption. Many of the challenges are COVID-19 related, but shifts were underway well before COVID arising from international trade disputes and concerns about the perceived vulnerability of U.S. interests and the need to improve the long-term reliability of the domestic supply chain.

In a recent survey of supply chain executives, no less than 64% of U.S. based companies indicated they are reevaluating their global supply chain. While significant disruptions are COVID driven and considered short term, long-term strategies with far-reaching impacts will be implemented globally to improve supply chain reliability.

Deep Impact of Global Disruptions

COVID-19 paralyzed most of global manufacturing and shipping from April through June 2020. The suspension or delay of product flows from Asia created serious bottlenecks and materially higher transportation costs now that shipments have resumed. Six downstream problems include:

  • Container shortages throughout Asia as U.S. and European importers struggle to return them. Shortages are expected to get worse before they improve. Ocean carriers are cutting back on “free time” before containers are returned, adding complexity and cost to U.S. importers.
  • Shipping costs of 40-foot containers (FEU’s) from Asia to the US West Coast have increased 140% in less than a year, to $3,750 per unit. Interestingly, Asian shipments to the US East Coast ports have increased only 72%, to $4,500 per FEU in the same period of time. Transpacific shippers have only recently suspended price increases due to China’s decision to stabilize outbound freight rates. Ocean carriers who have been struggling for profitability for years are now flush with cash. They are even recommissioning moth-balled and obsolete vessels to capitalize on high trans-Pacific demand and pricing.
  • Trade wars and geopolitical friction between China and the U.S. have already reduced both imports and exports between them. According to a Boston Consulting report, trade volume between the two countries dropped 16% in 2019. However, U.S. imports increased sharply from Japan, South Korea, Vietnam, and India.
  • U.S. east coast port access through the Suez Canal and the Mediterranean Sea is closer for Asian countries like Vietnam, Thailand, and India. This route allows more transshipment stops at southern European ports before crossing the Atlantic, as well as greater revenue from multiple legs of service. Since 70% of the U.S. population resides east of the Mississippi River, the outsized influence of west coast ports, especially LA and Long Beach is expected to erode.
  • Nearly 400,000 seafaring workers have been stranded on ships for months due to COVID. A Bloomberg investigation found numerous violations of maritime law, including unpaid overtime and insufficient medical attention. Over 120 countries have restricted ships from implementing seafarer shift changes in a bid to prevent the spread of COVID. The United Nations is appealing to all governments to end this untenable situation.
  • Use of air freight from Asia has increased substantially, despite the significantly higher cost, to ensure products arrive for the peak Christmas season. The recent release of the new iPhone, PlayStation, XBOX, and other consumer electronics are expected to soak up the available air cargo capacity from Asia.

The estimated $46 trillion in trade flows across the global supply chain will undoubtedly change and rebalance for many years to come. These changes are driven by a number of factors, with the most important being overall cost, national security interests, and the need for greater supply chain stability.

Conclusions for Now

The global supply chain will evolve and rebalance for many years to come. While some companies are reshoring back to the U.S., others are evaluating new foreign markets to lower costs and improve supply chain reliability. Some are taking a post-COVID “wait and see” approach in hope the current disruptions ameliorate.

Far-flung international supply chains are expected to become more regional and less impacted by the growing hostility between the U.S. and China. Costs are an important factor in selecting any new facility location. But so is improved productivity through automation and advanced technology.

Under all circumstances, the landscape of global supply chains will be dynamic and unpredictable, based on a wide range of interdependent factors.

What’s Next?

This article is part one of a three-part series on disruptions to supply chains brought to the forefront by the global pandemic. In our first installment, we focused on global disruptions. In part two we will address domestic (U.S.) disruptions and in part three we will offer suggested solutions.

Stay tuned for more next week and check out the case studies in the sidebar to uncover how other companies have used disruptions to create opportunity!