Supply Chains of 2021: What could possibly go wrong?
When we were putting together 2020 predictions, nobody could have foreseen the events which have unfolded. This year has been defined by COVID-19 and its various disruptions. For people and businesses alike, it has been one of the most challenging and unpredictable years in many of our lifetimes.
From a supply chain point of view, we have seen immense disruption. When lockdown measures were at their most extreme, we witnessed closure of manufacturing facilities, distribution centres, ports, and retail stores. We also faced shortages of things we often take for granted, such as toilet paper and basic food such as pasta and rice. On a national level, the repercussions are set to be huge. Even without considering the costs of new lockdowns, the Office for Budget Responsibility has reported that the . Prior to the pandemic, this figure was estimated to be £55 billion.
Going into 2021, many business leaders will be thinking: what else could possibly go wrong? Unfortunately, if 2020 has shown us anything, it’s that disruptions can come when you least expect them. For 2021, the focus must be on preparing for the unpredictable and strengthening supply chains across the globe. So, without further ado, what can we expect to see in 2021?
Rising to the top of the business agenda
Until 2020, supply chain was a business function which largely operated in the background, receiving very little attention in either the national media or people’s day-to-day lives. Deliveries would arrive as expected and everything would run like clockwork, bar the occasional delay.
However, the old adage: ‘you don’t know what you’ve got till it’s gone’ rang true in 2020. National lockdowns and social distancing measures exposed serious weak points in the supply chain, causing huge delays and disruptions which affected people’s daily lives.
Owing to this, people and businesses alike are paying much more attention to the supply chain. In the business community, mentions of the supply chain have shot up dramatically. From January to May 2020 supply chain disruption was mentioned in the earnings calls of the world’s 2,000 largest firms. This is compared to 23,000 in the same period last year.
What this means is that supply chain has become a more important topic for the C-suite and the board rooms. In 2021, the supply chain will take centre stage on the business agenda.
Same risk, better resiliency
Until an effective vaccine is discovered, disruptions caused by COVID-19 will continue into 2021. While there have been some predictions about when a vaccine might be available, in truth, we cannot be 100 per cent certain. One thing we can guarantee, though, is that, whether it’s COVID-19, Brexit’ or other geopolitical tensions, there will always be disruptions in this never normal world we inhabit.
As a result, the level of risk in 2021 will remain elevated and will be part of the new normal. What I anticipate will change is businesses’ resiliency to these risks and disruptions. CFOs are taking an increased interest in how supply chains can support business growth and reduce financial risk. The financial implications of supply chain disruption or inefficiency can be huge, with .
To manage this risk and improve efficiency within the supply chain, uptake of technology will undoubtably accelerate and as such many organizations large and small are accelerating their digital journey. Where technology such as AI, machine learning and digital twin was once seen as a ‘nice-to-have’, it is now essential to set the winners apart, a theme that was highlighted in a . To become truly resilient in the supply chain, optionality is key. Using a supply chain digital twin, which acts as a virtual representation of a business’ supply chain, businesses can model a wide range of possibilities to ensure they can assess and prepare for any disruption they can imagine. Probabilistic models and simulation technology tied to financials will play a pivotal role.
One industry where improvements will be imperative is healthcare and life sciences. This is an industry which is lagging behind others such as FMCG or High Tech in terms of supply chain technology adoption. Yet, it will be an industry the world is relying on more than ever in 2021. As the hopes for COVID-19 vaccine to be available in 2021 remain high, the vaccine makers in collaboration with governments and private entities will have to make sure that the vaccine can be accessible to most of the world’s population at the earliest. Besides this, disruptions caused by COVID-19 also elevated the weak links within the pharma supply chain in general. Unless there are vast improvements in 2021 and the digital adaptation for the industry is accelerated, this will prove immensely challenging.
More visible and sustainable supply chains
In 2020, we have seen a number of companies pledge to be carbon neutral by 2030. This will only be possible if businesses create shorter, more circular supply chains. Currently, one of the greatest contributors to air pollution and CO2 emissions is transportation, which makes up almost a quarter of global CO2 emissions. Yet, only 30% of companies are currently incorporating sustainability into their supply chain decisions.
Speaking to businesses, there is more desire to achieve end-to-end visibility across the supply chain to identify vulnerabilities and risk. By achieving this as a first step, businesses will be able to more accurately identify inefficiencies which contribute to increased CO2 emissions, for example, excessively long transportation routes or sub-optimal warehouse locations.
With these insights, businesses can then utilize the latest technology to optimize their supply chains and ensure they are both shorter and more circular. Will 2021 be the year we see huge change on this front? Probably not, as it’s a long process and most businesses are just starting their journey. However, businesses will have to be showing consistently positive results by 2025 if they are going to convince investors and customers that they will reach their sustainability targets.
2020 has been the year where pre-existing supply chain rulebooks have been thrown out. 2021 will be the year where business models are adapted to the new ways of working. If businesses are to survive and succeed in a world where one disruption replaces the next, resilience and agility, powered by the latest supply chain technology, will be crucial.
What’s Causing the Global Supply Crunch?
As the global economy gradually recovers from the impact of COVID-19 pandemic, worldwide supply crunch is intensifying, spreading not only from one country to another, but also from one industry to another.
A year ago, when the pandemic continued to spread, economies around the world were severely hit and there was panic buying among consumers. Today, it is companies that are trying to go on a stockpiling, buying more raw materials than they need to keep up with rapidly recovering demand. The panic buying is fuelling more shortages of raw materials, including copper, iron ore, steel, corn, coffee, wheat, soybeans, wood, semiconductors, plastics, cardboard, etc. As a result, inventories of seemingly every raw material around the world are running low. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said earlier, and he noted that his clients are “trying to get everything they can because they see high demand”.
Supply shortages have driven prices up significantly, with the impact of rising prices for some key raw materials being significant. The prices of various industrial raw materials such as crude oil, plastics, and chemicals are rising. Some of the impacts of higher raw material prices have already begun to be reflected in consumer goods. Reynolds Consumer Products Inc., the maker of the namesake aluminium foil and Hefty trash bags, is planning another round of price hike, and this will be the third for the increase this year alone. Food prices are also climbing. The price of palm oil, the world's most consumed edible oil, has risen more than 135% over the past year to record levels; soybeans have topped USD 16 a bushel for the first time since 2012; corn futures prices have touched an eight-year high, and wheat futures prices have risen to the highest level since 2013.
Changes in factory orders due to the impact of the pandemic have also tightened supply in some markets and pushed up prices for raw materials. Some knitting enterprises in Dongguan, Guangdong, said that affected by the pandemic, about 40% of the orders have come back to China from countries such as India and Southeast Asian countries, while the factory utilisation rate has increased by about 30% to 40%, and now it has reached 100%. In Jiangyin, Jiangsu, a bedsheet enterprise adjusted its production capacity to accommodate a USD 20 million order from Southeast Asia. Increased demand from the textile industry has led to tight supplies of raw materials. In Wujiang, Jiangsu, where polyester filament yarn is the most in demand, the shortage of raw materials this year has been unexpected, especially in the current off-season, when there is not much stock. In Suzhou, also in Jiangsu, the export of polyester filament yarn increased by nearly 60% from January to April, while the price increased by 40% to 60%. Compared with the same period last year, the price of filament yarn increased by RMB 2000-3000/ton.
Remarkably, this hoarding frenzy is pushing global supply chains to the brink of collapse. Inventory shortages, transportation bottlenecks, and price increases are nearing critical levels, raising concerns that strong global growth could fuel inflation. The supply disruptions in the past are simply incomparable compared to the severe inventory crunch of 2021. Industry insiders predict that both large and small enterprises will be affected by this supply shortage.
Why are current supply shortages so acute?
Researchers at ANBOUND believe that instead of having one single factor, there are multiple reasons for the emergence of complex systemic problems.
First of all, there is the recovery in demand as the pandemic is brought under control. This year, as vaccination rollout efforts have brought the pandemic significantly under control in the United States and some European countries, the economy has begun to show significant momentum for recovery. This trend prompted a near-simultaneous recovery in most markets around the world. The collective recovery of global markets has led to a near-simultaneous increase in demand, exacerbating the mismatch between supply and demand. In the case of commodity futures, the capital was collectively bullish on commodities under such expectations, significantly driving up the prices of commodities (mostly upstream commodities) and spreading to midstream and downstream commodities. It should be noted in particular that the surge in demand for certain specific commodities under the pandemic has also exacerbated the supply-demand mismatch in some industrial chains. For example, the increase in the need of remote, online working and studying has increased the demand for all kinds of electronic products, leading to a surge in global demand for semiconductor chips, which affects several chip-requiring industries.
Another reason is that the pandemic has disrupted the global supply chain system, causing distortions in supply and demand in certain industries, which are transmitted along the supply chain, causing a wider supply crunch. As ANBOUND previously pointed out, the spread of the pandemic has dealt multiple blows to global supply chains. During the pandemic, China, as the "world's factory", was affected by the pandemic and its production side was disrupted. Then, the demand side of developed countries was suppressed by the impact of the pandemic. This is followed by the fact that the malfunctioning of the global supply chain system has exacerbated global supply distortions. To cite an example, the severe shortage of containers due to disruption of the supply chain has exacerbated the global supply distortions.
In addition, enterprises began to collectively increase their inventories, leading to the increase of inventories in the industrial chain and supply chain, amplifying the demand for all kinds of raw materials, intermediate products, and supporting products. In the past, in order to save costs and improve efficiency, many enterprises advocated zero-inventory production and tried to reduce the inventory in the production link, thereby reducing the capital occupation. However, the smooth operation of zero inventory production depends on the efficient global supply chain system. Once a problem occurs in the global supply chain system, it can lead to chaos in the whole supply chain system. The 2011 earthquake in Tōhoku, Japan has caused the shutdown of some key auto parts plants, which once led to the global auto supply chain being affected. Likewise, the global spread of the COVID-19 pandemic since last year has damaged, distorted, and even disrupted global supply chains.
Finally, geopolitical factors have also contributed to the tight supply of global commodities, resulting in the artificial disruption of part of the industrial chain and supply chain. For example, the U.S.-driven crackdown on chip supply to Chinese enterprises and related sanctions have seriously disrupted the global semiconductor industry chain.
How long will the supply crunch last?
Overall, the global supply crunch is due to a variety of reasons, including increased demand from the post-pandemic economic recovery, distortions in global supply chains caused by the pandemic, collective stockpiling by enterprises around the world, and geopolitical disruptions. However, this does not represent a significant expansion of aggregate global demand, but rather a distortion of the existing system as it is disrupted and broken. Judging from the current situation, this tight supply situation will last for a long time, leading to the price rise of raw materials and components. Therefore, both enterprises and governments need to be prepared for this scenario in the medium- and long-term.
Mr. He Jun is Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.