In 2022, the global supply chain crunch will worsen. Why and what comes next?
The difficulties plaguing global supply chains have captured the world’s attention in recent weeks. These supply chain issues will likely persist for the next six months to a year, possibly even longer.
Some of these challenges reflect the unbalanced nature of consumer demand—heavily skewed toward goods and away from services—a notable feature of the post pandemic reopening. Another factor is the dramatic decline in workforce participation, which some policymakers hope will right itself as workers become less fearful of returning to work. There are some tentative signs that the supply chain bottlenecks may be easing up a bit.
However, even as the current crisis is resolved, there are systemic issues that should be addressed so that global supply chains are more resilient to future shocks.
Transportation Troubles
Labor shortages in the transportation and warehousing sectors have been among the most significant contributors to the strains in supply chains in the United States and other countries, as cargo unloaded at ports is unable to reach their destinations on time. Though the pandemic has led to labor shortages in many sectors, truck-driver shortages were an issue even before the pandemic. However, in the United States, the problem is not a lack of licensed truck drivers. Many of these drivers simply prefer jobs that offer similar wages without the long hours and harsh working conditions. As a result, retention is a massive problem in the trucking job market, which averaged a staggering annual turnover rate of 94 percent between 1995 and 2017. Higher wages could help to address the problem; trucking companies have indeed been raising wages recently to deal with the backlog at ports, and, in turn, the number of working truckers has gone up. But there is still an estimated shortfall of around eighty thousand drivers in the United States. This is partly because wages have been rising in other sectors as well.
Wages are just part of the story. Working conditions for truck drivers should be improved by investing in infrastructure. Currently, drivers wait in line for hours at ports that have not been upgraded for decades, which increases both hardship on the job and inefficiency. The bipartisan infrastructure bill recently signed into law in the United States addresses some, but not all, of these issues. These and other investments in infrastructure, along with more competitive wages, would not only help eliminate the driver shortage, but also make trucking more efficient. Policymakers and industry leaders should also take similar steps for other transportation industries—such as shipping, intermodal transport—which are also hampered by a lack of capacity and whose workers also face poor working conditions.
Rethinking Just-in-Time Manufacturing
Just-in-time or “lean” involves ordering just enough components at just the right time for production. This cut down on the costs of excess inventory and warehousing—and raised profits. Today, it is the dominant mode of manufacturing worldwide. However, there is no room for error; a single delay jeopardizes the whole process.
This has proven to be a risky strategy, as there are always factors outside the supplier’s control. What is gained in terms of supply chain efficiency and speed is lost in resiliency. The pandemic is only the latest example. Supply chain disruptions due to natural disasters cost billions of dollars in lost output and revenue. Such events are likely to increase in frequency in the years to come due to climate change. Disruptions caused by the pandemic and natural disasters would have been challenging but they were certainly made worse by the world’s increased reliance on just-in-time manufacturing. Even after the current crisis passes, companies should rethink this model and keep stockpiles to increase resiliency, even if it is at the cost of short-term profits.
Time to Diversify
The pandemic also placed renewed focus on the hot-button issue of diversifying supply chains and reducing reliance on China, which has been the “factory of the world” for decades. This issue was already under discussion prior to the pandemic. When Covid-19 first emerged in China, the country’s factories shut down, causing massive supply chain disruptions for companies dependent on Chinese production. Though the virus eventually spread to the rest of the world, forcing factories everywhere to halt operations, the initial months of the pandemic were still a reminder of the risks of overdependence on one country or region. The next crisis could be China-specific; for instance, the country is currently struggling with power generation forcing some factory closures. Rising geopolitical tensions between the United States and China could also make continued reliance on China risky. For these reasons, many observers are starting to conclude that rerouting some supply chains would mitigate future risks.
Developed countries should be realistic about their ability to reshore manufacturing to ensure supply chain resilience. This can likely only be done for technologically advanced, research-intensive production such as semiconductor and battery manufacturing. Most developed countries probably cannot compete in more labor-intensive manufacturing due to their higher labor costs. Some countries facing this challenge have devised national policies to reroute some of their production to lower-cost nations other than China. Japan, for example, is incentivizing moving production to countries such as Vietnam and Thailand. Even without a concerted national policy, companies including Apple and Samsung have begun to move some of their production outside China. The United States has noted the need to reduce dependence on China and other countries for strategically significant goods, such as rare earth elements. Nearshoring could both reduce dependence on China and shorten supply chains for a range of products.
However, even with these steps, China remains perhaps the only country with competitive labor costs, enough skilled labor, and the infrastructure to meet much of the global demand for manufactured goods. It will thus likely remain an important part of global supply chains for the foreseeable future. The goal is not to shut China out of global supply chains, but to diversify supply and reduce overreliance on any one country.
A Real, Risk-Based Understanding
In most companies, the understanding of supply chains is incomplete, often fragmented across the enterprise and viewed through a “cost” perspective. Surveys of chief procurement officers (CPOs) by KPMG, Deloitte, and the Business Continuity Institute have all shown that one-half to two-thirds of these professionals do not have full visibility of their supply chains, and they have almost no visibility into the supply chain below their company’s direct suppliers. Even as CPOs admit they have a limited view, their risk-management colleagues understand that supply chains can be major vulnerabilities.
Given the experience of the pandemic and the recognition of the lack of visibility and the risks, it is time for data analysis to drive understanding and management of supply chain risk. Modern quantitative analytical tools and industry-wide event cataloguing can all play roles. Companies should consider adopting formal supplier risk-management policies. The goal of this work is to develop not just the lowest-cost supply chain, but rather the optimum supply chain, one that is adjusted for risk and uncertainty.
The current supply chain crisis, though likely temporary, should prompt action to address some of these underlying issues that have long plagued the system. Doing so would make supply chains more resilient against the next shock.
Adapted from an article appearing on CFR.org. Reprinted with permission. For more analysis and articles on global supply chains and foreign policy, visit CFR.org.
