Major Causes of Supply Chain Disruption

Three years ago, COVID-19 triggered a wave of supply chain disruptions that forced the media — and the actual masses — to care about global supply chain issues.

Now, we hear about supply chains all the time. It’s embedded in the news cycle and all over our social feeds.

Even if you’re not paying attention, it can be hard to ignore the empty store shelves, the prices at the pump, or the fact that you’re paying more for goods and services (and having worse experiences).

But — you can’t pin this all on COVID.  Global supply chains are getting walloped by what JP Morgan calls a “perfect storm” of root causes — fluctuating demand, geopolitical conflict, labor shortages, and a collective sense of dread.

In this article, we’ll examine some of those converging forces and their “contributions” to this challenging, complex environment.

Economic Uncertainty

Economically, we’re in a pretty weird spot. The pandemic upended everything – work, travel, purchasing habits, where we all eat, and what companies we do business with.

New winners emerged – certain tech companies, retailers specializing in home decor, sporting goods, and outdoor gear, and delivery services, while other industries – restaurants, airlines, and other “in-person” services suffered tremendous losses.

While many things have gone back to normal, changes brought on by COVID are still rippling throughout the global economy – and the supply chains (and their many links) we all rely on.

Obviously, inflation is a big one. Supply chain orgs take a hit any time the price of fuel or raw materials increases — even if it’s just by two or three percentage points.  Those orgs might then respond by raising prices to ensure they can stay profitable in spite of all that volatility.

As you can imagine, small price increases here or there have ripple effects spanning entire global supply chains. But, when those increases become widespread, you end up in this situation where everyone in that supply chain network is charging more for goods and services.

Eventually, those extra costs make their way to end-consumers. That, in turn, might color their perception of your brand, the market, and the overall direction of the economy and the world. And those perceptions — whether accurate or not — might bring about behavioral changes.

Many customers are changing their shopping habits or holding off on bigger investments out of fear their financial situation might take a sudden turn in the wrong direction.

The other issue here is that our instinct toward self-preservation is exacerbating the problem. There’s a lot of conflicting information about whether we’re in a recession, not in a recession, or teetering on some invisible economic ledge we might fall from at any moment.

Volatile Geopolitical Conditions

Recent geopolitical events are forcing companies to rethink their supply chains.

A recent survey from DP World and Economist Impact found that 96% of executives are responding to volatile geopolitical conditions by reshoring or near-shoring SC operations. To put things in perspective, that figure is nearly double what it was just 12 months earlier.

From a risk management standpoint, that shift makes a lot of sense. But — it’s also a paradigm shift with huge implications for global capitalism as we know it, and its underlying supply chains.

For example, the war in Ukraine prompted the US and other EU countries to impose trade restrictions on Russia, disrupting the flow of fuel, food, and financial services across Europe — and other countries that rely on Russian oil exports.

Rising tensions between China and Taiwan are raising concerns about what might happen if conflict erupts. Since Taiwan is the largest manufacturer of semiconductors, governments and private sector firms are coming up with contingency plans in case they’re suddenly cut off by the Chinese government.

The best known example of this is the CHIPS Act, which aims to reduce US dependence on China and build more resilient supply chains closer to home.

But — as more supply chain leaders (and governments) take reasonable steps to protect themselves, their actions could have damaging repercussions for the most vulnerable players in the global economy.

CSIS calls this shift the “great rewiring.” Essentially, when big global players stop sourcing from suppliers in X or Y country or move production to “friendlier shores,” it changes the underlying structure of the global economy.

According to Industrial Supply Chain Magazine, high-risk tensions could fracture established trade blocks – causing economic ripples across the globe and hitting developing countries the hardest. And, the International Monetary Fund warns that cutting off cross-border flows is a mistake that stands to make everyone “poorer and less secure.”

It’s not fair to expect some mid-size manufacturer to put their company at risk to preserve the status quo. The big takeaway here is, SC leaders should consider the bigger picture and prepare for future shakeups.

So — that might mean building larger supplier networks that aren’t so dependent on one specific economy. Or, maybe it’s investing in building out internal capabilities. In any case, it’s about contingency planning.

Climate Change

Until recently, climate change was largely considered a distant threat — a niche concern among environmentalists groups and “corporate greenwashers.”

To some extent, the climate crisis had a branding problem. Stats about melting ice caps and ozone holes weren’t exactly relatable to the average person — let alone the people leading companies that rely on fossil fuels, cheap materials, and emissions-heavy processes to stay profitable.

Sadly, the effects of climate change can be felt closer to home — regardless of where “home” is.

A recent collaboration between the University of Maryland’s Supply Chain Management Center and Earth Systems Science Interdisciplinary Center and Resilinc, a supply chain mapping company sought to quantify the financial risk climate change poses to global supply chain networks.

Researchers analyzed the supply chains of 100 OEMs in the consumer goods, tech, and automotive sectors in China and Taiwan. In the US, they studied clusters of industries in different regions. Think — IT in Silicon Valley, pharmaceuticals in the Boston area, and automotive manufacturing in the Midwest.

For each site, researchers looked at decades of temperature and precipitation data to measure climate variability over time. Those findings were then analyzed against business impact data by site, along with any existing continuity plans.

For example, if a pharmaceutical company loses half of their raw materials to flooding, how might that impact revenue? How long might it take to recover from that loss? Can they shift production to another site or source new materials quickly to minimize delays?

Source

Pandemics

As we’ve seen with COVID-19, temporary shutdowns and trade restrictions can set off a chain of economic ripples — with unexpected, often devastating consequences.

Surging demand for PPE like masks and gloves, a sudden spike in online orders, and increased adoption of online services meant some businesses experienced tremendous growth during the early days of the pandemic.

Meanwhile, other industries lost out big-time. Restaurants, hotels, airlines suffered. Downtowns emptied out. And, people started buying different stuff.

Instead of buying concert tickets and “going-out” clothes, consumers spent their extra cash on sweatpants, puzzles, and camping gear. As we now know, those behavioral changes completed upended supply chain dynamics. We saw production delays and port congestion across key hubs.

Pre-pandemic, just-in-time manufacturing was the norm. But — between the port delays, aircraft shortages, and production runs put on pause, companies were unable to get the materials they needed to keep up with demand.  SC orgs were unable to pivot to plan B, C, or Z, causing further disruption and uncertainty across the entire global economy.

Another issue is that different countries approached the pandemic in different ways, which meant, supply chains couldn’t just get back to business-as-usual, even after lockdowns were lifted in many places.

Consider the economic impact of China’s zero-COVID strategy. As the world’s biggest exporter, China’s long-term lockdowns and tighter trade restrictions set off a wave of disruptions across global supply chains.

For example, reduced manufacturing output and shipping meant companies in North America, Europe, and beyond were suddenly facing raw materials shortages.

Now, it’s important to understand that this isn’t just about COVID. This is just the only global pandemic any of us living humans have experienced first-hand. Fingers crossed, we won’t experience another global health crisis for at least a hundred years.

That said, if we’ve learned anything from COVID, it’s that historical precedent means nothing. We don’t even know if this virus will eventually fade away, stick around like the flu, or evolve into something far deadlier than the 2020 variants. And of course, there’s always the possibility that some other virus will cross species lines and make its way around the world.

Regulatory Hurdles

Supply chains can come with serious regulatory compliance risks.

Manufacturers and distributors already know — you must be able to trace every single link in your supply chain to its origin. We’re talking: individual workers, raw materials, vehicles & their routes, emissions, & fuel consumption, assets, tools, parts (down to the serial number or SKU), and so on.

The stakes are even higher when the finished products in question put real lives on the line. Food providers, medical device companies, auto manufacturers, growers, etc. — must all meet strict auditing and traceability requirements to ensure that they’ll be held accountable if something goes wrong.

Companies must comply with all regulatory requirements in every single market they serve — otherwise, they could be facing hefty fines, legal action, and reputational damage.  In other words, if you’re not careful, non-compliance might spiral into a death sentence.

Now, most companies understand that regulations are part of the price of doing business. They

exist to protect consumers, and, in many ways, the companies that serve them. For example, audit logs might shield companies against fraudulent claims against them. They also make it easier to take action in the event of a safety recall.

The problem is, regulations can vary considerably between countries or even states.

In the US, COVID-19 caused so many supply chain disruptions that the FDA made room for more regulatory flexibility, while still enforcing protections preventing consumers from mislabeled or tainted foods and medications.

On the surface, this was largely a positive change for both consumers and supply chain orgs. But — it’s easy to imagine a situation where suppliers in other countries might struggle to keep up with changing requirements. Or, perhaps, miss the memo when the FDA reinstates its old rules.

In Germany, a new supply chain act recently passed that promotes corporate social responsibility and penalizes orgs with human rights violations anywhere in their supply chain. Penalties can cost up to €800,000 or 2% of the violator’s annual global profits, and they’ll be prohibited from doing business in Germany for three years.

Here, you have a government taking action against climate change and human rights abuses. Which, obviously, is a good thing. At the same time, some suppliers might run into visibility challenges that prevent them from catching violations — opening the door to risks they may not be prepared for.

Labor Shortages Disrupt Supply Chains

When you hear about labor shortages, the conversation tends to follow one of two predictable paths:

A: Addressing labor shortages within your own organization. So, things like fighting high-turnover by investing in skills development, using automation to “do more with less,” or building a culture around agile best practices, collaboration, and innovation.

Or,  B: Freaking out about “societal ills.” You know, that old “no one wants to work anymore” trope that keeps popping up in op-eds, political talking points, and pull quotes from various rich people. 

Obviously, “path A” touches on something critically important – what you can do to respond to persistent staffing challenges. “Path B, isn’t really part of our wheelhouse, but it does signal that there’s something bigger happening with the global workforce.

According to the Brookings Institute, there are several converging factors behind the current labor shortage including:

• An aging workforce – particularly for skilled trades
• People (mostly women) dropping out of the workforce to care for children and elderly relatives during the pandemic
• Wage growth that incentivized job hopping
• A broader reckoning that pushed employees to advocate for better working conditions, higher wages, and basic protections

Even if you’re doing all the “right things” internally, labor shortages elsewhere in the supply chain have serious implications for your business.

For example, labor shortages in the manufacturing sector can delay production runs, causing materials shortages and longer turnaround times for critical shipments.

Companies that rely on a single supplier for key ingredients, parts, or raw materials can quickly find themselves in hot water if that supplier suddenly loses the workers they need to meet demand.

Without alternative suppliers, supply chain orgs could be facing significant financial and reputational losses. In some industries, delays and shortages could harm end-consumers.

For example, staffing shortages could make it harder for pharmaceutical companies to get the raw materials they need to produce life saving drugs, leaving patients scrambling for other options.

On the logistics side, labor shortages make port congestion worse and delay shipments traveling by truck, air, or rail.

A recent article from The Loadstar reported that worker “no-shows” during labor contract negotiations forced west coast terminals – LA, Long Beach, Oakland, and Seattle – to temporarily halt operations. Because there weren’t enough workers to handle incoming containers, cargo flows stalled, and domestic deliveries were delayed.

Final Thoughts

The thing about disruption is, it’s driven by forces outside of your control. That’s probably the last thing you want to hear if you’re dealing with the fallout of any or all of these disruptions, but there is a silver lining.

Coping with disruption – in any form – is all about resilience, flexibility, and taking contingency planning to the next level. While these aren’t easy things to achieve, focusing on these broader goals will prepare you for all future disruptions — whether history repeats itself or not.

What’s more, working with a partner like Velosio can help you reach these goals before the next black swan disaster rattles global supply chains — again.