The supply chain disruptions that we first saw in 2020 because of the COVID-19 global pandemic continue, unabated and even exacerbated by labor shortages and shipping delays. In just one incident, the positive Covid test result of a ship’s crew member upon arrival in China forced the ship to make the return trip, get a new crew, then return to China before it could unload. The result – a two-month delay in the voyage and disruption to that industry. At the end of August (2021) a record-breaking 44 container ships were stuck waiting at a California port which accounts for one-third of US imports and main source of trade with China. The month before it was “only” 33 ships. Such disruptions could not come at a worst time. They hold hostage the purchase and arrival of the foods, gifts, and other paraphernalia on which consumers rely to celebrate the holiday season.
China remains the world’s factory for the most part. The pandemic only adds a new urgency to the need for companies to re-engineer their supply chains. US tariffs which target Chinese imports continue to add up to 25% over the tariffs imposed on most other US trading partners. The result – more expensive imports from the world’s factory.
Estimates are that it will be at least 2023 before the shipping industry normalizes in the wake of these and other challenges arising from the much larger size of container ships. But what if another crisis occurs before then? Remember the six-day blockage of the Suez Canal by a large container ship in March (2021)? In those six (6) days 369 ships sat waiting to traverse the canal, causing critical delays and an estimated loss of US$9.6 billion in trade. Well, another one occurred early September (2021), though thankfully causing only a brief disruption this time. Flooding in China and Europe in August (2021) further strained shipping the systems that provide us with our goods. Delays and shortages are additional factors contributing to costlier goods.
The reality is that global supply chains are stretched to maximum capacity. It now takes very little for supply chain disruptions to occur, with huge implications for global trade. This is why companies need to explore opportunities to re-engineer their supply chains.
Here are five factors to consider as you explore:
- Map existing supply chains – Do you know where all your inventory and/or their component parts currently are sourced? As this Harvard Business Review article makes clear, the task is challenging but provides crucial information in a time of crisis. Knowing which suppliers or sites, goods or parts are at risk of failing you is a key first step to securing alternate suppliers and mitigating the potential damage from a future crisis.
- Stock more supplies closer to operations – The Just-in-Time approach may still be advantageous. Nevertheless, it is worth exploring whether there are alternate locations that provide opportunities to securely and cost-effectively store supplies that can be shipped as needed. Do not ignore the possibility of utilizing warehouses for stockpiling in other countries. Remember that simply storing products in a country will not impact the country of origin rules which determine how the good is treated upon entry.
- Start building new relationships – A key impediment to switching suppliers are the inevitable hiccups that come with a new relationship. This is why the time to start is now. It is not too late for the next disruption. Begin now to identify alternate suppliers and to explore diversifying. Invest in the relationship, just as you did at the start of your relationship with your existing suppliers. Leveraging the lessons learnt from those relationships to overcome known challenges will be beneficial during this process.
- Use trade rules – Tariffs and other importation costs are a key consideration when deciding from where to source goods and inputs. Trade rules are used to determine such factors as country of origin, how the product is classified, and whether it will attract a high, low, or no duty upon entry. As you explore new relationships, you will want to focus on those located in countries from which the same or like products can be imported and receive the same or better treatment upon entry.
- Practice patience – The alternate suppliers may not be ready today, but quite likely, neither were your Chinese suppliers, who had to be educated and trained. Making similar investments in new partnerships is an Inevitable part of the process of re-engineering your supply chain. Also, seize the opportunity to negotiate improved terms, and even to explore new manufacturing processes or product lines as these new suppliers position themselves to get your business.
With no immediate end in sight to the current pandemic and more disruption guaranteed it is not too late to take stock and begin to seek the opportunities that may be hidden in these crises.
Contact us to learn more and to discuss how we can support you effectively.