Why are supply chains torn and what consequences does it lead to?
The international supply chain which has been formed in recent decades seemed well-established and reliable. But the COVID-19 pandemic that swept almost the entire world in 2020 revealed serious vulnerabilities in the current situation. It seemed that the pandemic would end and everything would return to its former normal state. But this did not happen ... Now, most experts agree that supply chains will never be the same. The consequences of the pandemic will be fundamental, and new challenges will lead to the need for new transformations.
Logistics vs. COVID-19
The spread of COVID-19 has led to the introduction of quarantine measures in many countries around the world, the cancellation of flights, the termination of the enterprises’ activity and the disruption of supply chains.
Logistics is global. Vessels that sailed were stuck in queues before unloading due to COVID outbreaks in ports and lack of capacity to handle increased volumes. The downtime of vessels in ports of discharge reduced the number of empty containers heading back. This led to record high delays and price increases.
Suffice it to say that cost of the container delivery, which for many years fluctuated slightly within the range of up to $3,000, reached $16,000 on spikes in 2021.
The global container shipping cost index (Freightos Baltic Index, FBX) reflects the rental rates for 40-foot containers (in USD).
Source: fbx.freightos.com
In general, the pandemic has affected all the most important components of the global supply chain: maritime, air and land transport.
Many manufacturing enterprises face raw material and component shortages. Changes in the cost and delivery time seriously affect large, but also small and medium-sized businesses.
The simplest, but very striking example. A huge number of pizzerias around the world use canned Italian tomato sauce. But due to a shortage of steel, factories cannot produce as many cans as they used to. And tomatoes can be preserved only from July to September for no more than one and a half days after they were collected. Therefore, the delays in this example are not only undesirable, but critical, since they make the delivery on time meaningless.
Logistics vs. Events-2022
In 2022, countries began to forget about the coronavirus, but new factors seriously affecting trucking industry appeared. Events in Ukraine have already led to the disruption of supply chains and are affecting businesses in Europe, the US, China and elsewhere.
Carriers are rebuilding routes. Due to the closure of airspace over some regions, air carriers are forced to look for overflight options. As a rule, this significantly increases the distance, which requires additional stops. According to the European Organization for the Safety of Air Navigation (EUROCONTROL), flight times from Asia to Europe have increased by one and a half to two hours. Fares for air travel between China and Europe have risen more than 30% since the end of February.
Source: Freightos
Many sea carriers have stopped entering the Azov and Black Seas. The inability to use ports in the war zone provokes congestion in other, for example, Mediterranean ports.
Add to this rising fuel prices. All this leads to longer delivery times, and an increase in prices.
What is next?
The longer the Ukrainian-Russian conflict continues, the deeper supply problems will be, driving up consumer prices for everything around the world. And this factor is not the only one that allows us to make a forecast that stability in the logistics sector cannot be expected in the coming years.
The growing wave of problems with global logistics has been stimulating companies to build local supply chains since Coronovirus time. Even if it requires additional costs and price increases.
The determining factor in the configuration of the international supply chain for many years was the minimization of costs. Now, the trend towards the shortening of supply chains, moving production closer to sales markets and filling warehouses with excess stocks is becoming more pronounced. In the short term, this reduces companies’ profits, but will make the entire system more reliable.
Another long-term trend is moving away from the globalization of supply chains towards localization, if not in all areas, then at least in those industries that are related to ensuring national security and reduce the risks associated with the onset of force majeure situations.
Choosing between economic efficiency and stability of work, in the coming years, priority will be on the side of stability.