Insecurity increasing supply chain risks

Insecurity and instability are on the rise, with supply chains feeling the pressure. Port closures due to Covid surges, inland bottlenecks leading to port congestions and geopolitical conflicts are adding hurdles to supply chains.

Globalisation accounts for much of how production and supply chains work today. Rarely are things sourced, manufactured, and sold in one spot: today, supply chains span continents and regions, with multiple areas for sourcing of materials, production, and sales.

This intricacy allows for companies to keep costs low, but also adds sensitivity and fragility to supply chains. Disruption can bring about shortages of key materials, like fossil fuels, crude petroleum, grain, and cane sugar. Resources like aluminium, neon, and xenon, also risk being in short supply and are all necessary components in chips needed for technology and AI.

The domino effect

A report by Dun & Bradstreet noted that “businesses around the globe continue to grapple with inflation brought on by the pandemic, as well as commodity price increases brought on by disruptions to the supply chain”. Inflation has also been brought on by massive increases in fiscal and monetary stimulus, introduced by governments and central banks.

Adding in what we are currently seeing today, soaring energy costs, supply chain disruptions and new conflicts, inflation is further fuelled.

Companies will already be starting to feel this, even more so if consumer fear starts to hamper consumer consumption. To avoid global supply chain gridlock, companies will need to address such issues in their supply chain expectations.

Transportation affected throughout the supply chain

Diversions need to be enacted when disruptions happen. For every port disruption, we risk unfortunate Ocean delays that could lead to missed sailings and missed capacity. Even a delay of 1-3 days on a 12-port rotation could mean that a roundtrip of 10 weeks can take 11 or 12 weeks.

The InterContinental Rail used to transport roughly 500,000 TEU across the continent, but the conflict between Russia and Ukraine has halted bookings from China to Europe. This means an additional 10,000 TEU needs to be shipped weekly, straining an already pressed ocean network, and potentially causing bottlenecking. It’s a bad situation, made worse.

Flight operation services to and from Asia also currently face disruptions due to flight cancellations, rerouting and schedule adjustments that impact capacity availability. Coupled with limited capacity and longer flying times, the overall final product might end up having to cost more, as air has less transportation space than rail and because fuel prices are expected to remain elevated.

Across all modes of transportation, with longer freight times and costly fuel, the disruption to cargo movements may end up creating backlogs for industries where consumers are accustomed to quick turnaround.

Reading the signs for supply chain planning

The current situation means that prices for cargo transportation may remain higher for longer, in part due to more costly fuel and reduced capacity. If prices are lowered, it will most likely be minutely, as most indications point towards fuel costs remaining elevated for some time still. However, it is worth noting that oil prices are not currently as high as in 2014 for example.

Companies will need to investigate multiple sourcing options, as disruptions continue, and global congestion remains. This will mean that companies will, in some cases, choose to reconfigure their product designs, as may be the case with chips for technology, or will need to find source materials elsewhere. This may further add to cost, as products may not be as close to manufacturing hubs as before, and may also be far from market.

Companies should already begin to account for discrepancy in cost expenditures, as inflation, rising costs of materials and rising costs of fuel will affect their bottom line. By identifying key vendors and their suppliers, and understanding their supply chains, companies may be able to adjust their manufacturing and distribution plans. This will add flexibility and agility to supply chains, as well as resilience to distribution and sales.

Finally, be aware of region and location. By diversifying material sourcing, production hubs and warehousing spaces, companies can continue to shift their reliance on one area to multiple others.

Managing uncertainties with the right partnership

The last two years have been very challenging for global supply chains, with disruptions, congestion, and conflict. With the conflict now unfolding between Russia and Ukraine, more unpredictability is unfolding in supply chains. In a business context, it puts an extra emphasis on the importance of trust, collaboration, and partnership.

Today, global supply chains cannot be seen as a linear constellation of fragmented pieces, they are interconnected ecosystems where each subpart is fully dependant on the others to flow seamlessly. We understand the repercussions disruptions and global events may have for you and your business. We are continuing to follow situations closely on the ground and aim to give you the needed information for you to best manage your supply chain.