Supply Lines: Supply Chain Year in Review

Welcome to Supply Lines, a bimonthly column about the intersection of supply chain management and contract management.

 

If you had asked the average person in 2019 how much they cared or even knew about supply chain management, you’d have gotten a puzzled look at best. Then, supply chain management was relegated to administrative status, much in the same way we in business and government have considered things like contracting, accounting, or information technology. But like contracting, accounting, and information technology disciplines before it, since 2020 supply chain management has proved itself a critical business function with widespread impact.

 

During the global COVID-19 pandemic, supply chain management became vital for all industry and government operations, as well as for human survival.

 

Here we offer a very condensed review of 2020’s global supply chain events, from the onset of COVID-19 to the most recent cyberattacks. This is by no means a complete list, and we know there are many other examples. But that just proves our point: Supply chain management has never been more important.

 

2020 Major Supply Chain Events

 

Pandemic

 

On January 9, 2020, the World Health Organization (WHO) announced a mysterious coronavirus-related pneumonia had developed in Wuhan, China. Twelve days later, the United States confirmed its first case. By January 23, Wuhan was quarantined, and on January 30, the WHO announced a global health emergency. By mid-March, COVID-19 was officially declared a pandemic and the United States deemed it a national emergency. Governments scrambled to buy ventilators and personal protective equipment (PPE). By the third week in March, the U.S. Strategic National Stockpile was exhausted, with many needed items expired and inoperable.

 

The Homeland Security and Defense departments partnered with the Federal Emergency Management Agency to find, purchase, and deliver critical items across the country. As the government released enormous pandemic response funding via the Defense Production Act and other legislation, companies from around the world converged on the United States to offer solutions to logjammed supply chains. Many provided non-approved items or falsely claimed to have data analytic solutions for efficiently managing the sourcing and distribution of ventilators and parts, pharmaceuticals, and PPE. State, local, and federal agencies competed with private entities for available stock. As China and other sources shut their borders to exports, the competition intensified.

 

In a sort of dark irony, Wuhan became the epicenter of COVID-19 and, at the same time, home to the world’s largest concentration of PPE. By late 2020, the U.S. government and pharmaceutical firms successfully funded the design and delivery of new mRNA vaccines. During the same period, government funding bolstered domestic PPE manufacturing. By early 2021, China reopened its PPE exports, and the U.S. firms that had stood up to provide PPE domestically began losing demand to cheaper Chinese options. By summer 2021, 28 domestic firms confirmed to National Public Radio that they would be out of business within 90 days without additional business.[i]

 

Supply Chain Cyber Attacks

 

The Identity Theft Resource Center found that cyberattacks on supply chains rose by 42 percent in 2021.[ii] Companies and governments have been held hostage by ransomware attacks on supply chain nodes. In March 2021, the National Counterintelligence and Security Center published a summary of major supply chain software attacks since 2017[iii] (Figure 1 below). This figure shows 10 major supply chain software attacks from 2017 to 2021. Software provides persistent access opportunities for sly intruders, and the hostage is the supply chain itself. Strong supply chains rely on highly interconnected networks. This level of interconnectedness also creates dependencies that serve as a fertile opportunity for massive cyberattacks.

 

 

 

< align="center">Figure 1: NCSC Recorded Major Supply Chain Software Attacks Since 2017[iv]

 

 

Summer 2021 brought the SolarWinds attack. SolarWinds Orion’s Russian hackers entered the SolarWinds Corporation’s systems as early as January 2019, based on recent reporting from the company.[v] Headquartered in Austin, Texas, SolarWinds provides information technology (IT) infrastructure management software and services within the United States and abroad.[vi] The breach expanded and malware spread to thousands of SolarWinds customers, including the U.S. Justice, Commerce, Homeland Security, and State departments and the U.S. Treasury. In late June 2021, the U.S. Securities and Exchange Commission opened investigations into whether companies affected by the SolarWinds hack tried to mitigate their financial impact by purposely hiding the attacks from investors and customers.[vii]

 

In June 2021, the largest meat company in the world (by sales), JBS USA Holdings, a Brazilian firm, was forced to pay $11 million to Russian-based REvil ransomware hackers[viii] [ix] to regain access to critical operating systems across its networks. REvil is the same group that shut down Colonial Pipeline Co. operations on May 7, 2021, disrupting oil distribution in much of the eastern United States. Colonial was forced to pay $4.4 million to regain control of its systems, though the FBI recovered more than half of the ransom.[x]

 

On the eve of July 4, REvil hackers infiltrated Kaseya VSA software. VSA software allows IT departments to manage and monitor computers remotely. The attack had spread to more than 1,500 companies as of July 10. Kaseya was forced to ask 40,000 customers to immediately disconnect its software.[xi] [xii] [xiii] Many of Kaseya’s customers manage IT services for smaller firms, and the hack caused a downstream effect, for example, forcing Swedish grocery store chain, COOP, to shut down 800 stores for two days. REvil adjusted initial ransom requests from individual companies in lieu of a mass payout of $70 million in ransom for a global encryption key to release those affected.[xiv] [xv]

 

Supply Chain Weather Disruptions

 

Natural Rubber

 

North American manufacturers that use natural rubber in their production processes can expect higher prices over the next six months. Automotive, tape, and defense companies will suffer most, as they require the unique properties of certain grades of natural rubber, and natural rubber and latex have few substitutes. Roughly $350 million in natural rubber is brought to North America by distributors and sold to first- and second-tier automotive manufacturers and the entire tape industry.

 

While the economic value of these transactions is not large, they are of strategic importance to the North American economy. Without engine mounts, automotive assembly lines can't run. Without tape, Amazon can't ship packages. As shown in (Figure 2 below), rubber futures went to an all-time low of $135 in April 2020 and have since risen to about $221. While this increase is not insignificant, based on our forecast, this market is poised to experience real price shock as the delayed impact of market forces come to bear later in Q3.

 

Figure 2 – Global Natural Rubber Prices – Investing.com

 

 

Low prices resulting from the pandemic and the global economic slowdown have reduced the incentive for growers, tappers, and producers to manufacture natural rubber. As a result, production fell an estimated 6.5 percent for the quarter ending December 2020 versus the same quarter in 2019.

 

When North American manufacturing came back online in Q1 2021, natural rubber demand exceeded supply. The shortage has been exacerbated by a La Niña weather event that is building momentum and expected to persist. Heavy rainfall in Southeast Asia interferes with natural rubber harvesting and hurts productivity among growers, tappers, and producers. 

 

In January, in four provinces of southern Thailand, two million acres of natural rubber plantation were flooded by heavy rainfall. Production in the region could be reduced by 100,000 metric tons.

 

Having suffered losses in the palm oil and coal markets, Singapore's banks have withdrawn funding from all commodities, affecting companies critical to the natural rubber supply chain. Without funding for raw material purchases and to sustain factory operations, producers are buying less from the tappers, producing less for inventory, and withdrawing from the market.

 

These combined forces have curtailed the availability of natural rubber and there is no quick or convenient way to make up for the production shortfalls. It is likely that the supply deficit will be felt well into Q3 and Q4 2021.

 

Prices today remain below the inflation-adjusted trend over the last several decades, but the last time this perfect storm of conditions existed, the price increased five-fold and took several years to settle.

 

These conditions have created a strategic trade issue. The economic recovery in China began before that of Europe and North America, so while prices have been artificially low, China has been buying natural rubber beyond its immediate demand. The Chinese likely now exercise soft control over more than 70 percent of the world's production of natural rubber.

 

Right now, U.S. tire manufacturers are unconcerned because they purchase directly from the producers. This is done with the tacit cooperation of the Chinese. Should trade relations further degrade between the United States and China, this consent cannot be assumed.

 

The withdrawal of funding by the Singapore banks is also giving rise to a strategic vulnerability in the distribution of natural rubber to manufacturers in North America.

 

All but one of the distributors serving the North American manufacturing base are Chinese-owned or controlled. Absent bank funding to support the purchase and transport of natural rubber along the 15,000-mile supply line from Southeast Asia to North America, the single distributor not under the influence or control of China will be forced to withdraw from the market.

 

China's possession of most of the current natural rubber inventory and the continuing trade tension between the United States and China should concern all U.S. stakeholders. While there has been no indication that the Chinese have influenced U.S. distribution as yet, the risk to the U.S. economy cannot and should not be ignored.

 

The brewing rubber crisis offers a rare view of a supply chain crisis as it develops. It is a reminder of the importance of maintaining visibility of and protecting a supply chain all the way to the source of strategic parts. Mitigating the crisis now is imperative. U.S. banks, legislatures, and corporations must act immediately to protect and maintain diversity in the global distribution of natural rubber. Doing so will require strategic funding for distributors whose interests align with those of the North American manufacturing base. The alternative allows Chinese government interests to attain monopoly control.

 

Texas Freeze

 

In mid-February 2021, a polar vortex hit Texas, driving temperatures down to levels not seen since the late 1980s.[xvi] The freezing conditions shut off water to more than 12 million people and power to more than 4 million, causing the largest energy disruption in U.S. history.[xvii] [xviii] Supply chain disruptions hurt grocery distribution in New Mexico, fuel distribution, energy, and even the already threatened semi-conductor supply chain.[xix]

 

The world’s largest petrochemical production cluster was brought to a complete halt.[xx] U.S. prices for polyethylene, polypropylene, and other chemical compounds used to make auto parts, computers, and a vast array of plastic products reached their highest levels in years.

 

However, Houston-based Kinder Morgan, Inc., an energy infrastructure company and gas pipeline owner, managed to make record earnings in excess of $1 billion during the first quarter of 2021[xxi] as other Texas power producers and utilities lost billions. Kinder Morgan attributes its positive position to strategic natural gas logistics networks and storage assets that kept operations alive during the Texas freeze.[xxii]

 

Manmade Disruptions

 

Suez Canal

 

On March 23, 2021, Ever Given, Evergreen Marine’s super container ship, ran aground in the Suez Canal, which moves more than 13 percent of the world’s freight. The main passage between Asia and Europe was blocked.[xxiii] [xxiv] The ship remained stuck for six days, creating a traffic jam of more than 370 vessels.[xxv] Ships were forced to take an alternate route around Africa, adding nine days to traditional shipping times.

 

Saudi Oil Fields

 

In March, Yemen’s Iran-aligned Houthi rebels launched six drones at a facility belonging to Saudi Aramco. The attack caused more than half of the world’s oil production to cease, momentarily driving oil prices to their highest level in more than a year.[xxvi] In 2019, the same rebels attacked another Saudi Aramco processing facility and oilfields causing a 5.7-million-barrels-per-day loss in production.[xxvii]

 

< align="center">Supply Chain Immunity

 

Considering the past year of supply chain disruption and the increasing problems it portends, we recommend building supply chain immunity by intentionally fostering five system attributes:

 

  1. Flexibility The supply chain needs the ability to pivot quickly. For example, Kinder Morgan’s ability to leverage sophisticated networks for natural gas storage and access allowed it to shift during the Texas freeze and respond to the crisis, saving lives and making them very wealthy in the process. In sharp contrast, the Suez Canal has shown itself to be a major choke point for a large percentage of the world’s supplies. Firms and governments should reconsider the origins of their critical sources of supply when they require high-risk logistics with single points of failure.
  2. Traceability and Transparency As cybersecurity risks evolve, the ability to secure vital supply chain information becomes paramount. Governments and companies should adopt technology to track supply chain items from origin to final confirmed receipt across a trusted network. They must be able to monitor and trace disruptions in both information and physical goods supply networks. Advances in blockchain technology may provide an opportunity to keep tabs on supplies as well as information.
  3. Persistence and Responsiveness Companies and governments must build capability to make rapid supply chain decisions based on constant preparation grounded in sound market intelligence. Natural rubber shortages aren’t new. In the past, we responded by developing synthetic rubbers. However, synthetic rubber cannot be used in all applications. Other options such as shrubs found in Mexico and dandelions found in Kazakhstan may be acceptable alternatives; however, they are still far too expensive to manufacture at scale. China has taken this seriously and proactively purchased large quantities of natural rubber at very low prices. As the stock depletes and new volume is reduced due to weather and COVID-19, the West will feel the pinch. Governments or firms must invest in building warning systems and market research capacity to alert and respond to coming disruptions.
  4. Global Independence Supply chains cannot be agile without options in responding to global supply chain risks. Opening new supply options doesn’t just mean onshoring production in the United States. For many products, that isn’t feasible. Microchip shortages have had enormous impact, from shutting down Ford automotive production to spiking computer prices. The Biden administration has committed to invest billions in microchip onshoring. Intel has agreed to build plants in the United States.[xxviii] We also recommend considering Pan-American options for manufacturing in Mexico and Canada to bolster this effort. We are not alone. Canada’s rich resources, ranging from water to rare earth elements, and the availability of a young and relatively cheap labor force in Mexico and Central America make developing this alternative supply source both attractive and possible.[xxix] [xxx]
  5. Equity Supply chains should respond to need, as opposed to demand, guided by a set of ethical principles in the cases of a global need, such as pandemic response, materials, and services. Humanitarian and disaster response for events like the COVID-19 pandemic require a preset methodology for equitably distributing materials and products to ensure that the entire world builds immunity to the virus. Allowing the wealthiest countries to buy up the stock and receive full vaccination for their populations first will not heal the world. Other countries will take years to reach immunity levels necessary to prevent the spread of COVID-19. This introduces the potential for geopolitical disruption, new variant mutations that could undermine current vaccination capabilities, and a breakdown of critical supply chains in areas where the population is still under extreme threat.

Daniel J. Finkenstadt, Maj. (USAF), PhD

  • Assistant Professor, Graduate School of Defense Management, Naval Postgraduate School.
  • Editorial Board of the Journal Logistics and the Journal of Contract Management.

Rob Handfield, PhD

  • Bank of America University Distinguished Professor of Supply Chain Management and  Faculty for Operations Research Curriculum, North Carolina State University.
  • Director, Supply Chain Resource Cooperative.

[ii] https://www.cips.org/supply-management/news/2021/april/troubling-rise-in-supply-chain-cyber-attacks/

[iii] https://www.dni.gov/files/NCSC/documents/supplychain/Software_Supply_Chain_Attacks.pdf

[iv] Ibid.

[v] https://seekingalpha.com/pr/18325545-hackers-targeted-solarwinds-earlier-previously-known

[vii] https://www.reuters.com/technology/us-sec-official-says-agency-has-begun-probe-cyber-breach-by-solarwinds-2021-06-21/

[viii] REvil operates as a ransomware-as-a-service provider, leasing the malware to outside parties for use in crippling networks for a ransom.

[ix] Pronounced “Are Evil”

[x] https://www.cnn.com/2021/06/07/politics/colonial-pipeline-ransomware-recovered/index.html

[xi] https://www.washingtonpost.com/technology/2021/07/02/kaseya-ransomware-attack/

[xii] https://apnews.com/article/joe-biden-europe-government-and-politics-technology-business-fc0df4c42f8cd6148bf936ca24bb5cbe

[xix] https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2021/2021-03/the-texas-freeze-repercussions-and-risk-mitigation/

[xxi] https://www.dallasnews.com/business/energy/2021/04/22/pipeline-operator-kinder-morgan-posts-1-billion-windfall-from-texas-winter-storm/

[xxii] https://www.forbes.com/sites/greatspeculations/2021/04/23/kinder-morgan-the-texas-freeze-winner/?sh=19c90263bac0

[xxx] [Insert link to Finkenstadt and Handfield CM Magazine “Don’t Just Buy American, Build American” Supply Lines column. I don’t have the ability to provide an open source link.]
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