Supply chain risks in 2022: Year in review
Many of the supply chain risks predicted for 2022 came true, but the devil’s in the details. Seemingly tiny knots tangled up entire industries and regions. Here’s a look at the disruptions, their defining moments, and some takeaways for 2023.
In early 2022, we were hopeful that the new year would bring relief to global supply chains. We were starting to see signs that pandemic-related disruptions were easing. But geopolitical events, such as the war in Ukraine, were already upsetting global supply chains yet again. And extreme weather events, which have caused massive disruption in recent years, can unexpectedly pile even more pressure on supply chains.
The past few years have taught us how unanticipated events can cause problems that cascade through interconnected supply chains, creating more challenges. In 2022, we witnessed more of this “new normal.” Seemingly tiny knots tangled up entire industries and regions – details some may have missed until it was too late. It’s a stark reminder that supply chains are better understood as supply networks, with millions of cross-connecting threads sweeping across the world.
Together with our partner, Everstream Analytics, a supply chain risk analytics company, we’d like to unpack those details and offer some takeaways for 2023. You’ll also find the five risk areas originally outlined in Everstream’s 2022 risk predictions.
In early 2022, the problems in the ocean freight sector showed little signs of easing. Many of the world’s largest ports had been operating above capacity for months while dealing with labor shortages. The situation was similar in the trucking and railway sectors. Navigating the pandemic had forced many companies to ask a lot of their people, and patience had stretched to the breaking point. It was not sustainable, and strikes ensued. Canadian truck drivers kicked off a year of protests in February with their opposition to vaccination mandates. The most significant disruption in ocean freight transport came in May, when negotiations stalled between the International Longshore and Warehouse Union and the Pacific Maritime Association, sparking sporadic strikes at 29 US West Coast ports. All of this was happening as COVID-19 lockdowns in China continued to create port bottlenecks.
Russia’s surprise invasion of Ukraine sent shockwaves across all supply chains. It caused the diversion of vessels and aircraft, shut down production in affected regions, and pushed up already high energy prices. The result was a global food shortage and an energy crisis in Europe. Wheat, barley, corn, and sunflower oil were just a few commodities that quickly became expensive or impossible to obtain. Russia’s gas exports to the EU shrank from 40% to 9%. Textile, food and beverage, glass, paper, chemicals, and metal-working sectors were hit hard, with some of the continent’s most prominent steel, aluminum, and chemicals producers curtailing output.
Defining geopolitical events
Last year, Everstream cautioned that companies would need to understand the setup and operating practices of the companies in their supply chains, all the way back to the source of raw materials. Why? Because more governments had begun to hold companies accountable for human rights violations in their supply chains. The issue became headline news and stunned corporate executives worldwide when media investigations alleged that a former Hyundai supplier in Alabama had employed children at its metal stamping plant.
Defining events in corporate governance
Extreme weather events have taken their turn in the disruption spotlight many times over the past several years, and 2022 was no different. One of the most damaging storms was Hurricane Ian, which tore through southwest Florida in September. Over 2.54 million people lost power, hurting manufacturing operations across the pharmaceutical, medical device, and electronics industries, while 157 people died – the most Florida hurricane fatalities in nearly 90 years. Other extreme weather disrupted logistics, destroyed infrastructure, and damaged crops during the northern hemisphere’s growing and harvest seasons.
Defining extreme weather events
Water was seen as one of the top risks to watch in 2022. Water scarcity creates ripple effects across many facets of society. Two-thirds of the water we use goes toward agriculture, which means food production is highly vulnerable. But shortages and rising costs can also affect households, industries, and logistics networks. In 2022, we saw major disruptions that can result from drought. The Mississippi River, for example, carries 92% of U.S. agricultural exports, and its water levels dropped to the lowest in 34 years. Drought also impacted European transportation by sucking water out of key rivers and lowering summer crop yields.
Defining drought events
Key takeaways for 2023
With mounting concerns over gas prices and the cost of living, there is an increased risk of cargo transport strikes. Ad hoc disruptions will continue into 2023. If your supply chain depends on one mode of transport, now is the time to diversify. It’s vital to remain flexible to shift cargo volumes to other ports of origin or even change transportation modes. So, make plans early for emergency shifts to alternates. Predictive ETA tracking analytics can alert you to potential risks along routes.
Food, semiconductor, and automotive manufacturers were blindsided by not knowing they had sub-tier suppliers in Ukraine, Russia, and Taiwan. Know the location of your sub-tiers since unstable food sources, rising commodity prices, and inflation could cause more countries to protect domestic supplies. In addition, manufacturing output will slow across Europe as companies reduce production, lay off workers, and file bankruptcy. Spread your supplier base across different geographies and vendors to help cushion the impact.
Watchdog organizations are on the hunt for environmental, social, and governance (ESG) violations. Remember that ignorance is no excuse for abuses by sub-tier suppliers, so map your entire network and ESG risk to avoid fines or damage to your brand reputation.
Extreme weather events
Climate change will continue to create more extreme weather, such as floods, hurricanes, drought, or heat waves. Get ahead of storms as early as possible with business-focused forecasts specific to your supply chain’s key locations, routes, and schedules. Monitor forecasts that are specific to your supply chain network. The headline “Drought in Honduras” may not seem like important business news until you realize your supplier has a supplier in the region at risk of shutting down.
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Recap: Supply chain risks in 2022
The first big risk highlighted in Everstream’s 2022 risk outlook was ocean freight. Reliable, low-cost, long-distance marine transport has traditionally been the backbone of global trade. But in early 2022 problems showed little signs of easing. At the end of 2021, for example, vessels waited on average more than 30 days for a berth at the Ports of Long Beach and Los Angeles.
Delays were also rising at other West Coast ports as carriers looked for alternative routes into the US. Many of the world’s largest ports operated above their maximum sustainable capacity for months in 2022 while dealing with labor shortages. The risk of short-notice shutdowns due to COVID-19 outbreaks remained high in some areas.
The workforce was another big risk for supply chains. Navigating the pandemic forced many companies to ask a lot of their people, and there were increasing signs that employee patience had been stretched to breaking point. In the US, for example, record numbers of people exited the job market in what was dubbed the “Great Resignation.” Open positions remained unfilled in many sectors, notably in critical logistics roles including truck and van drivers. Industrial disputes broke out around the world, with striking workers demanding better pay and improved conditions.
Everstream’s report warned that labor-related challenges were set to intensify in 2022. Workers had significant bargaining power in sectors already suffering from labor shortages, and the rising cost of living in many places was set to add to the pressure to raise wages.
Labor was in short supply in early 2022, but inventory was not. The repercussions of a shift from just-in-time to just-in-case supply chains was the third challenge highlighted in Everstream’s 2022 report. The company cited a 2021 survey by Morgen Stanley in which most respondents said they planned to increase inventories rather than reduce them. After two years of shortages and delays, companies in many sectors boosted their buffer stocks, filling warehouses with products and components as insurance against future disruption.
However, excessive inventories carry high costs. Companies must pay to buy, store, and handle all those items. And there’s always the risk of being stuck with spoiled or obsolete inventory, especially when demand is volatile and tricky to forecast. Everstream predicted that in 2022, companies would face difficult decisions about where to set their “new normal” inventory levels and how they managed the adjustments needed to get there.
While the first three risks were linked to the pandemic, Everstream pointed to two issues that were not. The first related to environmental, social, and governance (ESG) issues, which were rapidly becoming a legal risk in addition to a reputational risk. In 2021, Norway and Germany passed new laws holding companies accountable for human rights violations in their supply chains. Similar European Union legislation passed in2022. Beginning in June 2022, companies operating in the US were prohibited from selling materials that are mined, manufactured, or produced in the Xinjiang province of China under the presumption that these were made with forced labor.
Companies were encouraged to understand the setup and operating practices of the companies in their supply chains, all the way back to the source of raw materials. And it isn’t just labor policies receiving increasing scrutiny. Efforts to tackle global warming were increasingly focused on Scope 3 emissions generated along global supply chains, which meant companies would also need to monitor the carbon emitted by their suppliers.
While attention was given to the environment and emissions, one resource Everstream flagged to watch was water. According to the United Nations, two-thirds of the global population will face water shortages by 2025, and five of the world’s eleven regions currently use more than a quarter of their renewable freshwater resources every year. Water scarcity creates ripple effects that are felt across many facets of society. Two-thirds of the water we use goes toward agriculture, which means food production is highly vulnerable. But shortages and rising costs can also affect households, industries, and logistics networks. In 2019, for example, historically low water levels prevented the largest container ships from traveling fully loaded through Panama Canal.
Everstream predicted that industrial users would face growing water usage restrictions in the coming years as regulators impose new requirements to install water-saving technologies or limit consumption in specific regions or when supplies are limited. Such rules are already affecting industrial development along China’s Yangtze River.
A delicate balancing act
As you can see, we expected 2022 to be complex and unpredictable, and it certainly turned out that way. How can companies cope with such a volatile environment and overcome supply chain disruptions? One way is to shift from reactive to proactive supply chain risk management. A proactive approach that leverages AI-driven technology can separate high-performing organizations from their competitors. Improving prediction in the supply chain is part of Everstream’s core business, which is why we work closely with them to spot potential problems early and avoid supply chain issues before they happen.
Updated: December 2022