Finding the opportunities in the supply chain crisis

Looking back at the last two years of Covid, it is fair to say that the topic of the supply chain has become familiar to most of us. As we began hearing about individual plant slowdowns and closures, it might have initially seemed only a minor disruption - but the ripple effect has gone on to cause absolute havoc for both suppliers and customers around the globe.

Things are improving; we now have a milder variant, Omicron, and life is going back to a ‘new normal’ in some countries. The supply chains, however, are far from regaining their balance.

Here at InReach Ventures, a recent conversation with a friend who runs Zero Waste Club (a cool London-based zero-waste brand) prompted us to think about how things really work. And as the world - if not yet the supply chain - slowly moves into the future, we wanted to dig into the crisis and understand the levers that could potentially make a difference for the systems that power global trade.

2022, where do we stand?
For manufacturers, shipping companies and retailers, the supply chain turmoil that has emerged during the pandemic is probably regarded as the most impactful business challenge. The widespread chaos has put the world on hold, as has a series of unprecedented events putting strain on worldwide systems with too many checkpoints and vulnerabilities. Ships are stuck at sea, warehouses are overwhelmed, empty containers are piling up in ports and the distribution of goods is delayed because trucks have no drivers. These are just a few of the bottlenecks that, before the pandemic, were kept behind the scenes and mitigated.

Is it really that bad? The highly interdependent and hyper-connected supply chain was originally designed to work a certain way, with many handovers. During the pandemic, however, unbalance occurred on every single front and they all simply collapsed. Ultimately, the whole situation around production, combined with the shortage of shipping containers and an accelerated trend in online shopping (with holidays, eating out and other services restricted, consumer spending shifted towards imported manufactured goods), became a source of the skyrocketing revenue in freight fees (in 2019, a shipping container from China to the West Coast cost around $2,000; at the height of the logistics crunch in 2021, the rates soared above $20,000). This benefited shipping companies, which currently don’t really have a good incentive to change.

Although the situation today has calmed down slightly and the on-going disruptions are probably less severe and more under control, the damage has been done. The supply chain crisis has already triggered a surge in prices, propping inflation - the biggest concern for policymakers, threatening the global economy and its recovery from lockdowns.

How did the crises unfold?
1. Offshoring in low-cost countries: With sprawling supply chains, much attention has focused on offshoring, a trend that has taken place for many years. As global competition created a considerable push to cut prices, even the slightest reduction in cost offered by offshore suppliers has made a huge difference, especially in the short term. In the age of Wall Street, when CEOs earn huge compensation for increasing profits by the end of the year, financial interest is often still the most dominant factor taken into consideration. Hence a fragmented and overextended supply chain offering better consumer prices occurs more often across many global brands, especially in countries with high domestic costs.

Offshoring has been happening for the last 40 years, and according to some estimates, 90 - 95% of manufactured goods now move across the world on shipping containers. So, is it possible to go back? Can reshoring or nearshoring fix the problem? Taking back all manufacturing from China, India and many other low-cost countries is feasible, but not easy - and it’s quite unlikely to affect disruptions, which come from many different angles.

2. Infrastructure: Another thing paralysing supply chain operations is the infrastructure itself. As we have seen, most manufactured goods are now moving across the world in containers, and to drive costs down they are transported on some of the largest vessels ever built (just picture the Empire State Building on its side). When these ships arrive at their final destinations, they require large ports to dock and enough resources to unload them.

While some ports, especially in Europe and Asia, have prioritised their efficiency improvements (they have fully automated terminals and are equipped to handle the largest container ships way into the future), the North American industry has for many years been quite resistant to modernising. Specifically in the USA, the small, low-infrastructure ports have put the Ports of Long Beach and LA under pressure; they are the biggest American ports and today handle 40% of the USA’s inbound sea freight. Moreover, the recent spike caused by the pandemic has seen them both starting to struggle with unprecedented traffic jams (ships were waiting for around 40 days for a spot in the port in 2021) that has only been resolved to a limited extent.

In docks, the story, unfortunately, continues with the container logjam. Once the container is unloaded, it must be moved to an inland hub. It currently takes up to a few days before the container is ready to be dispatched to a dedicated warehouse. This is not the case in all ports, but as there is no visibility or centralised system controlling the in-port operations, it is difficult to synchronise all the truckers trying to pick up and move the correct container on time from the right dock.

The infrastructure issue described above at a very high level is by far the hardest to fix! The shopping spree that has been happening since the lockdowns is driving a massive demand in imported goods, which cannot be efficiently moved around. Though a centralised system would help (many things are still happening on paper), the need for technology to eliminate gridlocks has been pretty much neglected by the ports.

3. Technology: On that note, though much has been said about offshoring, ports and infrastructure, the current supply chain also suffers from the lack of technology. As we have seen, there is little visibility when it comes to moving cargo, no integrations to improve communication whatsoever, and hardly any ability to anticipate problems either from the pandemic or from other natural disasters, such as floods, earthquakes and typhoons.

During Covid, as businesses and consumers reacted to shortages by ordering more, way ahead of time, the widely adopted ‘just-in-time’ manufacturing model was in many cases abandoned or put on hold. The massive disruptions across the fragile and overextended supply chain and the reliance on just-in-time deliveries when the lead-time to get parts or products from suppliers has extended to months, has pushed many to improve their operations.

While it is certainly not a fix to the crisis, many companies have turned towards AI-powered simulations called digital twins. These can forecast arising issues before they occur, and with machine learning capabilities, they can recommend the workaround so that firms can adjust. Although 2021 probably hasn’t killed the ‘just-in-time’ model (not everyone can afford the change, as it is too expensive for firms to keep full warehouses), knowing the possible breakages has given companies a chance to find the right balance between agile and efficient. With the correct forecasting, companies can better adjust their inventory, stock their warehouses at the right time or even decide to open a new one when needed.

Together with the pandemic, the disruptions over the past two years have completely snarled the supply chain. But, looking at positives, they have also accelerated a massive adoption of technology among carriers (Mærsk is an excellent pioneer), ports and retailers. Of course, it will take years to overhaul the supply chain; however, as the current situation has numerous pain points, there are also many opportunities to improve it.

The new wave of technology
The bad news about shipping bottlenecks, empty shelves and shortages still abounds, but while fixing issues such as global infrastructure, ports and delivering fleet is essential for moving forward, the good news is that the modernisation of the whole supply chain space is focusing on technology with the same urgency. Some innovations - such as self-driving cars - probably won’t make any difference, but as there is a wave of new generation startups tackling the most basic challenges, the digital transformation is already addressing some of the most painful inefficiencies.

With emerging logistics companies such as Forto, Flexport, 7bridges, Leverage, Zencargo and many others, along with a surge in capital going into the tech scene in general (tech-supply chain companies raised $24.3bn - 60% higher than in 2020, according to Pitchbook), we witness an interesting and accelerating trend. One reason for this is the increasing opportunity to digitize operations, and the capital available; the other however more sustainable is the ecosystem gradually building up for more to come. What’s more, because more aspects of supply chain gridlocks are being addressed, companies are now leveraging their activities so that no-one stands alone in this mess. Collectively, companies are helping each other to automate and loosen up some established and painful dependencies.

So, if you are reading this and have ideas for some long-term technology-related supply chain solutions, do not hesitate to drop us a line. As you can see, we are fond of all things supply chain and shipping-related here at InReach Ventures, and as such, we’re very happy to fund an idea that can potentially move us all one step closer to modernising decades-old systems.

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