With the holidays fast approaching and the end of the year in sight, the global shortage of goods is still going strong. Ports are still filled to the brim, and shipping is the most expensive it has ever been. Demand for goods is as high as ever, and prices are on the rise.
Overall, the global supply chain is in tatters. But what caused this?
Certainly, the COVID-19 pandemic is the main culprit behind the current state of global trade. And to add to that, overordering is prolonging the global supply chain crisis. But, while these contributed to the breaking point, they are not the underlying cause.
There is a deep-rooted issue that caused the current state of our trade, and that issue is the centralised supply chain system that many companies implement. Because of this strategy, unforeseen disruptions such as the global pandemic creates massive repercussions across their operations.
In this article, we discuss what a centralised supply chain is, and why it’s one of the main factors that contributed to the global supply chain crisis.
What is a Centralised Supply Chain?
In a centralised supply chain, companies manage their inventory and distribution from one location. If they have too much space to cover for that base, then it may be broken into two or more regional hubs. For example, in the case of the United States, many businesses have East Coast and West Coast hubs.
In these situations, a company will have a headquarter that handles most of the company’s logistics, while their regional hubs address specific markets.
Most companies employ a centralised supply chain because it offers several advantages:
- Operations are easier to standardize
- Operation costs are lower
- Upstream shipping costs are reduced
- Products have higher availability due to centralised warehouses
So, yes, a centralised supply chain has upsides. But there’s one fatal flaw: A centralised system is not flexible. A lack of flexibility means a business simply cannot function during crisis scenarios. As we’re experiencing now, the global pandemic pushed all centralised supply chains to their breaking point.
Let’s discuss the details of this situation.
How Centralised Supply Chains are Failing During the Global Pandemic
The pandemic is causing several events that are severely hampering the distribution of goods. Companies are backed up with orders that they cannot fulfil, where customer demand is at an all-time high, but they can’t get their products into their hands—all because of their centralised system.
Here’s how centralised supply chains are feeling the burden:
Power Shortages in China
With many supply chains primarily sourcing from China, any disturbance in “The World’s Factory” has catastrophic consequences on business operations.
This has come to pass when China suddenly experienced a surge of blackouts.
Source: Projects and Logistics
With COVID restrictions being lifted across the globe, the demand for goods has increased sharply. Since China is one of the world’s leading producers of goods, its factories have been working around the clock to meet the massive demand. As such, the increase of production requires a greater need for electricity, but there’s one major problem.
China has an energy issue.
A series of events that have led to this issue. First, China pledged to become carbon neutral by 2060, so Beijing has placed restrictions on coal production. However, half the country still relies on coal for power. So, as the demand for power increased, coal prices skyrocketed alongside. But coal-powered electric plants refuse to operate at a loss, which makes them produce a lower output than normal—causing the surge of blackouts across the country.
The situation is so dire, the rolling blackouts are estimated to affect around 44% of China’s production industry. This has severely limited the number of goods coming out of China and reaching the rest of the world.
Increased Shipping Costs and Port Congestion
In centralised supply chains, a company will ship out its products from its central warehouse to meet the demand of customers from across the globe. When the shipping industry faces issues, it causes a ripple effect on the delivery of goods.
For example, the shipping cost of a freight container has risen by a staggering 547% since the pandemic started. This price increase makes it difficult for businesses to engage and continue in their international trade. Moreover, customers are feeling the effects of the price hike, as the final product cost is largely affected by how much it takes to get them on the shelves—not good for businesses.
To further exacerbate the issue, ports across the globe are congested. At the same time, Asia is experiencing a lack of containers to load goods, while the destination countries are unable to off-load containers. There is also an issue where many containers are never sent back to the originating country as it is more affordable to ship containers one way only.
The shipping issues across the globe have created dire ramifications for centralised supply chains, and the problem will continue unless businesses adapt.
How a Decentralised Supply Chain can Avoid these Problems
While you can’t directly address problems like the power shortages in China or the shipping issues, there is a way to avoid them.
The main reason why our trade is so affected by the current supply chain crisis is the over-reliance on a centralised supply chain. If businesses can start the transition to a decentralised supply chain, these issues can be side-stepped—and businesses can actually satisfy eager holiday shoppers.
Here are just some of the advantages that come with a decentralised supply chain:
- Increased Flexibility: One of the main features of a decentralised supply chain is the existence of regional warehouses. Decentralised supply chains don’t rely on a central warehouse to manage their inventory. With a regional warehouse, a company can adjust its supply based on consumer demand.
- Less Reliance on International Shipping: With regional warehouses, international shipping becomes less of an issue. Instead, regional warehouses can ship goods to customers without the need for air or sea travel.
- Larger Inventory: A company that uses a decentralised supply chain will have multiple warehouses spread across its target markets. This allows them to keep a larger stock in comparison to having a central warehouse.
- Capability to Test Products and Services: With a decentralised supply chain, a company can roll out products or services on a trial basis with regional warehouses, conveniently testing customer responses in a specific market. Once the product or service proves successful, it can be implemented across multiple areas.
- Better Disaster Response: As clearly illustrated by the global pandemic, a centralised supply chain is unable to cope with disasters. By having a decentralised supply chain with widespread warehouses, operations won’t be as affected. While one warehouse may suffer losses, the entire business won’t be dragged down for it.
A Decentralised Supply Chain Can Save Christmas
As we can see from the information above, decentralizing supply chains can positively impact global trade. By not relying on a central location to serve an entire company, issues like the current supply chain crisis can be almost completely avoided.
When goods aren’t coming from a single location, logistical problems don’t drastically affect customers. With multiple sources of goods, supply chains will continue to run smoothly and Christmas gifts will certainly arrive in the hands of customers—good for them and good for your business.
Now, if you want to adopt a decentralised supply chain, you’ll need expert know-how to help you with the task of transition. Lucky for you, our team in Good for Life can guide you in the process.
Contact us for advice on how to create a decentralised supply chain.