Like COVID-19 Impact On Supply Chain, Expert Says Global Demand For Goods ‘Unprecedented’
Executive Summary
UCLA professor Chris Tang says like most US businesses relying on supplies or production from outside the country, particularly from China, consumer health and beauty and personal care product companies should expect at least another year of supply disruption.
The novel coronavirus pandemic’s impact to the global supply chain is more than a domino effect, says trade expert Chris Tang.
A boomerang effect also is happening – providers of goods needed in other countries aren’t making the products because those countries can’t deliver materials needed for the goods.
“When things are not moving, we’re in big trouble. Everyone relies on everyone. It's not localized,” Tang, business administration chairman at the University of California-Los Angeles School of Management, recently told HBW Insight.
“Even China is having problems because they need some ingredients from the US because our shipping is disrupted. … There's the boomerang – they cannot produce that much to ship back to us.”
The consumer health and beauty product industries are experiencing the same supply chain disruption as industries across product categories due to the lockdowns and travel restrictions that countries and regions have imposed in response to COVID-19.
Maritime Shipping Slowed
The World Trade Organization in September 2020 reported a “dramatic slowdown” in maritime shipping due to pandemic restrictions on economic activities and travel. Through June 2020, the average number of container vessels arriving weekly at ports worldwide was down 8.5% year-on-year to 8,722.
The WTO said 811m standard 20-foot equivalent unit containers (TEUs) containers were handled in ports worldwide in 2019, up 2% from 2018, which showed a 5.1% increase from the previous year. “Further momentum” in shipping from growth over the previous two years was lost to the pandemic, the agency said.
Tang says like most US businesses that rely on supplies or production from outside the country, particularly from China, consumer health firms – particularly dietary supplement marketers but also OTC drug firms – and beauty and personal care product companies should prepare for at least another year of supply disruption.
While production has restarted in China, supply chain delays will continue. “They had to catch up because they lost production worldwide. So that creates more of a shortage,” Tang said.
Expecting Less Helps
Most US businesses also can make things easier on themselves until supply chain operations return to a more typical pace, when adequate cargo ships and shipping containers are available rather than waiting to offload at US ports reporting shortages of workers.
Factories in China and elsewhere outside the US have unused capacity currently but reaching full capacity wouldn’t help.
“They need to work smarter … if you keep on pumping, asking the factory to produce more, it’s not going to help because everything's backed up. I think that the companies and the shipping companies and logistics companies and the factories in China or in Asia and elsewhere need to coordinate,” Tang said.
“When one leg of the supply chain is disrupted, it disrupts the other legs as well. They cannot ship because they are no ships, no containers for the factory. Production is also useless because there’s no place to put the products,” he added.
As well, businesses will pay more currently for shipping than they will after supply chains are re-normalized. Shipping a standard 20-foot equivalent unit container from (TEU) China to the US West Coast pre-pandemic ran around $1,000, but now costs $7,000, Tang says.
Chris Tang: “If you purely look at the cost, of course, you outsource everything under an assumption there's no disruption."
Source: UCLA
Other estimates are for prices currently past $15,000 for shipping a TEU to ports in other parts of the US.
Tang added that shipping prices, like prices for most business and consumer costs are “sticky” – they won’t tumble as fast as they increased.
“When the price goes up, it does not come down too quickly. … When oil price goes up, the gas would go up, but then when the oil price goes down, it would take a long time for people to see gas prices come down a little bit,” he said.
“When they increase the price, people get used to it. Big companies don't have the incentive to lower the price that quickly. This is called a sticky price.”
US consumer health product marketers, in the OTC drug and dietary supplement spaces, have reported higher supply-chain costs along with a shortage of some ingredients during the pandemic. (Also see "AHPA Members Report Problems In Raw Material, Other Supplies In Pandemic Survey For USDA" - HBW Insight, 2 Apr, 2020.)
OTC drug manufacturers and marketers large and small have not held back on explaining how supply chain disruptions are hammering their results. ([A#RS15162)
Climate Disrupts, Too
In addition to COVID-19, climate is affecting the supply chain and could add further delays before shipping and other transportation reach more normal levels.
“I think the floods in the East and the fires on the West Coast have further disrupted the logistics on the ground,” Tang said.
But even when roads and other shipping channels open, delivering goods internationally or between states remains slow. Some drivers and other workers at shipping firms were sidelined early in the pandemic aren’t returning to their same jobs.
“For the trucking companies during the lockdown, a lot of truck drivers switched to work for UPS, or FedEx or Amazon. … Opening up again, some of the truck companies will have a difficult time to find enough drivers.,” Tang said.
‘All About Money’
Tang, who is a UCLA distinguished professor in an endowed chair for the management school, came to study shipping and global trade after losing a job to outsourcing 30 years ago. I
"used to work at IBM, in the factories in New York. Bit by bit, everything was outsourced. Then I became a professor to study why production is becoming so complex,” he said.
“Well, I discovered everything is about money, it’s all about money.”
But supply chain disruptions test whether cutting costs brings long-term solutions.
“If you purely look at the cost, of course, you outsource everything. Now, that is under an assumption there's no disruption,” Tang said.
Consumer health, beauty and other product manufacturers should consider their experience during the COVID-19 pandemic as training. That’s because similar protracted, global public health emergencies are more likely currently than in even the recent past.
Larger Supply Chain, Larger Demand
Additionally, global businesses had little information to use for preparing for something like the COVID-19 pandemic, which wasn’t predicted even though factors contributing to the emergence of a novel coronavirus were known.
Comparing the pandemic’s impact to that of Spanish flu pandemic of the early 1900s is inaccurate, Tang says.
“This is unprecedented … go back to the Spanish flu 100 some years ago, the supply chain was more local. In that case, it’s not that you need to rely on so many countries,” he said.
Another differentiator isn’t about supply but demand and has potentially more impact. “We didn’t consume that much. Now we consume so much and rely on a global supply chain,” Tang said.
“If you go back to 100 years ago, … we don't need so many new things and you buy from local, most of the popular products were locally made. The disruption was local, localized. But this is globalized,” he added.
“Even if you diversify, your supply chain is still not healthy because COVID is affecting many countries. That is the why the pandemic is precedented, because we have disruption in every single link of the chain.”
Bring Back Production?
Tang noted the Biden administration has asked federal agencies to examine stabilizing the US supply chain to withstand potential disruptions. Tang, who was asked to submit comments to the White House, said improving the supply chain will require returning a large amount of manufacturing to the US.
“The idea is good, but everything is in the details. The problem is that when you outsource so many things for so many decades, to get it back is very difficult,” he said.
The change wouldn’t be limited to facilities and equipment. “Because you lost a lot of engineers, you lost a lot of scientists focusing on this area, it hollowed out a lot of capabilities. It would take a decade.”
And production needs resources. “If there’s disruption, it won't work. You have to think about the product in totality, not in terms of isolation,” Tang said.
As well, the federal government isn’t positioned to effectively re-establish a US-centric supply chain. “The government is so bureaucratic, there's so many agencies,” he added.
The Food and Drug Administration’s suggestions to strengthen the supply chains for pharmaceutical ingredients and other health care products, for instance, would be coordinated with other Department of Health and Human Services agencies and an overall federal approach would be developed from across federal agencies.
“They need maybe a separate agency to coordinate all these agencies through the red tape. This could take years, decades.”
Tang also noted a California public transportation project as an example of federal bureaucratic delay. “Look at the train along the West Coast, the high-speed train from LA to San Francisco. It’s delayed by decades, 25 times in all.”
In an offshoot of the White House's initiative, the FDA is establishing a Pharmaceutical Supply Chain Governance Board to start in September on advancing the agency’s efforts to increase the transparency of pharmaceutical supply chains and protect them from emergencies like the coronavirus pandemic. The board was formed to support the center’s role in strengthening supply chains for pharmaceuticals and active pharmaceutical ingredients as part of a governmentwide initiative outlined in a June White House report. (Also see "US FDA Board Formed To Manage Increasingly Complex Pharmaceutical Supply Chain Oversight" - HBW Insight, 23 Aug, 2021.)
The White House document compiled reports on 100-day reviews HHS and three other departments conducted in response to an executive order Biden signed in February on strengthening supply chains. A more in-depth one-year report is slated for February 2022. (Also see "Public-Private Consortium To Strengthen Essential Medicines Supply Under White House Initiative" - Pink Sheet, 9 Jun, 2021.)