Is Supply Chain Recovery During a Pandemic Possible? These Experts Say It Is

One could say global supply chains have never faced more multifarious, fluctuating conditions than they have during the COVID-19 pandemic.

But these shocks – think hurricanes, floods, fires, and cyberattacks, to name a few – are actually more frequent than you’d think.

Advertisement

“Even before COVID … on average, companies now will expect to see a disruption to their production lines of one to two months, which is a very long time, every three and a half to four years,” explains Susan Lund, a partner at the McKinsey Global Institute in Washington, DC. “So even though each time there is a disaster, it seems like it’s coming out of the blue, the fact is that the world has more shocks.”

What the coronavirus has done specifically is put a big spotlight on the impact these shocks can have on global supply chains. In agribusiness, a large enough shock can impact the entire value chain because the strain on supply rises with growing demand. “We’ve spent 25 years creating these incredibly complicated, complex global supply chains,” Lund says. “And they were designed for cost and efficiency, but without really a thought to what could go wrong along the way.”

Ocean Freight Remains Highly Unpredictable

The ups and downs are almost never-ending in the shipping arena of the supply chain. In fact, any decent modeling used to get a handle on what’s going on – even those that are 95% confident – show massive potential variation, explains Keith Holdsworth, a senior supply chain consultant based in West Oxfordshire, England.

Top Articles
ADAMA Reports Fourth Quarter and Full Year 2023 Results

Ocean freight is the most unpredictable area, Holdsworth says, reviewing the 13 lanes that are in the Shanghai Containerized Freight Index (SCFI).

In fact, Perfection Limited, a specialized supply chain consultancy based in West Oxfordshire, England, that Holdsworth works with, reported the SCFI hitting an all-time high on Oct. 30, 2020, reaching a never-before-hit $1,600-plus per TEU (20-foot-equivelent unit) mark. “All lanes increased bar Durban, and with various carriers also announcing December General Rate Increases, or disguised in order surcharge terminology,” the company shared.

Then, just two weeks later on Nov. 16, Perfection Limited reported the record was broke again with $1,857.33 per TEU – the highest composite index ever seen. All of the lanes saw records they haven’t seen since the index began in 2009.

“The ocean freight arena is a tremendously tricky place right now, with limited space, shortages of containers, congestion in ports, and lack of service,” Perfection Limited reports. This is on the back of “carriers still blanking sailings, empty container shortages, and port congestion charges being added to many lanes.”

Empty container availability is definitely distorting capacity and making shipment variability even worse, Holdsworth says.

Maersk CEO Soren Skou reports that ocean freight rates have probably plateaued and will return to normal levels by the end of 2020. But Holdsworth is already seeing signs that between now and the end of the year, prices will not go any lower. “My prediction is that it will stay high through the Chinese New Year,” he says. In 2021, Chinese New Year is Feb. 12.

Maersk remains optimistic in its 2021 forecasts. “Global supply chains had quite a lot of bottlenecks and they have driven up prices,” Skou said in a Bloomberg Television interview. As a result, freight costs have stayed unseasonably high, especially on trans-Pacific routes. But “I think that’s of a temporary nature. We expect things to calm down and normalize in 2021.”

Maersk says its container volumes in the fourth quarter are expected to be in line with or a little better than levels the company saw in 2019. “We believe that in 2021, we will see a market that is similar to one we saw in 2019 or maybe slightly better,” Skou shares.

Focus On What You Can Control

What’s happened as a result of the coronavirus pandemic shows that despite similar events in the past, “the supply chain risk management approach to events like pandemics is highly unsatisfactory,” explains Kumar Singh, founder at Smart Supply Chains LLC. “The major driver behind this is the thought process that such events are rare.”

But while companies should have an idea of what shocks are out there and what could happen, “companies should not be just focusing on the scary event – the hurricane, the pandemic, whatever it is – but really focus on their vulnerabilities,” points out Ed Barriball, a partner in the Manufacturing and Supply Chain service line within the Operations Practice, based in Washington, D.C. “What do you control? Where are you single-sourced? Where do you not have visibility in your supply chain that you should?”

“As incidents of pandemic outbreaks become more frequent … corporations doing business globally will need better preparation and training to be able to implement a plan quickly,” Singh agrees.

And cutting out China in the supply chain is really a non-issue, at least in the short term. “Over the last two decades, China has built a manufacturing ecosystem of OEMs and multiple tiers of suppliers,” Singh says. “It is not easy to replicate that ecosystem rapidly anywhere else, so we will probably have to plan for China supply chains for now. If you remove certain elements of manufacturing to another location, or even have a backup supplier in another country, chances are that the supplier may have its second or third tier suppliers still in China. It may take decades to build an end-to-end manufacturing supply chain that does not involve China.”

Singh suggests some strategies: create a local crisis management command center, geographically diversity your China operations footprint, invest in digital capabilities, and create strategic relationships with logistics providers.

Hide picture