Retail supply chains were made to be broken. Will brands adapt — or revert?

When linking up dozens or even hundreds of firms, with thousands of workers among them, all trying to move in coordination across continents to complete the task of getting products on shelves — all sorts of things can go wrong. And there was never any reason why a whole bunch of things couldn’t go wrong at the same time.

For all the talk of crisis and collapse, the system largely held through the holiday period. But the past two years have laid bare vulnerabilities that have long existed in the system. To name a few: lack of capacity, manufacturing concentration by geography, length and complexity of supply chains, and scale mismatches among links in the chain.

The question for retailers, brands, vendors and governments around the world is whether supply chains will be rebuilt for the future, with unknown crises in mind, or if the industry reverts back to “normal” once the current backups in the system ease.

Concentrated risk
To name just a few things that went wrong in 2021: A ship famously became lodged in Egypt’s Suez Canal, blocking traffic for six days. China closed one of the busiest ports in the world because of a COVID-19 outbreak. Vietnamese factories were fully or partially shut down because of outbreaks, wreaking havoc on apparel and footwear production.

COVID-19 also disrupted manufacturing areas in Bangladesh, India and other major producing countries, not least of all China. A demand surge in the U.S. led to shortages in cargo space, shipping containers and other equipment that led to skyrocketing ocean freight prices.

While tied together by the pandemic and its consequences, the problems were different and exposed different vulnerabilities in the system.

Consider the impact COVID-19 outbreaks had on ports and factories in China. On the surface, it seems like a pandemic-induced problem. But a supply chain system less reliant on Chinese production could absorb those shocks with less pain and for fewer players.

“Some of our clients are really taking a hard look at spreading risk so that it’s not so China-centric or even Asia-centric,” said a senior managing director in FTI Consulting’s business transformation practice. “It’s a hard thing to do. It’s hard to get out. There’s so much infrastructure and so much manufacturing capacity that’s been built up in China. So it’s not like flipping a switch.”

“It’s easy when the disruption event, the black swan event — whatever you want to call it — is over to shift right back to the lowest cost solution, which remains China. But I think this was a wake-up call for a lot of companies.”

Supply chains aren’t just concentrated by geography alone. In many cases, the production of a good can be centered on just a few factories. A research associate with Open Markets Institute, a nonpartisan group that advocates for more aggressive anti-monopoly policies, points to the market for semiconductors as a prime example.

That single component feeds into countless consumer electronics and other products retailers and brands depend on. “Semiconductors were a product the U.S. used to make in a relatively large capacity,” Open Markets Institute said. “Over the past few decades, you’ve seen consolidation of the semiconductor industry, the stripping of capacity, the shutdown of plants across the U.S. to a point where there are only three integrated device manufacturers, three companies that actually make semiconductors.”

Along with the potential for price gouging, supply concentration also poses an obvious supply risk. It’s the old saw about too many eggs in one basket. If a hurricane or earthquake — or a plague — hits the sole factory producing a given good, there is no more of that good until the factory has recovered.

Super-sized clogs
It’s not just supply itself that is concentrated. The top eight carriers control more than 80% of the market for ocean freight capacity, and carriers further form alliances with each other to expand their scale and reach. And while shippers saw freight prices blow up by many multiples, carriers had a phenomenal year. Bloomberg reported recently that ocean-freight carriers made an estimated $150 billion in profits for 2021, up nine times over from the previous year.

“There is hyper-consolidation of shipping lines, and they have no incentive to invest in capacity,” Open Markets Institute said. “At the same time, they’re making record profits. You really haven’t seen anything like it. It’s really frustrating at the same time, we’re just really captured by these shipping companies.”