Supply Chain

Crunch Time: Demand Rebound Causing Strains Across Supply Chains

With trade restrictions and delivery complications sparked by the pandemic, immense pressure has been placed on international supply chains to meet consumer demand. Manufacturers are faced with spiraling shipping costs and delays, resulting in product shortages and lags in delivery times. 

As the vulnerabilities in global supply chains continue to be exposed by the pandemic, we look at how firms can safeguard themselves in the future and take a look at an example of how local supply chain loops could be a part of the answer.

Triggering the supply crunch

When the pandemic took hold in early 2020, one thing quickly became clear — the world was not merely dependent on China for manufacturing, but suddenly also over-exposed. In 2018, China exported 2.5 trillion dollars worth of goods across the globe, around 13.3% of the global share, ahead of the US and Germany with 8.8% and 7.9%, respectively. The EU relies heavily on China for medical supplies, electronics, textiles, furniture, toys, and the list goes on. When China’s production lines slowed, the knock-on effect was felt widely and quickly.

Nowhere was this more apparent than in the pharmaceutical industry. By February 2020, companies were already feeling the squeeze and announced price hikes for over-the-counter medicines. Aspar Pharmaceuticals, a major supplier of pain relief medicines to chemists and supermarkets, increased the price of aspirin and paracetamol by 20% due to a shortage of raw materials from China (and India). And in the automotive industry, the EU saw a $2.5 billion decline in trade caused by supply chain disruptions and shortages in China.

Strains on shipping 

New restrictions in China and across the world also slowed down shipping processes considerably, sparking more bottlenecks at ports, severe disruptions to delivery times, and skyrocketing costs. This ultimately led to further product shortages throughout the EU. 

In a January survey of 900 SMEs by global freight marketplace Freightos, 77% claim to have experienced supply chain difficulties in the past six months alone. Moreover, as a result of container shortages and demand recoveries, costs to ship goods from China to Europe have more than quadrupled since November. Amongst the most shocking examples, Frucom, the representative body of European traders in dried fruit & nuts, stated that one of its members had been quoted $16,500 to ship a 40ft container, an increase of 667% on a previous $2,150 quote just months earlier.


Source: Freightos Baltic Index

Thinking ahead

Coupling the strains on supply chains due to over-exposure to far-off production with a growing sentiment to support struggling local businesses, a growing trend for local sourcing and local buying has emerged. Add to the mix, the ecological consciousness of the 21st Century and reducing dependence on international supply chains should come almost naturally. To take advantage of this trifecta, businesses will look to local networks to protect their operations in the face of global disruptions while marketing their local support. Take, for example, Good Eggs. The San Francisco-based food delivery company sources 70% of its inventory from surrounding areas and recently received $100m in funding to expand its operations to Los Angeles. 

Navigating limitations

By exposing vulnerabilities in global supply chains, companies have had their business models challenged and often had to pass an increase in pricing onto consumers – in particular companies making less than $5 million in annual revenues. Does that mean companies should now aim to cut down global suppliers completely? Of course not. Globalization still plays a key role in staying competitive. But firms will need to seriously look at diversification and that’s where the main challenge arises: to strengthen supply chains without weakening their competitiveness — identifying areas of improvement that can ensure the efficiency and solvency of their operations. 

Carrying out advanced supply chain mapping is essential for deciding whether every distributor in a supply chain is low, medium, or high-risk. These risks can then be mitigated by becoming more flexible, for example, by diversifying suppliers or stockpiling certain crucial materials, especially if a sales pipeline can back this up. Containment strategies are also a viable option, minimizing the disruption to production in the event one section of the supply chain takes a hit.

Taking advantage of accelerated innovation

As firms reassess their supply chains, more opportunities to modernize and implement new technologies arise. Companies that develop new local networks should seize the chance to leverage the latest innovations in fulfillment and distribution tech. On the one hand, smart warehouses, robotics, and advanced inventory management software are ensuring that production and supply chain management processes are as lean and cost-efficient as possible. On the other, the demand for innovation in these fields has now been brought forward by several years. Dealflow and startup activity in these areas is expected to respond accordingly. And the response may just have a local ring to it, also.