The gloves are off: the global supply chain is facing a hard fight.
From the COVID-19 pandemic to the ongoing Russia-Ukraine war, cracks are forming. From raw materials to cars, shortages are nearing historic levels. As a UK exporter, you know that this isn’t business as usual. Those days are over now.
Here are some threats to the global supply chain you should know.
This article at a glance
Supply chain disruption is everywhere. From natural disasters and the climate crisis to shipping container scarcity and geopolitical conflicts, this article will explain everything you need to know about threats to the global supply chain and how exporters can prepare for the worst.
Global supply chain risks threatening your business
To minimise disruptions to your export business, you should stay in the know about what's happening around the world and how it could potentially affect you:
1. Natural disasters
The number of natural disasters is on the rise. According to McKinsey, floods and hurricanes are responsible for the majority of economic losses in natural disasters, resulting in 20% and 50% of total losses since 2000.
Natural disasters can result in a halting of production. Access to plants can be disrupted, affecting production downstream and resulting in a potential price hike. For instance, a severe winter storm in 2021 resulted in a power outage in Samsung Electronics’ foundry plant in Austin, Texas, forcing the chip plants to shut down. Since the Austin plant included production lines for automotive chips supplied to Tesla, IBM, Intel, and Xilinx, this natural disaster eventually resulted in severe shortages.
Although no one can foresee or stop natural disasters, you can monitor the regions of your core supply paths or suppliers and have contingency plans to reduce the impact of natural disasters on your business and procurement functions.
Due to the COVID-19 pandemic, shipping containers have become increasingly scarce and costly. According to UK consultancy Drewry, three Chinese companies make the majority of the world's shipping containers. Chinese factories build over 96% of the dry cargo containers globally and 100% of refrigerated containers in the world.
There are problems. Production has been increasing at an estimated 6 to 8 % in container capacity in 2021. However, that’s not fast enough to meet the demand. Therefore, inventories of new shipping containers remain low despite factories increasing container production activity in 2021.
In short, the West is vulnerable. Any trade war with China could result in a severe shortage of shipping containers.
Worse still, there have been significant delays across the global supply chain. Freight companies are also facing challenges in employing port workers and truck drivers due to this group of workers’ fears over COVID-related border controls.
3. Sustainability and decarbonisation
Today's consumers are increasingly more conscious of carbon emissions. Global governments are pressuring shippers, ocean carriers, and logistics service providers to manage and assess their greenhouse emissions.
Over two-thirds of corporate boards in the US have integrated environmental, social and governance (ESG) objectives into compensation plans. Additionally, the US Securities and Exchange Commission is putting disclosure requirements in place – forcing companies to be open about their carbon footprint.
The European Union proposed the Carbon Border Adjustment Mechanism (CBAM) to combat climate change. The CBAM will become fully operational in 2026, with a carbon tax imposed on the import of selected products.
The first phase of CBAM includes taxing carbon-intensive industries – including iron, aluminium, steel, cement, electricity and fertiliser. This could also affect other industries reliant on steel, forgings and castings – undoubtedly, this will send shockwaves through the global supply chain.
The EU will force businesses importing from outside the EEA to purchase certificates based on the number of carbon emissions produced in the importation of those products. However, this will only happen after the transition phase of CBAM – in 2026.
Geography plays a vital role in the global supply chain.
Take the Suez Canal. In 2021 container ship Ever Given got stuck in the waterway and caused significant delays.
Now, an estimated 12% of global trade goes through the Suez Canal. Approximately 50 ships pass through the Suez daily. Thus, when Ever Given was wedged in the Suez Canal, over 350 vessels were stuck on either side of the canal.
A geographical disruption like this has a ripple effect. Buyers don’t receive supplies. Payments are delayed. Customers are angry.
Geopolitical factors can result in trade restrictions and conflicts.
Take the ongoing US-China trade war. During the early Covid-19 pandemic days, this resulted in restrictions on imported vaccines and other essential medical products.
The Russian invasion of Ukraine is another example.
Ukraine is closed for business and UK businesses directly engaged in trade with Russia will face tariffs and import bans issued by the British government.
Notice the ripple effect. Transport costs rose when Russian banks were removed from the SWIFT network and the resulting oil crisis led to higher fuel prices and insurance premiums. This led to higher shipping costs.
Compare a few quotes from different carriers – ensure you’re getting the best price at the most efficient service. Also, accommodate for the potential of limited capacity or unforeseen delays.
How do I mitigate global supply chain risks?
1. Understand your supply chain
Understand every step of your supply chain, from your manufacturers’ material suppliers and components to the companies distributing and selling their goods. Do your due diligence to ensure the parties you’re involved with are reputable and dependable, so they can consistently supply you with the goods as promised.
2. Build a more diverse supplier base
When managing supply chain risks, it’s important not to put all your eggs in one basket. So, build a more diverse supplier base instead of solely relying on one. Dual Sourcing. In short, mitigating risk by diversifying your supplier base. Using just one supply means you face greater supply chain risks, as a small issue with your supplier will upset the entire supply chain.
By diversifying, you can spread risk and mitigate its impact. Involving multiple suppliers in various locations can also help you lessen the risk of localised supply issues.
3. Hedge against currency volatility with Silverbird
Geopolitical concerns can result in currency fluctuations. Since the global financial crisis, the value of both the USD and the euro has declined.
You can hedge against currency volatility. Silverbird allows you to secure exchange rates and hold them in your account until you wish to use them. This allows you to avoid low forex rates when transferring money.
International trade doesn’t have to be tough, even in unprecedented times
Silverbird empowers international merchants during uncertain times, allowing you to pay your global suppliers in an affordable, fast and easy way.
You can start your business account in under 10 minutes. Get a global account with local details, including direct IBANs, more than 30 currencies, and EU/UK/US and international payments, so paying and receiving payments can be a breeze.
Best of all, Silverbird is a bulletproof security solution – protecting 100% of your money by holding it in Tier-1 financial institutions.
Business without borders. Business without compliance hurdles. Open an account now and try out our services for yourself.
Author: Melissa Yeo
Illustration: Kate Faldina