Global supply chains are facing an unprecedented crisis as the world recovers from COVID-19. But the issues leading to it aren’t new – and the solutions aren’t easy
Written by Henrik Batallones
When issues affecting global supply chains reach wider awareness, it is normally not referred to as a “supply chain crisis”. It’s always about something else.
Take this story at the beginning of the COVID-19 pandemic, which coincided with the release of the much-anticipated video game Animal Crossing: New Horizons. As most of us were forced to stay at home to stem the spread of the coronavirus, we found ourselves with not much to do, and collectively turned to a “life simulation” game where you start anew in a deserted island run by a tanuki and populated by other animals. (It also helped that it was a game anyone can get into, even if you wouldn’t consider yourself a gamer.)
But as it’s a Nintendo game, one can only play it with a Nintendo device – in this case, the Nintendo Switch, first released in 2017. So, demand for the console went up. Sales doubled in March 2020 compared to one year before. The game itself sold 13 million copies in its first weeks, making it one of the largest game debuts on the Switch system.
But there were only so many Switch devices available. Again, this was the first few months of the pandemic. Production facilities either drastically reduced capacity or closed down entirely, in a bid to stem the spread of the disease. Parts were also hard to come by. By June, a device that usually sold for PHP 16,000 was now selling for twice that. Demand was high, but supply was low—and seemed to stay that way for as long as supply chains were uncertain.
That said, nobody called it a “supply chain crisis”. But it was a sign of what is to come – the extraordinary times we now live in. Just as the world’s major economies begin to emerge from their lockdowns and reopen their economies, we find ourselves with a shortage of everything from food items, to electronics, to furnishings, and everything else in between. Ports around the world are congested. Shipping prices continue to creep upward. Experts on the evening news are saying it may last well into the next year at the earliest. Even late night comedians are talking about it in their monologues. “It’s a supply chain crisis!”
This crisis has many manifestations that impact every point in the supply chain, from procurement to manufacturing to distribution. And, while the COVID-19 pandemic is the key factor leading to this confluence of issues, the problems leading to this point have been felt long before.
Take the global chip crisis. As offices and schools shifted to an at-home set-up – not to mention the need to be entertained – the demand for integrated circuits grew larger than available supply. It has resulted in price increases for devices such as laptops and phones – but also in production delays and shortages in everything from home appliances to cars, as they now also require these chips for certain functions.
As economies around the world went into lockdown to prevent the spread of COVID-19, production of these chips were affected, leading to a depletion in available supply. While manufacturers were able to anticipate an increase in demand due to even stronger reliance on chip-powered devices, they were not able to resume production as quickly as hoped. But other factors also contributed to the shortage. Ongoing tensions between China – one of the world’s largest chip manufacturers – and the United States led to companies being forced to obtain supplies from other producers. There were also a shortage of raw materials such as copper; a drought in Taiwan, the world’s leading semiconductor manufacturer, also affected production of chips, which is heavily reliant on ultra-pure water.
For customers, this meant a hike in the price of electronic devices such as laptops – which couldn’t have come at a worse time, as people buy laptops and handheld devices to work and study at home. For businesses, this also meant their finished goods being released with different specifications, or delayed altogether. For one, Nintendo was rumored to be announcing a “pro” version of their Nintendo Switch console, with better graphics; they ended up releasing a revised version of the original product with only an upgraded display, but no under-the-hood improvements. Sony and Microsoft, the two other major game console manufacturers, saw a tempered response to the release of their PlayStation 5 and Xbox Series X and S, respectively, due to demand outstripping supply.
The shortage is also expected to impact the production and sale of products deep into 2022, with some industry leaders projecting a normalization of supply in one or two years. As it will affect many industries, the impact is expected to hit not just product availability, but also lead to a reduction of workforces as costs are inevitably reduced.
The chip shortage, as massive as it is, also provides a microcosm of the ongoing supply chain issues we face today. Lockdowns have forced manufacturers to reduce their production capacities, or shift to products that have seen higher demand, such as hygiene products. (Take how the San Miguel group temporarily moved from producing alcoholic drinks to rubbing alcohol, as towns and cities implemented liquor bans, ostensibly to prevent the spread of the coronavirus.) These businesses were also forced to revise their forecasts and revisit their operation set-ups to accommodate the wild shifts in demand – and to ensure their viability through an uncertain period.
Lockdowns also affected the logistics services sector, from port operators to prime movers. While they were allowed to operate for the most part – in the Philippines, the principle of “unhampered movement of goods” was upheld from day one of community quarantine, meaning logistics frontliners can continue operating while being subject to minimum health standards—lockdowns nonetheless impacted other points in the supply chain, from port operations to trade facilitation, as well as banks and retailers, leading to delays in the processing and release of shipments, as well as in the movement and delivery of goods.
For example, a confirmed case of COVID-19 at the Bureau of Customs office at the Manila International Container Terminal in the first weeks of the pandemic led to uncertainty over potential delays. Similarly, closures of banks and retail establishments – sometimes at short notice -meant products are stuck on the road or in ports. And, of course, capacity is further reduced when the truck drivers and helpers themselves are hit with the coronavirus.
Sea and air transport were also affected by these lockdowns. As the number of goods being moved around decreased, particularly in the early months of the pandemic, shipping lines reduced trips and personnel to stem losses. This had the side effect of a shortage of empty containers. Long seen as an inefficient practice (as they cost more to move), it was deemed a necessary evil to keep supply chains moving, but ultimately fell victim to pandemic-related cost reductions. (Air cargo was also affected by the wider suspension of passenger travel, but airlines were able to reconfigure their business models faster.)
However, like in the case of the semiconductor industry, the pandemic merely heightened long-existing capacity issues. In the Philippines, for one, there has long been a looming shortage of truck drivers, who are choosing to drive other vehicles or work in other countries as they have difficulty completing trips due to road and port congestion. Efforts to increase capacity both in transport and production are hindered by high investment costs and bureaucratic delays. Elsewhere, geopolitical concerns and tensions have led to a reduction in these capacities; take the United Kingdom’s issues with a lack of truck drivers and factory workers after it exited the European Union, partially in a bid to reclaim control of immigration policies.
This meant that available supply chain capacities – a concern before the pandemic, and heavily battered by it – were not able to respond effectively to increased demands, particularly as world economies began to take control of the disease and emerged from the most restrictive of lockdowns. We first saw it in China, the first country heavily affected by COVID-19, and the phenomenon dubbed “revenge shopping” – of people going out and buying the things they could not buy during lockdown. The further explosion of e-commerce – both in countries that have a strong online shopping scene, and those just entering it, like the Philippines – has resulted in greater demand for imported products, as well as imported components for locally-manufactured goods. Finally, as customers regain confidence with the successful rollout of vaccines, consumption is set to pick up further.
But supply chains haven’t been able to fully keep up with them. There’s the backlog generated by earlier lockdowns. There’s the increase in transport costs as capacities remain low and stakeholders seek to maximize profits. There’s the trend towards lean inventories, usually done to reduce operational costs, but now hampering a firm’s ability to satisfy demand.
Also, the pace of recovery from COVID-19 remains different per country. Some countries are close to operating as normal, while others are still in the grips of the disease. The emergence of more virulent strains – like the Delta outbreak at the beginning of 2021 – threw a spanner in the works and further complicated the path to recovery for many countries, no matter the degree of preparedness and success of disease management.
The uneven pace of recovery has made complex global supply chains even more complicated, making it more difficult to keep costs optimal, service levels high, forecasts accurate and plans up-to-date. There’s still no certainty about the availability and efficiency of production capabilities, especially for companies with international locations. Which leads us to this moment: the evening news and night comedians talking about a “supply chain crisis”, just as we thought everything would go back to normal.
This supply chain crisis has different manifestations around the world. In the United States, a backlog of shipments in the major ports of Long Beach and Los Angeles, accompanied by sustained consumption due to the lifting of restrictions and the looming shopping seasons, has led to a shortage of many products. In parts of China, power is being rationed as energy shortages begin to impact factories, which will deepen supply issues. In the Philippines, long heavily-reliant on imports, rising shipping costs has led to an increase in the price of finished goods, which are ultimately passed down to the consumer.
And indications point toward the crisis not being resolved soon. Even if production capacities return to normal, the costs of transport will remain high. Demand will continue to be high as some consumers, weary of lockdowns, engage in their own form of “revenge shopping”. (Of course, some consumers – those who have lost their jobs as businesses shrink—will continue to exert pressure on the supply chains of “essential” goods.) Experts believe that the global economy is facing what is termed as “stagflation” – a stagnating economy, coupled with rising prices, resulting in a squeeze for both businesses and consumers, and prolonging economic recovery to something closer to pre-pandemic levels.
Clearly, to solve this issue, a lot of heads have to come together. Various functions within a business have to work together to solve immediate supply issues and ensure that they maintain service levels for end customers and stakeholders alike. Policy makers also have a key role, particularly in maintaining a competitive environment for businesses in the present, and in ensuring circumstances that are conducive for consumption in the future, whether on the public health or economic front.
Already we are seeing some progress on this front. In the Philippines, the public and private sectors have worked together to launch a non-stop shipping route from the Philippines to the United States, to address issues of high shipping costs and inadequate vessel space. It is significant considering the US is a major export market, particularly for agricultural goods. On the regulatory front, various government agencies issued a joint memorandum order mandating cargo owners to immediately pull out their shipments from ports to reduce congestion.
But these only address a few points in a complex issue that demands long-term interventions. The ports may be decongested, but warehouse space may still be available, or personnel to facilitate transport may still be lacking. Globally issues surrounding the movement of raw materials and components impact our capability to produce finished goods, and can still impact competitiveness. Of course, addressing these issues means higher initial costs, something businesses may be unable, or unwilling, to deal with as uncertainty and disruption continue.
One such approach is to further embrace supply chain digitalization, widely seen to improve visibility at most points in the supply chain, and allow managers to make more informed decisions much faster. While larger companies are able to embrace this, smaller companies may not be able to commit to a program that requires significant investment in money, time and resources. The lack of infrastructure remains a roadblock to a company’s digital ambitions, particularly in far-flung parts of the country where connectivity may be limited. It may also partly explain why efforts by government authorities to introduce digital tools for trade facilitation remain limited.
Another approach is a reassessment of our supply chains. The ongoing crisis has raised questions of whether truly global supply chains – which were made possible by improvements in transport and low labor and production costs in certain countries – are still viable after a cataclysmic disruption like COVID-19. With the pace of recovery still uneven, and companies anxious to reduce disruptions as much as possible, some may look into reshoring some production activities, especially if it primarily caters to a domestic audience. Globalized supply chains rely to a great degree on synchronization across all points, and these can be affected by many factors, whether operational or bureaucratic. But any shifts to a more regional or local supply chain will entail costs and may affect service levels for the worse – and, again, these long-term questions are something businesses may not be able, or willing, to grapple with.
Yet another approach is more the concern of policy makers: how do we make responsive supply chains thrive in our business environment? Again, the answers to this are long-term. Apart from investment in physical and digital infrastructure, as well as in competencies of personnel, care must be made to ensure that policies and initiatives match with current needs, and are able to anticipate future ones as well. Say, if we shift major ports to operate on a 24-hour basis, will there be enough personnel to man critical points? Will it be easy to facilitate movement of goods in and out of the port? Will these efforts be undone by bottlenecks elsewhere down the chain, and if so, how can we address them?
Internally, companies can begin by continually monitoring the situation, revisiting forecasts – perhaps increasing their frequency – and reassessing their relationships with both suppliers and customers. Strengthened collaboration continues to be a key to gaining ground against these disruptions – as well as an openness to the idea that we may come out of these trying times with a fundamentally different way of working.
This supply chain crisis provides a unique opportunity, amidst all the disruption. It gives us a chance to rethink, in full-picture terms, how we are providing value to our customers, shareholders and partners. It gives us a chance to improve what can be improved, and to further propagate best practices. Finally, it gives us a chance to remember what we are here to do: to serve the customer.