Covid has broken supply chains. Now on the mend, will they be able to withstand a new shock?


Minneapolis
CNN

The pandemic has dislodged the global supply chain, plunging once smoothly functioning businesses, industries and economies into a state of disarray.

After almost three years of fluctuations and extreme extremes, the system is slowly accelerating and synchronizing better: ocean freight times are steadily decreasing, ports are less congested, labor strikes have been narrowly averted, product and worker shortages have eased, prices have fallen, warehouses are full (perhaps too full), friendhoring, nearshoring, and reshoring efforts have accelerated, and China has lifted its “zero Covid” policy.

“We had a fundamental change that started about six months ago,” said Timothy Fiore, president of the Institute for Supply Management. “There are certain components, such as integrated circuits [and] microcontrollers, which still impact manufacturers’ ability to get hardware around. But, overall, the pressure has eased.

However, many potential obstacles continue to loom.

Globally, developments in China and Ukraine remain permanent question marks, particularly if the manufacturing megapower suffers another setback or lockdown, or if conditions worsen with Russia’s war in Europe.

Domestically, exports have weakened and the state of consumer demand remains a wildcard, said Phil Levy, chief economist at freight forwarder and consultancy Flexport.

“I wouldn’t describe it as a purring machine right now,” he said. “It’s more about getting your bearings and trying to figure out what’s next.”

Among the potential bottlenecks: warehousing capacity in some places, including Southern California, is nearly full, he said. Additionally, the inland distribution network — particularly rail and areas where transfers are made between modes — has experienced some challenges, he said.

The system is not yet at a steady state where companies have a good idea of ​​how long it will take to produce, ship, and ultimately sell.

“I don’t think we have that,” Levy said. “There is still a lot of uncertainty about how long it takes to move things. When you see the warehouses piled up, is it because the demand is too low? Is it because people have moved things too early? So there are a lot of things that are still in the process of being settled.

Supply chain activity has not yet normalized, but is returning to pre-pandemic trajectories, said Zac Rogers, assistant professor of supply chain operations and management at Colorado State University. .

“There’s a sort of reaction-over-reaction pattern that always tends to happen whenever there’s a major disruption,” Rogers said. “And Covid is the biggest disruption we’ve had.”

At the start of the pandemic, companies canceled orders, thinking consumer spending would be crushed. However, trillions of dollars have been pumped into the economy in an attempt to keep consumers and businesses afloat. Americans, stuck at home with fewer outlets for discretionary spending, have turned to e-commerce for their purchases.

Increased demand for finished goods at a time when supply was severely constrained in part due to pandemic-related labor shortages and closures – including cities, factories and manufacturing centers in China – has messed up the global logistics system.

Ports have become congested, delays have become long and costs have increased dramatically as shortages have increased throughout the supply chain.

“Everybody over-ordered, and around February and March of [last] year it all happened – just about in time for the invasion of Ukraine,” Rogers said.

Gasoline prices and inflation soared, which significantly reduced consumer spending.

“The challenge of the last 10 months in supply chains has been trying to make the connection between bringing inventory down to a reasonable level, not overreacting, again, and [landing] in a shortage situation,” he said. “We are moving back towards the trendline in a way that we haven’t done in recent years.”

To help with that, supply chains are much more resilient now than they were at the end of 2019, Rogers said.

“In 2019, we pretty much had all of our chips in one hand, which is things are built in East Asia, come on a boat through Southern California ports, they go up in trains that go to Chicago and then to other trains or trucks to distribute to the East Coast,” he said.

And while it’s nearly impossible to divorce China, companies are taking different supply chain routes, whether in Vietnam, Bangladesh, Central America or domestically, Rogers said.

“Because of this, supply chains aren’t as fragile as they were three years ago,” he said. “And so if there’s another shock – especially if there’s a China-centric shock – I think we’ll be able to absorb it a little bit better than we did. … But you can’t disregard something like the invasion of Ukraine or a viral outbreak shutting down the world – no system is designed to handle that smoothly.

Rogers is also a researcher and co-author of the Logistics Managers’ Index, a monthly survey of supply chain executives conducted by a team of university researchers and the Council of Supply Chain Management Professionals.

The December reading of the index – which measures inventory levels and costs; storage capacity; use and price; and transmission capacity, utilization and pricing — came in at 54.6, up 1 point after eight months of declines.

The majority of IMT measurements were in the 40s, 50s and 60s range, Rogers said, noting that this is the first time since the start of the pandemic that the indices have not been in the 70s. or 80.

The container ship Ever Libra (TW) docks at the Port of Los Angeles on Monday, November 1.  21, 2022. The supply backlogs of the past two years – and the delays, shortages and exorbitant prices they have caused – have improved considerably since the summer.

“If you’re 40, that’s a contraction, but 50 is normal, healthy growth rates,” he said. “There could be another huge black swan event in a month that would turn everything upside down; but at the moment it looks like respondents are predicting supply chain stability.

On the contrary, the shock of the pandemic on the supply chain should be a wake-up call, said Jack Buffington, director of supply chain and sustainability at First Key Consulting and assistant professor of chain management. supply at the University of Denver.

“I would categorize it as ‘effectively broken,’” said Buffington, whose own book on supply chains, “Reinventing the Supply Chain: A 21st Century Covenant with America,” had its release delayed due to security concerns. supply chain.

“All supply chains are really supply and demand, and there have been so many disruptions in materials and consumer demand related to labor, inflation, and geopolitics,” a- he declared. “Inherently, the foundation of the model is broken from what the demands of today are. The complexities of a globalized supply chain, human systems are not able to handle.

He added: “Covid was not the cause of the problems with the supply chain, it was a trigger to show how bad it was,” he said.

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