2022: A Look in the Rearview Mirror–Part I

December 7, 2022

This was the year that supply chains regained some of their footing finding firmer ground. It wasn’t a breakthrough year. But the supply chain industry resolved some major issues and formed a more certain path ahead.

To be sure, volatility and unpredictability still disrupt supply chain operations. That’s par for the course. However, businesses found ways to eliminate, avoid, or mitigate these disruptions.

In that sense, you could say a return to normalcy is underway. Supply chains are still plagued by external events over which they have little control. But businesses are learning how to manage external disruptions and manage internal ones more effectively.

Generally speaking, businesses continued to adapt to rising costs, inflation, recession, war, increased regulation, and remote work. To deal with these myriad disruptors, businesses shifted from static or scenario-based operations to create agile and resilient supply chains.

This shift represents a transition and transformation from fragmentation to integration. More concretely, it represents a shift from a focus on cost to a focus on the customer. And it represents a shift in mindset from taking a short-term view to taking a strategic view in planning.

Those are not insignificant changes, but those changes reflect a major shift from pre-pandemic times. These changes promote future-proof supply chains that are agile and resilient.

That is, they can adapt and respond to both short-term and long-term volatility and unpredictability. On a daily basis, these changes facilitate agility that quick, data-based decisions enable to avoid or mitigate unforeseen disruptions. That results in responsive supply chains that meet customer needs, regardless of changing conditions.

It also provides a viable framework to bounce back from serious disruptions or dislocations. Building resilience into supply chains introduces the shift from short-term to long-term thinking.

The new model being developed in 2022 is customer-centric and strategic in outlook and planning. 

We’ll look back to events in 2022 that show this transition and transformation in the making.

In this post, we’ll explore five of the ten different areas where a shift to agility and resilience is taking hold. We’ll examine the remaining five next week in our final post of 2022.

#1 Geopolitics–An external disruptor promoting volatility and uncertainty

Geopolitical events weighed heavily on supply chains in 2022, promoting volatility and uncertainty.

We had a hangover from the pandemic: Which led to continued inventory shortages, closures of manufacturing plants in China, congested ports, and underemployment.

Another geopolitical event, the Russo-Ukrainian war disrupted supply chain operations in a major way in 2022. Trade basically ceased as ports closed because of western- imposed economic sanctions on Russia.

Cargo planes could not fly out of or into Russia or Ukraine. Likewise, ships could not sail into or out of Russia and Ukraine. Some of that was because of sanctions and some of that was related to safety concerns related to combat operations. That exacerbated food shortages with Russia and Ukraine among the top five grain exporters.

In 2019, both countries combined exported 25.4% of all wheat. As of this year, Ukrainian wheat exports are down 30.7%, drastically affecting Ukrainian and global wheat markets.

Also, sanctions disrupted fuel markets further exacerbated by the Nord Stream I and II explosions.

To adapt, the U.S. administration approved the release of 1 million barrels of oil per day (BPD). That helped alleviate some of the pain. Nonetheless, prices at the pumps spiked contributing to inflation that persisted through 2022.

Another change, caused by China’s Omicron-induced lockdowns, led to an increase in nearshoring and on-shoring. Originally, industry stakeholders believed this would be nominal. Now that’s changed to help alleviate disruptions caused by China’s policy of zero-tolerance for Covid.

#2 Economy–An external disruptor promoting volatility and uncertainty

The economy deserves listing as a separate category from geopolitics, although there is overlap. Both the U.S. and global economies factored considerably in supply chain disruptions.

As mentioned above, economic sanctions led to major impacts on Ukraine and Russia. However, sanctions also had a boomerang effect, negatively affecting the U.S. and the global economy. We saw supply shortages lead to price increases. Inflation set in for fuel and transport costs, increasing logistics costs as a whole over last year.

The rise of economic disruptions led to an emphasis on risks associated with economics. This was evident with the creation of a new report from the New York Federal Reserve. That report is the Global Supply Chain Pressure Index (GSCPI).

The purpose, as stated on the NY Fed’s website, is to integrate “… transportation cost data and manufacturing indicators to provide a gauge of global supply chain condition.”

This metric, referred to as a “Frankenstat” due to its grand scope, has many critics. Putting that aside, the creation of this metric signifies the federal government’s increasing role in supply chain matters.

#3 Supply Shortages exacerbating constraints and dislocations

Cargo capacity exacerbated inventory shortages in the first half of 2023. In the latter half, as stakeholders focused on increasing container capacity, supply businesses began to come to terms with inventory shortages.

To cope with the unprecedented backlog of inventory at ports, penalty fees became a tool to address these issues. For example, at the Port of New York New Jersey (NYNJ), port officials announced a new penalty feels for empty containers with lengthy dwell times. Other ports took notice and followed suit to address capacity issues that prolonged supply shortages.

That led to some positive changes as transport prices began to decline. That decline was evident in spot rates and had not penetrated contract rates, as those were locked in by long-term contracts. Continued pressure by port authorities saw constrained capacity decline as a disruptor. It also had the beneficial effect of forcing container prices downward.

In September, HSBC assessed that carrier profits would decrease more than 80 percent over next two years. HSBC cited overcapacity and falling demand as the two main factors affecting this decline.

Adapting mechanisms in 2022 included increased engagement by federal and state authorities. That underscored the recognition that supply chain issues needed a strategic solution. Namely, supply chains in the future can only function seamlessly with closer cooperation and coordination between government and industry/private stakeholders.

That’s a significant change from a predominantly “hands-off” policy. Supply chains are too complex and complicated, hence they required a whole-of-government and whole-of-industry effort.

#4 Changes in consumer demand patterns create uncertainty

Another factor at work came from a change in consumer demand patterns. This was a hangover from the pandemic, which experienced a shift from services spending to product spending.

As Covid-19 declined, that demand pattern shifted back to services, adding unpredictability to previously stable demand patterns.

It also led to inventory excesses. Rather than risk running out of stock, businesses compensated by increasing procurement of inventory to err on the side of caution rather than face stock-out situations and unhappy customers.

The immediate impact on shippers was to be more flexible in their procurement and shipping strategy. The static demand and procurement patterns associated with peak intervals are a holdover from pre-Covid times.

Now businesses are making decisions in tune with real-time data and information. So, many companies accelerated their transition to data-based decision-making in 2022. Shippers have become more anticipatory of consumer demand in their planning. And they have become more strategic in their planning, keeping an eye on long-term effects as opposed to short-term gains.

As we are in the early innings of movement towards NextGen supply chains, this changed behavior that favors strategic planning and customer-centricity will grow in 2023.

#5 The modal shift to air freight from ocean freight

In an effort to reduce supply chain chaos, shippers and carriers turned to expanding air freight operations. Factors causing this shift include: “… high demand, difficulties re-positioning empty containers to Asia and port congestion.” This helped relieve capacity constraints while seeking a way to tamp down the spiraling costs of ocean shipping.

This represented new thinking about moving cargo from the point of origin to its destination. Although air cargo capacity had its limits, it mitigated capacity constraints to keep cargo moving at somewhat competitive costs.

Shifting the movement of cargo to air transport worked well as an interim solution. Its long-term impact remains unclear. Nonetheless, it shows that industry stakeholders viewed new problems with new solutions.  

Greater reliance on air operations also supported a customer-centric view. During and after the pandemic, consumer expectations held steady or increased. Air operations helped to address consumer need for speed but at a cost. The cost, compared to ocean freight, narrowed significantly, making air transport a viable complementary option.

Stakeholders viewed capacity and transport issues from a holistic view, and thus rolled-out bespoke solutions that offered promise. eCommerce was another factor that boosted the shift to air transport. Tailored solutions will emphasize multi-modal operations more so than in the rent past.

At American Global Logistics, we look back annually to make sense of the recent past. More succinctly, as Winston Churchill stated, “Those that fail to learn from history are doomed to repeat it.”

That’s why we look for trends, separating them from fads, to focus on future growth, sustainability, and profitability.

In 2022, we witnessed an industry in transition and transformation. The rise of the significance of geopolitics and economics, to supply shortages, rising consumer expectations, and a shift in reliance on different modes of transportation.

Are you prepared and positioned for success in 2023?

Contact us today to stay ahead of the trends and the competition in 2023.

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