Gary Shawhan, Chemark Consulting10.11.21
It seems to be harder and harder to recall what life was like prior to 2020. The anxiety that accompanies unexpected events are unavoidable. More often than not, however, the impact of these events on day-to-day business operations have a temporary impact. There is an expectation that things will return to what was considered the norm in a reasonable timeframe. As a result, companies are not compelled to initiate changes in the long-term direction of their business.
Throughout the chemical industry and within the CASE markets for sure, supply chain disruptions have continued to provide major challenges. As a result, sourcing has become a critical path issue in doing business today. It is also forcing companies to rethink business strategies going forward as they address how they can ensure adequate supply of raw materials long-term.
The Cause
Over the past two-years, there have been several causes for the disruptions in the supply chain. No question, however, that the center piece for these disruptions has been the COVID-19 pandemic.
Key events that have occurred following the release of the virus in China and its subsequent proliferation into a worldwide pandemic which impacted the global supply chain include:
January 2019 – Texas and Gulf Coast winter storm had a major impact on the availability of petrochemical feed stocks critical to polymer manufacturing and their uses in the CASE markets. This impact is still being felt in 2021.
February-March 2020 – The COVID crisis becomes a global pandemic. Temporary plant shutdowns and reduced production at existing chemical producers occurred with increasing regularity. It created shortage of many key raw materials a problem that still continues today.
In particular, the disproportionate reliance on offshore sourcing from China (and the Asia Pacific region in general), as a primary source of supply for key raw materials, showed companies the risks that it can also represent.
Sabre-rattling between China and their trade partners over tariff inequities and the use of government subsidies to create unfair trade situations has been and will continue to be a frequently talked-about issue. If nothing else, this bantering highlighted the risks associated with a high level of dependence on offshore sourcing. The actual impact of these actions on supply chain practices was limited or temporary.
The pandemic took hold during the first quarter of 2020 and continued to accelerate globally into 2021. Supply chain problems began to mount creating critical shortages of raw materials across the value chain.
China was front-and-center in this situation. Many products from raw materials, to formulated products, and them forward to components manufactured in China and other A/P countries suddenly were in short supply. Ocean going freight shipments and delivery schedules were accompanied by growing delays. No longer could supply chain management proceed with business as usual.
The significant drop-off in production in China and across the Asia Pacific region that occurred at the outset of the pandemic caught many companies reliant on exports un-prepared. Many fully laden outbound container ships were already enroute to ports around the world. Unfortunately, when these in-bound goods arrived at destination ports there were no out-bound goods ready to refill these ships and put them back into service on a normal schedule.
Containers started to collect at port locations where they were not needed. Shortages of shipping containers emerged as a major global problem during 2020.
As markets began to recover and demand increased, ships waiting longer times to load and unload their cargo often left empty containers at the port after unloading (rather than wait in a long Q to reload empties). This was done in order to try and keep their vessels on or close to schedule. This created a “domino” effect on the availability of containers at port locations where they were needed.
The shortage of containers and delays on scheduling shipments due to the availability of product reached 60 days in many cases. It also resulted in a significant increase in shipping cost-per-container of around 2X the previous cost.
This story had another event that added to the container shortage problem and further impacted the scheduling of ocean-bound freight. A 20,000-container cargo ship logged itself in the Suez Canal for 6-days in March of 2020. The result was a further disruption in container availability and balance in their distribution. It also added to scheduling delays for ocean-going cargo ships already at a breaking point.
To add insult to injury, several large chemical plants in China and in South Korea suffered explosions that halted production of key raw materials. The loss of this production resulted in a scramble to find alternative sourcing for these products during a period when other major supply chain problems were already in play.
Faced with these challenges, companies dependent on offshore sourcing from China and the Asia Pacific region, were faced with unpleasant if not
difficult decisions.
The Effect
The impacts on companies for how they do business created by these collective events has been nothing less than traumatic. As markets are showing intermittent signs of recovery, the reality is that it will be a longer time than anticipated until things return to what will likely be a “new normal”.
China and other countries in the Asia Pacific region are showing some signs of recovery. The actual pace of the recovery, however, seems more gradual than rapid. The Chinese government has painted a very optimistic view of their return to pre-COVID conditions. Other sources suggest that the recovery is proceeding at a more moderate rate of speed. Effects created by disruptions in the supply chain include those listed in Table 1.
Possible Consequences, Supply Chain Outcomes
It seems certain that the events of the last two-years will result in alternations in the way companies manage their supply chain. While short-term fixes required to address the immediate needs of customers will continue to play-out, longer-term changes in supply chain practices
are expected.
The most obvious consequence of the disruptions in the supply chain is a re-assessment on a high reliance on offshore sourcing for critical raw materials. The risks associated with the inability to supply customers with product, especially if they operate on a JIT platform, are unacceptable. In addition, the volatility in shipping costs experienced over the last two-years has added an incentive for companies to consider modifying their supply chain practices.
Table 1: Some Effects on the Supply Chain
• Implementing an allocation plan for current customers. This includes the setting of volume maximum per a given period-of-time for accounts. This can also involve deciding which customers to supply and which ones not too.
• Customers, for which the company has long-term contractual supply agreements, are often those that are higher volume purchasers. In these cases, suppliers are now faced with a decision on whether to implement force-majeure based on their inability to supply.
• Price increases from raw material suppliers escalated reflecting the higher demand for products and/or services in relation to a limited supply. This has made it difficult for manufacturers to keep pace with product pricing in relation to their cost to manufacture. Contributing to these add costs to manufacture are the significant increases in shipping for ocean going freight.
• Major exporting countries, including China, are faced with a decision on prioritizing the supply of raw materials. On the one side, there is a benefit for favoring regional manufacturers over exports to support economic recovering in-country or within the region. In China’s case, since the export business represents a major portion of their economy, the price for taking this tack can have long-term repercussions.
• Another impact of supply chain disruptions has been the increased regional demand for raw materials such as polymers. Imported product was especially important to address supply to those customers and
select markets that have a high volume/low-cost requirement.
Regional manufacturers, already struggling to get the raw materials they
need to produce and supply to their regional customers, were now inundated with orders for products that were not part of their normal scheduled production demand.
Unfortunately, this filled available capacity with lower margin products.
• Shortages of drivers in the trucking industry has emerged as another effect of the COVID 19 pandemic. The available labor force has shrunk. At the same time the increasing demand for goods of all kinds, including chemical raw materials, has put a strain on the ability of trucking companies to keep pace.
Table 2: Possible Consequences, Supply Chain Outcomes
• Companies that have relied on an offshore source for raw materials used as an ingredient for a product they manufacture will try to locate and qualify additional sources of supply that are more local or regional.
• Opportunities will emerge for regional manufacturing companies to capture new business currently sourced offshore particularly from China or in the A/P region.
• Corporations will re-consider backward integration to ensure supply of critical raw materials. The goal is to minimize risk in being able to meet their long-term obligation with customer in key strategic markets.
• Strategic partnerships or alliances will be considered to reduce risk and strengthen the company’s competitive position in supplying their customers.
• Supply chain management practices will be revised along with contract terms to reflect the need to reduce risk in the supply of product to customers.
Throughout the chemical industry and within the CASE markets for sure, supply chain disruptions have continued to provide major challenges. As a result, sourcing has become a critical path issue in doing business today. It is also forcing companies to rethink business strategies going forward as they address how they can ensure adequate supply of raw materials long-term.
The Cause
Over the past two-years, there have been several causes for the disruptions in the supply chain. No question, however, that the center piece for these disruptions has been the COVID-19 pandemic.
Key events that have occurred following the release of the virus in China and its subsequent proliferation into a worldwide pandemic which impacted the global supply chain include:
January 2019 – Texas and Gulf Coast winter storm had a major impact on the availability of petrochemical feed stocks critical to polymer manufacturing and their uses in the CASE markets. This impact is still being felt in 2021.
February-March 2020 – The COVID crisis becomes a global pandemic. Temporary plant shutdowns and reduced production at existing chemical producers occurred with increasing regularity. It created shortage of many key raw materials a problem that still continues today.
In particular, the disproportionate reliance on offshore sourcing from China (and the Asia Pacific region in general), as a primary source of supply for key raw materials, showed companies the risks that it can also represent.
Sabre-rattling between China and their trade partners over tariff inequities and the use of government subsidies to create unfair trade situations has been and will continue to be a frequently talked-about issue. If nothing else, this bantering highlighted the risks associated with a high level of dependence on offshore sourcing. The actual impact of these actions on supply chain practices was limited or temporary.
The pandemic took hold during the first quarter of 2020 and continued to accelerate globally into 2021. Supply chain problems began to mount creating critical shortages of raw materials across the value chain.
China was front-and-center in this situation. Many products from raw materials, to formulated products, and them forward to components manufactured in China and other A/P countries suddenly were in short supply. Ocean going freight shipments and delivery schedules were accompanied by growing delays. No longer could supply chain management proceed with business as usual.
The significant drop-off in production in China and across the Asia Pacific region that occurred at the outset of the pandemic caught many companies reliant on exports un-prepared. Many fully laden outbound container ships were already enroute to ports around the world. Unfortunately, when these in-bound goods arrived at destination ports there were no out-bound goods ready to refill these ships and put them back into service on a normal schedule.
Containers started to collect at port locations where they were not needed. Shortages of shipping containers emerged as a major global problem during 2020.
As markets began to recover and demand increased, ships waiting longer times to load and unload their cargo often left empty containers at the port after unloading (rather than wait in a long Q to reload empties). This was done in order to try and keep their vessels on or close to schedule. This created a “domino” effect on the availability of containers at port locations where they were needed.
The shortage of containers and delays on scheduling shipments due to the availability of product reached 60 days in many cases. It also resulted in a significant increase in shipping cost-per-container of around 2X the previous cost.
This story had another event that added to the container shortage problem and further impacted the scheduling of ocean-bound freight. A 20,000-container cargo ship logged itself in the Suez Canal for 6-days in March of 2020. The result was a further disruption in container availability and balance in their distribution. It also added to scheduling delays for ocean-going cargo ships already at a breaking point.
To add insult to injury, several large chemical plants in China and in South Korea suffered explosions that halted production of key raw materials. The loss of this production resulted in a scramble to find alternative sourcing for these products during a period when other major supply chain problems were already in play.
Faced with these challenges, companies dependent on offshore sourcing from China and the Asia Pacific region, were faced with unpleasant if not
difficult decisions.
The Effect
The impacts on companies for how they do business created by these collective events has been nothing less than traumatic. As markets are showing intermittent signs of recovery, the reality is that it will be a longer time than anticipated until things return to what will likely be a “new normal”.
China and other countries in the Asia Pacific region are showing some signs of recovery. The actual pace of the recovery, however, seems more gradual than rapid. The Chinese government has painted a very optimistic view of their return to pre-COVID conditions. Other sources suggest that the recovery is proceeding at a more moderate rate of speed. Effects created by disruptions in the supply chain include those listed in Table 1.
Possible Consequences, Supply Chain Outcomes
It seems certain that the events of the last two-years will result in alternations in the way companies manage their supply chain. While short-term fixes required to address the immediate needs of customers will continue to play-out, longer-term changes in supply chain practices
are expected.
The most obvious consequence of the disruptions in the supply chain is a re-assessment on a high reliance on offshore sourcing for critical raw materials. The risks associated with the inability to supply customers with product, especially if they operate on a JIT platform, are unacceptable. In addition, the volatility in shipping costs experienced over the last two-years has added an incentive for companies to consider modifying their supply chain practices.
Table 1: Some Effects on the Supply Chain
• Implementing an allocation plan for current customers. This includes the setting of volume maximum per a given period-of-time for accounts. This can also involve deciding which customers to supply and which ones not too.
• Customers, for which the company has long-term contractual supply agreements, are often those that are higher volume purchasers. In these cases, suppliers are now faced with a decision on whether to implement force-majeure based on their inability to supply.
• Price increases from raw material suppliers escalated reflecting the higher demand for products and/or services in relation to a limited supply. This has made it difficult for manufacturers to keep pace with product pricing in relation to their cost to manufacture. Contributing to these add costs to manufacture are the significant increases in shipping for ocean going freight.
• Major exporting countries, including China, are faced with a decision on prioritizing the supply of raw materials. On the one side, there is a benefit for favoring regional manufacturers over exports to support economic recovering in-country or within the region. In China’s case, since the export business represents a major portion of their economy, the price for taking this tack can have long-term repercussions.
• Another impact of supply chain disruptions has been the increased regional demand for raw materials such as polymers. Imported product was especially important to address supply to those customers and
select markets that have a high volume/low-cost requirement.
Regional manufacturers, already struggling to get the raw materials they
need to produce and supply to their regional customers, were now inundated with orders for products that were not part of their normal scheduled production demand.
Unfortunately, this filled available capacity with lower margin products.
• Shortages of drivers in the trucking industry has emerged as another effect of the COVID 19 pandemic. The available labor force has shrunk. At the same time the increasing demand for goods of all kinds, including chemical raw materials, has put a strain on the ability of trucking companies to keep pace.
Table 2: Possible Consequences, Supply Chain Outcomes
• Companies that have relied on an offshore source for raw materials used as an ingredient for a product they manufacture will try to locate and qualify additional sources of supply that are more local or regional.
• Opportunities will emerge for regional manufacturing companies to capture new business currently sourced offshore particularly from China or in the A/P region.
• Corporations will re-consider backward integration to ensure supply of critical raw materials. The goal is to minimize risk in being able to meet their long-term obligation with customer in key strategic markets.
• Strategic partnerships or alliances will be considered to reduce risk and strengthen the company’s competitive position in supplying their customers.
• Supply chain management practices will be revised along with contract terms to reflect the need to reduce risk in the supply of product to customers.
