Supply chain crisis will leave permanent scar, UPS warns

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Supply chains updates

The supply chain crisis unleashed by the pandemic will inflict lasting damage on the globalisation driven by multinationals, according to a top executive at UPS, one of the world’s largest delivery companies.

Sharp swings in consumer demand, a battered airline industry and disruptions to global shipping have created the severest crisis in years for the supply chains that global companies have built their operations around.

As a result, multinational retailers and manufacturers were making a “big push” towards regionalising their supply chains, said Scott Price, president of UPS International.

“A lot of companies are coming to us saying ‘where is the best place to put manufacturing and assembly?’” he said. “There’s an understanding that reliance on stretched supply chains puts you at risk.”

The range of industries affected by the logistics crunch is growing with manufacturers of computers, furniture and cars all struggling to source key supplies quickly enough. Although several factors are at play, most executives and experts point to the pandemic as the driving force.

With a fleet of more than 500 aircraft serving 220 countries, UPS’s position as one of the world’s largest logistics companies offers it a rare vantage point on the strains. In recent decades, the $165bn company has been a big winner as the ranks of multinational companies has grown.

Price, who oversees the group’s operations outside of the US, said that the damage wrought on the aviation industry had laid bare the vulnerability companies face in moving large amounts of cargo in the belly of passenger aircraft.

Industry estimates suggest it will take until 2025 for air travel to fully recover on long-distance routes, he added.

“One of the reasons it [supply chain regionalisation] accelerated is companies were surprised how little optionality existed during this period,” he said.

Price expects factories in Asia, which historically have also produced goods for sale in the west, to begin catering more to regional markets.

“It will take five or 10 years before you see it,” he said.

More manufacturers are also setting up production in Mexico to supply the US market in a bid to shrink supply chains, he added.

The prediction from Price came as Atlanta-headquartered UPS said that its annual price increase for customers will average 2.8 per cent, the smallest rise in a decade, and will take effect from December 26.

However, combined with demand-related surcharges that UPS had applied to customers this year, Price said the company would be able to maintain strong levels of profitability.

In the second quarter, the group’s operating profit climbed by almost 50 per cent from a year ago to $3.3bn, as a surge in online shopping during the pandemic led to more demand.

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