Welcome to the world’s biggest traffic jam

Robin Nicholson
Director: Corporate-911

One of the most extreme experiences I have seen in my life was a New York rush-hour traffic jam. It was a static beast where nobody could get anything done because these were the days without the connectivity we have today.

While the major story in South Africa has been Load Shedding and the impact that it is having on businesses around the country, there is a global traffic jam of epic proportions playing out. The biggest challenge of the Covid-19 Pandemic will be the global supply chain crisis, and South Africa is still waiting for this tsunami to hit our shores.

How we help our clients manage these challenges will be the biggest challenge our profession faces to date.

Higher input costs, delays restrain global manufacturing
Let’s start with this article from Bloomberg. Data from IHS Markit and JPMorgan showed that of suppliers’ delivery times fell in October to the lowest reading in data back to 1998, indicating record delays for factory managers awaiting production materials. Meanwhile, an indicator of manufacturers’ input prices rose to its highest level since 2008.

The two indexes typically move in opposite directions — prices increase amid shipment delays as factories compete for a subsequently limited stock of materials — before stabilizing as supply catches up with demand.

The article points out that the spread in the two indexes has ballooned in recent months as disruptions proliferate around the globe. Rebounding demand has outstripped supply as economies re-emerge from the pandemic, fuelling inflation as vendors struggle to keep pace.

Product shortages and price spikes threaten to constrain the global recovery, with debates intensifying over whether inflation will be temporary or more long-lasting. A measure of global output showed the slowest growth since June of last year, the data from IHS and JPMorgan showed.

The supply chain crisis is worsening
Photo By: Mika Baumeister via Unsplash

The article adds that growth rates of manufacturing production slowed in the US, Europe and the UK, while a slump in China continued. Among emerging markets, India saw faster growth, while the Brazilian manufacturing economy contracted.

Port delays spark Rubik’s Cube of pain for warehouse logistics
Another Bloomberg article points out that snags in the supply chain don’t end when a container ship finally reaches port. In many cases, the problems are just beginning.

Consider the goods piling up at inland warehouses around Los Angeles that are sending vacancies plunging and rents soaring. That is good news for big landlords like Blackstone and Prologis, but a nagging headache for logistics managers.

“A lot of spring goods got here late and didn’t sell and then a lot of Christmas stuff came early because they were afraid of being late,” said B.J. Patterson, Chief Executive of Pacific Mountain Logistics in San Bernardino, California. “This is the biggest challenge I’ve faced in my career.”

The warehouse crunch is part of a complex web of overloaded infrastructure, exposed by the Covid-19 pandemic. Labour shortages, port congestion and soaring purchases by free-spending consumers disrupted the normally synchronized flow of global trade.

Warehouse vacancies fell to 1% or less in gateways such as southern California, where rents skyrocketed as much as 30%.

South Africans are about to feel its pinch
A recently published article by IOL points out that the global supply chain is broken and it will impact South Africans, especially where medicine is concerned.

Covid-19 has triggered a black swan moment and factories do not get supplies, the number of containers increased faster than the number of ships and there is a shortage of fuel and gas.

The article points out that a black swan event is an unforeseen event, such as Covid-19, that has a low probability to occur but if it does, it causes substantial disruptions to a supply chain, Alicia Weber from the Department of Applied Management at the Unisa College of Economic and Management Sciences, wrote recently in her research article about responding to supply chain disruptions caused by the pandemic.

Economist Mike Schűssler told IOL that the broken global supply chain problem is big, with containers delayed for as much as five weeks, when the loading as well as unloading delays are added up.

“Some factories around the world have to wait for supplies and that adds to delays, as some goods are not manufactured on time.”

An elaborate game of Jenga is being played out at most ports
Photo By: flexport.com

The article adds that complex goods – such as cars, appliances and big smart toys – can be delayed even longer than five weeks, for two or even three months, he says.

“Other goods, such as medicine, are also delayed, partly due to supply chain problems, but also manufacturing issues.”

Schűssler told IOL that South Africans should get ready for shortages, and he is particularly worried about medicines.

“You can wait a month for a car, but not for some medications. Complex health instruments, such as robots and lasers will also be delayed.”

He also expects food delays, but these will be more due to crop failures and should be shorter. “However, the main concern is containers as food is often bulk orange juice, maize and wheat, but the actual tin that the cake is baked in may be the problem. For food, it will be the speciality complex goods, such as say protein shakes.”

The IOL article points out that the broken global supply chain can affect our shopping on Black Friday and for Christmas. “In America they expect a toy shortage as most toys are made in China and we could expect the same here. Not so much the small everyday toys, but PlayStation, Xbox, mini cars and other toys with chips or complex manufacturing can face delays.”

The role of BRPs
Where does the BRP fit in? South African companies are going to eventually feel the pressure of the worlds biggest traffic jam.

As business rescue practitioners, we need to ensure that our clients are given the best advice to survive this challenge. Our advice needs to be focused in the following areas:

  • We mentioned the power challenge at the beginning of the article. It is imperative that the lights stay on and that the wheels of business keep turning. Therefore, there needs to be some capital investment in alternative power supply. Until Eskom finds a credible solution to the country’s Energy Crisis, loadshedding is here to stay;
  • Separate the wheat from the chaff. In all businesses, some product lines perform better than others. Do not be afraid to decrease your product lines to focus on what makes the most money for your business, especially if there are supply chain issues;
  • Prioritise your payments. What needs urgent attention and what can wait? and
  • Keep your creditors informed. If you are impacted by supply chain issues, creditors will rather work out a payment plan with you than see you default on a payment.

Allow me to reiterate the words from a previous article on Turnaround Talk. Experts are expecting that South Africa will only recover from the economic challenges that are associated with the Covid-19 Pandemic in 2024. During this time, South African companies will be under pressure to manage both supply chain challenges and whatever challenges Government causes with the management of the National Lockdown that we are still in. Watch my full thoughts about this issue in a video that appears on the multimedia page of the Turnaround Talk website.

This may mean that the number of companies that become financially distressed may increase significantly. It is then up to BRPs to put our best feet forward to play a role in managing this crisis.

Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner