State of supply chains today – Oil prices and Beijing COVID

Intro

Just when we assumed we were done with the worst of supply chain issues and delays, new shocks are hitting global supply chains. Two unrelated events have come together to cause exponentially large negative downstream impacts.  The first is an increase in oil prices. The second is a shutdown in China caused by a new COVID outbreak. The state of supply chains continue to amaze.

Oil prices are rising due to an imbalance in supply and demand. COVID related fear over the last 2 years has caused an underinvestment in oil wells. Simultaneously, consumers want more gasoline as they are returning to normal lives increasing oil demand to pre pandemic levels. This imbalance has been worsened by the ban in oil sources from Russia that equal over 8% of global supply.[1]

The shutdown in China is the result of a new COVID outbreak. While the incident numbers are lower than in other countries, China has implemented a 0-tolerance policy. Returning to work requires three negative tests.[2] In the best case, manufacturing plants and ports will be open in a few weeks. But if cases don’t reduce or increase the quarantine and shutdown could potentially extend to months.  

We are in a sensitive market that has already been left scarred by supply chain shocks in the last few years. So, new shocks compound impact, leading to even higher prices.

Multiple factors can go wrong at the same time

All supply chains are globally spread out and are inherently risk prone. Businesses should build supply chains that plan for this risk. Planning for even one risk at a time might seem a daunting task. But as we are currently experiencing, multiple factors can go wrong.

What this means for supply chains when multiple factors go wrong

Since supply chains are so intensely interlinked, even one issue can multiply into many other issues downstream. For example, China shutdowns have resulted in delayed trucks in turn resulting in product piling up in warehouses, ships waiting at ports and container rates going up. A second factor gone wrong deteriorates downstream impacts exponentially. In current times, this is the issue of rising oil prices that have further increased container rates and worsened delays. Ever increasing freight costs drive up the inflation problem, with consumers eventually bearing the brunt.

Planning for unexpected shocks

During black swan events or even during minor calamities, lack of communication and visibility worsen delays, increase costs, impact sales, and reduce customer satisfaction. Manufacturing shutdowns and delays in one part of the world can kill product flow if a business’s entire manufacturing base is concentrated in that country. Accordingly, the top 2 actions that have the most impact on reducing risk are digitizing supply chains and implementing a dual sourcing strategy.

A digitally connected supply chain to combat shocks

A next-generation supply chain platform digitizes supply chain operations and provides internal and external participants a seat at the digital table. The communication and collaboration functions help users at the company and at the manufacturers and freight companies better react to shocks. These platforms also capture and store historical data. Formula driven metrics proactively alert users to exceptions and risks. This combination of proactive preparation and nimble reactive actions can together greatly minimize delays and lost sales.  

A dual sourcing strategy to combat shocks

The biggest risk to any supply chain is concentrating manufacturing in one part of the world. If there was one action above all else to be encouraged, it is planning geographically spread manufacturing bases. Timing-wise, it is strongly recommended to set up these bases as a now-priority. Establishing and building up new supplier bases in new countries is a longer process. By planting these investments before shocks happen, companies are ironically set up to better combat surprises and run ahead of competition. For a company selling in the United States, manufacturing in the US may be prohibitively expensive. But Central and South America, for example, can provide the right combination of speed, costs, and flexibility.

In conclusion

While it is impossible to predict the timing and type of supply shocks, we can say with 100% certainty that the state of supply chains will continue to evolve and all businesses will be impacted multiple times over the course of every 3-to-5-year period. Company executives should be deliberate about investing in and planning towards building supply chains that are to the best extent possible fortified against shocks. The best companies in fact use these black swan events as an opportunity to increase their market leadership position. It all starts with planning ahead and creating a digital supply chain with geographically spread manufacturing bases. The future state of supply chains may be unpredictable, but you can future proof your business by identifying diverse suppliers, harnessing data, and being proactive.

To learn more about how you can drive supply chain improvements – check out more about our platform, the GRID here!

1. Smart Digital Scaling in Sourcing

2. Supply Chain Digitization

3. Why Oil Prices Are Going Up

4. COVID Lockdowns And Impact On Global Supply Chains


[1] https://www.forbes.com/advisor/investing/high-oil-prices/

[2] https://www.nytimes.com/2022/03/15/business/covid-china-economy.html

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