Are Supply Chain Disruptions Easing?

In 2020, 72% of companies reported that the COVID-19 pandemic negatively impacted their business results. In sectors heavily reliant on supply chain resilience, this number was much higher. In fact, 97% of companies in the industrial sector reported a negative impact resulting from pandemic related supply chain disruptions.

More recently, the Russian invasion of Ukraine has once again brought supply chain disruptions to the forefront of leaders’ minds. In response to these issues, many businesses have invested in new technology and shifted their operations to make their supply chains more resilient.

To minimize these issues, business leaders should monitor global supply chains to understand when disruptions might ease and which solutions they can implement to strengthen supply chains during this turmoil.

Current State of Supply Chains in the U.S.

In the United States, the economy is expanding, and that expansion has brought an increase in consumer demand. As such, new manufacturing orders have grown for 21 consecutive months.

Although demand is strong, manufacturers have struggled to develop, assemble, and transport their products to consumers in a timely manner – in many cases, due to supply chain disruptions. These disruptions can be seen in almost every facet of production, from acquiring raw materials, through the production process, and into warehousing and transportation of final goods. The Russian invasion into Ukraine has only worsened these difficulties.

Raw Materials

Throughout the pandemic, some raw materials became difficult to source and increased in price. These difficulties remain today and have been exacerbated by the Russia-Ukraine conflict. Electrical components, plastic resins, and semiconductors have all been in short supply for over 12 consecutive months. These shortages have increased lead times for many businesses. Further, many commodities have gotten more expensive since the COVID-19 pandemic began. Certain metals, electrical components, diesel fuel, and packaging supplies are among the inputs that have experienced inflation for more than 12 consecutive months.

To make matters more complicated, some commodities have seen rapid inflation in a very short period of time since Russia’s invasion of neighboring Ukraine. Russia is a key exporter of metals and oil, both of which have skyrocketed in price in response to global sanctions. Since the sanctions took effect, the price of nickel has surged more than 75%. Additionally, oil prices rose by 17.8% and reached $139.13 a barrel, the highest price since July 2008. Higher input costs brought on by this conflict could weigh on business profits and could exacerbate the already high inflation in the U.S.

Factory Production

After an initial slowdown during the COVID-19 pandemic, new manufacturing orders and production have each shown 21 consecutive months of growth. However, inventories remain low and order backlog has been expanding for the past 20 months. For businesses that rely on intermediate inputs to create their final product, delays in manufacturing brought on by supply chain issues have caused production to lag.

Shipping

Shipping delays have created additional difficulties in getting raw materials and intermediate inputs to businesses. Backlogged ports, slow air travel, and too few truckers make it difficult for manufacturers to receive necessary inputs and to deliver final products to consumers.

Two factors are currently adding to shipping delays, port congestion and a shortage of labor to move goods once they arrive in port. For container shipping, Peter Tirschwell, VP of Maritime and Trade at IHS Markit, noted that there are enough ships and containers to meet shipping demand, but congestion at the ports has reduced capacity by 10-15%.

Once products arrive in the U.S., there is a shortage of truckers to deliver those goods to their intended purchaser. Some analysts have estimated the trucker shortage to measure in the tens of thousands of drivers.

In recent weeks, the Russia-Ukraine conflict and rising oil prices have created further shipping issues. The invasion and resulting sanctions are bringing higher shipping and insurance costs, and logistics companies are scrambling to create alternate shipping routes that avoid the area.

Supply Chain Outlook in 2022

Most economists and logistics experts conclude that the first half of 2022 will see continued supply chain disruptions. These disruptions could worsen if the Russian invasion into Ukraine persists. In the U.S., a shortage of labor is likely to continue serving as a bottleneck to shipping and manufacturing.

In order for supply chains to recover, workers in all stages of the process need to be able to complete their jobs. So, the course of the virus is likely to be a key indicator of the supply chain recovery. If the virus continues to slow and more people are able to come to work, the U.S. could see some easing of disruptions in the second half of the year. However, geopolitical concerns will weigh heavily on the recovery.

How are businesses responding to supply chain disruptions?

Businesses have responded to supply chain disruptions by increasing their investments in supply chain agility. This includes increasing supplier diversity and investing in technology that reduces reliance on human labor and increases insight into supply chain risk.

Reevaluating Supplier Relationships

The COVID-19 pandemic highlighted existing issues in supply chain management. According to KPMG, “[t]he days of buffering inconsistent supply with excessive inventory at the lowest purchase cost are quickly becoming a relic of the past.”

Instead, manufacturers are shifting their focus to evaluate risk as the first decision point when developing their supply chains. To address these risks, supply chain managers are actively seeking to add alternative suppliers and trading partners which in turn adds greater diversity and resiliency to their supply chains.

Investing in Technology

Many manufacturing firms are increasing their investment in technology to combat supply chain issues. By Q2 2021, 49% of businesses had increased investment in supply chain technology including robotics and automation, computing, predictive analytics, and AI.

These technologies increase visibility into a firm’s supply chain and forecast potential risks using predictive analytics and artificial intelligence. By combining a diverse supplier network with predictive analytics, firms can forecast potential delays and pivot their business decisions accordingly – before they experience issues. Additionally, as labor remains scarce, automation can reduce a business’ reliance on human capital.

Together, investments in technology and a diverse supplier network can help businesses adapt to the current supply chain ecosystem. These investments are not only valuable in the current environment, they can also help businesses be more productive and agile once supply chain disruptions ease.

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