Talking Trade blog
Managing supply chain disruption in 2022
Published 18 January 2022
The Covid-19 pandemic has been ongoing for what feels like a lifetime already. The initial shock of a rapidly circulating virus gave way quickly to at least three related challenges for supply chains.
First, unlikely many other disruptive events, the pandemic affected demand in substantial and sustained ways. Consumers, largely locked down in homes, started ordering a different range of products while significantly cutting back on spending on many types of services. Institutions, like offices and schools, also rapidly adjusted market demands—often switching from robust ordering for supplies to zero demand for long periods of time.
Second, the pandemic also started hitting supply. The pandemic and associated government restrictions on movement affected the ability of firms to effectively respond to new demands.
Finally, the pandemic has been a global phenomenon. This is also highly unusual, as most disruptive supply chain events in the past have been localized or regional in nature, such as when an earthquake or floods hit key manufacturing or distribution centers.
Despite tremendous pressure over the past two years, global supply chains have largely managed the triple pandemic shocks. Except for brief periods in some markets, most products and services were available. Trade flows, in fact, have rebounded quite sharply.
This was due, in part, to substantial investments of time and energy by companies in managing to solve often cascading sets of challenges. Firms swung production between facilities, adjusted orders quickly, found alternate suppliers for key raw materials, parts and components, and often worked with governments to ensure that critical activities could continue.
This does not mean, of course, that the pandemic showed completely resilient supply chains. There were substantial bottlenecks for some products, shown particularly starkly by the scramble for adequate personal protective equipment (PPE) early in the pandemic.
Companies discovered that they were often quite dependent on a single firm or a single location for key elements in a supply chain. Often, it was not the obvious items of concern that created the greatest heartburn for companies. It was not, for example, always the high-tech components that proved hard to procure. Companies were sometimes caught out by an inability to find sufficient quantities of a critical screw or bolt or an inability to find suppliers able to manufacture boxes or packaging in the right locations.
As might be imagined, while supply chain and logistics had tended to be a background activity, during the pandemic, nearly every C-suite suddenly needed to become an expert in the movement of goods and associated services. This has led to endless conversations about the need to improve “resilience” in supply chains.
In some circumstances, firms did need to build greater resilience. This may have meant holding additional inventory in stock to better manage a short-term disruption or delay in deliveries. It may have meant find additional sources of supply, particularly for those parts and components that proved to be critical points of failure for the entire chain operation.
Firms started developing wide-ranging plans to more effectively become resilient. Locations that had been seen as highly desirable in a pre-pandemic situation started looking more fragile under heavy disruption. Having many just-in-time operations became more of a liability when logistics delays lengthened to weeks or even months.
In response, some firms started developing action plans to near-shore or even re-shore some production. In some instances, these activities were already underway as the pandemic followed several years of highly disrupted trade, particularly during the height of the US-China trade war from 2018 onward.
For most companies, however, heading in 2022, the actual changes made by firms to adjust to the pandemic has been considerably more modest than might have been assumed.
Why? At least four reasons seem important. First, adjustments to supply chains can be quite expensive. At a time of widely fluctuating supply and demand projections, most companies did not want to deploy capital to actually change production or distribution locations. Many of the “resilient” suggestions can also involve substantial costs. Holding additional inventory can be expensive. Creating duplicate chains or even duplicate suppliers for critical parts can involve substantial additional costs. There are often sensible reasons for how a firm organized its supply chain in the first place.
Second, such adjustments take time. It is not a simple thing to declare that key production should be moved. It’s especially hard to make changes during a pandemic when staff are unable to travel and movement on the ground in so many locations was also restricted.
Third, companies have recognized that the pandemic is surely—at some point—going to moderate and eventually subside. Making costly and time consuming adjustments may look particularly problematic if the pandemic ends and economic growth rebounds quickly.
Finally, despite pressure, most supply chains did not, in fact, break. They may have bent. They may have been adjusted or “taped” together in unusual ways. But firms largely got what they needed to where it needed to be in roughly an acceptable time frame. Budgets may have been squeezed, particularly by soaring logistics costs, but companies have mostly survived.
However, 2022 may not remain the same. There are substantial sources of risk heading into the year. For example, the continuing imposition of Covid Zero by China could prove increasingly disruptive. Until now, while China has had strict lockdowns on movement across the border, life inside China for most has remained as per usual. The increasing spread of omicron, however, could lead to ever-greater restrictions on economic activities including shutdowns of factories and new challenges in moving goods internally and through port facilities.
The pandemic may linger longer than anticipated. Demand for products and services could be permanently disrupted. Finally, while the pandemic itself presents challenges for companies in 2022, government reactions and responses to the virus is also likely to led to continuing disruption in supply chains.
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