The current challenges in global supply chains: The weaknesses evidenced in 2021 and how to attack them
By: Ignacio Barros
If 2020 marked the year that Covid-19 locked the world in lockdown, then 2021 could be defined as the year that global supply chains slowed down, resulting in shipping delays and price increases across a wide range of products. .
While it would be easy to blame the pandemic for the serious logistical problems that have occurred, the truth is that the impact of the virus has only exposed and exacerbated long-standing vulnerabilities. Before the pandemic, in 2018, the US ranked 14th out of 160 countries for the efficiency of its supply chain, according to the World Bank. Already in a pandemic, the restrictions imposed and the obligation to stay at home accelerated the online purchases of millions of people, and the Census Bureau (Census Bureau) reported an increase of 32% versus 2020 in the participation of electronic commerce in the total retail dollars (1). No one clearly foresaw the implications of this monumental increase.
2021 also saw a global chip shortage that crippled the auto industry, gridlocked trains for 25 miles around a major Chicago rail transportation hub, two- to three-week waits for container ships to unload their goods at the port of Los Angeles. and, recently, a more than threefold increase in the cost of shipping on major east-west trade routes. Just to mention some of the main impacts in the United States, but we see figures very similar to these in the main European and Asian ports.
The 4 main challenges on a global scale.-
As we approach two years into the pandemic, supply chains continue to malfunction as a result of overcrowding, congestion, costs, and storage capacity. A more detailed analysis of the main challenges is provided below.
i. Crowded ports create delays.
Supply chains remain bogged down, especially in Asia, where two of the region’s largest ports, Hong Kong and Shenzhen, are seeing record delays. That has slowed shipping traffic from east to west. It currently takes 73 days, or 83% longer than pre-pandemic times, for goods to travel from Asia to their final destinations in the U.S. Delays and closures at Asian ports, combined with disruption to air cargo travel, have caused an excessive accumulation in the system.
ii. Congested roads and poor “last mile” infrastructure make local delivery slow.
With e-commerce on the rise, more transportation solutions are desperately needed and they push prices up. Unfortunately, this last stage of the supply chain is often the least efficient, comprising up to 41% of the total cost of moving goods, with costs rising nearly 50% year-on-year through November 2021. Trucking companies they also compete aggressively for drivers, driving up wages, while warehousing costs also rise. Meanwhile, an aging infrastructure system of local roads and bridges struggles to carry ever-increasing traffic. This in Latin America is particularly evident.
iii. Rising shipping costs
Overseas shipping costs have increased three to four times over the past two years, while air shipping costs have risen even faster, four to five times per kilo. As a consequence, manufacturers and retailers try to pass these costs on to consumers.
iv. Growing pressures on storage capacity
Storage space is largely commoditized around the world, although costs vary by location, class, height restrictions, and parking availability. Supply is inelastic, especially in the crowded coastal markets. Consequently, demand is expected to continue to outstrip supply, driving rates higher. Warehouse storage costs represent a small portion of 5% to 6% of the total delivery cost. Freight, however, accounts for roughly 50% of logistics operating costs, making proximity to the consumer crucial for distributors and placing a premium on local warehousing space.
How to face these challenges.-
The supply chain problems just mentioned are likely to continue until several fundamental issues can be addressed, including infrastructure improvements, technological innovations in shipping, and onshoring. We develop these points below.
i. Infrastructure improvement and modernization
If the US urgently needs investment in its highway systems, the case of Latin America is frightening. Decades of deferred maintenance have left major arterials and highways barely able to cope with current use. State and local governments must commit to bringing this vital last mile of infrastructure into the 21st century to manage the increased flow of vehicles.
ii. Delivery Innovations
Innovative alternatives to current ground delivery capabilities, including aerial drone delivery, tunnels, and double-deck arteries dedicated to commercial freight and built above or below consumer traffic lanes, could also help improve current supply chain problems. Of course, building such solutions will take time and require substantial capital.
Suppliers can also speed up delivery times by moving semi-finished production onto their own land, which can help ensure more reliable local product availability, even if global supply lines fail. Factories cannot be built overnight, but more long-term investment in local production could help alleviate delays, cost increases and volatility due to over-reliance on global shipping.
Unfortunately, this is a harder nut to crack, as local production often relies on imported materials. In this way, the shortage of supplies abroad could stop manufacturing in the own country.
iv. Innovations in technology.
Technology can play a key role in providing suppliers, retailers and other industry players with real-time, granular insight into the movement of commodities around the world.
For example, in Rotterdam, Europe’s largest port, a data-sharing platform called PortXchange provides real-time information on maritime traffic, including satellite tracking of individual ships and estimated time of arrival predictions with up to three weeks in advance. The tool was designed to enable shipping companies to optimize maritime traffic and reduce carbon footprint. Additionally, freight brokers and trucking companies are pioneering Uber-like ride-hailing apps to ease port congestion.
v. Smart structures that prioritize efficiency
Solving the storage problem is not simply a matter of building new facilities. Often the process is rushed and the facilities are terribly designed. Builders pay little attention to how the design speeds up or impedes the flow of goods, which can exacerbate the problem by creating bottlenecks and adding costs.
Building new efficient logistics spaces requires aligned relationships and in-depth knowledge of tenant behaviors. Success depends on a nuanced understanding of how the space is used and how it fits into a larger supply chain.
Looking to the future.-
The pressure on the global system is driven by the demand for basic and necessary goods, both consumer and commercial. Without drastic innovation or a significant reduction in the need for such goods, supply chains will continue to be under pressure.
The global supply chain is always evolving, whether due to once-in-a-lifetime events like Covid-19, or incremental trends like the growth of e-commerce. By understanding these trends and taking steps to mitigate their impact we can ensure healthy and consistent trade flows even in difficult conditions.
Sources and revised material:
- (1) Elion Partners – How to fix today’s supply chain disruptions? (Dec 2021)
- World Economic Forum – How to stop supply chain issues disrupting the economic recovery? (Nov 2021)
- Supply Chain Dive – 10 disruptions that rocked supply chains in 2021 (Oct 2021)
- Internal material of SYNERGOS