Things are messy right now – a pandemic, weather woes, factory shutdowns, logistics issues, containers shortages, you’ll find disruptions up and down the supply chain.
While the world was already suffering from the effects of semiconductor shortages worldwide, another critical addition comes in the form of plastic shortages. Three of the most widely produced thermoplastic polymers, i.e., monoethylene, polyethylene, and polypropylene, are facing supply disruptions, leading to delay in production and delivery, price inflation, and even factory shutdowns.
Here is a deeper dive into why a plastic drought is upon us and how procurement consultants can keep up with navigating through yet another turbulent time.
Why is there a plastic shortage?
Mid-2021, there are constraints on the supply of plastic resins as the plastic product makers see the cost inflation first-hand. Plastics made from thermoplastic polymers are now used in almost every other product – packaging, appliances, automobiles, smartphones, etc. When you combine this situation with increased discretionary spending, the impact of supply shortages becomes apparent.
But why is something as common as plastic facing supply constraints?
Just like the semiconductor shortage a couple of months ago, plastic shortages have been a long time coming. Instead, it was more of a fallout from seemingly unrelated incidents.
In the early days of the pandemic, oil prices dropped due to lower demand, so oil production decreased (thermoplastic polymers are produced during crude oil refining). On the other hand, quarantine increased the demand for plastic products, and with oil production slow, suppliers could not keep up with the demand.
In addition, polymer production facilities require constant maintenance, which was again not possible due to COVID curbs and health concerns.
Finally, natural calamities like extreme weather during the hurricane season and severe winter storms disrupted the extraction and processing of hydrocarbons. Meanwhile, several chemical processing plants also reported major fire outbreaks and leaks, further straining an already distressed sector.
Impact on supply chains worldwide
As vaccinated consumers step out of their homes and discretionary spending increases, there will be a surge in demand that supply might not be able to keep up with it. Several companies up and down the supply chain are already facing depleted inventories, leading to price surges and longer turnaround times. Sourcing consultants expect such disruptions to last from 6 to 12 months.
While industry 4.0 is just around the corner, it has yet to debut in several industries. So, many companies lacked the early warning systems and instead relied on their market intelligence to navigate this pandemic. Therefore, although it was necessary, it was impossible to map all tiers and categories of materials that go into building a single product.
Similarly, sourcing consultants also failed to monitor the performance of polymer suppliers effectively, mainly because thermoplastic polymers are relatively inexpensive used to produce resins and adhesives. They paid close attention to their direct suppliers but failed to gain insight beyond them. What was chalked off as inexpensive ended up exposing plastic supply chains to the pandemic vulnerabilities.
Logistics has emerged as another pain point on international supply chains. With transportation curbs worldwide, it is going to get increasingly difficult to reallocate plastics and raw materials within the top three markets, i.e., The US, Asia, and Europe.
From the looks of it, plastic raw materials will be delivered late to the production houses. Even if adequate shipping capacity becomes available, the plastic delivered will have significantly smaller volumes and a higher price tag.
Building supply chain resilience
However, supply chain disruptions do not only spell doom and gloom; they present exciting learning opportunities that will be crucial to prevent events of such sorts in the future. For instance, the COVID pandemic highlighted the vulnerabilities baked into cost-optimised supply chain models and the need for supply chain resilience going forward.
Organisations that had better visibility down to the sub-tier levels could map the disruptions this pandemic would cause, allowing them to take actions before lockdowns started and avert negative impacts to their supply chains.
Several top companies spend time and resources identifying who supplies their suppliers to help continue production and protect the supply chain from external interferences.
Amid an increased demand, organisations need to work closely with their procurement consultants to map out their Tier-1 supply and logistics hubs. Better supply chain visibility will allow them to intervene at the pain points and stop problems from aggravating into major disruptions. For instance, companies can decide to source raw materials from more than one supplier to react faster to future supply chain disruptions. In this market environment, companies ready to brace for impact have a competitive advantage.