Supply Chains Stabilize, But Risks Ahead

Supply Chains Stabilize, But Risks Ahead

In 2023, it seemed like the supply chain was finally starting to calm down from the turmoil and instability that the pandemic set in motion. But storm clouds are appearing on the horizon, and manufacturers and distributors should pay close attention to them.

Let’s start with the good news: the supply chain has mostly recovered from pandemic shocks. In 2021 and 2022, container ships waited weeks to unload at the Port of Los Angeles, shipping containers were in short supply because they sat empty at U.S. ports without anything to ship back to Asia, and many manufacturers couldn’t fulfill orders because they couldn’t get the raw materials they needed.

In early 2023, just as things started to settle down, inflation took off, which increased costs and once again threw a monkey wrench into the supply chain. Fortunately, inflation is on its way back down and the supply chain is starting to look healthy again. Average lead times for production materials have almost, but not quite, returned to pre-pandemic levels. And freight rates are actually lower than they were before the pandemic.

But significant risks ahead could easily tip the supply chain back into chaos.

Climate change. It’s undeniable at this point that climate change is already having an impact on the supply chain. Individual weather events may or may not be the direct result of climate change, but they are without doubt becoming more common and more severe.

For example, Canada experienced the worst wildfires in its history in 2023, with more than 15 million hectares burning—almost 5% of all of Canada’s forestland. With so many roads closed, trucks had to take alternate routes, and large parts of the Canadian timber industry were paralyzed, with sawmills temporarily shutting down for lack of supply.

In another example, one of the worst droughts in the region’s history has significantly lowered the level of the lakes that feed the Panama Canal. As a result, the canal is so low that authorities have reduced the number of ship crossings by more than one-third. It’s forcing ships to take much longer routes to reach destinations, increasing costs and delaying deliveries.

We will see more of these kinds of events, and they will be more intense. The U.S. Environmental Protection Agency finds that hurricane intensity in the Atlantic has grown significantly since 1990, and the frequency of “atmospheric rivers” that recently deluged California will increase.

War. The war in Ukraine rages on, which has significantly disrupted the flow of grain and other vital foodstuffs to global markets, as Ukraine is the breadbasket of Europe.

The war in Gaza has caused the Houthis in Yemen to disrupt shipping through the Red Sea, jacking up insurance rates and increasing risk for loss of life on ships that brave the region, and significantly increasing the length of routes for those who do not. The financial impact will likely be only a few percentage points, though shipping could be delayed by up to two weeks. If these wars expand further, the consequences could be much larger.

The lesson here is that manufacturers and distributors need to prepare now for unexpected shocks to come. Organizations need resilient, flexible supply chains. Shortening the supply chain, nearshoring and friendshoring with extremely trusted partners are all excellent strategies.

Additionally, AI can help manage dual sourcing strategies, which increase resilience but rapidly become far too complex to manage effectively using manual methods.

The supply chain is nearing stability, but no one should take this stability for granted. Get ready now so that when the next crisis arrives, your organization will be able to navigate the storm.