Will 2022 be exceptionally different from 2021 for Global supply chain, perhaps not. Last two years have been quite challenging across sectors, but these challenges have been good lesson specially for adaptative and disruptive business practices. Darvin theory of “Survival of Fittest”, which suggested that “organisms best adjusted to their environment are successful in surviving”, holds true for supply chain industry as well. World is welcoming new year on a backdrop of new wave of pandemic and the rate of spread of pandemic is higher than previous waves. Although there are lesser causalities and better preparedness to handle, but the challenges will be unavoidable specially for the sector like logistics and supply chain.
Transportation Capacity and turnaround time: In last two years mismatch of demand and supply of transportation capacity have been critical on Global front. Strict lockdown at Chinese ports in 2021 disturbed global containers flow. Un availability of containers have negatively impacted waiting time of ships at various ports. As per industry data, China – US end to end ocean transit time has doubled in last 2 years. In pre-pandemic days TAT was hovering around 40-45 days, which is currently around 75 – 80 days and this situation is not expected back to normal in 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 pre pandemic level. Although capacity and count of freighters have increased in last 2 years, but lesser availability of belly space has resulted in net decrease. Since last few days restriction on global flights are increasing, which is going to reduce availability of air cargo capacity in near future.
On domestic front capacity will not be a challenge for surface cargo, but air cargo will remain too much dependent on degree of restriction during surge period of pandemic. Since beginning of pandemic domestic air cargo has dipped almost 15% in volume terms, which may witness some recovery in year to come.
Freight rates: Ocean Freight rates skyrocketed in year 2021, which was result of multiple factors like, increased consumer goods demand, unavailability of containers, Suez Canal obstruction, high waiting time of ships at ports etc. On some of the sectors ocean freight soared as high as ten times of pre-pandemic level. In last few months there was some correction and stabilization in rates, still they are multifold higher than 2019 level. 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 ocean freight will continue. in shorter term there might be some fluctuations due to Lunar new year, but no significant relief is visible in year 2022.
On 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.
Inventory level: In the shadow of new wave, inventory holding by companies is likely to increase. Last two waves of covid have given strong lessons about cons of JIT and lean inventory levels in time of disturbed supply chain. Increase in inventory will have definite impact on working capital blockage, but given the risk of disruption we expect higher inventory level will be norm for 2022.
Diversification of sourcing strategy: Global supply chain will relook on vendor mix in order to realign it to multi geography sourcing. Single geography sourcing has proven to be very risky in last 2 years of pandemic. Dependence on 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 covid crisis. Real time Information availability worked as a key weapon in handling uncertainty of supply chain. Companies that were equipped with digital technologies were fast to respond fluctuations of demand and supply compared to other peer group companies. While higher degree of automation supported in keeping operations live with limited manpower. In 2022 when threat of more waves of Covid is hovering, adoption of digitization and automation will take next momentum.Report this
Vikash Khatri Founder: Aviral Consulting Pvt Ltd I Business Strategy, Logistics & Supply chain consultant I Research Scholar (PhD in Logistics)