Understanding the global supply chain disruption

Source: Times of Malta

Date: 17/01/2022

By: John Cassar White

The main reason for this is the chaotic effect of COVID on the freight industry

A cargo ship berthed at Qingdao port, in China’s eastern Shandong province. Flexport, a US freight forwarder, has confirmed that it now takes more than 100 days between pick-up from Asian exporters and hand over at European and US ports. In 2019, it took less than 90 days. Photo: STR/AFP

In the last year, many have experienced delays in the delivery of goods they have ordered online, mainly from the Far East. We tend to take the efficiency of the global supply chain system for granted until the item we purchased online fails to turn up even after a few months. This is not unlike taking for granted that your car will function until one day you are left stranded because of some mysterious fault.

Flexport, a US freight forwarder, has confirmed that it now takes more than 100 days between pick-up from Asian exporters and hand over at European and US ports. In 2019, it took less than 90 days.

There are many reasons behind these delays and none of the bottlenecks can be quickly cleared. This is one reason why those who believe that rising inflation is very transient may not be understanding the real cause of supply chain disruption.

The main reason for disruption must surely be the chaotic effect of COVID on the freight industry. Labour shortages, congestion at key maritime ports and a lack of space on vessels and containers have hit ocean freight with massive delays and elevated rates.

In the last few months, some countries have cut off land access for sailors due to the spread of COVID. There is still no sign that this labour shortage is becoming less acute. All this disruption came when consumer demand for foreign-made goods rose substantially. European car manufacturers have suffered more than some other industries.

In the last two decades, business schools inculcated in students’ minds that just-in-time supply chain strategies are the gold standard for procurement that progressive companies must adopt to get the best return on their investment. 

But all business models have an expiry date, and the just-in-time maxim must now be changed to just-in-case. Few businesses have anticipated the pandemic’s disruption would bring on their activities.

For decades, reducing costs was the holy grail of many business strategists who fail to understand that there are always hidden risks lurking in corners and threatening to paralyse ill-prepared businesses.

Many companies are now rethinking their supply chain management. Some are moving production of critically essential components back to the country where their products are manufactured. Others ensure that they have enough stocks needed for manufacturing to last them for at least one year.

The business model built on the premise that labour must be treated as any other commodity is bound to fail. Western economies are almost all suffering from severe demographic challenges. Political leaders are caught in an unenviable situation. On the one hand, they want people to access goods manufactured in low-cost countries. At the same time, they have to deal with the unemployment of a substantial section of their society, mainly older adults.

Some argue that globalisation should include the free movement of people from low-cost countries to more affluent countries. But even this solution is not without flaws. Spiralling inflation makes it inevitable for low-skilled workers to move from one country to another to ensure that rising inflation does not erode their earning power.

Planning for possible catastrophic events like pandemics may now take up more management time in business. But the business models of the last two decades also need to be stress-tested to ensure that gold standards on how best to excel are no longer based on maximising profits and the drastic reduction of costs.

Western societies need to address the consequences of shrinking populations. While investing more in education and the digitalisation of the economy may ease the demographic problems, more needs to be done to encourage families to have more children. Selective immigration is a solution that has been adopted for centuries in situations not significantly different from that faced by many western countries today.

Globalisation is likely to continue to exist even if the benefits for western societies need to be enhanced by better investment in people. In an ideal world, people should buy goods and services from wherever they can source them. But this is only possible if the lower-paid workers are not exploited because they have little bargaining power.

Precarious work conditions have become more common in most western countries in the last two or three decades. The pandemic has made the conditions of the have-nots in our society even worse. Low-skilled labour is not just another element of the supply chain. It is a resource that needs to be enriched with opportunities for social advancement.

Tags: COVID19 | Supply chains |