A chain is only as strong as its weakest link, and the coronavirus pandemic that struck in early 2020, experts say, exacerbated weaknesses in the supply chain that will continue to reverberate through the economy for months.
From new vehicles and personal electronics and the microchips that go into them, to paints and plastics and the chemicals from which they’re made, raw materials as well as finished goods are often scarce around the country due to breaks in the supply chain brought about by the pandemic and several other shocks, including the February winter storm in Texas, the May cyberattack on the Colonial fuel pipeline and a 2021 hurricane season that’s barely begun.
Delays have resulted in higher prices for some goods and mean that manufacturers wait longer for their materials and consumers wait longer for products they’d like to buy.
Increased demand — and rapidly changing demand from consumers who, because of the pandemic, began going out less and working from home more — has also stressed the system, experts say, forcing companies to pivot to meet demand by, for instance, quickly finding new markets for their products and new ways of getting those products to market.
“When supply chains fail people pay attention, but in between we just expect it to run,” said Anshu Prasad, the CEO at Leaf Logistics, a New York City startup that uses artificial intelligence and predictive analytics in transportation logistics to help clients find efficiencies.
Logistics professionals and consultants who keep a close watch on logistics in order to advise corporate clients say the pandemic has highlighted the fragility of the supply chain.
“We are just not ready for handling disruption and change the way we should be,” Prasad said.
“Almost everybody is having huge issues in transportation right now,” said Dr. Zach Zacharia, an associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh University in Bethlehem, Pennsylvania. “Everybody is having trouble getting supplies in, getting their product out.”
Zacharia said it may get worse before it gets better as companies prepare for the Christmas retail rush, which typically requires that goods from China, where so many consumer products are made, start being shipped in the summer so that they can be on store shelves in time for the holiday buying spree.
“What people forget is if you want something in December it’s got to leave China in June, July or whatever,” he said. “It takes that long to go through the entire system.”
The Lehigh CSCR in late June issued its supply chain risk management index for the third quarter of 2021, putting the average risk for July, August and September at 69.35. (Any number over 50 indicates increased risk; the maximum is 100.) The index is based on supply chain managers’ responses to a survey about 10 different factors that impact the chain — transportation, cybersecurity and data, government intervention, customer behavior and several others — and the transportation risk index for the quarter was set at 86, the highest of any single risk factor since the index was launched five quarters ago.
The labor link
In comments accompanying the report, survey respondents cited labor shortages and labor costs, raw materials prices, coronavirus outbreaks, trucking costs, greater demand, bottlenecked seaports and the possibility of increased taxes and government regulation as among their concerns related to the supply chain.
Compounding the gaps in transportation right now, for companies struggling to overcome supply-chain problems, is a shortage of workers.
“Labor has lots of options right now, and we’re seeing labor jump around,” said Steven Wybo, automotive practice leader at the consulting firm Conway MacKenzie, part of Riveron.
People at auto suppliers he works with tell him, “We can’t get parts and we can’t get people and we can’t get transportation,” said Wybo, who is based at Conway MacKenzie’s Birmingham, Michigan, office.
“All the manufacturing companies I talk to have 10-, 15-, 20-percent (work force) vacancy,” said Zacharia.
A labor shortage is also hurting the trucking industry, experts said, while the need for freight-hauling has increased due to the reopening of the economy and a surge in demand. “The truck drivers are not coming back into it because they can find better jobs,” Zacharia said.
Labor, however, doesn’t appear to be a problem now at the Port of Los Angeles, which handles about 20 percent of the cargo shipped into the U.S. and is the busiest container port in North America. Productivity is up 50 percent since before the pandemic, said Phillip Sanfield, the port’s director of media relations: POLA averages 15 ships per day at berth — that is, docked and being unloaded or loaded — compared to 10 per day before coronavirus, he said.
Shutdowns, shifting demand
But greater productivity can’t keep up with skyrocketing demand for goods shipped into the port, mostly from Asian countries. On June 29, according to the POLA online dashboard, there were seven ships at anchor, waiting for a berth; before the pandemic, Sanfield said, it was unusual for arriving ships to have to wait for a berth.
“We started to see ships at anchor last October as the American buying surge really kicked into gear,” Sanfield wrote in an email. There are other contributing factors, he said, but demand is the primary cause for the backups.
Manufacturing shutdowns during the early days of the pandemic meant inventories were drawn down, and when businesses reopened, consumer demand rebounded strongly.
“All that pent-up demand got released, and it got released far faster than most companies were expecting,” said Ara Surenian, senior director of product management at the Troy, Michigan, -based Plex Systems, which offers manufacturing, automation and supply-chain planning software and services.
The pandemic also abruptly changed some consumer habits, forcing some companies to quickly shift relationships with suppliers and markets in response to resulting supply-demand imbalances.
Leaf Logistics, for example, worked with a beverage company that saw demand from bars and restaurants plummet because of pandemic-related shutdowns, but then saw increased demand for packaged drinks from people who were consuming them at home, Prasad said. That required the company to buy more cans from its supplier, he said, meaning that sheet-metal deliveries, which had slowed in the automotive sector because of closed assembly plants, were moved toward can production.
The worldwide microchip shortage is probably the best-known example of the imbalance: At the beginning of the pandemic, demand from automakers weakened and chip-makers began shifting more of their output toward the consumer electronics, such as computers, televisions and gaming systems, that were in high demand. When vehicle assembly ramped back up, automakers suddenly needed more chips, but shortages have forced auto plants around the country to shut back down temporarily.
The average new vehicle contains about a thousand microchips, according to Wybo.
“Now consumer goods are going to get shorted,” said Mazair Adl, a co-founder of Gocious, a southern California startup that specializes in product planning. “There’s just not enough capacity for everyone.”
Chip prices are “going through the roof” and, pandemic-related problems aside, the demand for microchips worldwide is rising “almost exponentially,” Adl said.
Adl said there is a serious push to increase chip-making capacity, and also to build more computer chip factories in the U.S. Currently, only about 12 percent of the world’s chip supply comes from U.S. factories, according to Business Insider.
But increasing production, Adl said, is a time-consuming, capital-intensive process, and the machines used to produce the chips are made in just a few countries and hard to come by.
“This is not something that’s just going to get fixed in the next six months,” he said.
More broadly, some experts foresee a coming readjustment of supply chains that could see companies establish and strengthen relationships with alternative suppliers, “reshore” or “near-shore” raw materials and parts sources closer to where they’re needed, and relax the just-in-time delivery philosophy, which often leaves manufacturers with few or no stocks of the materials they need to keep operating during supply-chain breaks.
“Instead of having five days of inventory on hand, have 10, have 15,” said Wybo, the Conway MacKenzie auto sector consultant. “I’m not saying we’re going to abandon lean at all, but plan and prepare.”
“The future of supply chain is going to be a mix of different approaches,” said Surenian.
Most of the professionals surveyed by Corp! expected to see kinks in the supply chain into early next year, or even later.
“You’re starting to see that things are slowly getting back to normal,” said Surenian. Lumber prices, which shot up in the spring only to start coming down more recently, are an indicator of that, he said.
“A lot of catch-up has to happen to get everybody back on track,” said John Ruther, managing director of the Grand Rapids, Michigan, office of the corporate consulting firm O’Keefe.
“It’s going to be through the first half of 2022, depending on the industry” before all issues are worked out, said Surenian. Ruther predicted an even longer supply-chain recovery — late 2022.
“The next quarter is going to be pretty dire,” said Zacharia, referring to the third quarter. “Hopefully, by the time we get to the end of the quarter we see some light at the end of the tunnel.”