A new wave of Covid-19 infections in Shanghai is causing new delays in worldwide shipping, presenting global supply chains yet again with a new challenge. Supply chain disruptions have been on the rise for several years now, but since the start of the pandemic this type of incidents has intensified, creating endemic issues within national economies that are leading to a never-ending series of challenges. The recent problems in Shanghai are just another manifestation of these problems.
The Port of Shanghai is one of the largest in the world, extending over a surface of more than four squared kilometres. It is a constantly evolving infrastructure, that is subject to constant works of renovation and enlargement; its volume has been expanding every year since 2009 and it offers passage to the largest ships in the world. Over 25% of all cargo ships in China and almost the entirety of Shanghai’s foreign commerce go through the port, making it a critical infrastructure not only for regional but also for global trade.
The recent disruptions visibly confirm the importance of the port, where hundreds of ships have been waiting since February to make their route through Shanghai, increasing in numbers as the crisis intensified. As reported by analytics provider Winward, the number of vessels queuing at sea in the last two months has almost doubled, going from 260 to 506. To get a sense of the scale of this disruption, the April figures amount to almost 30% of all cargoes waiting to dock globally.
The primary reason for such delays is the new series of lockdown measures imposed by the Chinese government to contain the new wave of infections; however, it is not the only one. The reality is that the scars from the last two years have deeply affected supply chains, as disruptions have accumulated, and the related economic slowdown has had long lasting consequences. The first global restrictions in 2020 caused a first halt to production, followed by the crisis in the Suez Canal, the shortage in semiconductors, the recent Ukraine conflict, and now the partial shut down of the Shanghai port.
All these events have led to a mounting ripple effect, consisting in a higher difficulty for suppliers to withstand this constant uncertainty without recurring to extra costs. The reasons for these extra costs are manifold, such as more expensive maintenance, backlogs, and shortage of skilled labour. The latter, especially, is extremely visible in the current disruptions occurring in Shanghai, as organizations try to match the needs of unstable supply and demand while trying to comply with a new series of restrictions.
The shortage of labour that factories are currently experiencing is a usual consequence of frequent supply chain disruptions. As suppliers are forced to shut down and reopen multiple times, workers might find alternative occupations that grant them better stability. Furthermore, some employees might not be available due to Covid-19 infections, quarantines, or travel restrictions.
As a countermeasure, some organizations have decided to adopt what they call a “closed loop management” system, where all workers stay at the company’s dormitories for extended period of times and have no direct physical exposure to external individuals. Workers conduct their professionals and private lives in isolation, also avoiding contact among each other as much as possible. However, some workers have been complaining about the conditions, since living in such a “closed loop” can be very challenging from a social and mental point of view. In addition, some argue that this type of systems will never work completely, as it will be impossible to restrain the whole workforce over a prolonged period.
The Shanghai port case might be the most recent major disruption, but it will not be the last of such kind. The last two years have created levels of uncertainties for supply chains – and national economies – that have led to a series of irreversible changes. Even though the popular perception is that the time of lockdowns is over, there are still areas where restrictions can have a global impact on trade. Furthermore, it has become increasingly difficult to recruit workers across many fields, including manufacturing, which directly affects supply chains. Geopolitical tensions are also here to stay, since at the moment it seems impossible to predict how long the Ukraine conflict and its consequences will last. As a result of these trends, inflation has been on the rise in several countries and economic growth projections have curbed.
It is important to appreciate these factors by taking step back and looking at the current state of supply chains worldwide not only as a management issue, but also as a political and economic one. The ripple effect for the current and past waves of supply chain disruptions will extend well into the year, with further congestions and unstable supply of skilled labour. While the Chinese government is offering some support to local organizations to reopen – so far over 600 have started production again – there will still be repercussions both domestically and internationally.
Solutions to mitigate the ripple effect are well known and yet in many cases they are still not implemented. Getting to know the supplier base is essential to understand what challenges vendors might be experiencing based on industry sector and geographical locations. Organizations should monitor their suppliers during unstable times, identifying those that are critical for business and applying business continuity measures, if necessary. These might include finding back-ups, reviewing the supplier’s business continuity arrangements, and diversifying the supplier base across different geographical areas.
Most of all, it is important for organizations to accept the fact that global trade has undergone some deep changes that have made it less stable; this is not a phase, it is the new nature of conducting business. The longer management refuses to accept this, the harder the consequences. As always, becoming resilient starts with a change of mindset, which in this case includes taking a hard look at reality and accepting that there is nothing ordinary about the new normal.
Author: Gianluca Riglietti
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