Every year lately, “a big unknown” has impacted supply chains, says Leo Qvarnström, director, Sea-Air Logistics and air sustainability, North America with Kuehne+Nagel, a provider of logistics services. Recent examples include the war in Ukraine, the ecommerce boom, and the current conflict in the Red Sea.

The acronym VUCA, which has its roots in the military and stands for volatility, uncertainty, complexity, and ambiguity, is now being used to describe the world of commerce, says Tom Goldsby, executive director of the Global Supply Chain Institute at the University of Tennessee, Knoxville. Supply chain and logistics professionals can gain an edge by understanding the trends and shifts contributing to the current global logistics environment.

Geopolitical Upheaval

In addition to exacting a human cost, conflict impacts supply chain and logistics operations. For instance, Red Sea attacks are forcing more shipments around the horn of Africa, lengthening cycle times and driving up fuel costs and carbon emissions, says Ted Stank, co-executive director, with Tom Goldsby, of the Global Supply Chain Institute.

Between November 2023 and February 2024, container leasing rates on the China-to-U.S. trade route more than doubled, finds Container Xchange, an online container logistics platform.

Challenges in the Red Sea will even indirectly impact shippers whose cargo doesn’t travel this route, says Robin Knopf, global head of Sea-Air Logistics with Kuehne+Nagel. The reason? As carriers move to avoid the Red Sea, they create disruptions or container shortages along other routes, he adds.

Other trade lanes are also at risk, says the Boston Consulting Group (BCG). One is the Strait of Hormuz, which accounts for 20 to 30% of oil trade. If Iran is drawn into the conflict in the Middle East, vessels navigating this strait could be at risk.

Another lane, the Strait of Malaca, accounts for 30% of global trade. An ongoing dispute between China and several members of the Association of Southeast Asian Nations (ASEAN) over an area in the South China Sea may impact this strait, BCG says.

Along with rising transit costs, it’s likely that confirming bookings will be more difficult by summer 2024. “Companies will need to plan longer lead times for getting goods to their final destinations,” says Christa Pitts, co-CEO with The Lumistella Company, the firm behind Elf on the Shelf.

China Plus One

To offset rising labor and other costs in China, many companies are employing a “China + One” strategy. “Firms are reducing their concentration in China and adding capacity in Southeast Asia, India, and Mexico,” says Marc Gilbert, managing director and senior partner with BCG.

Countries in Southeast Asia, for instance, currently supply multiple regions of the world, including China and North America, Gilbert says. In India, leadership has taken steps to address corruption and enhanced the country’s ability to move goods around, he adds.

Nearshoring/Reshoring

More North American companies also are looking to locate operations closer to home. In early 2023, Mexico replaced China as the United States’ top trading partner, benefiting from its geographic proximity, strong manufacturing-based economy, skilled workers, and free-trade pacts, reports research firm MSCI.

Along with Mexico, all of Latin America offers strong potential for nearshoring, says Rick Jordon, senior managing director with FTI Consulting. Many companies will still need to rely on supply networks based in Asia. However, as Latin American companies implement new technology, it’s possible they’ll leapfrog ahead of their Asian counterparts.

Regionalization

A major gateway for global cargo shipments, the Oakland Seaport in Northern California serves a local market of more than 14.5 million consumers and 50% of the U.S. population by rail.

Interest in regional supply chains is growing. The idea is to “move away from thinking that we have one manufacturing hub for the whole world,” Stank says. Instead, companies can set up regional supply chains, which tend to be more agile, to support their major markets. If operations are disrupted in one area, other locations can compensate.

Artificial Intelligence

“The biggest impact to the global supply chain will continue to be the use of artificial intelligence (AI),” Pitts says. Among other benefits, AI allows supply chains to maximize efficiency in ways that hadn’t been possible previously, such as maximizing space utilization on a container or a pallet.

“AI allows companies to work smarter,” she adds.

Given ongoing disruptions, supply chain transparency and visibility to the sources of goods will factor in planning. “AI can enhance that power,” says Melinda McLaughlin, global head of research with logistics real estate company Prologis.

One company employing AI in the supply chain is Good360 is a nonprofit that distributes product donations through its network of 100,000+ vetted nonprofit partners.

The company is trying to use AI to help determine if it can efficiently move products where they’re needed after an event occurs, says CEO Romaine Seguin.

For example, Seguin has been working with a donor to determine how Good360 can help in areas impacted by wildfires. “We’re bringing in AI technology for mapping weather and identifying how much damage is in an area and what’s needed, such as water or hygiene products,” she says.

Cybersecurity

As supply chains digitalize, the risk of cyber attacks increases. “It’s the flip side of the digitalization and automation coin,” Stank says. Some chief information officers are even throttling back supply chain initiatives because of cybersecurity concerns, he adds.

A criminal may act as a carrier, broker, or even a customer to break into a system and then try to hijack freight or access customer or employee data. “Any system is open to attack,” warns Nathan Johnson, founder and CEO of transportation consultancy GLCS.

Sustainability

While it’s difficult to pin a single weather event on climate change, the drought at the Panama Canal is capturing the attention of supply chain experts. Drought cycles used to occur once every five years, but now are happening every three years, said Ricaurte Vásquez Morales, administrator of the Panama Canal, in a statement.

Another sign of the emphasis on sustainability is the European Commission’s Carbon Border Adjustment Mechanism. CBAM, which will be phased in between 2023 and 2026, is intended to fairly price the carbon emitted during the production of carbon intensive goods entering the EU.

CBAM will initially apply to some goods whose production is carbon intensive and at most risk of carbon leakage, such as cement, iron, and steel; additional goods will be added.

Navigating Evolving Global Logistics

As global logistics evolves, here’s how shippers can adjust.

Strengthen Agility
Resilience remains essential, but it doesn’t mean trying to create bulletproof supply chains. “There is no such thing as being bulletproof,” says Goldsby of the University of Tennessee. Instead, resilience should take the form of agility, or developing options before they’re needed. Plasticity, or the ability to make rapid structural changes, such as sourcing in new locations, is also necessary, he says.

Understand Geopolitics
Supply chain leaders today need to understand a range of subjects, including geopolitics, economics, and cybersecurity, Goldsby says. “They have to be global citizens and understand that what takes place in, say, Indonesia could very much influence their supply chains and business,” he adds.

Create a Task Force
More than three-quarters of respondents to BDO’s Global Risk Landscape 2023 indicated that the risk landscape is shaped more by connections between risks than individual risk factors. Addressing these connections requires a company-wide focus.

Assemble an enterprise-wide task force to take a control tower view of the supply chain, advises Tony Nuzio, founder and chief executive officer with ICC Logistics Services Inc. It should be cross-functional and include employees from all levels. Employees on the ground might be best suited to identify, for instance, suppliers that are critical to production, even if the company purchases relatively small amounts from them. Task force members can run scenarios and assess how prepared the company is for them, he adds.

Beef Up Cybersecurity
Nearly three-quarters of cyber incidents include a human element, such as an employee clicking a phishing link, according to Infosec, a cyber security training company. Employee education is key to preventing attacks.

“All it takes is one person in the organization to click on something they shouldn’t, and then the entire company is exposed,” says Nathan Johnson from consultancy GLCS. Another essential safeguard is multifactor authentication, or requiring users to present two pieces, or factors, that show their identity before they can access a system.

Find Partners or Platforms
The very largest companies may have the resources they’ll need to manage the evolving global logistics environment by themselves. Many other organizations will need to work with partners and/or platforms to achieve the benefits of scale, says Prologis’ McLaughlin.

Global Trade Management Solutions

Technology tools can help shippers tackle the challenges of global logistics operations. Here are a few of the many available solutions.

Descartes: Datamyne™ is a searchable trade database that provides real-time access to import and export information from customs authorities and trade ministries across 230 markets.

e2open: Features on e2open’s global trade management software include due diligence screening, the ability to automate export compliance and import management, as well as a database of government trade regulations.

ImportKey: The AI-driven algorithm leverages global and U.S. import and export data, as well as U.S. customs data and records, to identify top products, sellers, and buyers for given time periods.

Oracle Global Trade Management: This solution allows companies of any size and in all geographies to centrally manage global trade operations and to optimize, automate, and monitor cross-border transactions from a unified trade and transportation platform.

PartnerLinQ: This supply chain platform integrates with more than 70 TMS, WMS, and ERP systems using industry best practices, common workflows, and data structures.

SAP Global Trade Services: This platform integrates trade services across the entire enterprise and automates and streamlines trade processes.

Trademo: This solution connects billions of supply chain data points and leverages software to provide organizations visibility into their global supply chain networks.

Zonos: The platform provides a range of cross-border solutions, like Landed Cost, which offers the ability to show guaranteed duty, tax, and carrier fee calculations on all orders.

The interest in diversifying options for sourcing parts and materials outside of China has grown significantly; however, the United States and other countries are not yet equipped to pick up the capacity. 

This new manufacturing reality is forcing companies around the world to diversify their supply chains to mitigate disruptions, reduce risk, and increase supply continuity. With geopolitical issues at the root of the problem, we’re experiencing a domino effect on our supply chains.

Below I outline how we got here, where things currently stand, and how companies can best move forward.  

United States and China Geopolitical Issues Intensify

In the past few years, friction between the United States and China has risen. We’ve watched tensions flare as China refused to condemn Russia for the war and humanitarian crisis in Ukraine, and China conducted live-fire drills following the U.S. House Speaker visit to Taiwan in August 2022.

The United States then introduced strict restrictions on exports of U.S.-made chips, followed by President Biden’s first official meeting with China’s leader Xi Jinping taking place in November 2022. 

In early September 2023, U.S. Commerce Secretary Gina Raimondo met with Chinese officials to strengthen U.S .business relations with Beijing while also imposing some of the toughest Chinese trade restrictions in years.

Citing national security as the reason behind the export control, Raimondo reinforced that the United States will not be selling sophisticated chips to China for China’s military use. Despite a positive outlook from this meeting, companies know that tensions are still high, and overreliance on China creates concentrated risk while its own economy is struggling and exports continue to drop.

The Rise of Artificial Intelligence and Chip Shortages

On top of concerns regarding business in China, we’re currently seeing a new surge in the need for computer chips, which U.S. companies have traditionally sourced from China.

Popular tools like ChatGPT call for high-powered graphics processing units (GPUs) to deploy and integrate advanced generative AI models. However, few U.S. companies manufacture GPUs, and leading providers like NVIDIA are working hard to keep up with the current demand and avoid another chip shortage that has the potential to hinder AI innovation and progress. 

By investing in chip manufacturing and requiring federally funded infrastructure to source materials and products from the United States, the United States is taking a positive step in securing its vulnerable chip supply chain. However, this does not mean we’re prepared for a full shift to all manufacturing being “made in America.” 

U.S. Manufacturing Labor Gap 

It has become clear the United States does not yet have the labor and talent necessary to drastically expand our manufacturing capabilities. Just take the Taiwan Semiconductor Manufacturing Co. (TSMC) as an example.

The company announced at the end of 2022 that it would be opening a new factory in Arizona. Come August of 2023 TSMC delayed opening due to a shortage of skilled U.S. workers and is now looking to obtain visas for as many as 500 Taiwanese workers to fill the talent gaps. 

The clear manufacturing and labor gap in the United States is forcing companies to shift their supplier base elsewhere.

A new report presented at the Federal Reserve Bank of Kansas City’s annual conference in August shows a decrease in U.S. imports from China with a corresponding increase in U.S. imports from Vietnam and Mexico between 2017 and 2022.

At the same time to reduce the impact of these changes, Chinese firms have increased their exports and foreign investments in areas like Vietnam and Mexico as well. With this new dynamic, it’s clear Chinese and American supply chains will always be intertwined in some capacity. 

Operating within the New Global Supply Chain 

The end goal for companies shouldn’t be to avoid business with China altogether but rather to diversify their supplier base to increase resilience. The pandemic shed light on the severe concentration risk the United States was facing by over-relying on China for most goods, services, parts, and raw materials.

The heightened geopolitical risks between the United States and China right now are only encouraging companies to de-risk their supply chain footprint and source from around the world if they haven’t already. 

To make this transition, companies need to empower their supply chain and procurement teams with the proper tools powered by advanced technology. Too many teams still rely on outdated, time-consuming manual processes in spreadsheets or traditional tools when it comes to managing supply dynamics, leading to a lack of visibility throughout their supply chains.

By utilizing the advanced technologies available today with AI and automation to contextualize data and operate in real time, procurement teams gain insights to make better, smarter decisions regarding who and where they source from at scale.

While we can’t predict how geopolitical tensions will continue to develop in the immediate or distant future, companies can boost their resiliency and diversify their supply base to ensure they are prepared to navigate any disruptions and maintain a competitive edge.

To survive and flourish in this complex landscape, businesses must be adaptable and value networking and collaboration as essential paths for economic success.

While some regions face challenges, others seize opportunities, redirecting their trade routes and networks to continue doing business effectively. For example, in recent years, much concern has been about the loss of manufacturing jobs in the United States. However, there is now a thriving $11-billion investment in electric vehicle and battery production in my home state of Georgia alone.

Challenges in one sector can lead to burgeoning opportunities in another, highlighting the dynamic nature of global trade.

The Importance of Networking

We live in an interconnected world, so global trade demands innovative solutions to sustain growth and overcome obstacles. Fortunately, technological advancements, such as Zoom, AI-enabled supply chains, digital payments, and ecommerce platforms, have emerged as powerful catalysts, revolutionizing international trade by enhancing transparency and efficiency. This has enabled businesses to navigate complexities and continue their global operations.

Strengthen the Role of Sustainability

The importance of sustainability in shaping supply chain networks cannot be overlooked. Contrary to fears that sustainability might impede economic progress, it fosters new businesses and stimulates innovation, generating job opportunities and driving growth.

Incorporating sustainable practices into global trade strategies benefits both individual enterprises and the health of the planet. Georgia’s success in the EV sector is a perfect example of how sustainability is becoming increasingly vital in global trade. As environmental and social concerns escalate, businesses must prioritize sustainability to remain competitive and meet the evolving demands of conscientious consumers.

The Power of Partnerships

Foreign Trade Zones (FTZs) are also a powerful tool to enhance the global competitiveness of U.S.-based operations. These zones offer attractive incentives such as reduced tariffs, streamlined customs procedures, and enhanced supply chain efficiencies.

By leveraging the benefits of FTZs, businesses can optimize their global trade capabilities, giving them a strategic advantage in the ever-changing international market.

Of all the solutions to overcome challenges in this ever-evolving global trade environment, networking is indispensable for success. As specific trends and opportunities vary across regions, businesses must focus on building strong partnerships to stay ahead.

Global trade is a dynamic landscape, influenced by geopolitical events, international relations, and trade disputes. Despite these challenges, the global economy continues to exhibit resilience, constantly seeking new paths for trade.

In this ever-evolving environment, businesses must embrace adaptability and prioritize networking and collaboration as essential elements for achieving economic success.

By embracing change, staying attuned to emerging trends and fostering global partnerships, businesses can position themselves for success in global trade. Collaboration and networking are crucial to navigating the complexities of international relations and supply chain dynamics and pave the way for sustainable growth and prosperity.

About the Author

Scott Center is a director of World Trade Center Savannah (Board President and Former Chairman), a member of the World Trade Centers Association’s Global Board where he serves as Chairman of the Investment Committee, a member of the Executive Committee, and a member of the Nominations and Compensation Committee.

• Approximately 6% of global maritime trade travels through the Panama Canal
• Last year, nearly 15,000 vessels with 520 million tons of cargo passed through the channel

Why rainfall, or lack thereof, is crucial:

• Fresh water from two large lakes in the interior sections of Panama (Lake Alajuela and Lake Gatun) is used to “lift” vessels across the country. The “lift” is around 26 meters above sea level and covers 12 locks from the Pacific to the Caribbean.
• For every vessel that moves through the canal, it takes approximately 200 million liters (52 million gallons) of fresh water.

The current situation: 

Source: Everstream Analytics 

• The past few months have been unusually dry across Panama. The map above depicts the percent of normal rainfall during the past three months – February, March and April. Rainfall has been well below normal across most of the country with some of the driest conditions near the canal. The canal is just east of Lake Gatun which is shown on the map in the middle of Panama. Rainfall in the area near the canal has been less than 50% of normal and in some cases, less than 25% of normal during this three-month period. This period is important since it is the start of the rainy season and begins to replenish lake levels in the interior sections of the country.

Source: Everstream Analytics

• The dry weather during the past three months is significant from a historic perspective. The graph above portrays rainfall during the February – April period for each year from 2000 to this year; this year is highlighted in red. The recent rainfall is tied for the lowest so far this century with 2019. In both years, rainfall when averaged out across the country was around 60% of normal. The values this year near the canal and the feeder lakes are lower and well under 50% of normal. In 2019, the drought continued through the spring and into the summer causing major impacts on shipping (restrictions in capacity). Inevitably, this caused a ripple effect through the supply chain across much of the globe.

The impacts…so far:

• The canal authority has imposed several restrictions in the past few months on vessels due to the decreasing availability of water in the key lakes (Gatun and Alajuela). As a result, the draft of the ships crossing the canal has been reduced which means less weight/fewer goods are able to be transported.

The forecast:

• There is no sign of any significant improvement in the situation either in the short term (the next few weeks) or the long term (the remainder of the spring). The pattern continues to feature below-normal rainfall across Panama in the foreseeable future. As a result, we expect the lake levels to decrease and the impact on shipping over the canal to get worse.
• Longer-term, the transition to an El Niño event (warmer than normal ocean temperatures in the equatorial Pacific) expected by summer is an item of concern since this typically correlates to drier than normal conditions across much of Central America.

Based on calculations done before the war, global GDP was forecast to grow by 3.6% in 2023. The latest forecasts show 1.3% growth for the year. Similarly, pre-war, Atradius predicted that global trade would grow 4.5% in 2022 and 3.5% in 2023. However, the estimated figures are now 3% and 1.5% respectively.

Impact on Commerce

Russia and Ukraine are the countries most affected by this war. While these two countries don’t appear to be major players internationally—representing less than 2% of global GDP combined—much of what they do contribute to the global economy is important for commerce.

Russia is a main supplier of oil and gas to European nations, and that supply has dropped by 80% since the start of the war. This shortage forced European countries to scramble for energy alternatives in the United States and the Middle East, but at a much higher cost.

This shortage has caused high global energy prices, as well as record profits for oil and gas companies. It has also brought about major changes to the global energy trade, mainly U.S. crude oil and liquefied natural gas (LNG) exports to Europe.

U.S. oil and gas will continue to fill Europe’s energy supply gap in the short term, but this crisis will also expedite policies to speed up the transition away from fossil fuels. Expect to see more investment and momentum in cleaner LNG alongside efforts to reduce the greenhouse gas impact of trade.

Energy hikes also impact food production costs. Russia and Ukraine accounted for a good part of wheat, corn, barley, and fertilizer exports. In 2023, fertilizer shortages will be a significant constraint on global food supply.

Commodities were also affected over the past year. Russia is a major supplier of nickel, used in battery production, and Ukraine is a major supplier of neon, used in semiconductors.

When Russia first invaded Ukraine, we expected that the conflict would be complete by the end of 2022. One year later, we now expect the two countries to remain in protracted conflict, at least as long as Western military support continues. Combined with simmering tensions in Beijing, this could ensure global value chains will continue to shift, with U.S. producers opting for trade with neighbors and allies.

Taking on the Challenges

Rerouting supply chains is expensive. Identifying and vetting new suppliers can be complex and time-consuming. Companies are also dependent on transportation and logistics infrastructure, which may need to be upgraded, leading to delays and reduced product quality.

With inflation already weighing on margins, taking on these extra costs is a difficult choice but can contribute to a more sustainable long-term strategy.

Price volatility and economic uncertainty will continue throughout 2023. To help businesses find some extra cash flow, it would be a good idea to increase the efficiency of current resources and expand investment in lower carbon fuels and other clean energy technology—this could be a win-win for the sector in the interest of meeting energy needs and energy transition demands.