A chaotic supply chain is putting a strain on the retail landscape this holiday season. But headwinds from slowdowns could last beyond the holidays and well into 2023, changing the global supply chain network for the long term.
“We will see a rebalancing,” said Bindiya Vakil, CEO of global supply chain monitoring company Resilinc. “We’re going to start to see a more regionalized supply chain strategy.”
According to Vakil, the changes come as a result of recent failings in the U.S. supply chain, which heavily relies on labor and sourcing from China, Malaysia and Vietnam.
“We were so far globalized. That mindset is shifting already and is likely to stay more conservative,” Vakil said.
In the wake of pandemic-related factory shutdowns and supply shortages, U.S. companies will shift operations to countries “closer to home” such as Mexico, Honduras, Nicaragua, El Salvador and Costa Rica to lessen their dependence on ocean travel, Vakil said. For example, Steve Madden Chairman and CEO Edward Rosenfeld said in an investor call on July 28 that the company shifted almost half of its women’s production from China to Mexico and Brazil for the fall to alleviate backlogs.
“There’s a land-based transportation route that is possible with our neighbors and they have low cost labor,” Vakil said. “They would welcome the factory and supply chain jobs there.”
On the home front, port congestion problems have also already inspired legislative change. With a record number of container ships stuck outside the ports of Los Angeles and Long Beach, US lawmakers have taken steps to address their supply chain failings. Last week, U.S. Senators Jacky Rosen (D-NV) and Dr. Bill Cassidy (R-LA) introduced an act to strengthen the domestic supply chain for medical supplies during shortages. Vakil said to expect to see more legislative measures like this in the future.
Despite moves to shift manufacturing bases and sourcing to regions closer to the US, immediate supply chain disruptions will likely last through 2022, and well into 2023, experts said. A report from Cowen and Co. said supply chain headwinds will persist through 2022.
“If you look at any part that any product that we use, that product has a supply chain spanning multiple countries around the world, and every single part needs to be available before the product can be manufactured and then every single link in the chain has to be there,” said Vakil.
For example, a global shortage of rubber and plastic, which are essential in the production of sneakers, has made it difficult for factories to produce enough product to meet demand, a phenomenon exacerbated by labor shortages and factory shutdowns abroad in China, Malaysia, and Vietnam.
These shortages are driving up prices for certain raw materials. In some cases, companies are sitting on millions of dollars worth of inventory, because the don’t have access to certain materials to complete unit production.
Costs compound later on the chain as well, with container costs rising 500% since pre-pandemic levels, Cowen analysts said in a report. Overall, this translates to a smaller profit margin for retailers and a higher price point for consumers.
“This can be a pretty big problem for the economy,” Vakil said.