Supply chains in 2022: navigating the waters

Supply chain disruptions have been increasing gradually. Many firms will need to reinvent their supply chain to one that is more competitive, sustainable, resilient and viable.

What washed ashore as remnants of the COVID-19 pandemic – lockdowns and other health restrictions; shortages of workers, freight drivers, and containers; an increase in the demand for certain goods and higher online sales – have now resurfaced and transformed into a new reality…a supply chain chaos.

The sources and impacts of the current supply chain disruptions on the local market were discussed during an online event on January 19, ‘Supply Chain Crisis: Managing the Reality’, organised by the Logistics and Supply Chain Business Section Executive Committee within The Malta Chamber, and supported by EY.

Supply chain disruptions spiked in early 2020 due to the onset of COVID-19, followed by a period of stability, but have now been increasing gradually, especially in the US and the eurozone – as recorded by the IMF’s Supply Chain Disruption Index.

The average freight spot rate per 40-foot container, as registered by the World Container Index, is 79 per cent higher than it was a year ago – and $6,537 higher than the five-year average of $2,953. And, when asked about market conditions, purchasing managers across the world continue to express worsening trends in manufacturing, especially in advanced economies.

Direct and indirect sectoral impacts

The current situation has, and is, directly hitting the freight transport sector as the first point of contact – sea, road, air, and other intermodal transportation have all been challenged. Availability of containers is low (albeit recovering); some key ports remain congested and cargo is hence blocked; freight rates have increased; and, ultimately, cargo deliveries delayed.

Local road transporters crossing international borders have also faced queues and long waits at port terminals overseas and got entangled in road haulage strike if unlucky. Aviation, on the other hand, has seen consolidation of flight frequencies, and a substitution towards cargo flights.  

The cascading effect, or indirect impact, has rippled across importers, exporters and manufacturers. Some impacts are immediate, while others more sustained in the medium to long term. We are seeing an increase in prices (both inputs and outputs) and operating costs of manufacturers. As a result, importers are ending up with inventory pile-ups to avoid the next price hike, while exporters need to readjust output prices for a reasonable mark-up because of increased costs of production.

Sustained impacts can include changes to the customer base, as customer preferences change, and loyalty takes a dip. Supply chain re-engineering will hence become the new norm. For Malta, as an island, these impacts are likely to be significant and some, unavoidable.

How to swim, not sink, through the crisis?

The crisis has struck at a time where changes are the order of the day. Indeed, looking ahead, we need to come to terms with the EU’s Mobility Packages effective from this February (featuring trucks’ return to the country of establishment); the EU’s ‘Fit-for-55’ package on the reduction of CO2 emissions; and the Road Freight Zero by the World Economic Forum (WEF) that aims to fast-track zero emission fleets and infrastructure by 2030.

Responses will lead to various trends:

• Governments are intervening to solve border delays and congestions, mainly through agencies and customs departments;
• Current logistics and supply chains are changing – Just In Time (JIT) is no longer manageable;
• Balancing the supply financing strategy will be key to both profitability and cash flows;
• Many firms will need to reinvent their supply chain, to one that is more competitive, sustainable, resilient, and viable: through more focus on risk optimisation and support of digital tools; and
• Where applicable, shortening supply chains by sourcing locally – this may be challenging for countries with limited natural resources.

Churchill famously stated to “never let a good crisis go to waste”. COVID-19 has put talk on supply chains back on top of the agenda. Now, to stay ahead of disruption, organisations must plan for the road ahead while remaining agile.