Expect Another Hit To Supply Chain With New China Shutdowns And Conflict In Ukraine

Despite dire warnings about product shortages impacting holiday retail sales, American consumers found plenty to satisfy their needs. Retail sales for the year advanced a record 14% year over year, reaching $4.47 trillion excluding autos, auto parts stores and gas stations, reaching a 20 year high.

Yes, shoppers have been forced to get used to spot product shortages – retail inventory levels remain 2% under 2019 levels, but 4% over 2020 – and everything costs more, but they entered the new year believing the worst of the pandemic was behind them and things were slowly but surely getting back to normal.

However, the latest news out of China suggests otherwise. China reports that Covid case rates are growing, reaching levels not seen since early 2020. This resulted in the lockdown of Shenzhen and the entire province of Jilin, including its capital Changchun, with no advance notice.

Now the virus is surging in Shanghai, causing a phased-shutdown in the city. Early notice is that the port remains open for now.

So far these shutdowns impact primarily semiconductor, electronics and automobile suppliers – a Tesla factory is located in Shanghai. But it could be an early warning of worsening product shortages and higher prices on the horizon.

This comes amidst reports that case rates are rising in Hong Kong. China’s aggressive zero-Covid policy to stop the spread of the virus often results in weeks-long factory shutdowns and hampers shipping of manufactured goods through affected areas.

So far, FreightWaves reports all China ports remain open though given how quickly the virus spreads and the government reacts, that could change at any moment.

Retailers and consumers better get ready for another wave of product shortages caused by backups in the supply chain. And this wave could prove worse than the last one.

“Depending on your definition of waves, this might be number three or four,” says Abe Eshkenazi, CEO of the Association of Supply Chain Management (ASCM), the industry’s largest non-profit supporting supply chain professionals.

“The entire supply chain is under tremendous stress right now. We’re dealing with a cascade of disruptions which is adding stress beyond what it’s already under,” he continues.

The fact that the supply chain never recovered from the experiences over the last two years makes it less able to handle the emerging challenges from the latest China shutdowns and Russia’s war on Ukraine.

“This is just another sequel to the horror movie we’ve experienced over the past two years and it doesn’t have a positive ending. It’s impossible to compare the humanitarian side of the tragic loss of life from war and the pandemic, but their effects will be felt throughout the supply chain.

“The supply chain is a global interconnected ecosystem that requires harmony, consistency and collaboration among all the partners in the system. When one node in the system either increases or decreases capacity, it has downstream and upstream effects,” Eshkenazi explains.

Right now the technology sector is most at risk from the recent disruptions, but virtually every other industry depends on the parts they produce to operate. Ukraine, for example, is a major source for neon gas, which is used in chipmaking. And land transportation across Ukraine is at a standstill, requiring shippers to turn to the already-crowded overseas routes.  

“Some 90% of global trade is shipped over the ocean between different parts of the world,” he reveals. “For shippers impacted by Ukraine, they’ve shifted to Scandinavia on the western side or to eastern China. And on top of that, we have the container issues that linger with containers not being where they need to be. It all has to ripple through the system and we aren’t anywhere near the end of it.”

Eshkenazi notes that while the Biden administration’s decision to open ports 24/7 was a move in the right direction, it didn’t solve for the other nodes in the clogged U.S. supply chain, specifically trucking and warehousing. “We opened up the ports but didn’t take care of logistics to get product out of the ports, into the warehouses and onto the retail facilities.”

Higher retail prices across the board are compounding the challenges for consumers caused by the snags in the supply chain. Supply chain issues took a lot of blame for inflation and now with gas prices steadily climbing as Russian oil imports are cut, consumers must brace themselves for even higher prices ahead.

“The Russia oil embargo will affect us directly but also indirectly in the prices of other products and services sourced from Europe and elsewhere that are reliant on Russian oil,” he advises.

What keeps supply chain executives up at night is the inadequacy of data to plan for the future due to the current uncertainties added to the uncertainties that remain from last year.

“Supply chain is an industry that runs on data and the data we’ve seen over the past two years is anything but consistent,” he shares. “We used to be able to effectively plan 12 to 18 to even 36 months out. Now we are down to six to nine months max.”

“It’s layer upon layer of complexity and it takes not just technology but knowledge workers to unravel the data and make the necessary decisions to move each company in the system forward,” he continues.

Ultimately, as reliant as the supply chain is on data, technology and mechanical means to move product from point A to Z, it all depends on people to make the decisions. And that is what causes Eshkenazi to lose sleep.

“My concern is that as we’re dealing with all the acute supply chain issues, we are taking our eyes off the longer-term systemic issues in the supply chain that must be addressed. They include environmental issues, human rights, labor issues and tariffs.

“These are the long-term systemic issues that we must address and we can’t afford to lose focus on them as we deal with the current crises. It’s not a function of either/or but both,” he concludes.

About Pam Danziger: Pamela N. Danziger is an internationally recognized expert specializing in consumer insights for marketers targeting the affluent consumer segment. She is president of Unity Marketing, a boutique marketing consulting firm she founded in 1992 where she leads with research to provide brands with actionable insights into the minds of their most profitable customers.

She is also a founding partner in Retail Rescue, a firm that provides retailers with advice, mentoring and support in Marketing, Management, Merchandising, Operations, Service and Selling.

A prolific writer, she is the author of eight books including Shops that POP! 7 Steps to Extraordinary Retail Success, written about and for independent retailers. She is a contributor to The Robin Report and Forbes.com. Pam is frequently called on to share new insights with audiences and business leaders all over the world. Contact her at [email protected].