Globalization

Understanding the “new normal” supply chain risks in 2022 and beyond

After two years of shortages and supply chain disruption, what risks will companies face in 2022, and how can they manage them in a post-pandemic future?

The pandemic sent shockwaves through global supply chains, which spent much of 2021 playing catch up. After the economic downturn early in the COVID-19 crisis, many sectors had cut their forecasts significantly and were caught off guard when customer demand came roaring back.

The automotive and consumer electronics sectors were hit especially hard. By August 2021, order-to-delivery lead times for semiconductors increased to a record 21 weeks, for example, as car and consumer electronics makers scrambled to fulfill customer orders. But many of their suppliers were still experiencing their own pandemic-related delays. A third national lockdown in Malaysia – one of the world’s top semiconductor suppliers – cut production in the country by 60%, and outbreaks among workers forced multiple facilities to suspend production completely.

The long tail of the pandemic has continued to create problems for the logistics industry too, exacerbating supply chain stress points across many sectors. In China, the only major global economy still pursuing a “zero-COVID” policy, various outbreaks have led to the temporary suspension of operations at the ports of Ningbo and Yantian as well as at Shanghai Pudong International Airport, a major air freight hub.

Is respite in sight?

Will 2022 bring relief to global supply chains? Across much the world, we are starting to see signs that pandemic-related supply chain disruption is easing. First, the Omicron variant was less severe than some predicted. Many parts of the world and major economies are enacting or announcing an end of pandemic-era restrictions.

The pandemic is, of course, not yet over. 

But while COVID-19 made a big impact in 2021, other disruptive events took their turn in the spotlight. Extreme weather events hit many important industrial regions, including a record-breaking heatwave in the western United States and Canada, and catastrophic floods in western Europe. Such disruptive events put further pressure on ports and logistics networks already stressed by high demand.

More recently, the conflict in Ukraine has upset global supply chains yet again, forcing the diversion of vessels and aircraft, shutting down production in affected regions, and pushing up already high energy prices, which puts further strain on companies in the chemicals and other energy-intensive sectors.

What will be the next supply chain crisis?

If we learned anything from the past 24 months, it’s how quickly unexpected events can cause problems that cascade through interconnected supply chains, creating more challenges along the way. But as we look beyond the pandemic and current conflict in Europe, what risks await logistics and supply chain managers?

Everstream Analytics, a supply chain risk analytics company, has highlighted five areas where companies should focus their risk mitigation efforts in the coming year in its latest Annual Supply Chain Risk Report. Here’s a look at the report’s findings:


Ocean freight

The first big risk highlighted in the Everstream report is ocean freight. Reliable, low-cost, long-distance marine transport has traditionally been the backbone of global trade. But the recent problems in the sector show 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. 

30+

days ships spent waiting to unload at Long Beach (US) in December 2021

100+

percent of capacity utilized at largest US and Vietnamese ports in 2021

And 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 have been operating above their maximum sustainable capacity for months while dealing with labor shortages. In some areas, the risk of short-notice shutdowns due to COVID-19 outbreaks remains high.


Labor shortages

Everstream says the workforce is another significant risk for supply chains. Navigating the pandemic has forced many companies to ask a lot of their people, and there are increasing signs that employee patience has been stretched to breaking point. In the US, for example, record numbers of people are exiting the job market in what’s being dubbed the “Great Resignation.” 

Open positions remain unfilled in many sectors, notably in critical logistics roles such as truck and van drivers. Industrial disputes have broken out around the world, with striking workers demanding better pay and improved conditions. Everstream’s report warns that labor-related challenges are only likely to intensify in 2022. Workers will have significant bargaining power in sectors already suffering from labor shortages, and the rising cost of living in many places will add to the pressure to raise wages.


Surplus inventory

Labor may be in short supply, but inventory currently is not. The repercussions of a shift from just-in-time to just-in-case supply chains is the third challenge highlighted in Everstream’s report. The company cites a 2021 survey by Morgen Stanley, in which most respondents say they plan to increase inventories rather than reduce them. After two years of shortages and delays, companies in many sectors have boosted their buffer stocks, filling warehouses with products and components as insurance against future disruption. 

7.8%

increase in US business inventories during 2021

>50%

of shippers plan to increase inventory levels

However, excessive inventories carry significant 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 as volatile and tricky to forecast as it is today. In the coming year, companies will face difficult decisions about where to set their “new normal” inventory levels and how they manage the adjustments needed to get there. 


Sustainability

While the first three risks are linked to the pandemic, Everstream points to two other issues that are not. The first relates to environmental, social, and governance (ESG) issues, which are now becoming a legal risk in addition to 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 is due to be enacted this year. Beginning in June 2022, companies operating in the US will be prohibited from selling materials that are mined, manufactured, or produced in the Xinjiang province of China, under the presumption that these were produced with forced labor.

Companies will need to understand the setup and operating practices of the companies in their supply chains, all the way back to the original source of raw materials. And it isn’t just labor policies that are receiving increasing scrutiny. Efforts to tackle global warming are increasingly focused on Scope 3 emissions generated along global supply chains, which means companies will need to monitor the carbon emitted by their suppliers, too.

11x

volume of supply chain carbon emissions compared to the average company’s direct emissions


Water

While attention is given to the environment and emissions, one resource we cannot ignore is water. Yet it is all too often overlooked. 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. 

2/3s

of the global population will face water shortages by 2025

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 even logistics networks. In 2019, for example, historically low water levels prevented the largest container ships from traveling fully loaded through Panama Canal. 

Everstream expects industrial users will face growing water usage restrictions in the coming years as regulators impose new requirements to install water-saving technologies or limit consumption in certain regions or when supplies are limited. Such rules are already affecting industrial development along China’s Yangtze River.


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A delicate balancing act

In this complex and unpredictable environment, how can companies avoid supply chain shortages?

“The companies we work with are using multiple levers to drive this resilience: increasing inventories of critical products and components, diversifying suppliers or implementing nearshore production strategies, and, of course using technology to provide risk information in real time and during planning.”

The shift from a reactive to a proactive approach to supply chain risk management is one strategy that separates high performing organizations from their competitors, she adds. “To use a recent example, we have seen some supply chain managers who really understood the likely impact of Chinese New Year and the Winter Olympics in Beijing. They drew in buffer stock early and were able to mitigate risk. Those who didn’t have the same actionable insights had to scramble, and right now it is difficult to find alternative transportation options at short notice.”

Improving prediction in the supply chain is currently a major area of focus for Everstream Analytics, says Gerdeman. The company has developed AI tools that aim spot potential problems early and provide users with actionable recommendations that help them avoid supply chain issues before they happen.

But if COVID-19 taught supply chain managers anything, it is unexpected circumstances have the power to expose crucial weaknesses in the system . “You are always going to have unexpected supply issues, and you are always going to get unpredictable surges in demand,” says Gerdeman. “The key to effective supply chain risk management is to ensure that the tools and the processes you put in place are not tied to a narrow set of specific events. They must be flexible and scalable so you can respond to whatever comes next.”


Published: March 2022

DHL Supply Chain

The world’s leading contract logistics provider

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