Jun 14, 2021

Five Minutes With Everstream Analytics' Shehrina Kamal

COVID19
supplychain
riskmanagement
Strategy
Shehrina Kamal, Product Director, Risk Intelligence, Everstream Analytics, discusses the impact of COVID-19 for supply chains and adjustment strategies

1. Could you give me an overview of the operational impact of COVID-19?

The global COVID-19 pandemic had a profound impact on the worldwide movement of goods as manufacturing operations came to a standstill in many parts of the world, global flight traffic dropped to numbers not seen in decades, and ground transportation was disrupted by new health and safety measures. Although authorities largely switched to more targeted restrictions as the pandemic progressed, operational disruptions remained a prominent feature of global supply chains throughout the year as containment measures as well as infection outbreaks, labour unavailability, and component shortages impacted business operations.

2. What challenges did logistics face as a result of COVID-19?

While many organisations relying on just-in-time supply chains still used air cargo as their primary option, in particular in the early stages of the outbreak, companies are likely to shift away from more transportation to multimodal solutions due to two factors: the persistent uncertainty around air cargo capacity in 2021 amid global vaccine distribution efforts and continued travel restrictions; and significantly lower transportation costs, compared to air cargo, and the ongoing container shortages affecting both ocean and rail logistics. 

Amid the turmoil in the logistics market, some multimodal solutions have received high interest throughout 2020. On the transcontinental lane between Asia and Europe, shippers looking for cheaper and more reliable services have increasingly switched some cargo to rail transportation. The number of trains connecting China and Europe has, in fact, increased by more than 40% compared to 2019 as transit times have been reduced to 10-12 days that make such services especially popular with automotive, machinery, and technology companies.

Meanwhile, the success of expedited ocean services on the transpacific lane has prompted more carriers to offer such products in the last quarter of 2020 that include faster customs clearance and guaranteed equipment. Some of these services have also been connected to express trucking services to inland U.S. destinations, offering a faster alternative to the dominant but slower intermodal setup that includes rail services. Cutting transit times by up to 20 days compared to traditional ocean freight, logistics providers have started to offer similar services on the transatlantic lane as well, particularly targeting customers in the e-commerce, retail, and consumer electronics industries.

3. How have manufacturing operations shifted in light of COVID-19?

The COVID-19 pandemic has reignited debate about near-shoring and re-shoring initiatives. During the crisis, over-reliance on a single country’s manufacturing facilities and supplier networks, i.e. China, exacerbated the impact of regional disruptions on global companies. Now many of these firms are thinking about moving the production of critical components to reduce the size and concentration of supply chain risks.

Shifting production to locations in (re-shoring) or close to (near-shoring) their end-market promises to reduce exposure to unforeseen disruption overseas and streamline logistics processes. Those supportive of more localised and shorter supply chains also point out that certain industries — ranging from automotive to aerospace — may benefit from bringing back domestic operations to ensure stronger quality controls and take advantage of a skilled local workforce.

Growing trade pressures — particularly in the form of tariffs and other types of trade restrictions — have also contributed to an environment in which firms are becoming increasingly inclined to bring manufacturing closer to their native countries to avoid exposure to additional costs and sourcing risks.

4. What would you say is the most significant finding from the 'COVID-19 survey: Supply Chain Impacts and Post-Pandemic Adjustment Strategies' Report?

Persistent air cargo constraints: COVID-19 has had severe implications for the global air cargo industry, on both the supply and demand sides, which continue to cause ripple effects throughout supply chains. Capacity in some trade lanes fell by more than 50% during the initial phase of lockdowns in the first half of the year. This was mainly the case for cargo transportation on passenger aircraft, so-called belly cargo capacity, as airlines around the world cancelled flights due to lower demand and travel restrictions. As of January 2021, global air cargo capacity remained around 32% below the levels of the same period in 2020.

Most of the capacity loss has been made up by dedicated freighter aircraft and charters — some of which used cargo-only passenger planes without passengers, as passenger travel remains well below pre-pandemic levels. This has resulted in freighter capacity now representing more than two-thirds of all air cargo capacity on all the major trade routes. The biggest increase has taken place on the transatlantic route, where belly capacity represented roughly two-thirds of available air cargo capacity. This has now decreased to one-third, with freighters now constituting the backbone of the air cargo market.

The capacity decline has led to demand greatly exceeding supply, which has driven air cargo rates to record highs. On some key routes, such as Hong Kong to North America, spot rates increased as much as 170% during their peak in 2020. Even as more capacity has been added throughout the year, rates remain more than 100% higher year-over-year on certain trade routes.

With COVID-19 outbreaks and travel restrictions likely to remain in place well into 2021, it is unclear how much belly capacity can or will be added, leading to increased uncertainty around freight rates. Some in the industry expect that the trend towards point-to-point travel, which became possible thanks to new fuel-efficient aircraft and low-cost airlines, could be reversed in favour of the hub and spoke network, at least in the short term. In times of COVID-19, flying more marginal point-to-point routes with few passengers has become less viable and airlines may try again to get as many passengers as possible on board longer flights.

The other big unknown is the impact of COVID-19 vaccine distribution on international air cargo capacity. While initial vaccines are expected to be produced locally by contract manufacturers, this may change as more vaccines become available. That could have a significant impact on overall air cargo capacity, as governments charter aircraft at high costs that are not available on the spot market. In addition, some airports may deprioritise general shipments in order to handle vaccine cargoes, which could cause bottlenecks, delays, and higher costs for companies.

5. How should organisations prepare for the future? 

After the most turbulent year in living memory, 2021 looks set to be a year of recovery for supply chains severely affected by the COVID-19 pandemic. Mass vaccination campaigns are expected to relieve pressure on healthcare systems and to permit an easing of restrictions on travel and social interaction. The crisis has cast a long shadow over the global economy, however, and its impact is likely to shape supply chain and logistics decision-making throughout the coming year and beyond. As mass vaccination campaigns get underway across the world, 2021 promises to be a year of recovery and a return to normal for supply chains and economies at large. However, the unpredictability of the virus spread, and associated disruptions to transport and business operations will continue to be a defining feature of global supply chains well into the coming year.

Beyond the pandemic, natural disasters and weather-related events continued to pose major challenges in several regions of the world, most notably Asia-Pacific and the Americas. There, countries such as Australia, Japan, China, and the United States faced their own share of disruptions in the form of wildfires, severe floods, or record-breaking storm seasons. As the frequency of these events continues to increase globally, so too will the risk of disruptions within global supply chains, making it ever more important to stay ahead of weather events before they turn into major disasters.

As the supply chain risk landscape across the world evolves, Everstream Analytics continues to be committed to review and assess the relevance of the risks that we monitor to ensure that our customers get the information and insights they need to make their supply chains more resilient and agile in 2021 and beyond.

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