What Happens After All the Supply Chain Issues?

It doesn't seem like there is an end in sight for the great supply chain disruption; what are the implications?

Dec 20, 2021

We are living through what some call the great supply chain disruption. As a supply chain investor, and one who receives Christmas cards like the one above, seeing the supply chain in memes, the ultimate sign of cool, is truly a Revenge of the Nerds moment. It does, though, pose questions about where this all heads. My musings are below, just in time for some reading over an open fire with ‘nog, or on a sold-out, N95-ridden Amtrak bound for hell (hopefully the former).

First, though, let’s set the stage for #supplychainissues. It all started in the beginning of the pandemic. China has quarantined 50M people in Wuhan to stop the spread of the virus. It also just so happens China is the center of global manufacturing. So, in essence, the government choked off trade to stop the spread of the pandemic.

How Bad Did it Get?

NYT reporter Peter Goodman laid the situation out better than I could. To essentially paraphrase him:

As a result of quarantine, factories as well as retailers cut capacity. Shipping companies assumed there would be a shipping downturn, so they waylaid ships to side line productive capacity, “which turned out to be a tremendous mistake.”

Life didn’t stop in pandemic. We outfit homes into offices; entertained children at home for the first time; outfit basements into gyms; which produced a surge of orders for factory goods, most of which are made in China.

The issue compounded because there were not enough shipping containers in the right ports to carry these goods from Chinese industrial cities to ports in the United States. During the pandemic, Chinese shipping lines were re-routed everywhere, full of PPE to places that don’t have lots of goods to ship back (to LatAm, Africa, etc.). So shipping containers sat empty at exotic ports instead of going back to China for more re-filling. This created delays in arrivals of all sorts of goods. Not just finished goods, but also components and ingredients.

As a result, shipping prices have sky rocketed, by at least 10x. Shipping companies seeing this windfall began shipping empty containers back to China to take advantage; however, this has created traffic jams in almost every port: 13% of the global shipping fleet is currently stuck in port. You read that right.

Those containers are stuck waiting, not only because of the empty container land grab, but also also because shipping containers are not getting emptied and are sitting in port full, because downstream warehouses are totally full of product stateside. Christmas season is upon us and companies have ordered in advance, and so the system is further swamped. Our delicate global supply chain, run by predictive algorithms and just-in-time manufacturing, is predicted to have issues for months to come, if not years.

Ok. That is Pretty Bad. What’s Next?

There are some obvious and non-obvious implications and opportunities as I see it.

Innovation cross-border. The pandemic accelerated e-commerce adoption by five years (now close to 20% of goods are bought online), which puts lots more strain on supply chains. It will take further time for this to normalize, and there will be a need for even more nimble delivery models, and customers will further seek what they need from brands both domestically and abroad - whoever is fastest. I have been excited about cross-border for a while (cross-border being the shipping of a domiciled brand to another country), but my interest is even further piqued as solutions are more acutely needed. E-commerce penetration is close to 65% globally and cross-border e-commerce is growing at 2x the rate of domestic e-commerce per Accenture.
Big retailers will win in the short term, putting small businesses as a disadvantage. Container ships will go to the highest bidders (i.e., large, public companies), so consumers will have fewer choices, and will likely have to transact with large, public-traded companies who have a better grip on the supply chain (i.e., Amazon, Walmart).
Prices will continue to rise. Those who are in control of inventory will maximize profits based on demand. This will continue to influence the global economy and less wealthy Americans will feel the pressure the most.
Customer retention will become paramount. As brands increasingly battle with being “Out of Stock”, which is the equivalent of a Mortal Combat fatality to customer conversion, the need for ways to engage and retain customers will become even more important. If you consider the zero party data issues and marketing challenges brands already faced this year, ensuring customer loyalty should be on every founder’s mind.
Digital goods will rise. Web3 is the largest trend to emerge from 2021, and it promises something the real world cannot: a lack of supply chain issues (gas fees aside). With consumers already questioning how much stuff they actually need as our daily lives evolve post-pandemic, it makes an even stronger case for why digital goods are compelling for consumers and brands alike.
Speed wins. Those who can create infrastructure and delivery networks that more readily give customers what they want. This includes the billions of dollars that have gone into last-mile deliverers like Jokr, GoPuff, Gorillas, Fridge No More, and others, who have a real shot at up-ending Amazon once they extend beyond late-night snacks.
Sustainability. Lastly, with the cost and heavy weight of the global supply chain’s carbon footprint squishing us like a Sumo wrestler, the demand for more sustainable, lighter, more circular and more local supply chain solutions will continue.

I am working on (finally) finishing a three-part series on the global e-commerce supply chain, which I will be publishing in January 2021. If you are interested in discussing any of this further, please reach out to me: @aubriepagano