Manufacturers, suppliers, wholesalers, retailers, consumers (frankly, everyone!) who’s tried to buy anything in the last 18 months agrees—the global supply chain is not running the way it used to. Raw materials, supplies, and finished goods are all taking significantly longer to move, and it’s costing significantly more to move them.
As a result, links in the supply chain are stretching and, very often, breaking. Shipments have been massively delayed. Forecasts are getting thrown out the window. Shortages are very real. Additionally, experts are warning U.S. consumers to prepare for a different kind of Christmas than they’re used to. Even books haven’t emerged unscathed as new shortfalls loom, like the paper shortage that may keep new books from reaching shelves.
If you’ve tried to move goods, supplies, or raw materials recently, you’re probably well aware of the challenges and rising costs. But what exactly lies behind these problems? And why is the solution so elusive? Supply chains are complex, interconnected networks that rely on the other links in the chain to operate effectively. Start with a global pandemic—which put pressure on existing weaknesses—then add in the fact that many companies have been relying on just-in-time principles to manage their supply chains, scale it up globally, and you’ll find yourself where we are now.
Let’s take a closer look at exactly what’s going on.
It All Begins with the Nature of the Supply Chain
If you work in logistics, you probably already understand that supply chains rely on a number of parties working together—suppliers, manufacturers, distributors, retailers, shipping companies, distribution centers, and even internal stakeholders like demand managers and warehouse staff. A supply chain manager has to coordinate all of these parties, as well as the moving parts they set in motion, so that everyone has what they need when they need it in order to keep everything moving forward smoothly. A breakdown in one link of the chain can cascade quickly, wreaking havoc down the line.
In other words, managing a supply chain was never an easy job, even before the global pandemic.
In addition to the pandemic, though, there’s another factor that set the stage for large-scale disruption of the global supply chain. It’s called the “just in time” logistics model. Under the JIT philosophy, supply chain managers keep very few supplies and very little inventory in stock. Instead, they let customer demand drive ordering and production, while keeping their organization just a little ahead of demand. Supplies are ordered as needed, rather than stockpiling and tying up your working capital. Additionally, inventory is kept lean, to avoid significant deadstock and reduce warehousing costs.
While the JIT model has its pros, the global pandemic has revealed that it’s not one built to flex in the face of widespread challenges.
Case in PointNike recently had to cut its sales forecast because it relies on production facilities in Vietnam for 51% of its footwear. Vaccines are hard to come by in the country, which resulted in 10 weeks of shut-downs at the factories that supply the apparel company.
As a result:
Nike simply couldn’t get the finished goods it needed to hit their sales targets. Clothing retailers Lululemon, Gap, and Everlane were also affected by similar shutdowns in the country.i
If only a few scattered companies were operating under JIT principles, it might be possible to recover quickly when something like a natural disaster or a global pandemic strikes. However, in a situation where everyone’s operating with very little margin for error, when one link breaks, they all break. The impact cascades, and there’s no one available to save the day with a secret cache they’ve accumulated in their warehouse. However, JIT logistics isn’t to blame for everything that’s happened. In fact, some experts have been predicting these problems long before we had even heard of COVID-19.
The Supply Chain Disruption Has Been a Long Time Coming
For the last few years, organizations and experts have raised red flags that all was not well within the U.S. supply chain. One significant note came from a July 2015 Federal Maritime Commission report, which stated that:
“Congestion at ports and other points in the nation’s intermodal system has become a serious risk factor to the relatively robust growth of the American economy and to its competitive position.”ii
Additionally, the Washington Post noted, in 2018, the World Bank dropped the U.S. to #14 in their Logistics Performance Index. The last time the U.S. held a lower spot was in 2010. The U.S. held the #9 slot in 2012 and 2014, dipping one spot to #10 in 2016.iii In other words, even in 2018, the United States lagged behind other GDP world leaders, including China, Japan, Germany, and the U.K.iv
One major weakness experts pointed to was the lack of data sharing between ports and the stakeholders who rely on the facilities. Advocates of data sharing argue that if all parties were willing to share data within a single platform accessible by all, it would be much easier to orchestrate the complex dance that allows ports to operate efficiently.v However, many parties are reluctant, citing concerns over data privacy and business secrets. This was the already-fragile landscape that existed when COVID-19 arrived on the scene.
Then, COVID-19 Put Pressure on Every Link of the Supply Chain
As you can see, maintaining the global supply chain was already a delicate operation, vulnerable to the massive disruption that burst upon the world without warning. Once the COVID-19 pandemic was in its full throes, it created:
The Results of All of This?
The U.S. is now looking at:
- A massive backlog outside of U.S. ports, including the Ports of Los Angeles and Long Beach, as well as the Port of New York and New Jersey.xx
- A crush of containers stuck in Asia, such that big retailers like Walmart, Home Depot, Target and IKEA have chartered their own vessels to bring goods to the U.S.xxi
- Similarly large backups in railyards, as these hubs struggle to keep record amounts of freight moving amidst significant (and controversial!) staffing cuts.xxii
- Rising costs and longer transit times for goods, supplies, and raw materials.
All of these are hitting two groups especially hard:
- Small companies. Unlike Home Depot, most smaller companies don’t have the budget to hire a charter vessel from China, so they’re stuck waiting for goods marooned in Chinese ports. Additionally, since small businesses ship smaller volumes, they have less bargaining power with logistics providers. Finally, they’re also less able to make up for the cost increases than larger companies, who often have greater cushions to absorb the additional cost.xxiii
- Consumers, who have seen the overall cost of goods rise 5.4% from July 2020-July 2021, the largest one-year increase since 2008, according to data from the Bureau of Labor Statistics.xxiv
The Bottom Line
As of October 13, President Biden has gotten involved, with plans for a 90-day sprint to clear the clogs at the Ports of Los Angeles and Long Beach.xxv Although many remain skeptical, even a solution at these two key ports is only one part of the puzzle. Over the next few months, each link of the supply chain will need to resolve its challenges. Only then can all parties move forward together—and function like the interconnected network that the global supply chain needs to be.
If you’re experiencing your own challenges in this environment, our experts can help. Reach out for a complimentary consultation to get started. Together, we’ll take a holistic look at your own supply chain and help you operate effectively amidst today’s challenges.
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