Four reasons the supply chain broke in 2021…
and where we’re excited to see capital go in 2022 as a result
As we look back on 2021 and ahead to 2022, we’ve been reflecting on why the supply chain was still in the daily headlines throughout 2021. Here are the four major reasons the supply chain broke in 2021 and what we’re excited to see in 2022:
- After an initial dip, consumer demand roared back, especially for physical goods.
In 2020, with the dangers and unknowns of Covid, society ground to a halt, including consumer spending and the supply chain. However, as stay-at-home orders and federal stimulus checks extended into 2021, consumer spending began to return to pre-pandemic levels. Significantly, the market saw a dramatic spending shift from services to products as consumers reallocated their travel and restaurant budgets to instead buy kitchen appliances, electronics, workout equipment, cars and other durable goods. Orders for these products even rose by more than 14% compared to pre-pandemic levels.
2. The supply of goods could not physically keep up with increased consumer demand due to shortages across the supply chain in labor, equipment, and raw materials. Covid outbreaks, while disrupting lives and livelihoods, also added to manufacturing plant shutdowns.
In 2021, it felt like there was a shortage of everything. Businesses struggled to work around raw materials shortages in semiconductors, steel and aluminum, cotton, crude oil, plastics, lumber, and more. This caused entire industries, from auto manufacturing to construction to CPGs, to struggle with unpredictable prices, inventories, and their own ability to meet consumer demand. Labor shortages driven by Covid outbreaks and exacerbated by the “Great Resignation and Lying Flat” movements shut down manufacturing plants globally. Open plants needed to compete for a limited labor pool of skilled and factory plant workers. Labor shortages were especially pronounced in China, which represents one-third of global manufacturing, where the perfect storm of “zero Covid” policy and energy shortages forced plants to run “two days on and two days off.”
As a result, companies like Apple warned investors of China based manufacturing disruptions as early as February 2020, followed by production cuts in 2021. Toyota slashed car production by 40% in October 2021, while Volkswagen, Ford, and GM plants sat idle as they waited for chips. Ultimately, consumers paid for all of these shortages in the form of delayed goods and increased prices.
3. While demand surged, the supply chain “pipes” were not as elastic. Ports, containers, shipping lanes, trucks, and any infrastructure limited by physical availability could not magically flex up at the drop of a hat.
2021 was yet another reminder of the physical reality of the supply chain. For example, the blockage of the Suez Canal was estimated to cost the global economy $400 million per hour, highlighting the sheer volume of trade that flows through a very limited number of physical chokepoints. On the road, shortages of trucks and truck drivers made for a record-breaking freight market. 3.3X growth of ecommerce as a percent of retail created more demand than ever for short-haul lanes in the last-mile and middle-miles. Similarly, as ports were forced to absorb more volume than pre-pandemic levels, even heroic feats of 24-hour operations couldn’t keep ports unclogged. Blockages at LA, Long Beach, Yantian, Savannah, and others held ships in the lurch for weeks, with dwell times through the roof. This then further exacerbated the equipment shortage, with containers being locked up while waiting on ships or trucks. Shipping prices leaped across every mode, whether ocean, road, rail, or air.
4. Corporate “panic ordering” exacerbated supply chain bottlenecks, while SMBs shouldered even more of the downstream consequences.
In response to the shortage in raw materials, goods, and predictability, retailers and manufacturers tried to get ahead of the bottlenecks by adopting new practices of over-ordering and pre-ordering. For example, Target ended Q2 of 2021 with 26% more inventory than a year prior. Walmart, Costco, and Home Depot chartered private carriers to expedite inventory around port delays. Industry watchers dubbed these practices “panic ordering” as a call back to the “panic buying” of consumers early in the pandemic. While these large companies could shoulder the high costs of adapting to kinks in the supply chain, SMBs were less capable of paying the premium for materials and capacity, putting more strain on independent businesses.
While much of this is temporary and once in a lifetime, it’s clear that a few things are here to stay: 1) consumers shifted a greater share of their wallets to e-commerce; 2) brands, retailers, and suppliers need to know how to fulfill that e-commerce demand in a unit economic-friendly manner; 3) businesses are looking for a way to reduce their exposure to strained global supply chains, whether through reshoring or reduced reliance on human labor.
As for what this means for early stage startups and investments, we’re particularly keen to see:
- Robotic fulfillment enablers at the warehouse and middle mile;
- Real-time inventory visibility in storage and in motion which is critical for resilience;
- Machine-learning based demand planning and inventory management;
- Data-driven optimization of freight spend, contracting, and billing reconciliation;
- Autonomous manufacturing reducing the burden on skilled labor, decentralizing manufacturing, and enabling reshoring;
- Improved data infrastructure and coordination between siloed retailers, manufacturers, tier-1,2,3 suppliers, and logistics service providers.
If you’re building solutions here, we and our corporate partners in the LINK Supply Chain Ecosystem would love to speak with you. Don’t hesitate to reach out to Natasha at firstname.lastname@example.org.