Managing Global Supply Chains in a Volatile World
The COVID-19 pandemic sent a jolt through global supply chains in 2020—a disruption from which the market has yet to fully recover. Then, in early 2022, the world’s supply chains suffered another significant disruption when Russia invaded Ukraine, setting off a series of actions and reactions that greatly impacted the movement of goods not only in Europe but around the globe.
Recently, Womble Bond Dickinson’s Washington D.C. office hosted a panel discussion on the current landscape of the global supply chain and the many challenges companies now are facing. The conversation also addressed possible solutions and best practices, including compliance and trade issues, export controls, near shoring, data analytics, and technology and logistics solutions. This article is taken from that discussion.
The panelists were:
Womble Bond Dickinson Partner Alan Enslen;
Mitsui & Co. (U.S.A.), Inc. VP & General Manager Mike Fedele;
Womble Bond Dickinson Partner John Scannapieco; and
V. Alexander & Co., Inc. Chief Operating Officer Chris Schmid.
“I don’t think you can pick up a newspaper without reading about how someone is affected by supply chain issues.”
Scannapieco knows this first-hand—and not just from helping businesses navigate these choppy waters in recent years. He helped start Womble Bond Dickinson’s new Nashville office in July 2022 and noted that the office has had significant delays in sourcing office furniture and audio-visual equipment. “It’s something all companies are dealing with, regardless of what you do,” he said.
Schmid leads V. Alexander & Co., a global logistics company, and has more than four decades of experience in the transportation sector. He said the pandemic has been one of the biggest supply chain challenges he has seen during his career.
“When Covid hit us in March 2020, the whole business environment changed. The big transportation providers—the ocean liners that transport goods across the Atlantic and Pacific—took capacity out of the market. They laid people off anticipating that trade would go down, but it didn’t,” he said.
“I don’t think you can pick up a newspaper without reading about how someone is affected by supply chain issues.”
JOHN SCANNAPIECO, PARTNER, WOMBLE BOND DICKINSON
Importers had difficulty finding space on cargo ships, ports were understaffed and containers stacked up in ports. Some customers looked to air freight, but this is far more expensive, and rates went up exponentially during this crunch. Schmid noted that a cargo flight from China to the U.S. could be more than $2 million—four times what it cost pre-pandemic.
Fedele agreed, saying, “Mitsui isn’t a manufacturer, but we supply a lot of the raw materials manufacturers need. We saw a constant delay of materials in route to customers, as well as frequent price increases.”
The panelists said that many manufacturers have developed “just-in-time” logistics operations in the name of increased efficiency. Any disruption to their supply chain throws off entire production lines—and disruption has been the status quo for more than two years.
If the pandemic was the only international challenge facing supply chains, perhaps the market would have returned to its pre-pandemic norm by now. But other, equally daunting, challenges have emerged, too. The Russia-Ukraine war has brought tremendous disruption to the global food supply and the energy industry, which has repercussions in literally every other sector. China’s zero-COVID policy has forced many suppliers and ports to close for extended periods of time, further disrupting supplies of finished goods and components. Plus, the U.S. and China —the world’s two largest economies—increasingly find themselves at odds over the status of Taiwan and other political and security issues in the Indo-Pacific region.
The U.S. narrowly avoided a major railroad strike in September 2022 that Schmid says “would’ve brought this country to its knees.” A similar strike at US ports could be debilitating as well—and the threat of a rail strike still isn’t completely off the table.
Fedele said that beyond geopolitical issues, other factors have been challenging to supply chain management. For example, a 25 percent tariff on imported steel imposed by the Trump Administration remains on the books, and Fedele calls it “a headache that’s an everyday affair.”
"We saw a constant delay of materials in route to customers, as well as frequent price increases.”
MIKE FEDELE, VP & GENERAL MANAGER, MITSUI & CO. (U.S.A.), INC.
He also said that warehousing space is a significant challenge for the import/export business. Supply chain disruptions have led to reconfigured supply routes—but existing warehouse availability doesn’t match these reconfigured routes.
Even the Port of Savannah’s recent decision to stop handling breakbulk cargo (i.e. cargo that doesn’t fit into standard-sized shipping containers) can complicate supply chains. Mitsui moves steel coils through Savannah, so they will have to find a new port to ensure that this supply chain runs smoothly.
“The landscape is changing constantly,” Fedele said. “The supply chain is in a constant state of flux.”
U.S. Regulations and Their Effect on Supply Chains
Increasingly, federal lawmakers have come to view economic security as national security. Both Congress and the White House see regulating global trade as means of protecting America’s interests, Enslen said. With that in mind, he said lawmakers are focused on moving manufacturing back to the U.S.
“You also see it on the export controls side,” Enslen said. “There has been a sea change in the way U.S. regulators look at it. The focus now is trying to control manufacturing capabilities (of enemy and rival states), especially in emerging technologies. How the U.S. controls emerging technology, in conjunction with close allies, will be something to really watch. They’re trying to control this but without stifling research and development.” How governments control the export of technology may cause major disruptions to supply chains because companies may not be able to trade in goods and services that include controlled technology, at least without a license.
"How the U.S. controls emerging technology, in conjunction with close allies, will be something to really watch."
ALAN ENSLEN, PARTNER, WOMBLE BOND DICKINSON
In early 2021, the Biden Administration ordered a review of supply chains related to semiconductors, pharmaceuticals, critical minerals & large-capacity batteries. That report was published in June 2021 and made a number of recommendations, including:
Rebuilding domestic production and innovation capabilities. This includes tax incentives for electric vehicles, providing financing for the full battery supply chain and the semiconductor industry, deploying the Defense Production Act to expand production in critical industries, and establishing a federal Supply Chain Resilience Program.
Supporting high standards and incentivizing best practices in the supply chain sector.
Leveraging the government’s role as a purchaser of and investor in critical goods. This includes expanding the scope of the Buy America Act to drive domestic production.
Strengthening international trade rules, including trade enforcement mechanisms. In particular, federal officials have expressed concern about China’s trade policies.
Working with allies and partners to decrease vulnerabilities in the global supply chains. The Administration convened the Supply Chain Ministerial Forum in July 2022 as a step in this direction.
Scannapieco said focusing on these specific sectors makes sense, given their importance to national security and their volatility in the global market.
“Some of our clients in the EV battery space saw their mineral prices go up 5,000 percent due to the Russia-Ukraine war – if they can even get those minerals,” he said.
Unraveling the Knot: Possible Solutions to Supply Chain Challenges
“This pandemic taught us a lot,” Schmid said. “It was a painful learning experience, but it still was a learning experience.”
Schmid said that companies now want to know that their suppliers have contingency plans in place if the normal supply chains break down.
For example, many goods were packed for ocean transportation. Those containers simply will not work for air transit. Companies learned from that and now are adjusting how they pack goods so they may be shipped via whatever means is the most efficient and cost-effective manner possible at that time.
Schmid said that V. Alexander & Co. also scheduled a “milk run” airplane route that ran from one Asian country to another, making multiple stops for a variety of customers. This proved to be a valuable and innovative solution and is helping its customers address current supply chain issues.
“This pandemic taught us a lot. It was a painful learning experience, but it still was a learning experience.”
CHRIS SCHMID, CHIEF OPERATING OFFICER, V. ALEXANDER & CO., INC.
Another practical tip Schmid recommended is ensuring that the company has an export/import manual. “If customs officials conduct an audit, that is the first thing they will ask for. You would be surprised at how many companies don’t have that,” he said.
Fedele said, “Five years ago, we made a major decision that was a solution for us during this time. We consolidated 20 custom brokers into one.” The company now has one point of contact to address its logistics needs and this has streamlined the customs and tariffs compliance processes considerably.
Mitsui also implemented business process improvements and “end to end processing,” using AI to process certain documents in much less time than it takes to do them by hand.
“We had to become agile and flexible,” Fedele said. “The landscape is changing constantly.”
He said the company also is now trying to source more materials domestically—for example, they’ve gone from importing 90 percent of their steel to under 60 percent.
In terms of regulatory compliance, Enslen recommends companies review harmonized tariff system codes and country of origin determinations to make sure those are correct and complete.
“We’d also recommend companies lean on your customs broker and logistics company—that’s what they are there for. There’s a lot of overlap between legal and logistics,” he said.
Enslen also cautioned companies to pay close attention to sanctions compliance. The U.S. Office of Foreign Assets Control (OFAC) oversees sanctions against 38 foreign countries, targeting such issues as counterterrorism, forced labor, and human rights concerns.
Scannapieco said companies need to map their supply chain to identify where potential bottlenecks may occur. From there, companies should replace financially insecure, unreliable, or other problematic vendors and build in redundancies where possible to address potential supply chain vulnerabilities.
Looking into the Crystal Ball—What is the Near Future of Global Supply Chains?
Schmid said the challenges facing global supply chains aren’t going away any time soon.
“What I’m hearing and reading is that the supply chain challenges will go into 2023,” Fedele said. “The stronger dollar and pent-up consumer demand will continue to drive demand.”
Enslen said that U.S. regulators will have a greater focus on large, substantive export violations rather than small problems.
“They’re going to be more aggressive to go after the willful and wanton violators,” he said. “One of the things we’re recommending is consulting with and having a relationship with government regulators. It’s to a company’s advantage to have a good relationship with regulators, so at least they know you are trying to do the right thing.”
“It’s hard to replace the China logistics machine.”
Another big trend to watch is “Nearshoring.” Nearshoring is the opposite of offshoring to reduce costs. Instead, companies are looking to bring production back to the Americas to minimize supply chain delays. “If the logistical end doesn’t work, everything is out the window,” Schmid said.
He said growing China-Taiwan tensions also are a reason for moving production back to the U.S. and other nations, such as India, would like to fill some of the manufacturing roles China currently plays in the global supply chain.
But despite these efforts, Scannapieco said China will continue to be a vital trading partner with the U.S.
“It’s hard to replace the China logistics machine,” he said.