Global supply chains are currently facing historic disruptions, with more than 70 cargo ships recently getting stuck off the California coast and ports in key export markets like China facing numerous shutdowns.
Warren Cohen, assistant professor of professional practice in the Department of Supply Chain Management, said that the coronavirus disease (COVID-19) pandemic has created unprecedented challenges for the global supply chain that will affect the upcoming holiday season and likely extend well into the next calendar year.
“These disruptions are affecting consumer goods, manufacturing capabilities and raw materials, ultimately raising prices on goods and services along with increasing inflation globally,” he said. “If other (COVID-19) variants develop along with the current delta surge, we could experience even greater shortages of supply and increased disruptions.”
Areas such as inventory management and transportation have been affected greatly, with many companies who were unprepared for the supply chain disruptions also facing nontrivial inventory shortages, Cohen said.
“These disruptions have weakened the global supply chain,” he said. “We are experiencing massive shortages of manufacturing components, micro chips that are used in so many products today, delivery delays, lack of shipping containers and rapidly increasing transportation costs.”
David Dreyfus, assistant professor in the Department of Supply Chain Management, said the pandemic has also caused a gap in the workforce. One reason for this is because people who were ill or caring for family members were unable to work, often for weeks at a time.
“Many businesses have been unable to hire enough employees to meet demand, thus orders have (been) delayed or not accepted due to the inability to ramp up production any further,” he said.
Additionally, many people have decreased their traveling or stopped altogether, which has had a huge impact on the economy’s service sector, Dreyfus said. The money typically spent on traveling was instead spent on material goods, resulting in businesses being unable to respond effectively to the increased demand, because of both lack of labor and lack of input material.
He said that suppliers face similar problems and are unable to reach sufficient production to match the customer’s new demand patterns. The increase in demand has also resulted in transportation hubs being unable to store enough product, and a shortage of shipping containers to move goods around.
Cohen said that China, as a major source of inexpensive manufacturing labor for many global companies, has been significantly impacted by the delta variant surge, with just a small outbreak resulting in the closure of shipping ports and manufacturing plants. This ultimately prevents the restart of the manufacturing processes.
In addition to manufacturing, transportation has been negatively impacted by the supply chain disruptions, with costs having risen by as much as 10 or 20 times compared to pre-pandemic, he said. Shipping rates and port congestion have also increased.
Container ports along the California coast, which collectively manage more than 40 percent of U.S. cargo ships, have seen more than 70 cargo ships waiting for a berth at the port, Cohen said. This means that approximately 1.5 million containers of product have failed to reach the supply chain.
He said that while there have been major shipping disruptions before on the West Coast, manufacturing companies were able to continue operating in Asia and other countries, which meant that companies were able to still maneuver shipping containers within the U.S. to other ports. Companies were also aware of the possibility of disruption and were able to create contingency plans.
Cohen said that if the crisis persists, it is likely that there will be pressure to increase interest rates and that companies may begin to manufacture fewer products, which would result in plant closings and job layoffs.
Companies may also decide to rethink their supply chain networks, such as whether to source materials from closer locations despite additional cost, and inventory practices, such as whether to hold additional inventory, he said.
“An effective supply chain prospers when there is predictability and accuracy. In today’s current environment it’s been impossible to leverage those capabilities,” Cohen said. “Ultimately these disruptions will have a cost impact for products and goods and can lead to inflationary pressures and a potential recession.”
Dreyfus said in the short term, businesses and customers will need to be patient and find workarounds, whether that be increasing wages and other incentives to attract employees, chartering transportation instead of waiting for suppliers or finding alternative suppliers.
In the long run, while the global supply chain will ultimately return to smooth operations, customer buying habits may remain shifted and industries may have to adjust, he said.
In order for businesses to minimize risk of significant disruptions in the future, Dreyfus said they can conduct risk analyses to inform their decisions on holding extra inventory, suppliers, production locations and automation.
“Overall, businesses will need to become more flexible, resilient and adaptable as global conditions change and disruptive events occur,” he said. “Becoming aligned with suppliers and other partners in the supply chain will provide opportunities to reach these goals and remain competitive so that future disruptions do not cause the severity of supply chain issues we have today.”