We’re still feeling the ripples of the global supply chain crunch that started with the Covid-19 pandemic.
Many businesses suffered. Some ceased operations. No industry was spared, from automobiles to food.
This article will examine the reasons behind the supply chain crisis – how it affects global traders, and the steps merchants can take in response.
This article at a glance
The already-fragile global supply chain crumbled under continuous assaults, from a global pandemic to a series of worldwide political crises – from Brexit to the invasion of Ukraine. A series of government-mandated global lockdowns drove up demand for consumer goods, but they surpassed production and shipment capabilities. International merchants scrambled to respond. Orders inflated. Products were stockpiled, rerouted and nearshored.
What is the supply chain crunch? Why did it happen?
In the global supply chain network, labour shortages and underdeveloped infrastructure were pre-existing problems. Truck drivers, seafarers, and warehouse workers were leaving their vocations due to low pay and long working hours. Road, rail, and port infrastructures in developing nations were also in dire need of development to ease land and sea congestion.
At the peak of the pandemic, factories cut production capacities. This meant fewer goods were deployed overseas, and empty containers piled up at depots. This resulted in container shortages, hiked freight costs and delayed deliveries. Worse still, when Covid-19 struck, traders faced acute labour shortages since many workers were sick or quarantined.
During the pandemic, certain industries fell into disuse. Owing to the state-enforced lockdowns, people stopped travelling abroad and dining out, instead of buying their groceries online. This was the crunch – a truly vicious cycle. Huge demand for goods unmet by suppliers.
You might think that it couldn’t get any worse. But let me disappoint you. Many companies employ just-in-time manufacturing and run near-maximum capacity to reduce waste and costs. Any disruption along the supply chain – no matter how small – would drastically affect their ability to deliver goods to end consumers.
The global supply chain’s health is not improving. The Shanghai lockdown and the Ukraine war caused jams in Chinese ports and the North Sea. Sanctions against Russia continue to aggravate the supply crisis and diverting air and sea freight means longer transportation times.
How does the supply chain crisis impact international merchants?
Let’s not mince our words. The global supply chain crisis has had a detrimental impact on international merchants.
Global traders must coordinate with their suppliers and attend to their customers’ worries about non-delivery. At the same time, they have to grapple with surging freight rates. Smaller businesses are locked out from their usual trade routes and find it increasingly hard to afford the hiked rates.
Additionally, cross-border traders often only know about upstream or downstream disruptions when it’s too late. They cannot reschedule or reroute their cargo. This results in losses in money and time.
Traders are at risk of the bullwhip effect. It works like this: small changes in downstream demand compound into large demand fluctuations at the upstream wholesale, distributor, manufacturer and raw material supplier levels.
Similarly, upstream supply chain disruptions from the supplier impact international merchants too. The automobile industry, for example, stalled production due to a worldwide shortage of semiconductors.
The Bullwhip Effect
Photo source: https://www.leandna.com/blog/managing-the-bullwhip-effect/
Alex, who trades in furniture, saw a 15% increase in demand for sofas in May 2022. He anticipates that demand would increase in the future, and orders 20% more sofas from his manufacturer for July 2022. The manufacturer also anticipates future growth and inflates this demand to 25% to his wood supplier. This pattern can repeat at each supply chain juncture.
The problem comes when there is a change of heart from customers. To illustrate, Peloton, the exercise bike manufacturer, fell victim to the bullwhip effect. It anticipated increased demand for exercise bikes and treadmills as Peloton received more orders when people stayed home during pandemic lockdowns. As restrictions eased, the demand waned. As such, they were bullwhipped. Peloton had overstocked equipment and to counteract the lack of demand they had to lay off staff and change its management team.
What can international merchants do?
Prepare for the worst
Supply chain reliability cannot be restored immediately – so, you must try to anticipate future ecological, political, and economic risks.
Cross-border merchants should talk to their suppliers and customers about their order commitments, expected lead times, and new quantities or timeframes-based pricing scales. For the short-term, merchants may explore nearshoring, rerouting, keeping more inventory, and diversifying suppliers or markets.
In an interview, Peter Sand, chief analyst of ocean-rate data provider Xeneta stated, "We will see some reshoring and nearshoring, but the lion’s share of changes I see will involve bringing manufacturing out of China to neighbouring Asia countries." Sand predicts that manufacturing will be based in Vietnam and Thailand or other low-cost Asian countries, rather than reshoring back home to the United States.
The drawback of this supply-chain crisis mitigation method – of keeping more inventory and nearshoring – is that it’s slow and expensive. However, it’s a solid short-term solution.
International merchants can find support from their government, trade agencies, or private sector investors.
There’s plenty of government support available. UK Export Finance (UKEF) is led by a team of trade finance experts who offer trade finance solutions to British SMEs, as well as help them win new export contracts.
The British Business Bank (BBB) is also a good place to start – they will optimise your ability to find financial support through the good times and the bad, and they also provide the sort of advice that only experts can.
If you’re looking to solidify your global expansion, check out UK Trade and Investment (UKTI). They offer expert advice on all matters of trade and will turbocharge your global reach.
Remember: it’s in the government’s economic interests to keep your business afloat. After all, a productive economy is a taxable one.
Analyse pricing plan
Global traders must examine their pricing, plan, and scrutinise their supply chain processes. It’s not enough to anticipate a disruption – you must have a proper response plan in place if such disruption occurs.
These are some questions that you should consider:
- Factoring in supply chain constraints. For example, are some products more costly to produce or import than others?
- Consider whether the product mix should be updated
- Sell more of less affected products
- Discontinue offering certain goods
- Stop selling to particular clients
- Source different products from other suppliers
Exploring these questions and coming up with Plan B (and C and D) would help you face future supply chain crises with confidence and preparedness.
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Author: Syahirah Aiman
Illustration: Kate Faldina