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Why is the global supply chain in crisis?

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Logjams at ports, soaring petrol prices, product shortages, parcels taking weeks to arrive … Welcome to the 2021 global supply chain crisis.

Dr Roberto Perez-Franco from Deakin University’s Centre of Supply Chain Logistics says we’re witnessing a perfect storm in the sector, with many factors driven by the COVID-19 pandemic.

“One of the reasons behind this is an unexpected increase in demand,” says Perez-Franco, who is a senior research fellow in supply chain strategy. “Back in the early days of the pandemic, most people anticipated a decrease in economic activity, when what we saw was more of a shift in the type of things people were buying.

“Yes, there was less going to concerts and movies, less eating out, less driving to work. But there was more online buying, more electronics to keep your kids busy, more doing that home improvement project that you had put off for so long.”

As global demand surged, prices rose and supply struggled to keep up. “Many factories had to shut down because of COVID-19, therefore reducing supply for some products,” Perez-Franco says. A shortage of components or ingredients impacted the products that depended on them, creating a ripple effect that magnified the crisis.

Compounding the problem are labour shortages triggered by restrictions and what’s been dubbed “the great resignation” in the US, where record numbers of people have recently quit their jobs.

A sharp rise in shipping costs has compounded the crisis, contributing to price hikes. “Shipping a container from China to almost anywhere – the US, Europe, Australia – has become an order of magnitude more expensive,” says Perez-Franco. “Where it used to cost $1500 to 2500, it now costs $15,000 to $25,000 for a single container.”

A design problem

The COVID-19 pandemic exposed inherent flaws in the global supply chain, which in normal circumstances of predictable demand operates on a lean model with minimal redundancy. “[It’s] not a system designed for robustness and resilience,” Perez-Franco says. “Instead, it’s a collection of separate entities, systems and markets, each driven by their own interests, with their own plans and objectives to serve those interests.

“Because most of these entities are private, typically their interests are about profitability, and their objectives revolve around efficiency. Under normal circumstances, that works fine because market forces will tend to align the interests of these companies with the needs of consumers.

“However, when something like COVID-19 comes along – a truly global disruption – then all those individual entities that make up the global supply chain start looking after their own interests. They will do what they have to: close plants, mothball planes, cancel orders for new ships, etc. When this disruption goes on for one or two years, the pipelines of products start to dry up.”

Most of the goods consumed in Australia are imported. “Now that it costs 10 times more to ship these goods and we’re competing against other markets for the same limited supply, we’re bound to see higher prices and longer waiting times for an assortment of products, from cars to chemicals,” Perez-Franco says.

He believes price hikes, shortages and delays will continue into 2022. “Replenishing these pipelines takes time,” he says. “Since COVID-19 is still disrupting many production and logistics systems around the world, we will continue to feel the ripples of these disruptions for many months and, in some cases, maybe even years.”

Future-proofing the supply chain

It’s possible to build more resilient supply chains but it “costs money”, Perez-Franco says, which means goods will cost more. “Furthermore, since some investments in resilience only pay for themselves when disruptions happen, they’re often seen as a waste of money during normal times and are often sacrificed at the altar of efficiency.”

Perez-Franco says the current crisis highlights the importance of protecting the supply of critical goods, such as food and medical supplies, through policies such as maintaining strategic stockpiles of goods that cannot be produced locally. “But for other goods that are not critical, such as gaming consoles and cars, it may be cheaper to just live with the disruption than to try to prevent it.”