Shipping shortages will persist in 2022, but some sellers will struggle with too much inventory

By Sarah Schiffling (The conversation) It was all about shortages in 2021. COVID vaccine shortages at the start of the year were replaced by fears that we would struggle to buy turkeys, toys or electronic gadgets to put under the Christmas tree. For most of the year, supermarket shelves, car showrooms and even gas stations were emptier than usual. Some shortages were resolved quickly, others persist. So are we facing another year of scarcity or will the supply chain crisis ease in 2022?

It should be noted that the shortages occurred for many reasons. During the lockdowns of early 2020, a sudden shortage of essentials such as toilet paper and pasta left shelves around the world bare. Singapore ran out of eggs as consumers hoarded them, for example. Retailers ordered more eggs, desperate to meet demand. But once the demand was met, suddenly there was an oversupply. In June of that year, distributors discarded 250,000 eggs.

This is what happens when demand changes temporarily. The effect amplifies at each level of the supply chain, as each supplier adds an extra buffer to their order to be on the safe side. Tiny changes in customer demand can therefore lead to huge additional demand for raw materials. This is called the bullwhip effect. As with a whip, a small flick of the wrist can cause a large crack at the other end.

The bullwhip effect can come from a sudden drop or a sudden increase in demand, and during the pandemic these forces have sometimes combined. For example, the combination of collapsing demand for new cars and increased demand for devices such as laptops and game consoles for locked-down entertainment has contributed to the shortage of semiconductor chips.

With modern cars sometimes containing 3,000 chips, automakers are big customers for chips. But as car sales tumbled in 2020, chip supplies were redirected to smaller electronics makers. When demand for cars picked up a few months later, there weren’t enough chips for everyone. Automakers were forced to shut down production lines and could not make enough cars to meet demand. They also started hoarding tokens, making shortages worse.

Other imbalances in today’s supply chains are greater than competing companies or industries. Shipping containers move some 1.9 billion tonnes a year by sea alone, including virtually all imported fruit, gadgets and home appliances. Normally, containers are continuously loaded, shipped, unloaded and reloaded, but severe trade disruptions resulting from blockades and border closures have interrupted this cycle.

Containers were left in the wrong place as trade shifted, carrying capacity was reduced, and ships could not land where and when they wanted. Coupled with congested ports and issues with timely unloading and transportation, a typical container now spends 20% longer in transit than before the pandemic.

Shipping rates have skyrocketed in this environment. Prices on major east-west trade routes are up 80% year-on-year, bad news for economic recovery. Even a 10% increase in container freight rates can reduce industrial production by about 1%.

The human factor of logistics

Technological advancements may have reshaped manufacturing, but production and delivery are still heavily dependent on people. Waves of layoffs in production due to shutdowns led to labor shortages when demand picked up. To give an example, Vietnam experienced a massive exodus of workers from industrial centers to rural areas, which could not easily be reversed.

Labor shortages were particularly evident among lorry drivers in the UK and other countries. The sector was already struggling to recruit and retain drivers due to the pressures of growing demand, an aging workforce and deteriorating working conditions. Meanwhile, Brexit has made it harder for migrant drivers to work in the UK.

There were at least early signs of driver issues easing in the run-up to Christmas as more recruits flowed through the system, which will have been one of the reasons supply shortages weren’t as serious as they could have been. Likewise, however, we should not expect a quick end to the supply chain crisis in 2022.

The omicron variant is causing more staff shortages as people take sick leave and suppliers face new restrictions. China’s zero-COVID strategy is expected to continue to disrupt both production and the transportation of goods, possibly throughout the year.

Yet we could also see trouble in the opposite direction, via another boost. Backorders in many sectors will have been filled, but consumer demand may well cool off now that the holidays are over and interest rates are starting to rise. Thus, some companies could end up with an oversupply of goods.

To avoid this, they will have to level their production rates with demand. Yet demand can still be difficult to predict – and not just because of omicron and China. A new variant of concern leading to a new wave of lockdowns could easily cause people to spend money on things again rather than vacations and nights out. Supply chains with good visibility of real demand and clear communication between levels of the supply chain will have a huge advantage. In sum, different industries are likely to experience both shortages and oversupply issues throughout 2022.

A longer-term question is how much supply chains are changing. The pandemic has raised new doubts about outsourcing production to distant countries where labor costs are lower. Likewise, the problems have been compounded by strategies aimed at maximizing supply chain efficiency, such as just-in-time manufacturing, where companies keep inventory to an absolute minimum to reduce costs.

A major theme of 2021 was how to make supply chains more resilient. But building additional capacity, managing inventory, and protecting against disruptions doesn’t come cheap. As maritime traffic jams ease and recruitment increases, talks of reform could run out of steam. Some companies will likely continue to improve their just-in-time with a dash of just-in-case. Others will bring the production of certain products closer to domestic markets while maintaining production facilities abroad to serve local markets. It also remains to be seen to what extent COVID reverses globalization.

Ultimately, supply chains are driven by people, and 2021 has shown the limits of the system. As businesses and consumers adapt, the current knots will unravel somewhat. But as the pandemic continues and the realities of business profitability come to the fore again, you probably shouldn’t expect a resolution in 2022.

by Sarah SchifflingLecturer in Supply Chain Management, Liverpool John Moores University and Nikolaos Valantasis Kanelloslecturer in logistics, Dublin University of Technology

This article is republished from The conversation under Creative Commons license. Read it original article.