The pandemic and US-China trade tensions have disrupted global supply chains.The economic turmoil caused by the Covid-19 pandemic has exposed many vulnerabilities in supply chains and raised doubts about globalisation. At the start of the pandemic, demand collapsed and now it is surging back. There are shortages of raw materials and components such as lumber, metals, plastic parts and semiconductor chips. Rising fuel prices have also had an impact. Companies are waiting weeks for containers and paying premium rates to secure them. The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has grown more than sixfold, according to the Drewry World Container Index. The spread of the Delta variant, particularly in Southeast Asia is making it difficult for factories to operate.
Why is it important?
All of the above factors combined have resulted in soaring prices and insufficient supply. Manufacturers are finding it a challenge not to transfer the high cost of production to consumers, many of whom believe they should be paying pre-pandemic prices. Economies are re-opening and people want to spend. Consumer demand has been growing and the manufacturing sector has been slow to respond to this. There are also concerns about the rate at which inflation is rising and that this may derail economic recovery. However, some economists suggest that inflation will settle down once the pandemic recedes.
What can businesses do about it?
Businesses need to make their networks more resilient without weakening their competitiveness. Companies can look to working together or leaning on domestic companies to fill the gaps created by the supply chain challenges. Managers should reduce or even eliminate their dependence on sources that are perceived as risky. They should diversify their supply base and hold safety stock inventory. “We are storing up critical components for one year of usage because if we miss one component, we cannot manufacture the products,” said Eric Chan, chief executive of household appliance manufacturer Town Ray Holdings. 90% of its sales are from household brand names in Europe. Companies should also be on the lookout for innovations that would make their supply chains more robust.
By Faeeza Khan
Image credit: Barrett Ward