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Signs grow of lengthy supply chain crisis

As the Omnicron strain of coronavirus triggers new lockdowns and undermines economic recovery, analysts are warning that signs of recent supply chain constraints easing are likely to be short-lived and that further bottlenecks can be expected over the next two years.

A recent report in UK daily The Guardian noted that the latest wave of the pandemic has hit particularly hard in the Chinese manufacturing hub of Zhejiang, which is home to the world’s largest cargo port, Ningbo-Zhoushan.

Thousands of workers are currently in quarantine under China’s strict zero-Covid policy. Both they and those who have not yet fallen sick are being urged not to travel home “unnecessarily” for the lunar new year festival in February.

“Further supply chain disruption is a significant possibility,” analysts at Capital Economics have warned in a note. Further pressures come from a shortfall of shipping capacity, ongoing port congestion and an overreliance on ‘just in time’ supply chains creating a ripple effect around the world.

In response, many companies have been forced to radically revise supply chain policies that have broken in the face of the pandemic.

“A lot of the operating models in the supply chains we see as broken today, were cemented 20 years ago on what at the time were universal truths, that going after low-cost suppliers . . . made a tonne of sense,” said Brian Higgins, head of KPMG’s US supply chain and operations practice.

'Just in time' is steadily being replaced by a ‘just in case’ approach with a greater appreciation of risk and strategies such as increasing inventory held, entering into longer term contracts with key suppliers, and diversifying manufacturing to create regional hubs.

A report in the Financial Times cites the example of a German industrial group that has moved from three-month non-binding arrangements with its computer chip suppliers to 24-month pay-in-advance commitments. Chinese energy groups have been keen to sign liquefied natural gas contracts that are for up to 20 years or double their previous commitment.

Counterproductive policies

With the global pandemic soon to enter its third year, despite shipping backlogs, labour shortages and geopolitical tensions many international supply chains have weathered market shocks rather better than anticipated. Some have adjusted or adapted to the changed circumstances, but the majority have continued as before.

However, writing in the US magazine Foreign Affairs, Shannon K. O’Neil, suggests that a growing number of government policies threaten to upend international supply chains and the global business environment more broadly. 

“Country after country is reshaping the business landscape with a mix of novel regulations and barriers to trade, often under the banner of pursuing a more robust form of industrial policy,” she writes. “The impetus behind these policy moves is often laudable: curbing carbon emissions, for example, or creating new opportunities for workers.

“Ultimately, however, a number of these policies will end up being counterproductive. Solar panel tariffs and domestic content rules on electric vehicle tax credits, for example, will slow the green transition. Import levies and export controls will destroy good-paying export-oriented jobs. It is these choices and changes – and not the pandemic – that will prolong supply chain uncertainty.”

Supply chain pressures have already fuelled an increasing demand for integrated data, which will help businesses in moving from reactive to proactive supply chain management, says Alistair Baxter, head of accounts receivable (AR) finance for the fintech Taulia.

“Integrated data from multiple parties in the supply chain will increase the field of vision, allowing for a fuller view of the complete value chain. This will bring material benefits to the business, such as reducing inventory and latency, improving working capital, and improving EBITDA.”

In the meantime, Flavio Macau, an associate professor specialising in supply chains at Edith Cowan University in Western Australia quoted in The Guardian’s report, said that fine-tuning the post-pandemic economy could take years and it is still suffering from a kind of “high blood pressure” as it lurches from one disruption to another.

“Lockdowns are hopefully a thing of the past outside China, but there are still all kinds of restrictions in place to the movement of people, including workers with in-demand skills.

“My view is that supply chains still have high blood pressure, consistently showing arrhythmia. It will take to mid-2024 to get back to “normal’.”

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