The Covid-19 pandemic has disrupted global supply chains. These are still facing huge challenges and struggling to bounce back in a period where demand has surged. This is leading to increases in the prices of products, shortages, and delays in deliveries. With Christmas around the corner, a season with above average consumption, the situation is only expected to worsen as the problems in the supply chain don’t seem to have an end near.
But what exactly are global supply chains? What led to the problems that we are observing worldwide? What have governments done to ease the situation?
What are the Global Supply chains?
Nowadays, a desire for something can be fulfilled with a simple click, but it was not always easy as today. In fact, a dramatic change occurred in the markets around the 80’s with the globalization, and liberalization of world’s markets, lower transports costs, advances in information and communication technology, and innovations in logistics. From that moment forward, low cost, high quality and satisfied customers became the buzz words, and with this new reality in global markets a new concept was implemented: Global Chain.
Global chains are networks that can span across multiple continents and countries with the purpose of sourcing and supplying goods and services. It also involves flow of information, processes and resources across the globe enhancing its efficiency. With this new concept, firms and organizations could now have its production broken into different parts in different countries to achieve high quality while lowering costs. The importance of the global chain is so notable that since 1995 intermediate manufacturers represent more than half of manufactured exports and imports at a global level.
Different geographical regions have a different net effect in the global chain. Africa and Oceania export more intermediate goods as a share of their manufactured exports than others. In Europe there is a balanced intermediate imports and exports. Meanwhile in Asia imports exceed exports as a share of their intermediate imports and exports.
However, the pandemic disrupted the normal functioning of the global supply chain. These difficulties showed up at the beginning of the pandemic with countries like China, South Korea, Germany, and Southeast Asian countries, being forced to reduce their production since workers were sick or in lockdown, leading to an overall decline in global supply with shortages in food, toys, chips, etc., driving prices up.
The causes behind the disruption in Global Supply Chains
Many factors lie behind the explanation for the supply chain crisis that the world has been facing. Overall, it is a culmination of lingering Covid-19 disruptions and a sudden surge in demand, with the supply side not being able to adapt quickly enough to demand´s rapid pace. Indeed, on the demand side, in the past few months, with many restrictions being lifted, the economy has been experiencing an unparalleled boom in demand. However, on the supply side of the issue, we face a still slowly recovering productive industry from the hardships imposed by the past year’s Covid-19 restrictions.
Many factories were forced to shut down, some have had to cut back on the number of workers and as such production still falls quite behind pre-pandemic levels, being unable to keep up with this increase in demand. Moreover, general labour issues across the globe, particularly a shortage of workers, have also greatly contributed to a clogging up of transportation networks. The lack of sufficient truck drivers has been a troubling concern in multiple countries, particularly in the UK as recent months have shown, with Brexit having greatly contributed to it. In the US, significant labour shortages have been felt in warehouses companies and major ports. This reality, combined with inadequate infrastructures and a shortage of the proper space and equipment to deal with the surging demand have resulted in warehouses running out of space and ports working under full capacity, leading in turn to port congestions and blockages in multiple cities.
Adding to all of these, the punctual raw material shortages as well as a scarceness of key components (such as the case of the microchip crisis), have also compromised timely deliveries of final products. Indeed, one of the biggest issues with the supply chain crisis is that the way the productive and distributive chain of a large deal of activities is organized, with numerous intermediaries and bottlenecks along the route from the assembly line to the final consumer, it makes it so that as one supplier depends upon another´s delivery, and the delays end up feeding on each other, amplifying the effects of the disruptions.
What has been done to ease the situation?
In the U.S., the Biden administration has been increasing its dialogue with the corporate sector to try to ease some of the ways that supply chain issues could affect consumers. Namely, the U.S. Gov. has secured pledges from retailers such as Walmart and from shipping companies UPS and FedEx to increase their working hours in an effort to ease some potential difficulties that could arise during the hectic holiday shopping season that is expected to be strong this year due to the fiscal stimulus pursued by the Biden administration. They are also urging rail and trucking companies to increase their transportation capacity, but labor shortages in these areas have made this difficult, which has contributed to worsening the bottlenecks. Moreover, the FTC (Federal Trade Commission) has requested information from big retailers to monitor whether they engage in dishonest business practices which might amplify the damages form the supply chain problem.
In September, in the U.K., to help with problems in the supply of fuel, the government resorted to the military to help deliver fuel to gas stations. A shortage of fuel would be even more devastating to other supply chains as it wouldn’t allow transportation of goods by truckers. Also in the U.K., the Treasury introduced measures to freeze taxes on the trucking sector, to attempt to ease supply chain pressures there. However, logistics companies say that this does not address the truck driver shortage that is bottlenecking many of their operations.
The U.K had also previously implemented 25 measures to try to tackle the chronic shortage of HGV (heavy goods vehicle) drivers, including increasing capacity for testing new drivers by the Driver and Vehicle Standards Agency (during the pandemic these tests had been severely decreased) and, generally, making it easier for new drivers to enter the truck-driving labor force. The U.S. new infrastructure bill would also allow drivers as young as 18 to drive trucks across states (currently the minimum is 21).
Economies all over the world have been struggling with a global crisis in supply chains in result of the pandemic. Even though governments have put forward legislation to help ease these problems, the issue is still very present. Higher prices, shortages and delays in delivery are just some of the problems that consumers and businesses have been dealing with. These problems won’t last forever but they are likely to get worse before they get better.
Source: CNDC, Bloomberg, BusinessInsider.