The supply chain crisis: what’s going on?

How serious is the problem?

In 2021, UK consumers saw gaps in supermarket shelves, queues at petrol pumps and shortages of goods ranging from cars, refrigerators and building materials to McDonald’s toys and milkshakes. Shortages and delays in delivery are now a major problem in much of the world.

Global supply chains that have operated smoothly for decades were suddenly sidelined by a number of related systemic issues: a global shortage of semiconductor chips; an energy supply crisis; transport disruptions; and labor shortages. There are huge traffic jams in major US ports; Felixstowe, the UK’s largest container port, is forced to turn down ships from Asia due to lack of capacity. Supply chain disruptions are now appearing in “every corner,” reports Moody’s Analytics. “Everything is falling apart,” says Brian Bourke of supply chain specialist SEKO Logistics.

Why is this happening?

In short, because of the Covid-19. Since the start of 2020, the pandemic has closed factories and offices first in China and then around the world; then, it radically changed consumer spending. As manufacturing and moving goods became more difficult, people who were stuck at home – still earning or on leave but unable to spend their disposable income to get out – instead bought durable consumer goods: televisions, iPad, dishwasher, PlayStation, Pelotons. This, says The Economist, “sparked a furious but unbalanced rebound.” Since then, companies have struggled with back orders, especially as Covid restrictions remained in place in major manufacturing countries, like Vietnam. In the UK, workers have been slow to move from struggling industries – sandwich shops in town centers, for example – to high-demand areas such as truck driving and warehousing. And together, these patterns have put great pressure on global shipping, which carries 90% of the world’s traded goods.

How was the shipment affected?

Global maritime trade fell sharply in early 2020, as millions of sea containers delivering protective equipment were sent around the world. Then, when consumer demand rebounded faster than expected later in the year, a large backlog quickly built up. The pandemic has also caused other forms of navigation disruption. In August, China partially closed the world’s third busiest container port, Ningbo-Zhoushan, after a single case of Covid was detected, disrupting supply lines across the world. In the West, the lack of truck drivers to move incoming goods has increased delays. In Felixstowe, “dwell time” – the time goods spend in port – has doubled from four and a half days in 2020 to nine days. All of this had profound ripple effects.

What kind of ripple effects?

Today’s global businesses depend on just-in-time supply chains. This system, whereby companies rely on deliveries of raw materials or inventory exactly when they are needed, was first developed in the 1950s. Since then it has become a well-established feature of world trade. . In theory, it aims to improve efficiency by eliminating waste (of time, space or stock). But these supply chains are also vulnerable: isolated events can cause them to deviate from their path. The Ever Given blockade of the Suez Canal for six days in March wreaked havoc on businesses around the world. Delays in the delivery of inputs for manufacturing – be they microchips or magnets – mean that finished products are also delayed. So when a whole host of problems hit just-in-time supply chains – plant closures, labor shortages, shipment delays – at the same time, they have vast spillover effects on the economy. global business.

How has business been affected?

The cost of doing business has risen sharply. It now costs almost £ 11,000 to transport a 40ft container from East Asia to Europe – around ten times more than before the pandemic. In California, queues of more than 50 cargo ships have piled up off two of the largest US ports, Los Angeles and Long Beach; before Covid, it was unusual for more than one to wait for a seat. Businesses can face delays of several months. Large retail chains such as John Lewis chartered their own ships to transport goods. The shortage of microchips caused UK car production to drop by almost 30% in the year through August. Toyota had to reduce its global production by 40%. The IMF has warned that supply disruptions and inflation could derail the post-Covid recovery.

Are all these problems due to Covid?

No. Part of the problem is that the pandemic occurred at a time when supply chains were fragile anyway. First, the rise of economic nationalism – whether it’s Brexit or the US-China trade war – has resulted in the introduction of new tariffs, border bureaucracy, and immigration controls. . Many countries are now bringing their supply chains to land, which could make them more robust in the future, but exacerbate the current difficulties. Second, the push towards decarbonization has left power producers in Europe and China struggling to meet increased demand for electricity.

When will the problems end?

There was a consensus earlier in the pandemic that factories and shipping companies would catch up with demand within months and clear the backlog. But that didn’t happen until the peak shipping season began before Christmas. Moody’s Analytics warns that supply chain disruptions “will get worse before they get better.” More optimistic, investment bank Jefferies predicted this week that October would turn out to be the worst month and that we are already “past the peak” of cargo ship delays, port bottlenecks and labor shortages. -work. But even so, most experts predict that it will take at least six months and maybe more than a year for the situation to stabilize. “The world still lacks everything,” read a recent New York Times headline. “Get used to it. “

Will Christmas be canceled?

The explosion in Christmas food, toy and gift shopping is grueling at the best of times: supply chain officials describe it as ‘pushing the pig through the python’. But this year, business leaders and shipping lines have been warning for months that the festive surge in demand will not be met at a time when the UK grapples with maritime congestion, a fuel crisis and shortages of truck drivers and slaughterhouse workers.

“I don’t want to look like a Grinch,” a shipping official told The Times, “but there are going to be gaps on the shelves this Christmas.” The National Farmers Union has warned of problems in the meat industry. Ministers were keen to play down fears about the problems consumers face at Christmas. “I am confident that there will be a fair amount of Christmas presents available for everyone to buy,” Chancellor Rishi Sunak said last week. This sentiment was echoed by Tim Morris, managing director of the UK Major Ports Group, who said supply chains are ultimately “strong” and there is no need to panic. But it is a question that could come back to gnaw the government. “To cancel one Christmas can be considered negligence,” said Patrick Maguire in The Times, but “to cancel two …”