Hedging Toward Stability: How to Create Resilience in Your Supply Chain
When COVID first shook the world, one of the biggest concerns of business owners and government bodies alike was its impact on the global supply chain. First, there was an assumed acute impact, which everyone hoped would only be a few weeks or months, but the bigger question soon became what the long-term consequences might be.
Now, almost two years later, the global supply chain faces more uncertainty than it has in a very long time. As a result, shippers are facing more logistical obstacles than ever before and unprecedented market volatility is causing massive price hikes that affect businesses and consumers alike.
So, as a shipper or NVO – what is on the horizon that could affect your business, and what can you do to improve your resilience against it? It’s a complex question, but let’s dive into some market analysis to see what experts are saying about the future of the supply chain.
Labor Shortages Aren’t Going Away Anytime Soon
One of the biggest factors in the global supply chain disruptions is labor shortages throughout the supply chain. And unfortunately, this problem isn’t as simple as waiting for more people to line up for jobs. According to an analysis by Forbes, bad public perception of supply chain jobs and their effect on physical and mental health, as well as a huge skills gap in the knowledge required for modern supply chain jobs, are major hurdles to reclaiming the workers needed to bring the supply chain back to its pre-pandemic efficiency.
And that’s not all that’s problematic. Capacity limits on docks, boats, and factories will continue to prevent a quick return to pre-pandemic outputs. All of this, of course, means that labor will become more expensive, and thus operating costs will only continue to rise.
Market Volatility Will Continue to Drive Prices Across the Supply Chain
It seems the only constant anymore is change, and the markets are no exception to that. The increased volatility we’ve seen across all market segments seems to be less of a fluke and more of the new norm. This is especially true for the energy markets. The International Energy Agency released its annual reportin which they said that due to underinvestment in the energy markets, especially in future-proof sources of energy, the instability on oil prices could lead to massive volatility in the energy markets in the coming months and years.
Already, oil prices are up over 60% compared to their record lows in mid-2020, and nearly every other energy provider has also seen sharp increases in prices. In short, the cost of manufacturing and transporting goods will only get more expensive as time goes on until our energy infrastructure can catch up with modern energy and environmental needs.
What Can Shippers Do to Protect Themselves Against Increased Volatility?
So, with prices only trending upward as labor, supply, and energy problems loom on the horizon, what can shippers and do now to help shore up their supply chain against the oncoming storm?
One of the most significant shifts that is happening in the industry is the transition towards multi-year contracts. The traditional spot or yearly contracts common in the shipping industry are beginning to look less and less favorable as price volatility and shortages remain high. Instead, many shippers are opting into multi-year contracts with lengths spanning from two to five years as a means of providing padding for their supply chain balance sheets.
Before this new high in market volatility, signing a multi-year contract meant that you might lose out on lower prices down the line. And many shippers were able to benefit from market prices that were fluctuating, or at the very least, staying competitive for their individual camps.
While there’s no way to know for sure, it doesn’t seem like those golden opportunities will be coming along anytime soon. So, by opting into a multi-year contract now, you could potentially be locking in savings if costs continue to rise, while also laying the groundwork and stability to strategize further down the road for your business.
Multi-year contracts also help create healthier relationships between carriers and shippers. Shippers can count on a fixed service and guaranteed space for their freight from carriers, while carriers can count on a fixed price and commitment to volume without concerns of the deal suddenly being severed. This is a great way to ensure that if another massive disruption hits the supply chain, no one, be it shipper or carrier, will be left up creek without a paddle.
If you’re looking to hedge your ocean business toward greater stability in an increasingly volatile and uncertain market, we’d encourage you to consider the benefits of a two-way committed contract to help protect both your business and your business relationships against the backdrop of uncertainty that may lie ahead.