Key Judgements
- Supply chains have become increasingly global and complex, using “just in time” production processes to keep inventories and costs low. They are increasingly susceptible to interruptions and even breakdowns.
- COVID-19 has highlighted this vulnerability where increased demand from COVID-19 recovering economies has coincided with the inability of Asian economies to supply. Further, some specific national issues can lead to localized spikes.
- The result is increased costs of raw materials, energy and shipping, and delayed goods to manufacturers. Manufacturers with over-reliance on finely tuned supply chains are especially vulnerable. Second-order consequences include increased inflation, reduced consumer spending, and delayed economic recovery.
Vessels Await Offloading at San Pedro
On October 5, almost 70 vessels were awaiting San Pedro Bay, the busiest American port complex. Nearly every day over the last three weeks, the number of vessels waiting has exceeded San Pedro’s daily congestion records. To reduce the backlog, port authorities have increased truck operating hours to 24/7. But vessels are still waiting for an average of three weeks before being able to unload; one year ago, vessels would remain at anchorage for an average of 1.3 days. The cause of the delays at San Pedro Bay are both specific to a single problem and indicative of broader strains on the global supply chain.
Further Delays Expected in the Coming Weeks
The current delays at San Pedro can be partially explained by the closure of the Meishan terminal at Ningbo-Zhoushan port, China, where operations were suspended for three weeks at the beginning of August 2021 after a port worker tested positive for COVID-19. Ningbo port complex is the world’s third busiest in terms of goods, using 4.5% of the world’s containers. This closure caused significant delays to shipping from Asia to the US west coast, which has now partially impacted the US market, leading to delays in delivery and shortages of goods.
The delays at San Pedro underscore the vulnerability of the modern global supply chain process. More particularly, the Toyota-originated “just in time” model has proved susceptible to shocks and breakdowns. The “just in time” model advocates a lean supply chain by reducing inventory to reduce costs and guard against obsolescence. During normal operating times, the process would run smoothly, with spill-overs sufficiently supplying the demand. However, global crises can highlight vulnerabilities, especially when dependencies are concentrated in challenging parts of the world.
The COVID-19 pandemic revealed pre-existing supply-chain challenges and how the “just in time” model is vulnerable to breakdowns. If one spill-over in the process stops, the whole chain is delayed and blocked.
COVID-19 Situational Conditions Reveal Structural Problems
COVID-19 impacted supply chains in three main ways. Firstly, as the pandemic broke, demand slumped, manufacturing factories closed, and production lines dried up. South-eastern Asian countries – which produce over a third of the world’s manufactured goods - were hard hit by COVID outbreaks in 2021 and imposed restrictions, which slowed their ability to supply. Yet, when “Western” economies reopened and demand for goods quickly rebounded to pre-pandemic levels, suppliers could not adequately match the demand. Incompressible transportation delays compounded matters.
Secondly, lockdowns and closures throughout the world delayed the logistics of shipping. When economies locked down over Spring 2020, empty containers were stuck in the world’s ports. As restrictions still remain, manufacturing countries face a shortage of empty containers, inhibiting their ability to ship goods. Prices rose to $10,000 per 40ft container shipped globally; in August 2019, 40ft containers shipped globally would have cost $1,800. The closure of the Ningbo-Zhoushan port forced delays as no containers could leave it.
Thirdly, restrictions also limit the ports’ workforce. For example, Indian workers - representing one-fifth of the world’s sailors - have faced entry restrictions in most world ports. Indeed, as India faced a brutal COVID-19 epidemic wave in May 2021, Indian nationals were banned from traveling, causing thousands of vessel crew to be stuck at anchorage without operating.
Unpredictable Impacts
There are occasions where strains to the supply chain manifest quickly and cause localized spikes due to national symptoms. In the UK, COVID-19 restrictions prevented thousands of heavy goods drivers from entering the workforce, exacerbated by rule changes following the UK withdrawal from the European Union. Rumors that the driver shortage had limited fuel supply caused a temporary spike in demand, panic buying at British petrol pumps, and a resultant fuel shortage.
The impact of the supply chain crisis is not only on short-term delays and limited to the world’s ports. Sectors that rely heavily on the “just in time” model with a finely balanced supply chain may experience severe shortages, notably in the case of automobile industry components. Industries reliant on goods in short supply – such as lithium, rare earth, and wood supplies – are also vulnerable to delays and increased costs. The global price for a container shipment in the past quarter has increased by 547%; as vessels are awaiting outside ports, bringing a new container in for shipping is more expensive, which is often passed on to consumer goods. Second-order consequences of increased costs may include inflationary pressure, reduced consumer spending, and delayed economic recovery.
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