Many of the constraints to supply that caused headaches in 2021 and into 2022 have eased, for reasons good and bad. (Good: Capacity rebounded. Bad: Demand slumped.)

But shortages haven't disappeared completely. Specific circumstances — from geopolitical and environmental turmoil to localized demand surges and more — are leading to stockouts of some goods.

“The macro conditions around Ukraine, climate [and] China are not changing significantly,” Simon Geale, EVP of procurement at the consultancy Proxima, said. “They're all dragging on.”

While the war in Ukraine has pressured commodities including some food staples, the continued concentration of production in China for numerous industries has also created a whole menu of risks that companies are still managing. China has rolled back its strict COVID-19 protocols and is grappling with a surge in case numbers, but the country could soon rebound economically and spark a new demand rush.

“While China is starting to open up, there's still a big backlog from the length of time they were shut down and turning things on and off again,” Ron Scalzo, senior managing director with FTI Consulting, said. “That's affecting everybody.”

Here’s a look at the goods that could give procurement officers a headache in the coming year.

Food

Last year’s invasion of Ukraine by Russia caused several commodities to spike in prices amid concerns about their supply.

Those troubles remain, though fears of disruptions to wheat have eased after Ukraine’s harvest was larger than expected. At the same time, environmental challenges elsewhere in the world are straining the supply of other important crops, including vegetables.

“The drought in California definitely had an impact on lettuce and tomato crops,” Scalzo said, noting also that recent floods in the state could have additional impact down the line.

Dole COO Johan Linden told analysts in November that the fresh fruit and vegetable producer was seeing “complete crop failure” in key commodities.

“This goes across the whole industry, where almost 30% to 40% of all the iceberg and romaine have failed and that is due to an extreme heat that we had in the beginning or late summer [and] beginning of the fall, followed by rain,” Linden said then.

Against that backdrop, buyers are managing inflated prices and tight supplies. Chick-fil-A, for instance, told customers that “some items may be unavailable or prepared differently” and Subway said it would temporarily use less lettuce in its sandwiches.

Eggs have also come under strain as avian flu has laid waste to flocks and driven up costs for farmers. Market prices per dozen eggs at the end of 2022 were up nearly fivefold from last January, according to USDA data. The term “eggflation” has, for better or worse, entered use.

“You can probably find eggs, but the prices have tripled in some cases,” Scalzo said.

Dine Brands Global CEO John Peyton complained in November that business expenses were falling more slowly at its IHOP chain compared to Applebee’s because “IHOP’s costs remain inflated due to the stubborn cost of eggs” as well as the war in Ukraine’s effect on grain prices, which feed into pancake batter.

Denny’s Corp. CFO Robert Verostek told analysts in August that commodity inflation had reached “unprecedented levels,” which included eggs along with pork, beef, dairy, poultry and other foods.

As often happens, tight supplies can translate into a boon for suppliers. In late December, Cal-Maine Foods, which calls itself the largest producer and distributor of fresh shell eggs in the U.S., logged a 110% spike in net sales and record profits, driven by highest-ever egg prices.

Lithium and other EV components

With electric vehicles seen as key to a global energy transition and decarbonization, demand has been on the rise for key commodities used in battery production and other green engineering components. The Inflation Reduction Act, which included incentives for EVs, is expected to raise demand yet further in the years to come.

Prices for lithium — a crucial material to making batteries — have soared with global consumption rising 33% in 2021 compared to 2020, according to the U.S. Geological Survey.

Lithium hydroxide prices were up 156% YoY in December, according to S&P Global Commodity Insights. The consultancy BCG noted in an August report that the price of lithium has increased ten times over in the past two years. High prices are likely to persist as chronic shortages loom, according to BCG.

“Costs are going up, demand is going up, supply is tight,” Geale said.

EV makers are feeling the pain. Tesla’s costs are likely to rise after a lithium supplier amended their agreement to peg the EV maker’s lithium costs to market prices, rather than at fixed prices as in their past agreement.

“[I]n electric vehicles, things like battery-grade lithium are still crazy expensive,” Tesla CEO Elon Musk said in October.

Supplies of other important materials for battery production are also under strain. Graphite, one of the primary components in the anodes of lithium ion batteries, has faced pressure as demand rises, with expanding shortfalls predicted over the next decade.

Shortage fears have also risen around cobalt, which was included in a Government Accountability Office report last year as a critical material for advanced technologies with high supply chain risks due to the U.S.’s reliance on imports.

Pharmaceuticals

“Tripledemic” is another recent addition to the lexicon, describing parallel spikes in various respiratory illnesses that hit the world’s population of children hard in 2022. The trend has pressured demand and supply for medicines common for children during the cold and flu season.

Stories abound of empty shelves and desperate parents. In December, drugstore giants CVS and Walgreens began limiting sales of over-the-counter children’s fever relievers including acetaminophen and ibuprofen. Walgreens said at the time that sales caps were meant to “prevent excess purchasing behavior” amid demand surges.

A form of amoxicillin used to make liquid doses for children also reached an “acute shortage,” according to the Food and Drug Administration in November. The agency said then that the supply shortfalls could “lead to potentially serious or life-threatening situations in particular in the pediatric population” as the respiratory illness season peaked.

The FDA has been working for more than a decade to combat pharmaceutical shortages. With many common medicines, the margins are thin, leaving little incentive for producers to build up excess capacity or stock.

In the case of amoxicillin, capacity is difficult and expensive to ramp up due to lack of flexibility in the equipment and processes used to make the drug.

“There’s not a short-term capacity answer for this,” John Gray, a professor of operations with Ohio State University’s Fisher College of Business, told Supply Chain Dive in December.

Also in short supply is the drug known by the brand name Adderall, used to treat attention deficit hyperactivity disorder, or ADHD. The FDA issued a shortage notice for the drug in October, noting that manufacturer Teva is “is experiencing ongoing intermittent manufacturing delays.” Supplies of other ADHD drugs are also reported to be under strain.

Semiconductors

The global chip micro shortage will enter its fourth year in 2023 after multiple disruptions stemming directly or indirectly from the pandemic.

Semiconductor constraints have caused headaches and delays for multiple industries. Supply is increasing for some chips, and 2023 could be the year when, finally, most of the industry stabilizes.

Reduced demand amid a global economic slowdown has lessened the pressure on supply. TSMC CEO C.C. Wei said in the company’s fourth-quarter earnings call, “As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduced sharply through first half 2023, to rebalance to a healthier level.”

Chokepoints remain, though. As Kazunari Kumakura, chief officer of Toyota Motor Corp’s purchasing group put it in November: “[I]n some semiconductors, the supply is getting better and in other semiconductors the chips remains in short supply.”

As with lithium, the U.S. government is trying to boost domestic chip production. In August, President Joe Biden signed legislation that included billions of dollars in subsidies to boost U.S. chip manufacturing with a 25% federal tax credit for companies investing in semiconductor production.

As consumer demand slows, the return of high-profile retailers in financial distress is a reminder of how vital trade credit is to the health and even viability of many store chains. It also shines a light on the financial threats of a flailing retailer to its suppliers.

But the question of whether to ship to a retailer in distress or even bankruptcy is rarely an easy one for suppliers.

When Party City filed for Chapter 11 last week, it owed critical domestic vendors more than $10 million for goods already shipped, and another $25 million to foreign vendors. The struggling party goods retailer had delayed payments as its liquidity waned. Suppliers had in turn shortened payment terms or started asking for cash on delivery, accelerating the retailer’s liquidity issues.

The story is typical of retail bankruptcies. No supplier wants their customer to fall into Chapter 11, yet tightened payment terms can accelerate a liquidity crisis.

“It could snowball,” said Dennis Cantalupo, CEO of Pulse Ratings, a credit analysis firm covering the retail space. “Suppliers are just responding to the retailer paying them slower.”

Cantalupo pointed to the case of Bed Bath & Beyond, which issued a warning earlier in January that it might have to file for bankruptcy if out-of-court restructuring efforts didn’t pan out.

“As a supplier, you're seeing, you’re hearing, and you’re reading in black and white that this company may be considering bankruptcy,” he said. “You have to take that threat seriously, and respond accordingly.”

Forecasting failure

Suppliers need to know the financial risks of selling to a retailer long before a bankruptcy is imminent.

“The first step is just simply doing the analysis,” Taylor Ricketts, AVP with Creditntell, said. “The second piece is also knowing your own situation, your challenges, communicating internally trying to figure out how long you have to mitigate.”

Albert Furst, chief operating officer of Creditntell, said that suppliers are always mulling the probabilities of a customer going bankrupt, and when, so that they can make decisions based on their own business.

“Are they risk averse? What are their margins? Do they have product that can't go anywhere else? What are the terms? Are they shorter or longer?” Furst said, describing the thought decision process of suppliers, which some may need to go through well in advance of the back-to-school or holiday season.

Retailers are well aware of the pressures facing their suppliers. In asking for emergency court authorization to pay its critical suppliers, Party City noted that some of its holiday product needed nearly a year of lead time for its vendors to develop, make and ship, and they often required payment far in advance.

Suppliers naturally want to ensure they’ll get paid. But cutting ties with a retailer or tightening up payment terms too early or too tightly comes with its own downside. Cantalupo noted that suppliers want to keep shipping merchandise as long as a retailer is not a short-term credit risk in their analysis.

“The way suppliers make money is to sell merchandise,” Cantalupo said. “So if they reduce a credit line, or stop selling into a retailer too soon, they can lose a lot of inventory turns that way.”

Suppliers have options to hedge their risks, including receivable puts and insurance, but those are added costs, and might not be offered once a retailer’s finances spiral past a certain point.

Selling into a bankruptcy

Once a retailer files for bankruptcy, the risks can be vast for some suppliers.

Anything owed on goods shipped within 20 days becomes an administrative claim in the case — known as a 503(b)(9) claim in the Bankruptcy Code — which means suppliers have to go through a court-regulated process with other creditors to get paid. Meanwhile, money for goods received by suppliers within 90 days of a bankruptcy filing could be reclaimed by the court if a supplier is deemed to have received preferential treatment in that payment.

Many retailers in bankruptcy want to pay back their suppliers quickly to maintain relationships, hence Party City’s emergency request within Chapter 11 to pay its critical suppliers.

Suppliers might even maintain trade credit for a bankrupt retailer, putting their confidence in the customer’s debtor-in-possession financing, which is meant to help fund companies through the Chapter 11 process. But it’s not without risk.

One stark illustration was the toy store giant Toys R Us, which filed for Chapter 11 in 2017 with plans to reorganize but ended up losing its financing after falling short of holiday targets.

An extensive list of toy makers and other suppliers who shipped to the retailer on terms collectively lost millions of dollars. But even that worst-case risk may be worth taking for suppliers that can absorb the losses.

Ricketts pointed to the Sears Holdings bankruptcy, which dragged on for years and forced suppliers to take a significant haircut when all was said and done. But if the margins were decent and suppliers kept selling to Sears through the several years of bankruptcy speculation, they still could have made a pile of money far outweighing what they lost in bankruptcy, Ricketts noted.

“It depends on your profit margins, it depends on a lot of things,” Ricketts said. “It comes back to how confident you are in the analysis.”

Ricketts also noted sometimes the credit department at a supplier gets overruled by the sales team. “The account could be that strategic, that important,” Ricketts said.

On the West Coast, the Port of Los Angeles is looking to attract more shippers as volumes fall from their record-breaking heights. Along the East Coast, the Port of New York and New Jersey’s leadership touts that it has been the nation’s busiest container port for two months running.

"We've been in the number one position here in the United States for 22 consecutive years. One or two months is not going to create a trend," Gene Seroka, the Port of Los Angeles' executive director, said in a Tuesday media briefing. Nonetheless, he said the port has been on a tour for months, knocking on shippers' doors to get some cargo allocation back.

While it’s not the only factor responsible for their diverging cargo trends, experts and port leaders agree the shadow of negotiations between the International Longshore & Warehouse Union and Pacific Maritime Association has motivated shippers to divert more U.S.-bound cargo from the west to the east. Companies deployed a similar tactic for rail cargo in Q3 to shield against a potential freight rail shutdown, which still remains a concern.

"Even though both sides — the PMA and the ILWU — have put out two jointly signed media releases, stating they will not strike nor lockout, there's still skepticism," Seroka said.

The threat of a strike has been enough to spur action from shippers, altering the nation's flow of cargo along the way. But in the process, shippers have found diverting freight — like other supply chain contingency plans — can create tradeoffs like longer lead times and added logistics complexity.

East Coast ports snag import share from the West

Diversion activity became more pronounced over the last couple of months after the ILWU and PMA failed to reach a labor agreement by the July 1 deadline, said Glenn Koepke, GM of Network Collaboration at FourKites.

In October, 62% of FourKites customers’ import shipments arriving to U.S. ports went to the East Coast, versus 38% to the West Coast, according to company tracking data. That’s the largest proportion for the East Coast so far in 2022 and exceeds its 57% share in October 2021.

The volatile ocean shipping conditions sparked by the COVID-19 pandemic — including sharp swings in rates and congestion levels — have led companies to renegotiate their contracted rates and capacities more frequently, according to Koepke. This has allowed shippers to be more nimble about where their cargo arrives.

“If you were to compare diverting cargo now versus four years ago, in essence, the process of which you procure ocean freight enables a little bit more efficient diversion today, because historically, it’s been annual contracts,” Koepke said. “Now you see quarterly type contracts.”

At the Port of Savannah, it’s unclear how much of its recent import growth is directly tied to diverted cargo, according to Cliff Pyron, chief commercial officer at the Georgia Ports Authority. But in the quarter ending in September, 166 importers were either completely new customers or grew their Savannah trade by 20% or more.

“Since FY2001, the Port of Savannah has gained cargo, both over the short- and long-term, with each labor action on the West Coast,” Pyron said in emailed responses to Supply Chain Dive. “We are already hearing from port customers who are shifting cargo to the East Coast as a hedge against a potential strike.”

Some shippers fled railroads in Q3

Concerns over labor-related disruptions don’t dissipate as shippers’ cargo moves inland. With negotiations between railroads and unions still in progress, companies have adjusted their supply chains to hedge against a potential strike or lockout.

Carriers touched on this shift during recent quarterly earnings calls. Schneider encountered intermodal volume erosion in September as customers looked to avoid uncertainty on the railroads by moving to trucks instead, which particularly hurt activity on shorter hauls.

Norfolk Southern executives said the railroad took a “no-surprises approach” in Q3 by speaking with customers about how they could keep their cargo moving. The company estimates the approach accounted for roughly 40% to 50% of the quarter’s volume decline, primarily in its intermodal markets.

Railroads and three unions reached a tentative agreement Sept. 15 to avert a freight shutdown, quelling some shipper concerns. And for now, there isn’t a flood of freight moving from rail to truck — Chris Caplice, DAT Chief Scientist, said in an emailed comment Nov. 7 that he hasn’t noticed any changes in trucking trends on lanes due to potential rail strikes.

But the threat of disruption still looms, with the deadline to avoid a rail strike or lockout now set for Dec. 4.

A railroad shutdown would require greater supply chain adjustments than just shifting all volume to trucks. The Association of American Railroads estimates that it would take roughly 467,000 additional long-haul trucks per day to move all railroad freight. However, it also noted that barges may be able to pick up some slack in areas with navigable rivers.

Cargo diversion introduces new tradeoffs

Although the tactic of diverting cargo can mitigate labor-related disruptions, it introduces other potential supply chain drawbacks.

When it comes to rail transportation, moving cargo to trucks can be an effective solution for automotive companies that rely on rail for outbound shipping, said Julie Gerdeman, CEO of Everstream Analytics. However, customers in the chemical or food processing industries can’t do so as easily based on the product they move, and shippers have to also keep pricing and contractual considerations in mind.

As for ocean shipping, rerouting cargo from Asia through the Panama Canal to avoid risks on the West Coast lengthens lead times. While retailers with bloated inventories may be less concerned with added days in transit, it can be a bigger issue for other sectors. Compounding this are inflationary pressures that companies of all types are looking to mitigate.

Cargo diversions may be a temporary measure as a result, said Sourcing Industry Group President and CEO Dawn Tiura: “You’re going to go back to the lowest total cost alternative.”

Quick jumps in import activity can also strain port operations, sparking congestion concerns for cargo that has already seen added lead times due to diversions.

As other retailers scrambled to divert their cargo from the West Coast, The Children’s Place’s inbound supply chain encountered East Coast port congestion in Q2, which contributed to an increase in the company's inventory levels.

Still, as the risk of strikes at ports or railroads incentivizes companies to strengthen their contingency plans, FourKites's Koepke expects cargo diversions will become a more regular part of a shipper’s playbook going forward.

“What we hear quite a bit is shippers are using this in their planning models, so as they look to future operations based on different global events or socioeconomic events, they will look to route cargo to certain places,” Koepke said.

Sarah Zimmerman contributed to this report.

A labor union representing 350,000 UPS workers could strike this summer if a new contract agreement isn't reached on time, threatening the delivery of millions of parcels.

Teamsters leadership has made it clear they are taking a hard-line stance on pay, scheduling and other issues ahead of negotiations for a new labor contract with UPS. The current contract is set to expire July 31, 2023.

“Our union is resolved to win the best contract for UPS members and to reset the standards for wages and benefits in this industry by August 1, 2023," Teamsters General President Sean O’Brien said in an August 2022 statement. "We won’t extend negotiations by a single day."

UPS, meanwhile, has stressed the need to reach an agreement, saying it aims to negotiate a contract that benefits all sides. The carrier has been touting its employee benefits and long-standing relationship with the Teamsters.

"Our focus is on reaching an agreement that provides a win-win-win, for our employees and the union, for UPS, and for our customers," the company said in a statement.

Here's what shippers need to know about the state of contract talks, the likelihood of a strike and how to prepare for any supply chain fallout.

Where do negotiations stand?

National contract negotiations don't kick off until April, Teamsters spokesperson Kara Deniz said, but the Teamsters' UPS National Screening Committee has been reviewing various proposals for what should be included in the Master Agreement.

Committee members sorted and compiled more than 11,000 proposals submitted by locals from across the country during a Jan. 9 meeting in Washington, D.C., according to a Teamsters news release. Five screening subcommittees also met to review proposals on areas such as safety and health.

"The screening of proposals will determine what will ultimately be put forth to the company when National Master Agreement negotiations begin," the release said.

What are the top issues UPS and the Teamsters need to address?

The Teamsters union is largely looking to address scheduling issues that have cropped up since the COVID-19 pandemic fueled a surge in package volumes, Deniz said in an interview. Some drivers say that they continue to be forced into working a sixth day or taking "excessive overtime."

A driver works about 9 hours a day on average, but schedules can vary according to customer needs, according to the UPS statement. Still, the carrier recognized the need to find the right balance between serving customers and meeting drivers' desired work hours.

"Last year, UPS met individually with drivers to better understand their unique preferences, and we are making adjustments where possible," the company said.

Deniz said the Teamsters are also looking to eliminate discrepancies in pay and other areas between full-time drivers and 22.4 combination drivers. The latter category, with the number referring to an article in the current contract, covers employees typically making deliveries on a Tuesday-through-Saturday schedule.

"It's the same job for less pay and a slightly different schedule in terms of days on the job," Deniz said of the combination driver positions.

In addition to eliminating pay gaps, the union is also looking to negotiate a member pay increase for both full and part-time employees, but declined to provide a specific amount. Full-time package delivery drivers at UPS have a $95,000 annual average wage, while the average part-time employee earns $20 an hour, according to the company.

How likely is a strike?

Both sides aim to reach an agreement by the July 31 contract expiration. If that effort is unsuccessful, the Teamsters say they are ready to strike.

"We’ll either have a signed agreement that day or be hitting the pavement," O’Brien said in August 2022.

A UPS strike wouldn't be unprecedented ground for the union. In 1997, 185,000 UPS Teamsters halted deliveries for more than two weeks before a new contract agreement was reached.

Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS, said in an interview that he believes the two sides will ultimately come to an agreement, though it won't be easy.

“But I also think the risk of a strike is the highest it's been since 1997, and it's a completely different environment,” Amling added.

This round of bargaining is also likely to be far different from 2018, when the Teamsters ratified a contract despite the majority of participating members voting against it. O'Brien, who will be the face of union negotiations this spring, had won his election for Teamsters general president in 2021 as a vocal critic of how the previous contract agreement went down.

"[The Teamsters] should've went back to the table or struck the employer," O'Brien said of the agreement in a candidate debate prior to his victory. "Unfortunately, that didn't happen and our members got stuck with a contract that they voted down.”

How disruptive would a strike be for shippers?

Out of UPS' roughly 534,000 employees worldwide, 350,000 are represented by the Teamsters, per a recent company report. A strike would create large-scale disruptions in the company's network.

It would also likely create headaches for FedEx and other last mile carriers as shippers attempt to divert their deliveries to alternatives.

"Even though I think UPS will try to maintain limited service in the event of a strike, the capacity being taken out of the market will drive up pricing with other carriers," Amling said.

UPS' U.S. ground delivery network handled more than 17 million packages daily on average in 2021. With that level of activity, the company held a strong position in the parcel delivery sector overall at 24% of market share by volume in 2021, according to the Pitney Bowes Parcel Shipping Index.

Despite concerns over the negotiations, in a July earnings call, CEO Carol Tomé said the company continues to win business with customers who are aware of the upcoming negotiations.

"We are building contingency plans, and we will take care of our customers," Tomé said.

What can shippers do to protect their supply chains?

Amling recommended for business-to-business shippers to have buffer stock on hand in the event of UPS disruptions, while business-to-consumer shippers should be ready to call on alternative carriers.

However, existing contract arrangements can make it difficult for many shippers to divert a large share of their volumes to other delivery providers, said Transportation Insight Chief Strategy Officer John Haber. Volume-based discounts incentivize businesses to rely on one carrier for much of their shipping activity, and minimum volume commitments penalize shippers that don't meet certain thresholds.

"For a lot of shippers, their hands are kind of tied if they move volume, which is dangerous if UPS goes on strike," Haber said.

Ultimately, Haber advised shippers to begin contingency planning as soon as possible, since capacity at other carriers will run out fast.

"If you wait until June, it will be too late," he said.

It's official: The International Longshore and Warehouse Union will begin its long-anticipated contract negotiations with the Pacific Maritime Association on May 10.

Many shippers were nervously awaiting this moment. After all, the two parties involved represent many of the companies and workers that keep West Coast ports running. If, like in the past, contract disagreements were to cause disruptions — supply chains could slow down further, too.

Leaders from both the ILWU and PMA have so far downplayed those fears.

"Talks are scheduled to continue on a daily basis until an agreement is reached," the two parties said in a joint press release Monday. "Both sides say they expect cargo to keep moving until an agreement is reached."

The message of mutual cooperation is one the two groups have consistently emphasized as they set the stage for contract negotiations. During subsequent appearances at the Port of Los Angeles’ monthly media briefings in April and May, officials from both the ILWU and PMA emphasized their optimism in the negotiations, noting the trials of the COVID-19 pandemic had helped cement a cooperative relationship. And while each side expressed confidence in reaching a deal, they also came short of guaranteeing the talks would conclude before the current contract expires at 5 p.m. on July 1, 2022.

“I expect the contract negotiation to go past July 1, they always do,” PMA CEO Jim McKenna said during the May media briefing. The ILWU confirmed similar expectations in an email.

‘We need to stay at the table’

For McKenna, how long the talks last is not the issue. “It’s just, we need to stay at the table and get an agreement without causing any further disruptions.”

The time and disruptions involved in previous contract negotiations have widely varied. In 2002, talks were extended for almost three months past the July 1 contract expiry date and an impasse led ports to shut down before a deal was reached. The 2008 talks, meanwhile, caused “little to no disruption” and lasted for three weeks past expiry, McKenna said.

During the most recent round of bargaining in 2014, negotiations prolonged for eight months beyond expiry and featured work slowdowns.

"Each contract is different. [You can't] decide them on the front end," McKenna said. "Again, I think everybody is optimistic going into this one that we're gonna get to where we need."

During the April media briefing, ILWU leaders struck a similar tone, highlighting the two parties’ recent record of contract revisions as an example of their ability to negotiate details without disruption to supply chains.

“If people just look [at] what we’ve done over the last past few years, we sat down and collectively bargained agreements to get through COVID,” said Frank Ponce De Leon, ILWU Coast Committeeman. “We didn’t close any of our ports up and down the whole West Coast.”

What will the parties discuss?

Days away from the first official meeting between the two sides, reports, open letters and public comments laid out a list of topics the ILWU and PMA need to address.

The PMA website indicates the employers' association is entering the negotiation with five goals: avoiding work disruptions; continuing to offer "world-class benefits"; prioritizing safety and training; "modernizing" terminals through densification and automation; and preparing to meet "stringent" environmental regulations.

On Friday, ILWU International President Willie Adams made parts of the union's negotiating position clear through an open letter, which was emailed to Supply Chain Dive. In it, Adams cited the need for a deal that protects both workers and the economy, but decried efforts to automate marine terminals.

"To strengthen America's economy, it's not enough for ports to hold the best economic cards," Adams wrote. "They have to play them in ways that help the American workers who make, grow, and move the things we need for our lives."

Of the five principles outlined for negotiation by the PMA, automation drew particular attention late last week.

On Thursday, the employers' association released a report outlining the benefits of marine terminal automation. The report cites two terminals at the Los Angeles and Long Beach ports as case studies of how the technology could affect volume and jobs. The terminals' use of automation starting in 2015 helped the ports stay competitive and drew in cargo volumes. And as cargo volumes rose, so did labor hours.

The ILWU did not delay in countering the report. By Friday, the union had emailed out a statement arguing automation had cost jobs and efficiency at the overall San Pedro Bay port complex.

"We've seen more container volume, not more speed at the automated ports," Ponce De Leon said. "This shift is due to shipping alliances diverting more cargo to automated terminals, leaving unused capacity at other terminals during a time when the ports have been congested and need every terminal to be as productive as possible."

At the Port of Los Angeles media briefing Friday, McKenna stood by the push for automation, saying it helps terminals achieve higher throughput, stay competitive and meet emissions standards. 

But he also noted it's not the first time the two parties have discussed automation. And though such topics are always tough to discuss, hours, wages and working conditions would remain at the forefront of negotiations.

“I think we're going in with that spirit of cooperation," McKenna said. "But until you get to the table, until you see the demands that come across and the proposals that go across … you're really at a wait and see moment in time.”

The "Made in China" label is ubiquitous in the United States, stamped on everything from industrial machinery to a pair of flip flops. But risks — from rising costs, to a trade war, to a pandemic — have prompted companies to rethink their relationships with suppliers and China.

"We've realized that we put too much power in a single country," said Dawn Tiura, CEO of Sourcing Industry Group.

The change in tone from U.S. based supply chains is not a mass exodus from China. Instead, it's an approach that embraces diversification.

The risks of single sourcing from China had been brewing for years, but they bubbled up even more during the COVID-19 pandemic. In early 2020, manufacturing and supplier operations in many parts of China ground to a halt. The effects rippled across the Transpacific to U.S. importers unable to procure goods.

Camille Batiste, senior vice president of global supply chain and procurement at Archer Daniels Midland, saw the disruption first hand. The company had multiple primary suppliers of a key ingredient for its energy drink customers, but they were located in China.

When the pandemic disrupted China production and exports, Batiste and her team had to "scrounge around and try to find other suppliers."

The procurement team ended up finding a suitable ingredient in South America, but it wasn't exactly the same as the product it was accustomed to bringing in from China. ADM had to adjust its internal manufacturing to use the material.

The short-term fix allowed ADM to keep product flowing, but it also brought to light the longer-term risks of having primary suppliers in one region or nation.

"That's fundamentally changed our supply chain in our nutrition business," she said.

Batiste said she will continue to seek out other sources for the key ingredient.

"We need to build a supply chain that can also receive material from other places," Batiste said. "We just need to always have ... multiple sources."

The alternatives to China-only

As the pandemic stretched on, no sourcing destination was immune. Lockdowns would lift in one region, only to be imposed in another. Supply chain executives became entrenched in a whack-a-mole situation that continues today. Single sourcing from China was not the only risk; single sourcing from any one region was a risk.

"You need to hedge your bets," Dale Rogers, professor of business in the supply chain management department at Arizona State University, said during a Resilinc webinar in July. "You can't just be totally sourced in one place."

That realization has pushed supply chains to diversify their supplier bases, with a few geographies and strategies emerging as dominant.

Southeast Asia

When the U.S. imposed Section 301 tariffs on imports from China, many companies looked to Vietnam.

The country has high levels of literacy and relatively low labor costs, said Eddy Malesky, director of the Duke Center for International Development, during a Flexport webinar in July.

Foreign investors view Vietnam as relatively stable politically, and property rights are more secure, according to Malesky. Electronics and automotive components are growing industries in Vietnam.

"This may be Vietnam's moment," Malesky said.

Vietnam is also stepping up in a way that's appealing to businesses, said Tom Gould, vice president of global customs at Flexport, on the same webinar. That means suppliers in Vietnam, not buyers, figure out the sourcing, production, quality assurance, environmental issues and labor concerns.

"Vietnam has ... been able to say to their customers, 'You want a product; I'll deliver you the product,' as opposed to, 'You want a product; tell me how to build it, and I'll make it for you,'" Gould said.

Companies have also sought suppliers in Bangladesh, Thailand, Indonesia and Malaysia.

But throughout Southeast Asia, human rights concerns remain. Many countries in the region also lack developed transport infrastructure and ports, which only adds to lead times and risks.

Reshoring/nearshoring

The same risk factors that drove supply chains to diversify also drove them to think about reshoring to the U.S. Proximity allows shorter transit times, lower emissions and the ability to tout a "Made in USA" label. Import duties are no longer a concern. Total cost of ownership is often lower.

A Thomas study that polled respondents in March found 83% of manufacturers are likely, very likely or extremely likely to reshore, up from 54% in March 2020. But reestablishing manufacturing bases in the U.S. could prove challenging, after decades of standing them up in Asia and Latin America.

"It is extremely difficult to reverse the 30+ year trend of outsourcing and offshoring manufacturing to emerging market countries," a chemical manufacturer in the Thomas survey said. "We no longer have the talent and expertise nor capital equipment to effectively manufacture key critical components of major products and assemblies."

Nearshoring to Mexico is more common, due to high labor costs in the U.S. and Canada, and it can offer significant cost benefits compared to China.

Still, experts are also quick to point out that sourcing from nearby does not equate to resilience.

"If I'm in North America, and my only suppliers are in North America, there's a problem here," Batiste said. "We're in trouble."

Latin America

Mexico retains the spot of No. 1 trading partner with the U.S., but sourcing executives are beginning to look at other nations in Central and South America, as well.

Nike manufactures several products in Asia, but some items demand shorter lead times, Rogers said. Nike adjusted its sourcing so that NFL-related products are imported from Central America, placed on a ship and brought into the Port of Miami with a short transit time.

Tiura has her sights set on Nicaragua. The country has a strong labor market and good level of education, although political unrest turns away many buyers, she said.

Sourcing from Latin America also offers additional transport options. Cross-border rail can carry goods from Mexico to the U.S. The Pan American Highway spans Alaska to the tip of South America, with only the Darien Gap breaking the route.

Still, infrastructure is limited in many parts of Central and South America.

"There is a road. It's not a great road," Rogers said, referring to the Pan American Highway. But with enough investment to build the transportation infrastructure, Rogers said the highway could compete with China's Belt and Road.

Do the roads lead back to China?

Diversification doesn't stop at tier 1. Some members of Sourcing Industry Group thought they had diversified by adding a supplier in Vietnam, only to find out that supplier was buying materials and components from the same spot as the vendor in China, Tiura said.

"At the end of the day, almost every road was leading to China," Tiura said.

In today's world, it's tough to conceive of a supply chain completely disassociated from China, whether the connection is in tier 1 or tier 4.

China is the most-utilized sourcing destination for U.S. fashion companies, according to the United States Fashion Industry Association's 2021 Fashion Industry Benchmarking Study. Machinery, toys and plastics are commonly sourced from China. Pharmaceutical supply chains rely heavily on overseas production.

The country has a wealth of manufacturing hubs, myriad raw materials, a robust labor force and strong port infrastructure. Global companies have established supplier relationships that could be damaging to erase.

Plus, the nation has a huge population and consumer base, and companies want to do business with the country, according to Tiura. China's e-commerce sales totaled $2.4 trillion last year, dwarfing U.S. online sales in 2020 of $792 billion.

These deep roots are the reason why China will likely always be a staple of sourcing.

"You can't replicate the size of China's manufacturing base," Rogers said.

But it doesn't eliminate the need for redundancy as a resilience measure.

"Who knows where the next earthquake is coming, or hurricane, or pandemic, or political uprising," Rogers said. "You're going to have to think about that and have ways of continuing to have product flow, even when these disruptions take place."

Empty grocery store shelves in April 2020 and bare car dealerships in 2021 led to a lot of finger pointing. And much of the blame fell on lean inventory or just-in-time supply chain management.

Industries have worked for decades to cut costs by lowering inventory levels. But it requires a careful balance. Inventory that's too low means lost sales when consumers can't find the item they want to buy. The empty shelves during the pandemic served as a wake-up call for businesses to carry more safety stock.

A Gartner survey published this year showed some interest among supply chain professionals in increasing safety stock. Still, others say the benefits of just-in-time are just too good for companies to give up on the practice.

And a look at some large companies' inventory levels shows that while they are higher in many cases, the companies have actually managed to return to a normal level when it comes to inventory as a percentage of sales. This simply means inventory has gone up, but so have sales, and companies are trying to keep up rather than build safety stock.

Take Walmart as an example. The value of inventory the retailer reported in July was 6% higher than it was during the same quarter in 2019, but its sales had increased more than 8%. Its inventory as a percentage of sales was back to where it was in 2019 — with less than 1% difference — after falling more than 4 percentage points from 2019 to 2020.

In this context, Walmart's inventory buildup seems less like a buildup and more like an attempt to keep up. Still, executives at the retailer have also said they would like inventory levels to be higher than they currently are.

"We were happy to report in the second quarter that we had a lot more inventory than a year ago," Walmart CEO Doug McMillon said at an analyst conference in September. "In 2020, at the end of the second quarter, we were way too light in stores and on the e-commerce side. So we would take even more inventory if we could get it, especially in some categories."

Every company has been affected differently, though. Hasbro has had a hard time keeping its inventory afloat amid high demand. Sales surged more than 34% compared to 2019, but inventory is down 11% compared to the same period, which has led to its inventory as a percentage of sales dropping 20 percentage points.

"We're ... working to ensure product availability during the holiday season," Hasbro CFO Deb Thomas said on the company's last earnings call. "We may experience some shifts in delivery dates and timing of revenue, but we're leveraging our global footprint and scale to meet demand."

Just-in-time: Time to shine or rethink?

Lean inventory management or just-in-time inventory planning has been a way of thinking within the supply chain management world for decades, with Toyota often credited with pioneering the method. The automaker famously redesigned its supply chain after it experienced issues following a 2011 earthquake. In fact, Japan adopted lean practices a full decade before companies in the U.S., John Dalton, an economics professor at Wake Forest University, noted in a 2013 research paper.

The idea, which U.S. companies began to adopt, is simple: Businesses want to try and match their level of inventory to consumer demand as closely as possible. In a well-oiled supply chain, manufacturers can meet fluctuations in demand, and theoretically sell more while reducing inventory carrying costs, Dalton wrote.

But as the pandemic swept around the globe, bare shelves had people questioning the practice. With the global supply chain strained under the weight of the pandemic, the Biden administration set out to understand what was going wrong. A 250-page report released in June outlines some of its findings — and it points a finger at just-in-time.

The report from the Biden administration said just-in-time supply chain management increased risk in industries from auto manufacturing to drug making, as it reduced safety stock and companies' ability to quickly adapt to upticks demand.

"In contrast to early projections, vehicle demand recovered much more quickly than expected in the second half of 2020," the report reads. "This sharp rebound impacted the auto industry in part due to its just-in-time supply chains and limited visibility into upstream suppliers. When auto parts suppliers returned to place orders for chips to meet the unanticipated surge in vehicle demand, semiconductor manufacturers had reportedly already utilized spare capacity to produce chips for electronics devices."

Biden touched on this reality again recently, addressing port congestion and supply chain challenges more generally.

"Prior to the crisis, we shared the focus on lean efficient supply chains, leaving no buffer or margin for error when it comes to certain parts arriving just in time is needed to make a final product," he said during a recent press conference. He went on to note that there needed to be an investment in increased resilience without specifying what this would consist of.

A new era of supply chain planning

From the outside looking in, it appears that just-in-time supply chains have caused more problems than they've solved over the last year. But companies still seem interested in adopting the practice, experts said.

Paul Lord, a senior director analyst at Gartner, said he's fielded almost 10 calls over two to three months about companies that want to work toward a just-in-time supply chain.

"So the aspiration hasn't gone away, at least not completely," Lord said.

Dan Hearsch, a managing director in the automotive and industrial practice at AlixPartners, agreed that the interest in lean inventory has not waned among corporate supply chain planners. There could be some changes to supply chains going forward.

"I think the changes will largely be represented in the safety stock calculation," Hearsch said.

This will mean keeping more inventory of what manufacturers consider critical components. Figuring out what exactly will be considered critical will be an "art" for many companies and the definition will likely be broader than it was a couple of years ago, he said.

Part of the calculus is the number of alternative suppliers a component has. An example of a non-critical component would be polypropylene as it has a lot of different suppliers available, while something like xenon headlights have fewer suppliers and are closer to the critical end of the spectrum, Hearsch said.

Companies might agree to order one or two years of stock from a supplier rather than 12 to 14 weeks to help ensure they have the products available. That doesn't change the just-in-time delivery aspect of the component, Hearsch said. The issue with committing to that much inventory is it cuts down on a manufacturer's flexibility.

"The supply chain planner is forced to compensate for shortcomings in agility, and resilience with additional inventory," Lord said.

And that's why, in reality, just-in-time has been and will always be an aspiration, Lord said. Uncertain lead times, squeezed shipping capacity and manufacturing shutdowns during the pandemic exposed the need for buffer inventories.

"When things get out of balance, you won't be able to predict and count on what you can and can't get," Hearsch said. "So you're gonna have to plan in a selfish manner."

Flooding, hurricanes, record temperatures. Disruption from extreme weather is increasing as the world warms. 

In a landmark report from the International Panel on Climate Change, researchers found that over the next 20 years, global temperatures are projected to rise 1.5 degrees Celsius (2.7 degrees Fahrenheit). Such a rise will mean longer, hotter seasons, unprecedented sea level rise in coastal areas and more intense flooding, among other effects. 

Like many industries, manufacturing is contending with this new reality. It's warping the way factories operate, how employees work and where companies plan long-term investments. 

Extreme heat threatens productivity, worker safety

One of the primary threats facing manufacturers is the impact of extreme heat on productivity. As more workers become exposed to rising temperatures, the amount of work they can accomplish under such conditions is projected to drop, while threats to health go up.

The issue is tracked by the United Nations' Human Climate Horizons Project, published in partnership by the UN Development Programme and the Climate Impact Lab. The report projects how rising temperatures in the coming decades will impact productivity among workers around the world. 

One conclusion: Without intervention on global emissions, the average worker in the U.S. could lose 0.4 hours of productivity in annual hours worked between 2040 and 2059. 

The number may not seem dramatic on an individual scale, but it's a significant impact when multiplied across millions of people, said Hannah Hess, an associate director with Rhodium Group’s Energy & Climate practice and the Climate Impact Lab.

"Think of how your workforce responds when it's super hot outside. Here's how those days are going to multiply over the course of the century, Hess said. "And here's how that is also projected to have a larger and larger effect over time on your workforce."

The effects will extend across the globe, with some countries more affected than others. In India, if emissions are not cut by midcentury, the country is projected to experience 118 days a year over 35 degrees Celsius (95 degrees Fahrenheit). Such a rise would send hours worked plummeting by 19.6 hours each year as workers are exposed to extreme heat.

"What these results point to is that maybe there's a need in some places to think about investing in protected things like air conditioning or more breaks, water stations, as the world warms," Hess said. 

Rising waters could submerge global manufacturers

While extreme heat is a major emerging manufacturing risk as a result of climate change, it's not the only one. Increased exposure to flooding in facilities is another threat that manufacturers around the globe are increasingly facing. 

Flooding threatens huge swaths of the U.S. In June, an Abbott Laboratories factory, which was made infamous by its contamination of baby formula, was forced to pause production for weeks due to flooding in the facility following a storm. 

The issue is also impacting major manufacturing hubs in low-lying regions. In a study from Cornell University and the International Labour Organization, researchers found that contract manufacturers and suppliers in Southeast Asia are susceptible to extreme flooding and eventual submersion if their sites aren't moved to higher ground. 

The situation will be particularly dire for these companies, as many lack the same resources and infrastructure enjoyed by their multinational customers. 

"For buyers, the relative lack of attention to sea level impacts on suppliers and their workers underlines the nature of the relationships; buyers with very few exceptions do not own factories and risks such as catastrophic flooding belong to their suppliers," researchers wrote in the report. 

Research like the International Labour Organization's and the Horizon Project's can help guide federal policies around issues such as worker safety standards for extreme conditions, Hess said. 

"I would want a manufacturer to know that the effects of climate change are going to be much wider. Adapting is really important," Hess said. "But the fact that this is likely a conservative underestimate about the effects of climate change on the workforce just points to the importance of that flip side of the coin, which is mitigating and doing your part to reduce emissions."

Experts say the time to start tackling the risk is now

Threats from climate change are felt around the globe and from every variety of manufacturers.

The ubiquity of the risk is part of why experts say managing it will be a critical factor for companies' future planning strategies. It will impact both how they manage risk and their emissions, two issues that are inextricably tied together, said Thomas Kurfess, professor and HUSCO/Ramirez distinguished chair at Georgia Tech's George W. Woodruff School of Mechanical Engineering. 

The higher the global emissions, the more severe the disruption.

"I see two directions here. One is we are seeing more and more companies being more concerned about the environment in general," Kurfess said. "The other thing is from an economic perspective, floods and so forth, these things generate a lot of risk. So how do you deal with all the different risks involved?" 

Despite public commitments to sustainable palm oil from some of the crop's largest stakeholders, deforestation continues at a rate of 18 million acres per year, according to the United Nations, causing some stakeholders to question whether current tactics to fight the practice are having any effect. 

Now, 15 years after the formation of the Roundtable on Sustainable Palm Oil (RSPO), the leading industry group and largest certifier of sustainably and ethically produced palm oil, new thinking is starting to take hold.

Businesses are realizing certification of supply is a place to start, but it doesn't necessarily lead to ongoing action by palm oil buyers. A deeper, more localized approach to advocating for change may be key to lasting impact. 

Experts from the RSPO, Environmental Defense Fund and other organizations explained this week at the Responsible Business Summit in Brooklyn, New York, the challenges and strategies to make this notoriously problematic, yet ubiquitous ingredient sustainable at scale.  

Commitment doesn't always mean action

"A lot of companies have very nice policies that they’re not implementing and they’re not implementing with urgency," said Daniel Strechay, director of outreach and engagement and U.S. Representative at the RSPO.

Deforestation is still growing, but at a slower rate, said Strechay. Progress is slow in part because many businesses have not yet put their money where their mouth is. The evidence is in the price growers get for palm oil.

Currently, just 62% of certified non-deforestation palm oil receives a premium price in the marketplace, according to Strechay, meaning there is more supply of sustainable oil than demand, causing sellers to lower the price of sustainably produced oil. The argument here is: with the number of major purchasers publicly announcing intentions to rid their supply chains of deforestation, that 62% should be higher. 

"That's a problem," he said. "That to me says that we have to have a bigger commitment from the downstream to implement these policies."

"Commitments are great. Commitments don’t always get to action," added Katie Anderson, supply chain manager for the Environmental Defense Fund. 

Certification is only the beginning

"There has been, I think it’s fair to say, a loss of confidence in certification schemes' ability to actually end deforestation," said Ethical Corporation editor and discussion moderator Terry Slavin. 

"The problem really stems from people viewing the certification as a silver bullet. Certification is a tool in the toolbox you help address these issues," responded Strechay. He went on to say, "It’s incumbent on companies to work holistically in their supply chain ... and not just lean on certification."

Environmental groups, certifiers and even some big palm oil purchasers have realized in recent years that making an effort to choose what seems like the most sustainable supply is not enough to actually change the dynamics on the ground in palm oil producing countries. Issues like farmer compensation and enforcement of local regulations around land use are important elements that simply certifying responsible growers won't fix. 

Rachael Sherman, director of global sustainability for McDonald's, said the company would like to rely solely on RSPO for its sustainable palm oil monitoring and compliance work, but that's just not realistic since certification doesn't necessarily change the deeper systemic issues at work. 

Moderns strategies are much more complex

One way corporations are starting to go beyond certification is by collaboratively working to influence local authorities in what is called the "jurisdictional approach." A simplistic way of describing this growing method of addressing deforestation is to put the certification standards into local legislation on the ground. 

The actual work is much more complicated since it requires a deep understanding of local players and dynamics. This approach said Anderson, "allows companies to be assured that simply sourcing from a certain jurisdiction is enough to assure no deforestation and relieves the burden of continual audits."

One of a handful of success stories in this vein is Sabah, Malaysia, where roughly 10% of the world's palm oil is produced. A group of RSPO members, local officials and nonprofits have worked to put sustainable practices into state regulations with the goal of being 100% RSPO certified by 2025. 

"Companies are starting to commit to sourcing from Sabah because of that effort — because they are taking the step to take the jurisdictional approach," said Strechay. And the benefit goes beyond streamlining supplier approvals for palm oil buyers: growers in Sabah see the value in being a supplier of choice. 

It's a longer and rockier road, explained the panel, since governments change, sometimes overnight, personnel shifts continually and stakeholders have often developed grudges over time. Anderson's work, mostly in the beef industry in Brazil, is entirely based on this approach, and McDonald's has three to four pilots across several commodities to see what addressing jurisdictions at a more systemic level can change.

In 2020, California lost 4,257,863 acres to fire. That came from 9,917 incidents, and damaged or destroyed 10,488 structures in one year. This year, wildfire season is expected to be worse.

"California has always had fires," but the number of days with favorable fire conditions like high winds and low relative humidity doubled over the past three to four decades, said Jon Davis, chief meteorologist at Everstream Analytics.

Less snowpack and an earlier melt result in longer and more intense dry seasons, with vegetation susceptible to flammability.

That requires logistics managers to anticipate more frequent and severe fires going forward, as the wildfires damage homes and buildings, as well as clog up transportation arteries. The combination makes it difficult for supply chains to operate.

The five-year average number of fires from January to May 9 is 905. But in 2021, California experienced twice that number, with 1,812 fires, and three times the number of acres burned. And it's not even the height of the season. Fire season typically peaks between September to November, and it's getting longer. Cal Fire, part of the California state government, estimates that fire season increased by 75 days, with climate change considered a key driver.

"The wildfire situation becomes an issue because there's a couple of choke points in California," primarily going north out of Southern California, said B.J. Patterson, CEO and co-owner of Pacific Mountain Logistics, based in San Bernardino, California. "The biggest challenge is contingency planning for when those routes are cut off."

I-15, to Las Vegas and Salt Lake City, as well as I-5 go through fire-prone areas. To avoid I-15 when bringing freight to Salt Lake City, drivers may use I-10 to US 95 to Las Vegas before cutting over to I-15, which can easily add a day and half.

"Sometimes they're cut off for a week at a time. When you're in Southern California, a week's worth of freight is more than most areas of the country do in two months," Patterson said. The choke points can affect interstates and trucking movement as well as railroads, he said.

The poor air quality also poses a health burden to workers. "You have to be outside loading and unloading boxes. That puts workers at risk," said Bindiya Vakil, CEO of Resilinc.

Rethinking warehouses and inventory

Fire risk hasn't deterred many logistics managers from expanding their supply chain networks into California. Real estate company CBRE reported that California's Inland Empire, adjacent to Los Angeles, was the top market in demand last year, and the state's Central Valley was one of the top emerging markets nationally.

Over the past few years, warehouses have been built closer to population centers, because of the Amazon effect, said Kathy Fulton, executive director of American Logistics Aid Network. "The things that make us more efficient also make us more fragile," she said.

Distribution centers are located closer to populations which rely on them for local needs. "There's more chances for supply chains to be interrupted, rather than just road challenges," Fulton said.

With wildfire risks, some companies are considering moving warehousing operations or sourcing from vendors outside of potential fire danger areas, said Davis.

But that's not possible in all cases. "Food is perishable," said Vakil. "How do you manage a Safeway distribution center? You can't locate your replenishment supply outside of 1,000 miles. It's hard to get in and out." Some industries have more leeway, she said, like technology or pharmaceuticals, where inventory stored elsewhere can still support operations.

To mitigate a potential impact, said Vakil, companies can periodically move some inventory or add buffer stock outside the region during higher risk periods. That allows them to keep the majority of inventory in the needed location, but ensure some supply availability in case that site is less accessible.

Having enough buffer stock is still a concern for many companies. When the country came out of the recession a decade ago, most retailers were inventory adverse, said Patterson, since they were caught with expensive excess goods.

"I often refer to it as the 2008 syndrome," he said. Supply chains moved to a just-in-time approach to mitigate that risk, resulting in shortages that were apparent during the early months of COVID-19. Low levels of safety stock can be problematic in an event like a wildfire. If the stock is inaccessible or transportation is delayed due to road closures, supply chains can grind to a halt.

Preparing for fire risk with data, drills and insurance

Unlike hurricanes, which come with advanced warning, wildfires, tornadoes and earthquakes do not.

"You're reacting," Vakil said.

Wildfires do have a season, and companies can prepare for the risk by understanding which supplies, suppliers and distribution centers are in riskier areas for wildfires in California or other states.

Even with planning, there can still be periodic disruptions, but it doesn't have to be a massive disruption if the company is planning ahead.

Risk management used to be ad hoc, but now companies are using more technological solutions, said Shehrina Kamal, vice president of intelligence solutions at Everstream Analytics.

"The last thing you want to do as a risk manager is scramble for resources when you're in a crisis mode," she said.

Monitoring the fire situation in real time and having all the company data in a central location with easy access helps. That allows a company to understand where its inventory is, how a fire in a particular area would impact them, what revenue is at risk if that inventory is destroyed or unavailable, and to connect other dots between disparate sources of information.

Logistics companies like Patterson's prepare for wildfires and earthquakes with annual drills. The firm has evacuation plans and business continuity plans, outlining how to deal with business issues and communicate with customers during a disruption. The communication tree designates which employees call which customers, and how inventory will be handled.

Pacific Mountain Logistics can move the product if needed to fulfill orders elsewhere. It backs up data to the cloud and is able to work remotely. The company has generators in case the facilities lose power, and emergency food, water and first aid supplies in the event that employees are trapped on-site.

Property insurance can protect the value of the warehouse or manufacturing site and contents in the case of a wildfire. But business continuity insurance can be expensive.

"The deductibles are very high," said Patterson. That insurance is helpful if a company is directly impacted over the long term, like if the warehouse or factory burned down. "But it has to be a pretty significant impact to make [insurance] worth going after."

Developers look carefully at the area's wildfire risk when building, partly because insurance can be an expensive proposition.

The other type of insurance to consider is contingency business interruption insurance, which only covers physical damage at the named sites, said Vakil. A company that relies on a 3PL or contract manufacturing site should name the site in the policy, in case it experiences damage or destruction from an event like a wildfire.

"It's important to map the supply chain, really all the sites that form that chain, and name all of them in the policy," she said.

Continuous crises and disruption

California wildfires come with other risks too, like proactive rolling blackouts, Vakil said. In 2020, PG&E shut down power because the wildfire risk was too high, and the company may proactively do so again in the future.

While using generators is not ideal, Patterson's facilities have generator back-up in case of power loss.

"We've been subjected to rolling blackouts a few times," he said.

With enough notice, logistics operations can rely more on locations outside of the crisis zone and plan ahead for closures.

And of course, California wildfires aren't the only crises supply chains need to consider.

"They're having to deal with multiple crises at once, whereas in the past, you're worried about hurricanes in the southeast United States, and that's all your business has to focus on," said Fulton.

Last year, companies had to deal with civil unrest, the pandemic, wildfires and hurricanes, sometimes at the same time.

"There are compound crises and we're seeing more of them, and more frequently," Fulton said. This requires companies to increase the scope of their planning. When trying to get through a crisis, "if we can't even support ourselves, where is the surge support coming from?"

The risks are not going away.

"It's a continuous role of disruption when it comes to the supply chain," Vakil said.

It's not possible to mitigate all concerns, but companies can leverage the information they get, to plan ahead for known seasonal issues like wildfires. That includes understanding which supplies are most critical to the company's revenue, so as to de-risk the supply chain at least in that area.

"That's how you make sure your supply chain doesn't bring you to your knees financially or cause financial distress for your company," Vakil said.

National Human Trafficking Awareness Day brings into focus the labor conditions of our extended supply chain — at least for one day.

Far too often, customers outsource their moral outrage, as well as their manufacturing, to their top tier suppliers. Turning a blind eye to these tragedies may be the easy choice, especially when the upstream supply chain is halfway around the world. But human trafficking and exploitation are not reserved to low cost countries.

We need to acknowledge there are labor exploitations within our domestic supply chain. Knowingly or not, we use suppliers who take advantage of employees, provide poor working conditions and low wages, and purposefully violate laws and regulations. Where is the moral outrage of labor exploitation in the United States?

As a supply chain professional, I spent a large portion of my time on the road, visiting suppliers for quality audits, sourcing assessments and contract reviews. My eyes and ears are my most powerful supplier evaluation tools. I found there are plenty of companies that exploit their employees, and I didn’t have to go very far to find them.

Some of these exploited workers are undocumented immigrants performing a range of jobs critical to our economy. Unscrupulous business owners, ignoring the voluntary E-Verify process, find it easy to "employ" these workers and exploit their immigration status with threats of turning them over to the U.S. Immigration and Custom Enforcement (ICE) for deportation. Nothing like threatening to destroy families by calling the feds if employees feel they deserve to be paid fair wages and work in safe conditions.

When visiting suppliers, my first task was to take the symbolic temperature of the employees, easy to do when looking in their eyes and at their surroundings.

I had a simple evaluation tool that seldom failed me. I said hello to employees on the manufacturing floor or at their workstations. A smile, a nod, an invitation to come see what they were working on was indicative of a generally happy employee and typically a well-run organization. Happy, safe and well compensated employees make better products. And I’m willing to pay for that.

But they were not always happy. A worker who did not make eye contact or who worked in substandard conditions with a supervisor imitating a prison guard’s demeanor told me very quickly all that I needed to know.

I remember the employees at a printed circuit board facility with holes in their clothes and burns on their skin due to the acids they worked with. Employees in a small and crowded break room that was crawling with roaches eating their lunch. Workers jammed shoulder to shoulder on assembly benches without enough room to properly do their work. Machinists lacking eye and hearing protection. Barbed wire surrounding an outside break area. Exposed electrical wires and leaking pipes, and clean rooms that were far from clean.

The responsibility lies with management. Perhaps like the manager who posted a sign on the one tiny coed bathroom used for 60 employees with a sign that said, "If this bathroom is occupied go back to work." Or company owners calling their employees idiots and morons in front of other employees, and the customer. Supervisors yelling at and making fun of employees who did not speak English. Managers who would not let employees leave work to care for a sick child, or parent, threatening to fire them if they did. Laughing at the handicapped and infirm. Degrading women and minorities and mocking LGBTQ employees.

If I saw these workplace issues at an existing supplier, I put the company on notice and followed up in short order. If I did not see the issue corrected, I found a new supplier. If I witnessed these behaviors during a sourcing visit, I ended the visit immediately.

At times when I noted my observations, I was even asked to leave. One owner told me I was not tough enough and had too high of a moral standard to be in business, ending his comments with a slur.

The good news is, our social consciousness seems to be catching on. Changes in the workplace, such as the #MeToo movement and living wage campaigns, are changing the global workplace in a positive way. And a move toward the green supply chain and ethical sourcing is forcing positive change as well.  

We will know we have successfully solved the global human trafficking and employee exploitation problem when we don’t need a day to acknowledge it. Until then, supply chain managers need to pay close attention to human rights issues in their supply chain. You have the responsibility to hold your suppliers to a higher standard, no matter where they are located.

Romaine lettuce, airbags, antibiotics, dog food. Nearly every industry at some point faces product recalls, which seemingly are in the news almost daily and can be catastrophic — financially or in human lives.

According to a report from Kiplinger, the total cost of the Top 10 recalls is $73.8 billion, beginning with the 1982 Tylenol poisoning, which resulted in seven deaths, to the ongoing Takata airbag recall. Of the 10 listed by Kiplinger, half are in automotive, three in pharmaceuticals, one in food and one in technology.

"When we think traditional recalls, we’re thinking of items at the consumer or the last step before the consumer, but it can be anywhere," Dale Rogers, Professor of Logistics and Supply Chain Management at the W.P. Carey School of Business at Arizona State University, told Supply Chain Dive. For this reason, recalls are a major concern for supply chain managers.

Recalls are split about evenly between voluntary and mandatory, Rogers said.

"There are a lot of reasons, but typically they’re some sort of liability [issues]," he said. "Some are mandated by a consumer product agency or the FDA (Food & Drug Administration). When it’s voluntary, a company says, 'we better do this,' and, when you think about it, it’s really every day because of product lifecycles."

The supply chain touchpoints for recalls

Faulty parts generally occur in two places along the supply chain: Either the product’s original equipment manufacturer (OEM) or at the facility that assembles the product, John Giangrande, Director of Sales who heads up the automotive aftermarket vertical at Fortna, told Supply Chain Dive. 

"First and foremost, it’s at the manufacturing point," Giangrande said.

The Takata airbag recall is a prime example. It affected 19 different automakers and 37 million vehicles in what the National Highway Traffic Safety Administration (NHTSA) called the largest and most complex safety recall in U.S. history, as reported by Consumer Reports. In brief, the propellant that triggers the airbag’s metal inflators was weakened by moisture and could rupture, sending metal shards throughout the car. As of July 2018, the most recent available statistics, the faulty airbags had killed 15 in the United States and 23 globally.

"Takata oversees the airbags and makes them for new vehicles. At the same time, those parts are available to the aftermarket, including dealerships," Giangrande said

When an automotive recall occurs, it puts a burden not just on dealerships, but also on aftermarket companies like NAPA, Advance Auto Parts and Pep Boys.

"They have to identify those customers — people who do their own repairs on orders cars — who bought those parts and absorb the costs," he added. "The responsibility goes to whoever the part is coming from or where it was bought."

Expect the unexpected

The burden and cost of unexpected disruption to the supply chain doesn’t necessarily happen only to the "big guys," Gary Barraco, Director of Global Product Marketing at Amber Road, told Supply Chain Dive, citing a company that screen prints T-shirts and sweatshirts.

"They got a call from the Consumer Product Safety Commission (CPSC)," he said. "[The agency] went into a store and, using a gun that can detect lead in spray paint, zapped the shirts and a number registered as 'hot.' They were pulled off the shelves. The manufacturer went back to his factory in China. They told him they were almost done with the run but ran out of paint for the last couple hundred. It was last minute, at deadline. They ran to a friend’s plant for backup paint and finished up the run."

Those were the shirts that came up "hot" during the CPSC inspection. The entire inventory was pulled, not just those that were discovered in that store. The onus was on the manufacturer to prove to CPSC that it was only a small batch, which it eventually did, but not without cost and aggravation.

"Traceability is near and dear to my heart," Barraco said. "Everything that happens upstream goes downstream. Polluted water upstream is going to spoil what it reaches downstream."

As with so many supply chain issues, technology can help, said Arizona State’s Rogers. When it comes to pharma or food, it’s especially important.

"Internet of Things (IoT) sensors can see where the product is and if it’s outside of the required temperature range. I think in the next few years we’ll see product damage on transportation reduced through better sensing. Intel, for example, has really developed a lot of technology around sensors tracking items through the supply chain."

Have a plan, and execute

If you’re the supply chain manager, are you part of the prevention or part of the cure, Giangrande said. "If it’s prevention, vet your suppliers and make sure they’re ISO (International Organization for Standardization) certified, do quality assurance and enforce safety standards. If you’re part of the cure, share responsibility, have recall insurance for your organization, be able to track the products."

Documentation, of course, is vital, Amber Road’s Barraco noted. "You need the purchase order and supplier information, serial codes and lot numbers in one consolidated platform. Who can drill down to where it happened? It’s imperative for manufacturers to test all components, then document everything related to the product. You really have to keep a finger on the pulse."

Despite a supply chain manager’s best efforts, recalls will occur — it’s just part of the business. Barraco offers a few key steps to a solid plan:

• Notify the customer and have a process for them to destroy or return the product.
• Fix the production so anything else coming down the pike isn’t affected.
• Retool the whole operation, whether it’s for a design flaw or replacing a part.
• Redo the entire inventory. What’s in stock? What isn’t?

"Diligence," Barraco said, "is key."