Pandemic upends global supply chain
The prolonged pandemic and resultant supply chain disruptions have left the world facing unprecedented shortages and a rise in prices of commodities and a possible reorienting of the existing supply chain management regime.
As the world entered the second year of the COVID-19 pandemic, the global trade is facing soaring freight rates and delays in deliveries. Six months into 2021, uneven recovery from the pandemic and recurring waves of infection across major trading hubs are causing shortages and a rise in prices of the commodities. Across the world, major manufacturers are reporting the shortages of all kinds of products—from potato chips to causing shortages and a rise in prices of the commodities. Across the world, major manufacturers are reporting the shortages of all kinds of products—from semiconductor chips. These shortages have disrupted global supply chains. Estimatessuggest that the shortage of semiconductor chips has impacted 169 industries across the board, which could last well into 2022. The chip shortage has even forced large automobile manufacturers to shut production and expected to cost the global automotive industryUS$110 billion in revenue in 2021. The chip shortage has exposed how the concentration on the handful of manufacturers to supply the demand of the essential items can disrupt industries across the world.
At the same time, the pandemic-induced delays in shipping has further deepened the shortage of products in almost every other segment. The ports were already facing a huge backlog of deliveries as they had scaled back the operation due to the pandemic. Then as the scale of the pandemic started to wane and restrictions imposed on the movements began to ease around the end of 2020, the movement of goods was hindered by a shortage of container and container ships. The mismatch between the supply of and demand for empty containers even caused the ships to resort to what is known as blank sailing—that is skipping ports. The shortage was further exacerbated by the increased demand for goods as consumers emerged from the lockdown. Moreover, manufacturers across the world have started to stockpile inputs in anticipation of another wave of the pandemic further exacerbating the shortage.
The Suez Canal mishap further added to the woes faced by the shipping industry as the massive cargo ship stuck in the trade passageway blocked the sea traffic for six days in March at one of the world’s most important trade routes. A recent upsurge in infection in the Chinese province of Guangdong caused massive delays in major Chinese ports of Shenzhen and Guangzhou that account for nearly one-fourth of China’s trade. These consecutive crises in the shipping industry have caused the freight rates to skyrocket to the historical highs.
According to an analysis by UNCTAD, the early-2021 peak freight rates were higher on all routes. The freight rates from China to South America were 443 percent higher than the median for that route. The Baltic Dry Index, which shows average prices paid for the transport of dry bulk materials across more than 20 routes, has been on a steep rise since May 2020 (see figure), even reaching an 11-year high in late June. Increased freight cost will eventually be shifted to the consumers giving rise to higher prices. Consumers are already facing the prospects of higher inflation as food prices are rising at unprecedented speed. According to the Food and Agriculture Organization, food prices were nearly 40 percent higher in May 2021 than a year ago, the sharpest increase since September 2011. Increasing prices will add to the existing woes caused by the recurrent waves of the pandemic and impact the world’s vulnerable the most.
The logistical disruptions caused by the pandemic also threaten to reorient the functioning of the global supply chain management. The domino effect of the supply chain disruption has left many questioning the efficiency of the fragmented production networks. The pandemic has demonstrated that concentration of suppliers and buyers make the supply chain vulnerable to shocks and magnify shock propagation. Moreover, the pandemic has exposed the flaws of the just-in-time supply chain method, which is a process of moving material right before it is needed. This method eliminated the need to hold large inventories for the manufacturers, thus saving money and making production runs shorter, and facilitated scattering of production networks across the world. The pandemic has given impetus to the voices that have been supporting the reshoring of the production process to the US and Europe. The Biden administration has commissioned a review of critical US supply chains following the spate of shortages. However, studies have shown that the majority of countries are better off in the interconnected regime, indicating that reshoring does not make economic sense.
The pandemic has disrupted almost every aspect of the world today but at the same time exposed resilience and adaptive capacities of those affected. The supply chain management and global movement of goods are some of those. Despite the difficulties, the sector has been able to cope with the disruptions to an extent. Experts believe that instead of upending the existing global value chain regime, the actors in the system are likely to adopt data-driven real-time insights to manage inventory. Likewise, opting for regional value chains or regionalizing the stockpiles could be the best way forward.
Ms. Singh is Senior Research Officer at SAWTEE.