The supply chain is about to get worse. Here’s what you can do about it.

The supply chain is about to get worse. Here’s what you can do about it.

By Eli Schneider, Senior Director of Operations, BAMKO

2021 was one of the most challenging years on record for those of us who work in the global supply chain. A white hot economy sent demand for consumer goods soaring while a global pandemic choked supply at its origin, leading to backlogged domestic ports.

Many analysts were hopeful the situation would improve in 2022. That hope is rapidly evaporating. Recent global developments have made it extremely likely that the costs of raw materials and freight (air, ocean, and trucking) will remain high throughout 2022. 

Let’s take a look at some of those events.

Russia’s invasion of Ukraine

The invasion of Ukraine by their much larger neighbor sent shockwaves throughout the world. Energy prices have skyrocketed across the globe. Russia happens to be one of the world’s largest producers of oil and natural gas. Ukraine itself is a large producer of natural gas. Disruptions in those marketplaces have turned the market on its head. In December, the price of a barrel of oil was around $65; it has now spiked to ~$100/barrel and seems unlikely to drop back to 2021 levels anytime soon.

Rising oil and gas prices lead to direct increases in the cost of transportation. Air freight costs, which are extremely sensitive to the cost of oil, have spiked. Ocean freight has actually gotten slightly cheaper from the all-time high of 2021, but still remains very elevated at 2X-3X the recent historical average.

Rising oil prices also lead to increases in raw material costs. Plastics are petroleum products and many other raw materials such as metals are very energy-intensive to produce.

BAMKO has already seen several of our manufacturing partners alert us to price increases on items we frequently order; particularly plastics and metals, due to rising oil prices. We do our best to mitigate these cost increases, but the high price of oil is a global phenomenon that will continue to ripple throughout the supply chain.

The (possible) collapse of Covid Zero in China

Following the initial outbreak of Covid in Wuhan in late 2019 and early 2020, China has taken pride in the success of their Covid Zero policy. The Chinese government has imposed very strict rules to not simply manage Covid spread but to try to eliminate it completely. In practice, this meant an almost total shutdown of the border in China to foreign nationals and very strict quarantine rules for citizens and green card holders. When cases do break through, the Chinese government does not hesitate to lock down entire neighborhoods or even whole cities of millions of people until the outbreak is contained.

With the highly transmissible Omicron virus now gaining a foothold in China, the policy of Covid Zero is being tested like never before. Outbreaks are popping up and spreading in major cities like Beijing, Shanghai, Dongguan, and Shenzhen. The Chinese government has struggled to contain these outbreaks as effectively as they have done for previous variants. It appears unlikely that they will succeed.

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While most Western countries have decided to manage and live with the virus, the leadership in Beijing is hesitant to depart from their Covid Zero approach.  China has a huge elderly population (over 260 million over 60) that is under-vaccinated and would be hugely susceptible to unmitigated spread.  Additionally, their previous success controlling the virus was a major point of nationalistic pride when contrasted to the Western democracies they measure themselves against.  They find themselves between a rock and a hard place.  They can continue to try (and very likely fail) to contain Covid or they can backtrack and not only lose face but risk a massive death toll.

In practical terms, this means we are about to enter a period of major disruption in production at Chinese facilities. For instance on March 13th, China locked down the entire city of Shenzhen which has over 17M people living there and is a major hub of manufacturing; particularly for consumer electronics.

Although Shenzhen is the first major domino to fall, we will likely see more lockdowns spread, and more Chinese suppliers delaying shipment on orders. Even if orders make it out of factories, we could see further delays at Chinese ports, as Covid has partially shut down several over the last year. 

It is essential that we communicate these developments to our clients early; even if their production has not yet been affected. These shutdowns happen quickly, with little to no warning, and can last several weeks or more.

Omicron Spread throughout Asia

While China has been an extreme outlier in following the path of Covid Zero, many other Asian countries have taken more drastic measures than the United States to control Covid. While Europe and the United States had their Omicron surge at the end of 2021 and into the beginning of 2022, Omicron is just now taking hold and causing another large wave in countries like Vietnam, Thailand, Indonesia. 

Some of these countries have provided a valuable alternative for some product categories out of China. The forthcoming spikes and corresponding lockdowns and production delays in these countries leaves manufacturers with few other places to turn.

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The Forecast Going Forward

2022 is looking to be a bumpy ride for the global supply chain; possibly even matching or exceeding the craziness of 2021. Global events continue to be unpredictable and will need to be closely monitored. 

There are several strategies we are implementing in order to minimize the disruptions during these unprecedented times:

  1. Plan additional time for production: Even if current facilities are open, they could close in a moment’s notice for testing and quarantine. Hope for the best but plan for the worst by building a cushion in lead times.
  2. Place inventory orders early: By stocking up on needed inventory now it may be possible to mitigate cost increases and ensure you don’t run out of stock should the situation further deteriorate.
  3. Book containers well in advance: If ports close in Asia, there could be a significant backlog of containers waiting to go out. Those who book early are more likely to be rewarded with access to limited space.
  4. Seek out alternatives to China: While China is still the factory to the world, we will continue to explore other options both in Asia as well as near-shore. This won’t be possible for some product lines, but for many products BAMKO has great manufacturing partners throughout the world. We plan to intensify this push even further.
  5. Consider alternative materials to save cost: Evaluate the Bill of Materials on each product to determine if there are alternative substrates that can be used to save cost or increase production efficiency. 


 

Andrew Stroup

Founder @ Leverage AI | Addicted Problem Solver, Chief Instigator | ex-White House, DOD, BofA, Reality TV, Megabots

2y

We’ve been tracking the same Leverage crazy days!

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Sasha Pirrie

VP of Sales at Logomark

2y

Great article Eli Schneider — that everyone needs to share and read.

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