Globalization allowed supply chains to become genuinely global as opposed to local sourcing. A global supply chain became important for businesses as it allowed them to compete efficiently in international markets.
But despite the apparent benefits that a global supply chain provides, it also exposed companies to further challenges and risks. While some of those challenges are direct, others are less obvious but equally threatening to businesses.
Why Supply Chains became Global
Supply chains have become increasingly global in the past three decades. The reason behind this was the dramatic increase in the number of tradable goods and services. This tradability is the extent to which items can be produced in places further away from the final destination. In addition, it is highly dependable on transportation costs and the perishability of goods. Therefore, high-value goods and low shipping costs like electronics makes more sense in producing them in low-cost countries.
As the demand for goods was going up, so was the competition among businesses. For them to compete, they should join the global supply chain race to reduce their costs when trade barriers were quickly falling off across the world. This signalled the beginning of the new gold rush era. Companies started flocking to those countries to take advantage of their perks. As a result, whole productions are now in countries like China to take advantage of the lower labour costs, materials, land and others.
When reimagining the global supply chain networking, companies put all their eggs in one basket. Blinded by the benefits of offshore production and global supply chains, they turned a blind eye to their obvious overdependence and any reasonable call for proper supply chain risk management. The COVID-19 pandemic was a wake-up call for corporations as they learned the hard way that relying on a few suppliers and from a limited geographic region potentially threatens their existence.
The challenges that companies face in globalized supply chains
Finding low prices to source or manufacture goods in Asia has never been an issue. The problems usually arise at a later stage. To make a global supply chain worthwhile, these issues need to be appropriately managed to ensure a good supply chain. To address those challenges, businesses need to identify them and then think of how to deal with them strategically.
Here are the top challenges that businesses have to face in global supply chains in 2021:
1. Black swan events
A black swan event is an adverse event that is almost impossible to predict and prepare for it. Businesses understood very well the consequences of a black swan event in 2020 with the COVID-19 pandemic. The whole world depends on China for manufacturing and transporting goods around the globe. But the fact that China shut down many of its production lines as a safety measure harmed global trade for months.
As the world is almost back to normal in 2021, the big bet for businesses is to avoid future black swan events. To achieve that, they need to regionalize and source their goods and materials from places closer to their home country to stop their overdependence on Asia.
2. Material Scarcity
This pandemic was characterized by a sharp increase in consumer demand like never before. Inputs was a concern even before the pandemic began, and things got only worse. Many companies and still suppliers are struggling to keep up with the existing demand. At the same time, there is a shortage of various kinds of parts and materials in global supply chains.
3. High freight prices
With a skyrocketing consumer demand and many orders left behind due to the pandemic, the demand for shipping has exceeded the industry’s capacity. As expected, with limited supply and high demand, freight prices are constantly rising. This creates more headaches for businesses as they need to consider higher transportation costs that further reduce their profit margins.
4. Port congestion
Port congestion means that freight ships in global supply chains arrive at their destinations, but they have to wait until they unload their cargo. While the demand for goods is still high, port capacity remains fixed on top of delays due to pandemic safety measures. Now, ships need to queue up and wait for a longer time than usual. A recent example of port congestion in 2021 was due to Ever Given being stuck in the Suez Canal for six days. As a result, there was a traffic jam of over 200 vessels waiting to pass through the Canal and reach their final destinations.
5. Difficulty in forecasting demand
During the pandemic, we all witnessed empty shelves at supermarkets due to people panic buying home goods. But at the same time, others languished on shelves. The pandemic made demand forecasting extremely difficult, and they don’t have a guide on how much to stock or manufacture at any given time. The previous demand forecasting models are almost useless in times like these, and businesses now work more on gut instinct.
In a globalized world, global supply chain networks came naturally as businesses saw the benefits, and everyone was doing it. But blinded in their efforts to gain a competitive advantage and compete efficiently in the global markets, they disregarded many risks.
The COVID-19 pandemic was the equivalent of the pandora’s box triggering many challenges at the same time, for which companies were unprepared. This situation caught many businesses off-guard with severe consequences to their brand or, even worse, their business itself. Supply chain managers need to properly understand the challenges that their companies face and reduce their exposure. Finally, they need to find new ways to safely overcome the global supply chain issues to navigate these challenging times for international business.
Learn more about BePrepared Project
The “BePrepared” project wants to prepare SMEs to learn how to identify and handle supply chain risks. The project consortium will prepare through VET training programs. Particularly, this training will mainly focus on young professionals and young entrepreneurs. Finally, this project will be carried out internationally, similar to the way transnational supply chain networks work.
You can read more about the project and its objectives at the official website here.