For the last two years, doing business globally has been a Sisyphean task. Every time we think we’ve rolled our product boulder to the summit of the supply chain mountain—past factory shutdowns, labor shortages, materials shortages, shipping delays, and hyperinflation—the ground trembles beneath us, the boulder slips from our grasp, and down it goes once more into the abyss. But unlike Sisyphus, who was eternally punished for his guile, global business leaders will eventually be rewarded for their fortitude and resilience. At Genimex, though we’re predicting a continuing struggle in the early months of the New Year, we see a gradual return to normality, rife with opportunities to capitalize on the strategies you’ve put in place over the last two years.
Knitting supply chains back together
In 2021, we saw increases in rates for labor, container shipping, product parts, fuel, and raw materials. We can safely predict that inflation will continue, and supply chains will struggle for the first three quarters of 2022. But we see a fourth-quarter rally when conditions start to look much better. Here’s a brief rundown on areas of concern:
- Labor shortages— Before the pandemic hit, the industry was already grappling with shortages of skilled and unskilled labor. Baby boomers were retiring, vaccine mandates kept hesitant workers on the sidelines, and the uncertain threat of new Covid variants interfered with business planning. Evidence suggests these pressures should ebb, allowing returning workers to fill gaps that are causing supply chain delays.
- Raw material costs— As costs continue to rise, manufacturers will have to improve operational efficiency, but increased efficiency will not close the gap. Eventually, manufacturers will pass on higher costs to their customers. Yet, pent-up demand and higher wages may prevent sticker shock from discouraging consumers. In short, we don’t believe higher prices alone will cause a noteworthy sales slump.
- Inventory —The pandemic exposed the myriad risks of “just in time manufacturing.” Now companies will segue to “just in case” strategies, acquiring inventory as a hedge against future events. Genimex predicts that some brands will buy too much inventory. There being overstocked may slow manufacturing demand, which in turn can create manufacturing opportunities for other companies shopping for suppliers.
- Shipping – Genimex believes bottlenecks will linger into 2022. But the planned slowdowns around the Lunar New Year will ease congestion at American ports, which must implement changes to improve off-loading when production ramps up again. Ultimately, Genimex believes that consumer demand will level off in the next six to eight months and so shipping will normalize. Historically high shipping rates will come down significantly, but not to their pre-Covid levels.
There’s no reason to believe the conditions of the last two years represent a “new normal.” Although there is no magic wand to banish Covid and restore pre-pandemic conditions, the supply chain problems Covid inflicted are manageable and are being sorted out.
Omicron: the wild card in the deck
Although the preliminary science says Omicron is a weaker variant, it is highly infectious. Thus, Genimex predicts Omicron could create havoc in Asia, potentially stalling the supply chain during outbreaks. Widespread Omicron in China during the beginning of 2022 could be especially disruptive. But even if the immediate impact proves severe, we believe it will be short-lived.
Here are a few noteworthy facts about Omicron in Asia:
- Currently, the omicron variant is spreading across Asia. As the world’s largest trading nation, China’s ability to keep factories operating is crucial for global supply chains. Unlike the West, transportation and labor issues have driven supply chain delays rather than factory shutdowns and shortages that were common earlier in the pandemic.
- Infections stemming from Delta and Omicron have triggered shutdowns to factories, with disruptions at Ningbo, China’s largest seaport.
- China’s “Covid-zero” strategy has shown success in containing viral spread, by imposing lockdowns that limit the movement of people and cause significant business disruptions. While this may not be the case here, sometimes the cure is worse than the disease.
For the most part, we can expect a chaotic start to 2022 with supply chain disruptions. But opportunities exist for savvy companies to mitigate the risk by resourcing to other regions or countries.
Onshore or Offshore? Which is the sure shore?
Due to past disruptions of foreign supply chains and ports of departure, many brands may trend towards reshoring to minimize their dependence on Asia, while increasing their reliance on countries, such as Mexico and Canada, that have trade agreements with the United States. However, much of the uncertainty will dissipate once warmer weather returns. As Asian supply chains return to a state of heightened reliability, pressures to re-shore will ease. This is fortunate, in our opinion, because abandoning Asia and its many advantages would be an overreaction that is likely to cause deep regret. However, Genimex believes in diversifying supply chains and building redundancies that ensure resilience. We’re prepared to help our clients do that in 2022 and beyond.
So, while we recommend our clients be patient and that their patience will be rewarded, we don’t mean you should stand still. Now is a good time to reflect on current challenges and develop strategies for future success. Genimex is ready to help in that process so you can meet and surpass your company’s goals.