The Supply Chain Crisis. Explained

This is a tell-all of what I know about the ongoing supply chain crisis that is affecting manufacturing firms and consumers who buy, like you!

You might want to take a sip of water before you read...

For the record, I took an interest in supply chains when I was outsourced at a Fortune 500 listed company years ago in 2009. This focus later grew into what it is today. I’ve also spoken many times on the platform about how finance can support their manufacturing firms and supply chains and so this article only mentions the crisis.

How did we get to a supply chain crisis?

The reason is due to scarcity. 

Scarcities. At. Literally. Every. Stage.

The second reason is partly due to an over-reliance on good habits (now) gone bad, such as just in time techniques.

In 2020, we were informed that global shipping factories had shut down due to the economy. We were told back then, that in response, shipping companies cut their schedules in anticipation of a drop in demand for moving goods around the world. 

This had a significant multiplier effect.

At the same time, in Trinidad and in other places around the globe, working from home meant a rapid increase in online purchases because there was absolutely no place to go nor shop due to lockdowns.

This led to an increased demand for packaging, cardboard, and paper board which is used to transport products/supplies. 

There are 2 limiting factors to consider here. One is paper. Most paper and cardboard are made from forestry products and recyclable items. Right now, paper mills are running at full speed to meet orders but they are filling the void of several marginal pulp mills that shut down in 2020.

 All cardboard boxes, however, were stuck on the second limiting factor which, is containers and ships.

 In 2021, these were either delayed at ports (containers empty or full stacked up) or re-routed due to where the orders were coming from. You were also at the mercy of what was available by shipping companies, especially if you aren’t a major player.

 In fact, as of late 2021, there is a backlog and after two years of pandemic-related supply and demand constrictions, 77% of the world’s ports are experiencing abnormally long turnaround traffic, (Bloomberg), with ships anchored off the coast of the U.S. and Chinese ports waiting to be processed (Fortune Magazine).

The long turnaround traffic is also causing periods where goods are either not coming in or coming in all at once and so there have to be ample coordination efforts in place.

So, why aren’t container manufacturers making more containers? 

Fair question.

In 2021, steel, (which is used to manufacture more containers) price has also skyrocketed this year. Think about it, who wants to buy when the price has increased so significantly?

The price of steel has climbed all year; and according to one index, the futures price for one ton of hot-rolled coil steel is roughly $1,923, up from $615 last September (Sept 2021, Quartz).

There is another issue. China which manufactures half of the world’s steel is forecasted to actually decline in the months ahead (Sept 2021, Wall Street Journal)

Are you still with me?

Compounded to all of this were global shortages in casual labor or persons who unload goods, transport them, and pack them such as truck drivers.

Since Covid19 is a health crisis, employees still got sick as they interacted with persons on the ports. They also had to quarantine, which forced some transportation businesses, distributors, and supporters within the supply chain to temporarily close, even as vaccination efforts rolled out globally.

This bull-whip effect or distortion in demand has also led to panic ordering, which according to analysts makes it worse.

All of these issues have significantly increased prices in freight, containers, transport, and delays in incoming and outgoing orders because scarcities always drive the price of elastic goods upwards.

 As of this date, no one knows when things will get better but one suggestion (from the operations team), is that an influential competitor can simply come and change the rules of the game for all consumers and manufacturers.

The other option is that as time passes and people become more and more vaccinated that things will eventually improve.

For now, we continue to forecast, diversify, manage risk, and coordinate.