MSMEs must brace for worsening global supply chain crisis

COVID-19 sent shockwaves across the intricate web of the global supply chain, already under strain from the US-China trade war. Repeated lockdowns to curb the rising infections set off a slew of catastrophic events that brought out the worst vulnerabilities of international trade - crippling raw material shortages, labor absenteeism and layoffs, shipping delays, an astronomical rise in freight charges. 

Lured by the safety and convenience of contactless shopping, bored consumers diverted spending on food, travel and leisure to e-commerce, adding further stress to the beleaguered shipping industry. The scale of the acute all-weather container shortage is something the industry has never seen before. 

Floundering with the pre-pandemic challenges of adjusting to regulatory disruptions, import-dependent and export-driven MSMEs in India are bearing the brunt of the supply chain crisis. 

The nightmare is far from over

Even as travel cautiously opens up and the green shoots of economic recovery are sprouting, the delta variant is still hampering raw material exports from South East Asia. Experts say that the global semiconductor shortage, which is affecting at least 5-10 percent of the demand in auto and electronics industries, will take a few more quarters to stabilize. Globally, chip scarcity is expected to cost the auto industry alone a revenue loss of 110 billion USD in 2021.

Worryingly, there is a coal calamity looming in India. Brought on by escalating demand for electricity in the post-lockdown world and the natural disasters in critical coal production regions in the country, the coal crisis is problematic on multiple fronts - data from the power ministry shows dangerously low stockpiles in more than 60 percent of the country’s coal plants - a huge damper for ramping up production ahead of the festive season. Thousands of MSMEs in the coal-dependent aluminium sector have already sounded off alarm about their survival if the coal crisis continues.

Maersk, the largest shipping company in the world, said that from January to August 2021, it ‘repositioned’ over 2 lakh shipping containers to India to meet the surging demand of exporters. MSMEs, however, are asking the government to provide a freight subsidy - container costs have increased nearly eleven times from INR 1.5 Lakh due to port closures and supply-demand mismatch, the Karnataka Small Scale Industries Association said recently in a statement. Without subsidy, MSME exporters would lose out on catering to the holiday season in the West and eventually be forced to shut down, a representative said. 

An inevitable ripple effect of the supply chain collapse is the rise in consumer prices driven by stressed bottom lines and high input costs. The International Monetary Fund has cautioned about rising global inflation that advanced economies like the US are already under. The IMF expects inflation to peak at the end of 2021 and settle down to pre-pandemic levels by mid-2022. While the Indian government says that the marginal rise in inflation is temporary, any impact on the price point will further weaken the ability of MSMEs to capitalize on the uptick in economic activity.

What should MSMEs do to combat the crisis?

The ongoing supply chain crisis requires sustained global effort from multiple stakeholders. It’s easy to feel helpless and overwhelmed, but there are a few areas that MSMEs can work on to hold the fort until normalcy returns.

A. Set up a crisis centre - If you are impacted by the supply chain crisis, the immediate task is to set up an emergency help desk to monitor the fall-out. Do not forget to record any data points that may affect your decision-making process later. Deploy your best teams to handle customers, analyze current production capacity, and forecast future trends. No decision should be made without the knowledge of the crisis team. If you do not have the manpower to run a crisis team, now would be a good time to hire one.

B. Talk to your customer - Any crisis expert will tell you that communication is key to resolving a crisis. While it seems simple enough, clear and honest communication with the customer is important to reset expectations and redraw production metrics. Do not overpromise - conduct regular meetings or calls to share inventory details and actively listen to their concerns - this may help offset ‘phantom demands’ that create artificial scarcity and enable you to reach a consensus on substitutions, wherever possible.

C. Go local - With global supply chains in a rut, advanced countries are thinking of reshoring their supply stream domestically. MSMEs can similarly turn to local suppliers to meet their production requirements and improve their bargaining potential by combining demand with other small businesses. Reducing the geographical footprint of the supply network can prove economical and convenient in the long run.

As always in business, do not forget to use every failure or setback as an opportunity to plan for the future. In part two of this series, we will look at how investing in technology can help tide over the disruptions in the global value chain.