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By now, you may have heard that the world has run short of everything from coffee to coal. You personally may have been caught off guard by the shortage of toilet paper in the supermarket. Perhaps, you’ve also felt the pinch of rising computer prices due to the price increase of semiconductors. Second hand cars have gone up in value, as businesses dismantle the tires of used cars. The immensely intricate and interconnected global supply chain is in disarray, with little end in sight (although, recently the Biden Administration has released 50 million barrels of oil to reduce the price of oil).
This article will first uncover the complexities of global supply chains, and explore the factors that contributed to the “supply chain crisis” of 2021.
Supply Chain: A Look at How iPhone Is Made
The global supply chain crisis has shone the light on the usually unseen processes of manufacturing, shipping, warehousing and distribution. While we have grown accustomed to clicking and waiting for the orders to appear on our doorstep, or simply dropping by the shop to pick up items, the supply chains operating behind the scenes are always taken for granted. Apple, the most valuable company (by market capitalisation) has also felt the brunt of the global semiconductor shortage despite being well-known for its excellent supply chain. Tim Cook, Apple’s CEO, revealed in an interview that the supply chain crisis cost $6 Billion in lost sales (Serrano, 2021).
Every new iPhone is designed at Apple’s headquarters in Cupertino, California, but the resources required to make the design a reality are largely dependent on manufacturers from around the globe. According to Apple’s 2021 Supplier List report, it has 200 suppliers in 30 countries to procure ready-made components, which are sent to factories to be assembled. The iPhone you hold has its chip made in Taiwan, camera and glass screen built in Japan, accelerometer manufactured in Germany, final test of chipset done in Philippines before being assembled into the iPhone in China.
Unfolding Factors behind the Supply Chain Crisis
The supply chain disruptions which have wreaked havoc around the world can be traced back to the early phases of the pandemic. With the outbreak of Covid-19, people and businesses were compelled to limit their activities, driving the world economy into a deep freeze. While January 2020 seems ages ago, disruptions to the global supply processes were inevitable considering the fact that China, the ground zero of the novel coronavirus, is the world’s second largest economy, the largest manufacturing country, and a massive purchaser of goods and services ranging from raw materials to the latest gadgets. Factories were shut down, production was suspended, and a large number of employees were laid off. Shipping companies anticipated a steep decline in demand and trimmed their schedules as fewer goods were manufactured and fewer people had paychecks to spend.
Despite fears that spending in many nations would be devastated, the pandemic merely led to a shift in consumer demand patterns. Purchasing surgical masks, kitchen appliances, furniture, electronics, home gadgets replaced demand expenditures for eating out, travelling to vacation destinations and attending social events. As a result of the pandemic, online shopping, a trend that has been fast rising for years, saw a boom. From April to June 2020, Amazon reported 57 percent more items sold than the previous year.
At the same time, a string of competing shortages exacerbated the situation. In early 2020, China delivered huge volumes of protective gear all around the world, even to regions with minimal trade with China such as West Africa and South Asia. Accordingly, empty cargo vessels piled up in many parts of the world – having delivered their imports, there was nothing for them to bring back to China. A shortage of shipping containers has ensued as Chinese exports rebounded with unexpected strength, leaving many containers stranded in Europe and North America. Factories that depend on Chinese-made components faced difficulty producing more to meet the pandemic-induced spike in demand. Meanwhile, as surging orders outstripped the availability of containers, the freight rates skyrocketed, with the cost of transporting a container of cargo from Shanghai to Rotterdam increasing by 547% compared to the average over the last five years, according to Drewry Shipping.
Even when items were shipped and unloaded at their destinations, another crisis arose: there were insufficient truck drivers to transport goods to warehouses, leaving them unclaimed. Truck drivers have long been in short supply, with wages continuously declining over the years amid arduous working conditions. Due to changing demographics like ageing and retiring workers, border controls and immigration quotas, as well as demands for higher pay and better protection for workers, the manufacturing and supply chain industries experienced a labour shortage, placing additional strain on the system. Major ports faced a staggering backlog of cargo, leading to lengthy queues of ships marooned at sea and delayed shipments. Shortages breed further shortages, and a breakdown anywhere along the supply chain has the potential of bringing output to a halt.
Effects of the Supply Chain Crisis
The interconnection of the global supply chain has long been an asset for increasing productivity, allowing specialisation, innovation, and cost-effectiveness. However, recent events have shown that disruptions in these intricate chains can be equally disastrous, as they are so intertwined, resulting in a domino effect.
On the front end, there have been two significant categorical effects. Firstly, the widespread shortages.
The most notorious example is the shortage of toilet paper, which has become particularly sensational and newsworthy due to the absurdity of the lack of necessity. However, the extent of the issue stretches far beyond just toilet paper. According to Sager (2021), it is becoming increasingly challenging to restock shelves with basic food necessities such as wheat, not because of an actual food shortage but because of disruptions in the supply chain. Hospitals around the globe have also been struggling to provide relief to the public. The lack of qualified medical workers, disturbances in the production and distribution of medicine, and limited access to personal protective gear and ICU beds have hampered the medical system’s ability, putting the lives of millions at risk. The global supply shortages have likewise led to power blackouts in leading economies like China. The severe shortage of electricity has halted the busy lives of millions of homes and businesses. (Hoskins, 2021).
As a result of these supply side shortages, consumers are paying significantly more for the same goods than in 2020. The Consumer Price Index (CPI), which measures the price changes in commonly purchased goods and services, has risen by 5.4% year on year, the most significant increase since 1991 (Adamczyk, 2021). The breakdown revealed gas prices increased by 42.1%, rental cars by 42.9%, meat and dairy by 10.5%, appliances by 7.1%, electricity by 5.2%, and rent by 3%.
The lower-income class is particularly hard struck by these price increases since they do not have consistent sources of income or large savings to tap into. Accordingly, the Raw Material Index has risen by 18% over the last year (Baffes, 2021). This index accounts for the increase in prices of materials such as metals, rubber, cotton, fuel, electricity, and more. Consequently, the cost of production and transportation have suddenly skyrocketed while supply reliability has plummeted.
On the back end, the supply chain crisis has detrimental effects on trade and foreign direct investment. There has been a significant decline in global trade, with imports and exports contracting by 32%, and as a result, foreign direct investment has fallen by 40% in 2021 (ILO, 2021). However, the issue does not end there. Businesses are under a lot of pressure because many are struggling to generate revenue and meet costs, especially small and medium-sized enterprises (SMEs), which usually have low capital reserves to buffer unforeseen expenses and businesses that operate in industries with high fixed costs.
Manufacturing, shipping, warehousing and distributing have long been regarded as seamless and invisible in the eyes of the consumer. But it is not! The supply chain is highly intricate and reliant on all components working well. The Covid-19 pandemic has shed some light on the vulnerabilities of the globalised supply chain system. With the infectious virus prompting authorities to impose domestic and international mobility restrictions, business operations of essential sectors have slowed, factories have shut down, transportation agencies are struggling to mobilise goods, workers can’t go to work, and so on. All of this is happening while consumer demand patterns are changing. Consumers are demanding more household and technology related products, in addition to personal protective equipment. As a result of this supply chain crisis, there is a severe shortage in almost every sector. Food is not being distributed timely, hospitals are understaffed, and an energy crisis has emerged leading to widespread blackouts. In accordance with basic economic principles, the shortage has skyrocketed prices. The CPI and Raw Material Index have had the largest jumps in the last 30 years.
The ILO (2021) has forecasted the crisis will have long lasting structural effects that will reshape the design of the global supply chains. Countries like the United States have repeatedly expressed their over-reliance on China and desire to become more self-sufficient. Therefore, we can expect many economies to start partially reshoring business operations and diversifying their suppliers in order to lessen their vulnerabilities. Some analysts have also indicated that there is a possibility businesses may accelerate the development of automation to conduct business operations even in dire situations.
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Researcher(s): Muhammad Usama Zahid and Tee Jia Rou
Reviewer(s): Muhammad Bahari
Editor(s): Jessie Gan
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