This article is based on Distribution Strategy Group’s recent report, Supply Chain Outlook: What to Expect in 2022 and Beyond. Get your free copy today.
Pressure on the global supply chain isn’t likely to let up anytime soon.
Labor shortages, port congestion and manufacturing delays are throwing off the supply chain’s delicate balance. Higher demand for products is exacerbating supply chain challenges. While some indicators might suggest that the pressure beginning to ease, it is important to note that today’s conditions are far removed from normal, and disruption is, unfortunately, likely to continue for the foreseeable future. The current geopolitical landscape might cause any easing to reverse, extending our stay in this unusual state even longer.
As a result, there’s still a long road ahead.
What is causing continued supply chain disruption?
Any discussion of supply chain disruptions in the U.S. cannot ignore the elephant in the room: our dependence on China.
The U.S. relies heavily on China for manufacturing of components and finished goods. Total imports from China jumped 16% between 2020-2021.
China has had its fair share of problems over the past two years:
- Labor shortage: Like the U.S., China is facing a labor shortage in the manufacturing sector. Workers below the age of 40 do not want to work in factories and instead gravitate toward less strenuous and higher-paying service jobs. This means that China is understaffed in manufacturing.
- Power shortages: In 2021, power shortages plagued China. The provinces in the north rely on coal to fuel their factories. However, regional flooding in the area halted coal production and led to widespread power outages. In the south, regional droughts put a strain on hydropower production. The government has implemented power rationing in regions, forcing companies to operate at half time or less.
- COVID-related lockdowns: Although they are lessening, COVID-related lockdowns also continue to hamper production in several provinces, including Zhejiang and Guangdong – regions in the “consumer belt” that produce a sizable portion of the products handled by U.S. distributors.
- Extended holiday period: Shutdowns related to continued concerns over COVID and power rationing coincided with the Chinese New Year, a major national holiday for many East and Southeast Asian countries. Because of this, the Chinese government extended the holiday period in 2022 in many provinces. This unusual extension halted production and shipping across the country for 15-30 days.
- Transportation issues: Transportation issues, whether it be container shipping or trucking/rail-related, further complicate matters because they are the lifeblood of moving goods around the world.
Shipping Delays & Costs
The most heavily trafficked shipping routes fall between Asia and North America and Asia and Northern Europe. Several factors, including container shortages, have caused shipping delays and spikes in transportation costs.
Chinese companies control 96% of dry-container production and 100% of refrigerated container production. Unfortunately, a shortage of raw materials combined with power outages and labor concerns has led to a decline in container manufacturing. Containers that cost between $1,600 and $1,800 two years ago have doubled or even tripled in price as the overall container shortage reached about 600,000 units.
The flow of containers through global shipping channels slowed in 2019-20. Although there has always been a gap between containers received and shipped back, that difference has grown since COVID-19. As demand surged, containers shipped from China were not returning at the same rates. A significant drop in truck chassis and drivers means containers are piling high in ports. As a result, containers are not making their way back to their point of origin, contributing to the imbalance, driving up prices and further straining distribution.
Dock and Land Transport
Many supply-chain issues are closer to home than some may realize. Port congestion, labor shortages and a sharp drop in chassis and truck availability have thrown a wrench into everyday operations in the U.S. Manufacturing delays in the production of spare parts and skyrocketing raw-material prices has limited repair of existing chassis. This has driven up used-chassis prices.
Companies are also making fewer trucks due to semiconductor chip shortages, and heightened demand has led to low availability. For distribution to be successful, a container must be unloaded from the ship, placed onto a chassis and transported from the port to its destination in a timely manner. Unfortunately, containers are arriving at these ports en masse with nowhere to store them and no way to transport them.
Ports are overloaded and gridlocked and have resorted to stacking containers higher than normal to speed up the unloading of ships. However, this has made it difficult to access containers at the bottom of the pile, slowing down the movement of containers off the docks.
Labor Scarcity and Costs
Businesses at every point in the supply chain are struggling to find workers. Low wages and difficult working conditions have resulted in high turnover rates and fewer applicants in manufacturing, shipping, ports and trucking.
A lack of workers has led to fierce competition between businesses. Experts believe that the current climate has reset warehouse labor and trucking wages, and they may not come back down.
While many positions working on a dock do not have formal educational requirements, developing the required skills is a slow process. Specialized areas such as dock-crane operators require additional certifications. As older generations retire, young workers do not appear eager to take their place, even though companies are offering higher wages.
Outside of the U.S., COVID and geopolitical conflicts continue to put pressure on overseas hiring. About one-third of the two million people who work in merchant shipping are Filipino, a group hit hard by COVID-19. An additional 14% of workers are from Russia or Ukraine and the current conflict in those areas has hindered rail shipments through the region. Because nearly half of the workforce in the shipping industry is tied to these two groups, there has been a disproportionate impact on the merchant shipping industry.
G. 'Ravi’ Ravishankar is a faculty member at the Strategy, Entrepreneurship and Operations Division at the Leeds School of Business. He is a veteran of supply chain, lean transformation, implementing product innovation strategies and technology transfer from national laboratories.
His career has spanned a wide range of operating roles from president, CFO to engineering manager and director of innovation. He has worked in four continents on lean manufacturing, supply chain, logistics, product development, factory start-up, and business strategy. His industry experience includes, semiconductors, machinery, medical devices, food and beverage, chemicals, consulting and not-for-profit organizations.