China Lockdowns Creating Supply Chain Disruptions
China’s response to COVID-19 was to implement a “zero-tolerance policy” in the early days of the pandemic. As a consequence of this policy, businesses and factories were shut down, residents were required to stay at home, and other, similar interventions were implemented in areas infected with the virus.
A significant increase in infections has been attributed to a variant of COVID-19 known as Omicron, which has been reported to be highly contagious.
In accordance with its zero-tolerance policy, China has implemented new lockdowns that have had far-reaching effects on global supply chains and logistics.
In this article, we will discuss the impact that China’s supply chain shutdowns have had on global production.
China and Our Interconnected World
From the outside, it may appear that closing a few factories in China would have a small effect on the rest of the world. The world is so interdependent today that any interruption in the supply chain will affect everyone involved.
There is no question that it is difficult for firms around the world to determine (with any degree of certainty) which aspects of their supply chains will be affected by China’s recent lockdowns. Global supply chains are becoming increasingly complex, to the point where companies often have to respond retroactively to situations.
An ideal scenario would be for businesses to actively prepare for such problems before they arise; however, this is not always possible with regard to many supply chain issues that affect global businesses today.
Looking to Other Countries As Suppliers
There is no indication that China intends to end its zero-tolerance policy any time soon. China’s stance on the issue has many businesses very concerned, considering that some experts believe COVID-19 will be a significant part of our lives for some time.
Due to this, companies are now reaching out to other regions and countries for their supply chain needs. Consequently, China finds itself in an inconvenient position.
The War In Eastern Europe
In parallel to these developments in China, the war between Russia and Ukraine is also escalating. It is important to note that the consequences of the war have added to the level of stress experienced by businesses worldwide in light of increasing sanctions.
In the years preceding Russia’s invasion of Ukraine, it was one of the world’s largest producers of fertilizer. This has had a cascading effect on a wide array of businesses and retailers. The result has been that farmers and others involved in the agricultural industry have scaled back their operations to remain viable.
In addition, there have been severe impacts on the oil and gas industry as a result of the war. There is good news, however, as it appears that fuel prices are gradually declining again.
Inflation in the United States is at its highest level in almost four decades. The underlying reason for this historic inflation, while differing among experts, is irrelevant for our purposes.
What is important is the combination of inflation, the war in Eastern Europe, and the widespread economic blockade in China. These factors have combined to create a perfect storm that is affecting businesses as well as consumers.
A Perfect Storm
Several consumers are feeling the pinch as a result of logistics delays and supply chain disruptions that can be attributed to the aforementioned issues. Therefore, most Americans are attempting to be as thrifty as possible. Specifically, this involves reducing spending in whatever ways they can.
Lessons for the Future
In looking to the future, there are a few key takeaways pertaining to the situation in which we currently find ourselves. As we move forward, we need to consider modifying our supply chains in the following ways.
Regional Supply Chains
Global supply chains work well until major world events deal a serious blow to these systems. If they haven’t already, companies need to consider moving toward regional supply chains, and they need to do so quickly. This will help to reduce the dependency on suppliers located around the globe. It will also help to curb some of the environmental impacts we see from maintaining such complex and interconnected supply chains.
Whether companies operate within a global supply chain or a regional supply chain, they need to have multiple suppliers available. This allows businesses to quickly pivot when a supply chain problem develops. Those who rely solely on one supplier are at the mercy of weather events, pandemics, and other unpredictable issues.
China has maintained a zero-tolerance COVID-19 policy for the last few years. This leads to the immediate closure of factories and businesses during an outbreak of COVID-19 in the country, which disrupts supply chains.
China is being hit hard by the Omicron variant, and per policy, many of its factories are temporarily closed. This consequently forces all businesses that utilize these factories as part of their supply chains to pivot rapidly in order to remain competitive.
For companies to avoid such issues in the future, increasing supply chain resilience is the first order of business. The two most promising approaches may be to diversify suppliers and move towards regional supply chains.