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Could 2022’s supply chain woes be even worse than 2021’s? Things are not off to an auspicious start.
In late November, due to increasing cases of Covid, China prohibited crew changes for foreign shipping operations and imposed as much as a 7-week quarantine for returning Chinese crews. Even vessels that have refreshed their crew elsewhere have to wait 2 weeks before they’re allowed to port in China.
In late December, the Chinese city of Xi’an was locked down, also due to Covid. Electronics component makers Samsung and Micron, which have a significant manufacturing presence there, now face continuing operations with limited manpower.
“Due to the ongoing Covid-19 situation, we have decided to temporarily adjust operations at our manufacturing facilities in Xi’an,” Samsung announced.
“The city’s closure has reduced Micron’s team member and contractor workforce at our Xi’an site, resulting in some impact to output levels of our DRAM assembly-and-test operations there,” Micron said on its website.
Omicron will have an impact on the already-disrupted global supply chain and the year-long shortage of semiconductors, experts say.
“The Chinese government continues to double down on its [zero-tolerance] Covid pursuits and manufacturing hubs are being scrutinized,” said Sébastien Breteau, CEO of QIMA, a global supply chain compliance service. “While lockdowns of factories are certainly not off the table, Xinhua, the state-run news agency, singled out ports as the entry point for China’s most recent outbreaks.”
To comply with crew quarantines, shipowners and managers have had to reroute ships, delaying shipments and crew changes, adding to the global supply chain crisis. Tens of thousands of people are currently in quarantine following a Covid-19 outbreak in Zhejiang province, including the cities of Ningbo, Shaoxing and Hangzhou, said Breteau. “These are three of China’s major manufacturing hubs, accounting for more than 50 percent of the province’s economic output of around 6.46 trillion yuan ($1.02 trillion) in 2020.”
While the new quarantine rules are not yet causing the shutdowns of the early pandemic, disruptions are still widespread. “For example, in Ningbo, while the port remains open, trucks are restricted from freely going in and out of the port zone. This is adding more cargo backlogs to an already fragile and congested supply chain landscape,” said Breteau.
Costs skyrocket
Last year saw an unprecedented series of supply-chain disruptions ranging from extreme weather to factory fires. Freight costs have skyrocketed to 10x pre-pandemic levels, according to cargo marketplace Freightos. Materials and component prices have also increased. Although the Institute for Supply Management’s prices index decreased by more than 14 percent in December, price hikes are not in the rear-view mirror. Overall, supply and demand for materials remains volatile and omicron is likely to cause further disruption in production and delivery. The ISM price index remains well above its baseline of 50.0 at 68.2.
If cases continue to rise elsewhere in China and more quarantine rules are enforced in other manufacturing hubs, ports will be widely affected and exports from China will inevitably slow down. With ports being targeted, the slowdown will happen even if factories stay open and production remains steady, according to Breteau. If factories are also locked down, the supply chain shortages, delays and backorders will be even more pronounced and dire.
Although manufacturers have already weathered a series of Covid spikes, the impact of omicron could last months — or longer. “The last two years have shown us it’s impossible to predict issues beyond one or two quarters,” Breteau said. “This makes it very difficult for anyone to say, with any degree of certainty, whether we’ll be back to normal in H2 2022 or if these problems will persist into 2023.”
Some issues, such as country-wide lockdowns, should be resolved as vaccination rates climb, particularly in lower-income countries. However, many of the challenges unearthed by pandemic disruptions are more structural and need to be addressed. “After all, global supply chains are systemic and interconnected,” said Breteau. “They have operated on a ‘just in time’ model for decades, allowing a very small buffer for delays or issues along each link in the chain. For example, the way ports are organized today leaves no room for extra capacity, making it difficult to address sudden spikes or drops in shipments.”
Sébastien Breteau, CEO of QIMA
Even if Covid-19 is completely eradicated soon, these issues will linger for some time and, until addressed, will continue to impact nearly every point along the supply chain.
Mitigation measures
Manufacturers can take steps to mitigate disruption, according to Breteau. Brands are switching sourcing to new suppliers and navigating unfamiliar territory so they can circumvent shortages, prevent delays and achieve more cost-effective operational models. Subsequently, amid this diversification, the role of supplier relations management (SRM) – especially in terms of ethical compliance and quality control – has never been more critical in safeguarding and protecting global supply chains.
“By prioritizing SRM at the inspection level, brands can exercise more supply chain malleability, mitigate risks and gain a competitive market advantage,” he said.
Supply chain digitization, especially in the quality inspection process, is proving to be a game changer for supplier relations. In QIMAone’s annual survey, supplier communication and quality were cited as a serious issue by 59 percent and 41 percent of respondents, respectively. However, compared to their counterparts, businesses with highly digitized supply chains cut concerns of supplier communications and quality in half, according to QIMA data.
Digitization has become a priority for many manufacturers but implementation remains challenging. To successfully digitize the supply chain, businesses must be thinking about how they can bring their suppliers on board the digital transformation journey and unlock meaningful benefits for them too, Breteau said.
“For instance, a digital QC program can be bolstered by innovative features such as integrated inspector apps, actionable insights, automation tools, configurable workflows, API integration and interactive reporting. And to facilitate supplier onboarding, many digital platforms also provide suppliers with training courses on operational workflows and industry best practices.”
Digitization also improves visibility throughout the supply chain so problems can be spotted earlier in the sourcing process. Many materials suppliers, for example, are unknown to the OEMs and EMS providers that consume components and subassemblies. Risk-management consultant Resilinc recommends customers take steps to prop up their smaller supply partners.
“By mitigating risks and harnessing the power of symbiotic partnerships, businesses can gain better control of their digital transformation journey to weather today’s supply chain storm and chart a new path forward toward resiliency – no matter what’s on the horizon tomorrow,” Breteau concluded.
