Why global supply chains may never be the same?

Daniel Kasif|Oct 13, 2022|No Comment

effects of supply chain disruption

The complex nature of the modern supply chain creates significant and unprecedented disruptions. Supply chain disruption can lead to shortages of goods, inflation, recession, factory closures, interrupted freight services, bottlenecks, and unfavourable economic well-being. Many countries around the world, particularly the Asia-Pacific region, rely heavily on imported goods; these nations are the most exposed to the consequences of disruption. Political unrest, global pandemics, manufacturing shortages, natural disasters and geopolitical issues are some of the key concerns that have caused severe disturbances around the world in recent years.  

Ongoing COVID Disruption 

For the most part, the global pandemic has subsided in most countries; however, things may not go back to what it was before COVID times. Since 2020, COVID-19 has had significant ongoing effects on the global supply chain; the worldwide lockdowns significantly slowed or temporarily stopped the flow of manufacturing goods. China is one of the few countries still experiencing lockdowns in 2022. China introduced strict lockdowns for businesses; this had implications for their manufacturing output and global trade, merchandise exports fell by 62 per cent when the pandemic first hit, and it continued to go downwards as the virus worsened. The country’s ‘Zero-Covid’ policy has caused significant effects on its economy and manufacturing abilities. 

The pandemic caused catastrophic impacts on the logistics industry, from delayed shipments to drastically increased freight prices; freight forwarders around the world were faced with multiple challenges and ongoing disruptions. Both supply and demand faced severe shocks and interruptions, and the issues associated with manufacturing goods have made it difficult for companies to keep up with demand. Businesses needed to make prompt decisions and take immediate actions to sustain their operations to continue to function; unfortunately, this meant that many people lost their jobs because companies had to cut their costs significantly. These interruptions affected the daily lives of citizens and businesses around the world, many companies lost millions of dollars, and some were forced to shut down. 

Restrictions shifted spending away from services while driving unprecedented demand for goods. It also impacted the production and distribution of goods, especially in China, a major global supplier. The medical industry faced a substantial shift in demand; face masks, hand sanitisers, medication and other medical supplies required high stock levels. Hospitals struggled to keep up with admitted patients; there were times when hospitals had to turn them away because there wasn’t enough space to deal with the constant flow of patients. 

Over the past two years, the world dealt with the shortcomings of the pandemic; it exposed the lack of flexibility of the global supply chain and its inability to deal with unexpected disruptions. As economies restart, some pressures have eased over 2022 as demand decreases, allowing bottlenecks to clear. However, other pressures are set to persist into 2023 as limitations continue. 

Other factors affecting the global supply chain 

The world as we know it today depends on a functioning and resilient global supply chain; however, constant disruptions have challenged its functionality. A broad spectrum of disruptions affects the global supply chain; freight forwarders are constantly dealing with shortages and delays. The combination of bottlenecks, fluctuating freight costs, global inflation/recession, geopolitical issues, natural disasters, and labour shortages create the perfect storm for supply chains. Some of the key disruptions which have occurred in 2022 include: 

China issues 

China has faced ongoing issues over the year that severely impacted its production abilities. As the global leader in manufacturing goods, a decline in their manufacturing abilities proves to be a key issue for the rest of the world. Apart from Covid, China has faced several other problems, such as droughts, energy issues and decreasing freight rates. In August, China experienced one of its worst droughts which caused some of the major rivers to dry up; this considerably affected hydropower, halted shipping, and forced major companies to suspend their operations. The government was also forced to limit the power supply to thousands of factories. Now that demand is decreasing due to the threat of a recession, ocean freight rates are now declining.

China’s shipping industry has reported a 60 per cent drop-in freight rates. China to the U.S. West Coast trade lines have taken one of the biggest hits; since January 2022, rates have dropped over 75 per cent. The drop in prices indicates the lack of consumer demand, ships are now sailing well below capacity, and as a result, some companies have been cancelling shipments. 

Ukraine vs Russia war

The war has been ongoing for many years; in February 2022, the war escalated Russia invaded Russia. The immediate effect of the war was the sharp rise in the prices of commodities around the world. The invasion also disrupted many areas of logistics - including air, ocean, and rail freight. The European Union placed many sanctions on Russia, and countries in the E.U. banned Russian transport vessels and exports of goods and technology from Russia. These sanctions have led to bottlenecks, shortages, and the need to find alternative routes for freight carriers. 

Labour strikes 

Labour strikes in the logistics industry have become more common around the world. From ports to rail yards, tensions between cargo workers and management have been rising, adding even more barriers to the flow of goods across the globe. Strikes in the U.K. forced freight transport operations to shut down temporarily, and some ports in Germany stopped operations for months until an agreement was made in late August.

Global inflation

The global economy is declining due to monetary policies tightening, and the global cost of living has increased significantly over the year. The impacts of the Russia and Ukraine war, COVID-19 and ongoing issues in China continue to dramatically affect the global economy. Interest rates will continue to increase into 2023; central banks worldwide have signalled more increases in the coming months. These monetary policies will likely lead to slow economic growth and recession in some countries.

Over the past two years the world faced many unprecedented issues which have caused significant disruptions and interrupted freight services. As these issues become more substantial economies started to decline, freight rates fluctuated, and bottlenecks built up.  From global pandemics to wars, there is no doubt that the resilience of the global supply chain was tested and will continue to suffer over the coming years.

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