The supply chain crisis around the world is significant, and it doesn’t feel like it’s going away. The impact of this on business is potentially enormous, and even more difficult in these times of high inflation, high interest rates and potentially reducing demand.
Shortages of semiconductors / chips is probably most visibly widespread issue, affecting no less than 169 industries, including IT, motor vehicles, consumer electronics, appliances and many, many more.
However, apart from the shortages of oil and gas, of wheat and sunflower oil, which are being felt since the invasion of Ukraine by Russia in February, there are many other shortages, too. For example, there’s a global shortage of epidural catheter kits – something of serious concern to expectant parents. I’ve read of year-long waiting lists for children’s bicycles, of clothing, and so much more, too.
And, of course, disruptions affect other industries, too – if an event cannot be staged because vital equipment is missing, that impacts the event companies, accommodation and food businesses, and all others peripherally involved, too.
So, what is causing these shortages and what scenarios are likely, as it’s vital for businesses to understand this to properly manage their risk exposure? You simply cannot say that your business will not be impacted at all, as the ripple effects impact everyone.
The start of the supply chain issue was, of course, the COVID-19 pandemic. Acting on what turned out to be incorrect information (possibly because China was trying to cover the believed source) on the speed and severity of infection, governments around the world imposed restrictions on gatherings and so, in effect, shuttered businesses, in a way never seen before.
And while many service business could, and in most cases did, pivot to a work-from-home model, albeit with varying degrees of success, manufacturing business and others reliant on physical presence to operate, could not and so had to suspend operations. And, of course, it was not just factories that closed, but the logistics side of things was also affected – if not closed completely in some cases, then severely curtailed – while China closed entire cities for protracted periods in its unsuccessful drive to achieve zero-COVID, and continues to do so from time to time.
So, many production lines were stopped, as were things like foundries, and staff were laid off. Ports were closed, too, so a number of ship operators decided to scrap ships rather than incur the costs of maintaining them while unable to operate them. So even for those factories able to operate, generally under some sort of emergency allowance, being able to ship the goods was subject to a whole new set of problems and delays.
As restrictions in countries were eased and economic activity started to pick up, companies found themselves in the unusual situation of not being able to get the items they were ordering – the global efficient “just in time” systems had become “just wait for some time” ones instead. Given that some 80% of global international trade is carried by ship, a reduced number of vessels compounded by them being in the wrong parts of the world awaiting slots to either load or unload cargo saw massive increases in shipping times and costs.
And these delays continue today, made worse by both China – the world’s major manufacturing hub – still closing port cities without notice and other ports around the world suffering ongoing shortages of staff due to both illness and being unable to replace lost workers.
Paradoxically, though, while ports like Los Angeles (the USA’s biggest container and freight terminal) have worked hard to considerably reduce wait times this year (down almost 80% from January), and the number of shipping containers available worldwide is now at an all-time high, with a surplus of around 10%, so reducing the sky-high costs associated with long wait times and a shortage of containers, as CNBC reported, so other factors came into play.
Russia’s invasion of Ukraine and the consequent sanctions on Russia’s massive oil and gas exports have exacerbated already-constrained energy stocks (again, output had been reduced due to the pandemic), sending energy prices to new highs and so impacting the entire logistics chain.
Agricultural input costs have risen sharply. This is partly due to Russia and Ukraine, which are among the world’s largest exporters of some commodities such as wheat and sunflower (oil), having production cut and exports halted due to the war and partly due to the oil crisis which not only affects costs for planting, maintaining, and harvesting crops, but also of fertilizers where, for example, the nitrogen component is generally produced from natural gas.
So, what does the future look like for supply chain constraints?
Certainly, shipping congestion is easing and that factor fuelling costs has dropped. Offsetting this to a degree is the higher fuel costs, but the overall costs are still 12-15% down on a year ago, while shorter shipping times/delays means importers can reduce buffer inventory levels.
Specifically on the semiconductors side, the USA is increasingly concerned about China following Russia’s example and invading Taiwan – the major source of chips for many businesses around the world, with that country’s TSMC producing more than half of global chip supply and more than 90% of the most advanced ones. This has led to Congress recently passing a bill (the CHIPS for America Act) which will lead to a greatly increased focus on domestic chip manufacturing to decrease dependence on Taiwan. This will also, of course, lead to a reduction in the current global supply constraints which are affecting so many industries.
So, these are both areas of good news for global supply constraints.
However, on the negative side, China continues to impose short-notice severe area-wide lockdowns which continue to impact various industries and, of course, shipping, while the Ukraine / Russia conflict will continue to impact wheat and sunflower oil supplies, amongst others, as well as oil and gas supplies, particularly to Europe, which will have a ripple effect on industry and agriculture there.
But, overriding all of this is the impact of rapidly-growing inflation on the global economy. As inflation rises, central banks will continue to aggressively raise interest rates to cool economies, having learnt the painful lessons from the 1970s of not doing so. This is almost certain to cause a recession with Moody’s Analytics chief economist Mark Zandi putting the chances of a US recession in the next 12 months at 55%. Given that the Chinese economy is expected to grow more slowly than the US one this year, and the problems in Europe, this signals a major global drop.
So, demand is expected to drop noticeably removing any last vestiges of supply constraints – at least until the recession is past – but slowing demand and rising costs bring their own problems, of course.
Essentially, then, the need for careful risk management is paramount. If you’re not already having monthly board meetings with risk and strategy taking a central point in discussions, you should start doing so without delay. Understand what your competitors and the markets as a whole are doing. Look at various possible scenarios and have at least outline plans in place for each, drawing on the expertise of those who’ve previously experienced high interest rates and sharp contractions in business to help you with this. Remember, too, the 5Cs…
And remember, that many of today’s largest and strongest businesses rose in tough times – it’s about planning, not despair.
I work with successful owner-led businesses to enhance their growth, profitability, cash flow and business value.
If you’d like to have a conversation about your business, inflation, and risk, book a free 30-minute call with me here. I’d be delighted to talk with you.
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