The global supply chain is vulnerable

Raw materials costs are soaring, logistics and transportation are in trouble: how about the industry?

The pandemic caused by Coronavirus has shown us the weaknesses of the global supply chain, which is still trying to recover.

The shutdown of all manufacturing activities during the first lockdown was only the beginning and today, more than a year later, the return to the normality is not going as hoped.

RAW MATERIALS

During the first months of 2020, due to the lockdown and to the uncertain evolution of health emergency, most companies cancelled their orders, this led to a severe reduction in the production of raw materials.

Once this phase was over, there was a rush to buy raw materials for production, but this situation get worse by the additional demand to restore stocks.

At this point these was a short-circuit in the global supply chain and the shortage of available raw materials led to an increase in prices.

The list of the hard-to-find materials on the market is long; from metals to wood, from chemicals to semiconductors. This leads to a critical situation in getting a lot of electrical and mechanical components necessary for our production like magnets, ball bearings, thermals, terminals and connectors, etc.

Today, the problem is not only to have enough components, but also to manage the price increases that these materials had since December 2020, and which show no sign of slowing down.

For most Italian companies, the manufacturing need has returned, or is returning, to pre-crisis levels, but the problem of production capacity remains.

The truth is that all raw materials are in trouble, and at the moment the complications for cost and availability of this materials are the main problem that we have to face, as demand continues to exceed supply.

TRANSPORT

Unfortunately, in addition to the shortage and cost of materials, we now have to consider two other problems: long delivery times and the increase of the transport costs.

We have the strong recovery in the domestic demand of China and of the United States, whose economic measures are designed to sustain imports and discourage exports; the problems linked to global logistics rising in freight costs (of all types; sea, air, etc.) also due to the “peak season” and unpredictable situations, such as the block of the Suez Canal.

The already desperate situation is aggravated by the shortage of containers and anti-Covid restrictions which extend the loading/unloading time at port docks; for example, the closure of Shenzhen and Yantian ports, due to an outbreak of the virus, is causing many difficulties for the massive congestion created by the lack of staff at work.

This situation is now the last critical issue to face, and since the ports involved are the the most important in southern China, this episode is increasing to worrying proportions.

The current overloading of ports and transhipment hubs (which are at 30% of full operational efficiency) continues to be a hard matter for the reliability of departures and vessel availability. Currently, the average delay for ships is 7-8 days, but the situation is expected to get worse in the coming weeks. Unfortunately, although this should improve between the end of June and the beginning of July, the quantity of cargo backlogs is expected to cause mass effects with outcome that are difficult to estimate.

THE CONSEQUENCES

According to economists, at least all 2021 will still be subject to severe tensions regarding prices and availability of materials.

This situation will have an extreme impact on costs and production times on medium and long term, and effect are expected for all players involved in our production chains.

Reducing profit margins has been the first measure taken by companies who are trying hard not to burden their business partners with these hostile conditions. At IPC we work on a daily basis with our suppliers and partners to ensure our production and to maintain our usual level of operativity.

We are currently working through all available channels to source raw materials and other components, trying to limit as much as possible another increase in sales prices, which at the moment seems inevitable.

Furthermore, the persisting problems in the transport chain will affect more and more the global logistic net. The main consequences will be others increase in transport costs and an extraordinary extension of the current delivery times.

Even in this case, although these situations are unpredictable and out of our control, IPC’s staff is on the front line searching for alternative solutions and methods that can reduce the impact of these inconvenience to all our business partners.

V.Caronni – IPC Marketing & Communications Coordinator