Covid broke supply chains. Now on the mend, can they withstand another shock?


Minneapolis
CNN

The pandemic has unleashed the global supply chain, throwing once-smooth businesses, industries and economies into a state of disarray.

After enduring nearly three years of wild swings and extremes, the system is slowly picking up and becoming more synchronized: ocean freight timelines are steadily decreasing, ports are less congested, labor strikes narrowly averted, product and labor shortages have eased, prices have dropped, warehouses are full (perhaps too full), friendshoring, nearshoring and reshoring efforts have accelerated, and China has lifted its “zero Covid” policy.

“We’ve had a fundamental change that started about six months ago,” said Timothy Fiore, president of the Institute for Supply Management. “There are certain components, such as integrated circuits [and] microcontrollers, which continue to affect manufacturers’ ability to flow material. But overall the pressure is off.”

However, there are still many potential roadblocks.

Globally, developments in China and Ukraine remain in constant question marks, especially if the manufacturing megapower suffers another setback or lockdown, or if conditions worsen due to Russia’s war in Europe.

Domestically, exports have weakened and consumer demand remains a wild card, said Phil Levy, chief economist at freight forwarding and consulting firm Flexport.

“I wouldn’t describe this as a machine buzzing right now,” he said. “It’s more finding its way and trying to figure out what’s next.”

One potential bottleneck: Storage capacity in certain locations, particularly Southern California, is nearing capacity, he said. In addition, the domestic distribution network, particularly rail and modal switching areas, has faced some challenges, he said.

The system is not yet in a stable state where companies have a good idea of ​​how long it will take to produce, ship and eventually sell.

“I don’t think we have,” Levy said. “There is still a lot of uncertainty about how long it takes to move things. If we see the warehouses full, is it because the demand is too low? Is it because people moved things too early? So there are still a lot of things that need to be sorted out.”

Supply chain activity has yet to normalize but is returning to pre-pandemic trajectories, said Zac Rogers, an assistant professor of operations and supply chain management at Colorado State University.

“There’s a kind of reaction-overreaction pattern that always happens when there’s a major disturbance,” Rogers said. “And Covid is the biggest disruption we’ve had.”

Early in the pandemic, companies canceled orders, believing consumer spending would be crushed. However, trillions of dollars were injected into the economy to try and keep consumers and businesses afloat. Americans, stuck at home with fewer outlets for discretionary spending, turned to e-commerce for their groceries.

The surge in demand for finished goods at a time when supply was severely constrained, due in part to pandemic-related labor shortages and closures – particularly of cities, factories and manufacturing centers in China – has thrown the global logistics system into disarray.

Ports became overloaded, lead times became long and costs rose significantly as shortages throughout the supply chain.

“Everyone ordered way too much, and around February and March [last] year, everything got here — pretty much right on time for the invasion of Ukraine,” Rogers said.

Aerial view of vehicles waiting for shipment at Taicang port on January 10, 2023 in Taicang, Jiangsu province of China.

Gas prices and inflation soared, putting a huge dent in consumer spending.

“The challenge of the last 10 months in supply chains has been to try to find the thread between reducing inventories to a reasonable level, without again overdoing it, and [landing] back in a situation of scarcity,” he said. “We’re going back to the trendline in a way we haven’t in recent years.”

What helps with that is that supply chains are much more resilient now than they were at the end of 2019, Rogers said.

“In 2019, we basically had all of our chips on one hand, which is things get built in East Asia, get on a boat through the ports in Southern California, they get on trains going to Chicago and then get into other trains or trucks to to distribute to the East Coast,” he said.

And while it’s nearly impossible to separate from China, companies are embracing different supply chain paths, whether in Vietnam, Bangladesh, Central America or domestically, Rogers said.

“As a result, supply chains are not as fragile as they were three years ago,” he said. “And so if there’s another shock coming – especially if there’s a China-centric shock – I think we can handle it a little bit better than we had. … But something like the invasion of Ukraine or a viral outbreak that shuts down the world, you can’t estimate – no systems have been built to handle that smoothly.

Rogers is also a researcher and co-author of the Logistics Managers’ Index, a monthly survey of supply chain executives conducted by a team of university researchers and the Council of Supply Chain Management Professionals.

The index’s December reading — which measures inventory levels and costs; storage capacity; usage and prices; and transportation capacity, capacity utilization and prices — came in at 54.6, up 1 point after eight months of declines.

The majority of LMI metrics have been in the 40s, 50s and 60s range, Rogers said, noting that it’s the first time since the start of the pandemic that the indices haven’t been in the 70s or 80s.

The container ship Ever Libra (TW) is moored in the port of Los Angeles on Monday, November 21, 2022.  The supply backlogs of the past two years – and the delays, shortages and outrageous prices they brought – have improved dramatically since the summer.

“When you’re 40, that’s contraction, but 50s are normal, healthy growth numbers,” he said. “There could be another massive Black Swan event in a month that will turn everything upside down; but at this point it seems that respondents are predicting stability in the supply chain.”

If anything, the shock of the supply chain pandemic should be a wake-up call, said Jack Buffington, director of supply chain and sustainability at First Key Consulting and assistant professor of supply chain management at the University of Denver.

“I would categorize it as ‘breaking efficiently,'” said Buffington, whose own book on supply chains, “Reinventing the Supply Chain: A 21st Century Covenant with America,” was delayed due to supply chain issues.

“All supply chains are really supply and demand, and there has been so much disruption in materials and consumer demand related to labor and inflation and geopolitics,” he said. “Inherently, the base of the model is broken compared to what the requirements are for today. The complexity of a globalized supply chain, human systems are unable to cope.”

He added: “Covid was not the cause of the supply chain problems, it was a trigger to show how bad it was,” he said.

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