The COVID-19 pandemic seems to be the catalyst to the disruptions within the global supply chain, but it is not the only contributing factor for these ongoing shortages. There have been several supply chain interruptions within the past 18 months, such as the logistical conundrum of the Suez Canal blockage, the freight backlog and plastic resin production stoppage of the Winter Storms in the Gulf Coast and the computer hacking that shut down the fuel flow through the Colonial Pipeline. And now, the Chinese manufacturers are reducing production capacity due to the electricity shortage and the United States continues to struggle with the labor market. With the magnitude of these disruptors within the global supply chain, manufacturers continue to struggle to meet the increasing demands due to the raw material shortages, difficulties with transportation, price increases and the labor shortage.
Conditions continue to evolve around our manufacturer and distributor’s product cost and the direct impact of elevated expenses, relative to container costs, logistics, labor, and raw materials. Along with outside sourcing, many have purposefully established an approach to offset a portion of these costs. Each segment surrounding these direct impacts is outlined below:
Shipping/Container costs – More than 18 months into the pandemic, the disruption to global supply chains is worsening, spurring shortages of consumer products, and making it more expensive for companies to ship goods where they are needed. Furthermore, shipping companies expect the global adversity to continue. This has considerably increased the cost of moving cargo and adds to the pressure of consumer prices.
The World Container Index shows that the composite cost of shipping a 40-foot container on eight major East-West routes hit $9,613 in the week to August 19, up 360% from a year ago. The biggest price jump was along the route from Shanghai to Rotterdam in the Netherlands, with the cost of a 40-foot container soaring 659% to $13,698. Container shipping prices on routes from Shanghai to Los Angeles and New York have also jumped.
There is port congestion, both in the US and China, continued COVID outbreak in factories, and challenges procuring containers.
Logistics – Most foreign countries have serious shut down rules for Covid-19. When this occurs, containers are trapped within those countries or vessels will skip certain ports to prevent being hung up. This has continued to cause severe backlogs at US ports.
Other events that have occurred in major supply chain routes; The Evergreen stuck in the Suez Canal, water shortage in the Panama Canal, typhoon at Shanghai port and the latest hurricane in the Gulf have added to the strain.
Labor – America is confronted with a labor shortage, which in turn, has affected productivity. However, employee costs are the focus of how labor is affecting the workplace. Compensation benefits, wage and salary increases, and benefit costs are essential factors in product manufacturing and substantially impact the costs to market.
According to the U.S. Bureau of Labor Statistics, employer costs for employee compensation for civilian workers averaged $38.91 per hour worked in June 2021. Wage and salary costs averaged $26.85 per hour worked or 69% of total compensation, while benefit costs were $12.06 or 31% of total compensation. The average cost for health insurance benefits was $3.09 per hour worked or 8% of total compensation. (U.S. Bureau of Labor Statistics, September 2021)
Raw Material – Significant raw material price increases due to force majeures, supply constraints, along with demand spikes has produced a very tight raw material market.
Force Majeures apply to all suppliers, most are due to acts of nature – freeze, flood, fire, mechanical issues, or shortage of their feedstocks. To get around contracted prices, suppliers are coming forth with surcharges to cover their additional costs. Usually, our distributors have the benefit to shop around if suppliers impose a surcharge, but supply is tight globally in many commodities.
To mitigate additional charges, many distributors push back on all supplier price increases, and explore multiple sources and imports. Also, reviewing substitution products while striving to maintain quality.
This year has been quite a process, with raw material increases over the past year being up over 50%, shortages of staffing, Covid shutdowns, plus the container shortage that has driven the freight costs up exponentially.
As a CPS member, you don’t have to experience the supply chain challenges alone. If you need assistance, reach out to your dedicated client account manager, Erica Azarigian (203-314-9777 or azarigianerica@carepurchasing.com) to explore if there is an alternative option available.
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