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Factors Wreaking Havoc in the Global Supply Chain Crisis

by | May 2, 2022 | Industry




Today’s supply chains have become a vital part of our lives. The ease of ordering products and services is a testament to the fine-tuned nature of the supply network. A supply chain is a long and often complicated journey that any item takes before reaching the end-user. It is a network of organizations that help a company create a product. It comprises suppliers, manufacturers, distributors, and retailers.

Ultimately, it helps reduce costs and speed up production which helps companies remain competitive. When a supply chain is efficient, a company can reduce its costs and increase its net value. The supply chain works like that:

Raw materials are mined, grown, or produced before being sold to suppliers. Those suppliers sell the materials to manufacturers, who transform those raw materials into finished goods. Those finished goods are moved around the world by distributors and carriers before reaching the retailers. Then at last the retailer sells the finished good to final consumers.

Importance of supply chain

Today’s world of business is one big supply chain. A good logistics network can help companies build their reputation, satisfy customers, and set a quality benchmark for the products they sell. Essentially, supply chain management (SCM) entails a long process, from the purchase of raw materials to the distribution of finished products. This includes labor and production costs.

But the result is not only about customer satisfaction, it is also about the competitive edge for a company. A good supply network helps companies increase their efficiency in the production process. Knowing that the distribution will arrive when it is needed will free up internal resources to focus on the rest of the production process. And if inventory doesn’t arrive on time this can have dramatic consequences for an organization.

Even the most efficient internal operations will fall flat if a company cannot find the necessary components when they need them. And as the customer demands certainty from the supplier, the supply chain must always function well for everything to run smoothly. The chain also determines the cost of the product.

bird eye view of a port with a lot of containers
Photo by Tom Fisk from Pexels

A better supply network can help companies reduce their costs. Because costs are under control, profits can be higher and the cost of doing business decreases. When manufacturing costs are lower, operating costs go down and the cost of raw materials and production goes down, profits go up.

SCM encompasses the movement, storage and manufacturing of goods. Effective SCM will optimize information, financial capital and materials throughout the logistics chain. It will also help companies achieve competitive advantages over their competitors.

The global supply chain is a complex series of interconnected steps that a product must go through to reach its final consumer. Now products often cross dozens of countries before reaching the end consumer. Each link in the chain is specialized in a particular step of the production process. This has many advantages for companies.

They can source production wherever it is cheaper and provide a broader selection of goods at a lower cost, but it also poses risks for companies. If the logistics network is not managed properly or there are issues in the link, this could result in a plethora of problems for businesses. If it is not efficient, it can lead to a business failing in its mission to meet customer demands. And that’s what’s happening today.

The supply chain crisis

Supply chains throughout the world are facing a crisis. The global distribution network isn’t functioning as it normally does and that’s impacting us all around the world. The recent pandemic has affected the industry and disrupted manufacturing and logistics companies, as well as the consumer. The pandemic has affected many industries, from transportation to shipping.

As the world economy grows, supply chain disruptions have become a major concern. The pandemic and widespread factory lockdowns, and logistics disruptions affect the costs and delivery times of products. Subsequently, disrupting the production capacity of companies. In the wake of the pandemic, the demand for certain products rose sharply.

This led to a shortage of materials and parts, resulting in higher prices and a reduction in profit margins. And as everyone was gradually returning to normal, some countries earlier than others this has impacted the procurement of raw materials even more. The shortage of raw materials has been a big issue in supply chains and it has been difficult for companies to meet their customers’ demands.

The impact of the pandemic was profound, but the supply response was dampened. The pandemic did cause shortages that would not have happened in the manner they did. However, it is not entirely responsible for this disruption. What made this disruption possible is a fundamental, structural vulnerability in the way today’s supply chains work.

During the past years, the rise of the pandemic has highlighted the fragility of global supply chains. Companies are so interdependent as things are made in one place and consumed in another. Globalization has brought a system of production known as just-in-time manufacturing. This system only delivers goods to firms when they need them which is fine until they don’t arrive.

In addition to a lack of raw materials, a shortage of trucks and containers created several logistical problems. While the issue is not specific to a specific industry, the repercussions are severe, affecting many sectors of the economy. The shortage of shipping containers is having global consequences. When the whole world was in lockdown, China’s manufacturing industry was emerging from it.

The entire world bought masks, equipment and regular goods from China and once those containers arrived at ports they were unloaded. However, due to those countries’ sanitary restrictions, there wasn’t enough shipped out. For every 2 containers that are imported only 1 was exported.

So, containers stacked up in the places they weren’t needed and didn’t make it back to the places where they were needed. Not only that, but a shortage of truck drivers means that it is even tougher to get empty containers back. The logistic sector is facing a labor and trucker shortage.

The labor markets throughout the world are very uneven. In some countries, there are labor shortages in terms of not enough labor to fill key roles and positions within suppliers and other aspects of the distribution network. In other cases, there’s not the right skill set or the right education level.

huge container ship being unloaded with crane
Image by MICHOFF from Pixabay

You may have heard about backlogged cargo ships in ports around the US, UK, and Germany. However, many of these problems are largely the result of fundamental changes in consumer demand. The types of goods we want, their prices, and the speed at which we want them. The global distribution chain has become increasingly complex and prone to scale mismatches.

The buying strength of consumers is so strong that it is creating a gap between supply and demand. And freight companies are not able to absorb these changes which in turn disrupts the logistics chain. The rise of globalization has increased the importance of the supply chain in our everyday lives. Many items are now manufactured overseas and shipped to retail outlets.

As technology advances and competition becomes more intense, the complexity of SCM is increasing. Short product life cycles, global competition and a lack of talent make these networks of distribution even more complicated and fragile. The fact that logistics networks are broken and we’re seeing it affect our day-to-day lives.

Consumers are faced with shortages of products and delays in orders that might make businesses struggle even more. Container prices have also gone through the roof and it is becoming unworkable. Logistics disruption can have catastrophic consequences for the entire chain, affecting consumers and economic growth. The pandemic has made supply and demands highly volatile. It has caused supply and demand to shift faster than the supply network could keep up with.

Additionally, companies are depended on the same suppliers to provide key resources, raw materials, inputs or parts. Most companies relied on single third-party logistics providers to provide logistics for their business. Or perhaps they relied on a single port for overseas products. This can be justified by the semiconductor chip shortages which are wreaking havoc in many industries.

In the past, relying on a sole supplier may have worked perfectly fine but in today’s unstable world we require a lot more flexibility and decentralization of risk. Also in today’s digital-driven world, a lot of organizations still don’t have the right technologies, software, application, automation, or predictive analytics tools to be able to ensure the efficiency of the distribution chain.

Today online shopping is booming and heavily driven by technology to drive sales up. While retailers have already embraced the power of technology to drive more sales, the supply chain industry has been a little bit slow to do so. Which has somehow created a gap between supply and demand.

When a single part of the chain is disrupted, the entire system is affected. But now we are seeing multiple defective links within the network. This disrupted distribution network impacts consumers and global economic growth. And the consequences of a global supply chain crisis cannot be overstated.

What next?

If we learned one thing since the 2020s is that supply chains have a very concentrated level of risk. In a world where disasters and emergencies have caused logistics disruption, the value of supply networks is increasingly critical. The resulting chaos would affect everyone, from companies and workers to the bottom line of small businesses.

Despite the global economic recovery underway, logistics disruptions will likely continue to deteriorate. In such a case, the company will be judged by communities based on the response it gives to these crises. The first step is understanding the vulnerabilities of the distribution network and taking the appropriate actions to strengthen its robustness.

Rather than being overly dependent on one raw material provider or one third-party logistic provider or a single port for all products coming in and out. Companies now need to look for backup plans. How to diversify risk and hedge risk to make sure that any disruption in the supply chain isn’t going to completely disrupt the network.

Companies need to embrace technology. It’s only now that a lot of organizations are finding that using automation and artificial intelligence technologies provides better business intelligence and predictive analytics. Technologies not only enable improvements in SCM but also in enterprise resource planning.

It also provides better visibility via automated technology tools. This is the best way to ensure business efficiency. Technologies can be a great way to mitigate the labor shortage crisis and ensure that companies attract and retain the right talent. Companies need to embrace industry 4.0 to reorganize global value chains. Automation and reshoring allow for more agile adjustment to change.

While the global economy is experiencing a growing trend of reshoring, not all companies can adopt such a policy. In particular, companies that rely on a single country’s supply network face a greater risk of experiencing a breakdown. If the company relies on one country for manufacturing, the global logistics network will be at risk.

However, reshoring can help businesses mitigate some of the risks associated with this situation. Some global supply chains can still be salvaged, but the time has come for them to restructure. Regardless of the causes, 2022 will be a pivotal year for procurement. New carrier agreements, restoring and diversified suppliers are all options.

A thriving global economy is challenging the traditional approach to manufacturing and distribution. Global distribution chains have to be flexible to meet the varying demands of consumers and the increasingly sophisticated tastes of consumers. However, a successful logistics network must address more complex issues that aren’t addressed by traditional business models.

Those shortages will only grow and the global supply chain will be even more strained as more cargo trucks and ships encounter bottlenecks. While logistics disruptions are widespread, these are likely temporary. While the current supply chain crisis has placed an enormous strain on the global economy, some policies can mitigate this short-term pressure on the system.

This problem has several causes, including labor shortages, rising gas prices and port congestion. Rising freight costs require executives to restructure their partnerships with carriers. If companies want to stay competitive in the global marketplace, they must be prepared to make some tough decisions.

The pandemic has exposed supply chain vulnerabilities and many businesses are now working to adapt and make their procurement and distribution more resilient. As a result, many business leaders are looking at their logistics network in new ways and aiming to build stronger, more resilient, and more efficient systems.