Will 2022 be exceptionally different from 2021 for the global supply chain? Perhaps not. The last couple of years have been quite challenging across sectors, but these challenges have been a good lesson especially for adaptive and disruptive business practices. Darvin’s theory of ‘Survival of the Fittest’, which suggested that “organisms best adjusted to their environment are successful in surviving”, holds true for the supply chain industry as well. The world is welcoming a new year on the backdrop of a highly possible new wave of a pandemic, and this time, it is even more contagious than before. Although there are lesser causalities and better preparedness to handle, the challenges will be unavoidable especially for sectors like logistics and supply chain.
Transportation capacity and turnaround time
In the last two years, the mismatch of demand and supply of transportation capacity have been critical on the global front. Strict lockdown at Chinese ports in 2021 disturbed global container flow. The unavailability of containers has also negatively impacted the waiting time of ships at ports. As per some industry data, China-US end to end ocean transit time has doubled in the last 2 years. Before the pandemic struck, it used to hover around 40-45 days, however, the same transit now takes anywhere between 75 – 80 days. The situation is not expected to get back to normal in a short term. On the other side, if any outbreak of Omicron happens in China, the situation of container supply will be more constrained. For global air cargo, available capacity is still lower than the pre-pandemic level. Although the capacity and count of freighters have increased, the lesser availability of belly space has resulted in a net decrease. Since the last few days, restrictions on global flights are increasing, which is going to reduce availability of air cargo capacity.
On the domestic front, capacity will not be a challenge for surface cargo, but air cargo will remain too much dependent on the degree of restriction during the surge period of the pandemic. In the last 2 years, domestic air cargo has dipped almost 15% in volume terms, which may witness some recovery in years to come.
Ocean Freight rates skyrocketed in the year 2021, which was the result of multiple factors like, increased consumer goods demand, unavailability of containers, Suez Canal obstruction, the high waiting time of ships at ports etc. For some sectors, ocean freight soared as high as ten times of the pre-pandemic level. In the last few months, there has been some correction and stabilization in rates, however, it still is multi-fold higher. As per the data released by freightos.com, the FBX global container index (on 17th Dec) was at $9513 against $3004 a year back. This situation of high freight will continue – in shorter-term, due to the Lunar new year, the ocean freight rate may slightly come down – but no significant relief is visible in the year 2022.
On the domestic front surface transportation rates have also soared almost by 12-13% on YOY basis. This is driven by increase in input cost. 2022 will further see hike in freight cost on account of increase in equipment cost (Euro Vi vehicles), which has not yet been factored in current rates.
In the shadow of the new wave, inventory holding by companies is likely to increase. The last two waves of Covid-19 have given valuable lessons about the cons of JIT and lean inventory levels in times of disturbed supply chain. An increase in inventory will have a definite impact on the working capital blockage, but given the risk of disruption, we expect a higher inventory level will be the norm for 2022.
Diversification of sourcing strategy
The global supply chain will take another glimpse at the vendor mix in order to realign it to multi-geography sourcing. Single geography sourcing has proven to be very risky in the last 2 years of pandemic. Dependence on a single source of procurement, in spite of saving of few dollars had led to stagnation in global supply chain of companies leading to huge losses. Disruption of semiconductor supplies from specific geography has given shock waves to manufacturers in multiple industry segments. More realignment in manufacturing setup will also take place in year to come. The driver for such shift is linked to mitigation of risk and reduction of dependence on single country as manufacturing base. Countries like India, Malaysia, Vietnam will be some of the preferred location for new manufacturing centers.
Digitization and process automation
Higher adoption of technology, digitization and automation started almost a decade back in order to drive efficiency, but the importance of such practices got reinforced amid the ongoing crisis. Real-time information availability worked as a key weapon in handling the uncertainty of the supply chain. Companies that were equipped with digital technologies were fast to respond to fluctuations of demand and supply compared to other peer group companies. While a higher degree of automation supported in keeping operations live with limited manpower. In 2022, when the threat of another wave is hovering, adoption of digitization and automation will take the next momentum.
This article is authored by Vikash Khatri, Founder, Aviral Consulting.