Omicron to hit supply chains again?

Author: Monika Kulej
Omicron to hit supply chains again?

The World Health Organisation warns that we will not avoid another wave of the pandemic that is currently gaining momentum throughout the whole world but particularly in Europe where nearly half of all the infections have been reported.

Tens of thousands infections are being reported per day in France, Italy, Greece, the British Isles, and many other countries. And the number of the infected continues to grow. Do we have to expect that the autumn will bring us another lockdown, restrictions, including movement restrictions resulting in a slowdown or a paralysis of supply chains? It seems that the transport and logistics industry is preparing for various scenarios.

  • Daniel Heinsch
  • Global Account Manager at | CargoON
  • I wouldn’t be afraid of closing the borders due to the rising number of infections. Europe has already established methods to handle this. On the other hand, the pandemic regulations may result in a limited access to parking spaces and infrastructure for drivers. In case of pandemic restrictions, the supplies of food articles and electronics will be the most vulnerable. The automotive sector may be particularly affected by this, which would exacerbate the crisis that has already dragged on for two years. It is worth paying attention to another sector—the European market may face a reduction in the supply of hygienic products. There is already a shortage of pulp supplied from Turkey and Italy.

For now, no one is imagining a repeat of the “Black Spring” of 2020 when the terrified Europe held its breath for 6 weeks, closing people in their homes, paralysing supplies, and restricting transport traffic. Although the memorable lockdown was quickly followed by an economic rebound, supply chains were overstretched by the consumer frenzy. There was a shortage of containers, a slowdown in port traffic, and a surge in demand for transport capacity, while logistics managers decided to gather the supplies, which in turn fuelled a boom for warehouse spaces and increased the total cost of deliveries.

Warehouse crisis

This unstable situation has remained in this form basically to this day; manufacturers and distribution companies have just learned to live with successive waves of COVID-19 and smaller lockdowns. But now the uncertainty has returned, as it turned out that Omicron—another variant of the virus—was not going easy on health services in Europe and around the world, spreading alarmingly fast, which reminds of the scenarios from the abovementioned “Black Spring.” – Each successive lockdown increased the crisis in the supply chain – confirms Rafał Jabłoński, CEO of the logistics company System Transport. – The stock started growing, while the warehouse network was unable to handle it. To this day, the companies often don’t know what to do with surplus stock because, on the other hand, we are bound by rental agreements with warehouse owners – he adds.

The issue mentioned by Jabłoński is probably a problem for most managers at manufacturing and trade companies. If there is anything that may pose a risk to the supply chain as a result of another (potential) lockdown, it is certainly the overloading of warehouses due to the difficulties in maintaining regular deliveries. The lesson learned by manufacturers from the shock lockdown of 2020 and successive lockdowns is that you need to stock up because you can never be sure what will happen tomorrow. – It is getting more and more common for companies to move away from the ‘just in time’ philosophy in towards the ‘just in case’ approach, meaning the establishment of additional, buffer safety stock, so the necessary goods are as close as possible to the points of sale in case of possible disturbances – adds Przemysław Piętak, Supply Chain Advisory Director, CBRE. On the other hand, some manufacturers are unable to replenish their stock because supplies are not arriving in satisfactory quantities (first because of the pandemic, then due to the disruption of supply chains as a result of the war in Ukraine).

  • Przemysław Piętak
  • Supply Chain Advisory Director, CBRE
  • The experiences from the previous pandemic waves indicate that the first victim of high increases in infections is the commercial sector. The restrictions in stationary sales shortly result in the increased interest in online shopping. As the logistics handling for the traditional channel and the e-commerce are very different from each other, particularly in terms of the degree of complications in warehouse operations, the potential another pandemic wave will be won by those entities that have used the last several months to make their processes more flexible. If necessary, they will be able to quickly switch their logistics operations from stationary stores to online sales.

Silence before the storm?

When talking to representatives of the transport, freight forwarding, and logistics industry, one does not get an impression that they are in a great panic due to the upcoming another wave of the pandemic. It is definitely because they have enough to do in terms of other supply chain work tensions not related to the pandemic but also because most of CEOs, logistics managers, and economic experts simply do not believe in overly limiting restrictions related to COVID-19. The fact is that the European economy just cannot afford another lockdown.

– The politicians have grown cautious of the previous restrictive solutions used in the fight against the coronavirus, as their results turned out to be too severe for the European economy. What’s more, today we have safe vaccines and the European Medicines Agency has approved the first medicine for COVID-19 available on the market, Paxlovid. It should be available on our continent in early 2023. That’s why I don’t think we are in danger of another lockdown – believes Maciej Wroński, President of the employers’ organisation Transport i Logistyka Polska.

  • Maciej Wroński
  • the President of the employers’ organisation Transport i Logistyka Polska
  • The threat of respiratory pathogens is relatively small for drivers as compared to other professions. In practice, drivers perform most of their work in isolation from other people, while the current sanitary procedures in place allow for maintaining the full safety of drivers in places of loading or unloading and during roadside inspections or customs clearance. I would be more afraid of coming back home and interacting with household members who will be constantly exposed to the possibility of getting infected with the coronavirus.

Although it is true that few people believe in a hard lockdown at the expected peak of the pandemic in the autumn, experts remind that never before in the history of supply chains have there been so many negative events affecting the pulse of the economy. A few months ago, all of those previous disasters were joined by the war in Ukraine which caused not only a rapid increase in the fuel prices but also a deep crisis in the energy market. The war also contributed to accelerating the inflation not only in Europe but also throughout the world, while in Poland—the largest European carrier—it has exacerbated the driver shortage crisis as well.

– If all these negative elements get worse in the autumn and winter, combined with the pandemic’s peak, they may actually undermine the work of supply chains. Therefore, the pressure to increase the effectiveness of the chains remains high. At the same time, there are increasing signs of the economic slowdown felt, among other things, through the reduced consumer demand. Macroeconomics have been even mentioning an upcoming crisis. You could say with some irony that we won’t get bored in the next two to three years,” predicts Piotr Roczniak, Head of Business Consulting at Group, who monitors the situation in the industry on an ongoing basis.

Light on China

Experts suggest to pay more attention to how the situation unfolds in Asia, particularly in China and Taiwan, as those markets are particularly important for the global economy. As we know, Taiwan is the largest manufacturer of semiconductors, so the global electronic industry and automotive sector are dependent on supplies from that market. (It was the limited supplies of chips that caused the massive bottlenecks in the truck manufacturing.) On the other hand, China is the largest global exporter and all restrictions in the work of Chinese ports have a knock-on effect on supply chains, the consequences of which we have been experiencing to this day. Last summer, the Yantian terminal and a part of the Ningbo-Zhoushan port on China’s east coast were temporarily closed down due to new infections of the Delta variant, which was quickly felt by almost all European economies and the United States.

  • Rafał Jabłoński
  • CEO of the logistics company System Transport
  • Supply chains will handle the upcoming pandemic wave in Europe. The central administrations of the particular counties will not allow themselves to implement strict restrictions. The transport and logistics sector is getting better at handling further challenges. We are currently experiencing the biggest slump in the fuel market since the late 1990s. And what happened? Nothing! Everyone is still driving. I look at everything that is happening recently in the transport market with a great deal of calm.

The reduction of Chinese ports’ capacity affects the availability of containers and in turn, the availability of the international transport on many key lines. Furthermore, waiting for the loading or unloading causes the reduced availability of the merchant fleet elsewhere and, as a result, irregular operation of supply chains around the world. So it is enough that China introduces strict restrictions due to the spread of Omicron—which seems likely—to strongly affect Europe and its economies. – The situation in Shanghai—the largest sea port in the world—remains volatile despite the formal lifting of the lockdown. We can expect that its ‘zero COVID’ policy will not relaxed any time soon. And that’s why I would expect future lockdowns in China rather than in Europe, which will of course primarily affect supply and order disruptions for European importers – comments Przemysław Piętak, CBRE.

Rampant inflation

In a nutshell, wherever the manufacturing depends on the global supply chains, there may be disruptions in the operation of supply chains during a potential lockdown. In case of Asia, aside from the abovementioned countries, one should also mention Vietnam with which the European Union signed a free trade agreement in early 2020. The goods received by our continent from Vietnam include, among others, telecommunications equipment, clothing, and food products, while Europe supplies Vietnam with transport machines and equipment, chemicals, and agricultural products. The turnover volumes are increasing, so in case of the restrictions in that part of Asia or in the EU countries, a disruption of supply chains may affect many countries.

  • Piotr Roczniak
  • Head of Business Consulting, Group
  • The rising inflation and the war in Ukraine will have a bigger effect on the transport market than COVID-19 did. Despite the successive waves of the pandemic, the transport and logistics market has not learned how to operate in the new reality yet. So far, the European companies are not managed by planning but reacting to the current challenges. The key to survival is to restructure the current planning and operating methods. Flexibility supported by digitalisation will take supply chains much further than the expectation that the survival is possible will. To paraphrase Winston Churchill, it’ll be a shame to let a good crisis go to waste.

The transport, forwarding, and logistics industry experts point out that the biggest challenge for the upcoming quarters is the rising inflation. It is rising particularly fast in the countries of Central and Eastern Europe (Poland, the Czech Republic, Romania, Bulgaria, the Baltic states) but also in the largest European manufacturer: Germany (8.5% in July according to the HICP index). It seems that the European Central Bank understands the severity of the situation, as—for the first time in 11 years—it raised interest rates in July and the further increases are expected. It would not be good for the European (and global) economies if the inflation curve met the high incidence curve of the current pandemic wave.

– Sadly, there is no vaccine for inflation. Only the cooling of demand can stop it and in the meantime, new state aid money is coming into the EU market after the recent lockdowns. We have also observed a dynamic increase in the energy prices which might rise even quicker in the autumn/winter period. The strategy for the ‘unexpected’ is to be prepared for almost every scenario. It is particularly important to focus on deeper digitalisation, automation, and optimisation of the road transport management processes. It’s also worth taking note of the flexibility, since a lack of effective access to means of transport may disrupt any supply chain – claims Piotr Roczniak,

As it seems, it is the inflation that may have the most significant effect on the transport rates, although there are many variables that may influence the outcome, including the upcoming incidence peak in the autumn. – If the recurrence of the pandemic affects the number of orders on the market or the supply of services, the rates will obviously change. However, one should remember that it is only one of the factors that nowadays may affect the market. Thus, you can compare the accuracy of the forecasts on the effect of the pandemic on the rates to the results of telling fortune from a magic ball – concludes Maciej Wroński, the President of Transport i Logistyka Polska.

Text author: Marek Szymański

report tsl