Much has been written about recent shocks to global supply chains, and the focus has more often been on critical raw materials or parts suppliers located in China. In a recent article in the Sloan Management Review, I talked about the globalization of supply chains and how specialization and subcontracting has led to deep tiering of suppliers. Suppliers draw upon suppliers who in turn draw upon networks of other suppliers in complex multistage production networks. It is not unusual to have four or more tiers in a product’s production network, and this makes it difficult for companies to have visibility into who all their suppliers actually are.
The current COVID-19 crisis draws attention to another critical part of any supply chain: the transportation and logistics links that connect each of those suppliers and the ultimate consumers. I pointed out that some of the delayed impacts and bullwhip effects that we are now seeing were because of transit times in ocean container shipping. But more recent news reminds us that any chain is only as strong as its weakest link.
Belly cargo being loaded on an American Airlines 777-300ER destined for Frankfurt, Germany. The … [+]
A crunch in air cargo
For high value and time-critical products like medical supplies and many tech products, air cargo is a critical link. The majority of passenger flights on trans-Atlantic and trans-Pacific routes have been grounded, and this has led to an acute shortage of air cargo capacity. This is because certain aircraft types, notably the Boeing 777-300ER and the Airbus A330/A350XWB have large “belly” capacity. Even after a full load of passengers and baggage, there is room to carry a lot of cargo, and this has been an important revenue booster for those flights. The 777-300ER and the A330 are very popular on trans-oceanic international routes, and overall passenger flight belly capacity comprises around 60% of global air cargo capacity.
The Journal of Commerce recently reported that air cargo rates from Shanghai to North America have jumped 70% compared to a year ago and Shanghai to Europe have hit a five-year high, even though oil prices are down markedly. Space constraints are a big problem, and carriers like Cathay Pacific, Korean Air, American, and Delta are using passenger planes (carrying no passengers) just to ferry freight. That means the rates have risen enough to make this economically viable. They are even stuffing cargo into passenger seats.
When India stopped all commercial flights from Europe and the United Kingdom, this had an immediate impact on the pharmaceutical supply chain because many generic pharmaceuticals and over the counter drugs are manufactured there. Indian pharmaceutical manufacturers sourced 70% of their active pharmaceutical ingredients from China.
If U.S. airlines continue to remove more passenger flights, which makes economic sense given the low load factors, this will take out still more cargo capacity. We should watch out for a potential impact on U.S. mail deliveries.
Medical equipment delivered to the Jacob K. Javits Convention Center in New York City. (Photo by Ron … [+]
Trucking networks
Trucks play a vital role in delivery of goods all along the supply chain. During China’s shutdown, the availability of trucks was a critical issue for moving materials into factories, and for getting finished goods to ports for export. With China restarting, the challenges are shifting downstream. In the U.S., the cost to ship things by truck in areas that have been hit hard with COVID-19 infections are up sharply in high-risk zones like New York City, thanks to the rush to restock grocery stores and health care facilities. Shipments of food and beverage products rose 17 percent and consumer packaged goods 38 percent compared to the month earlier. At the same time, we can expect traffic for resupplying most other retailers, like furniture and clothing, to plummet as end consumer demand dries up.
The disruption caused by COVID-19 highlights the remarkable orchestration of modern supply chains, and the need for all of the pieces to work in synchrony. Freight and logistics providers play critical roles that are often overlooked because it is easier to see the factories that make the products. But as in any chain, every link matters.
