Supply chains transition to a new normal

posted on 15th September 2020
Supply chains transition to a new normal

Studies indicate post-coronavirus logistics will involve adjustments to transport flows and warehouse networks, fresh impetus to digitalisation and automation initiatives, and moving from procurement by cost to procurement for resilience, reports Will Waters

As the air freight sector begins its recovery from the first wave of the Covid-19 pandemic, the scale of the disruption worldwide along with other recent geopolitical trends leave major questions about short- and mid-term air freight and economic growth, as well as midand long-term questions about the future of globalisation – and the global outsourcing pattern that has been a major driver for air freight’s development in the last two decades.

Questions include how serious is this threat? Are we talking about a reversal of outsourcing or a slowing of its development? To what extent could this happen, and how quickly? And which commodity types or verticals does this apply to?

Although the potential unravelling of the global supply chain patterns of the last two decades clearly cannot happen overnight, there have been signs of a desire among some – particularly in the US – to ‘de-couple’ from China. And the risks exposed by the extreme events of the Covid-19 pandemic
appear to have accelerated the trend to want to reduce or spread companies’ perceived risk of over-reliance on China, or any single manufacturing source – although it remains somewhat unclear how fast or to what extent real-world change will happen in practice. And the changes discussed involve wider improvements in supply chain management practices and processes, not simply geographic or geopolitical realignments.

According to a study published in July by DHL and supply chain academic Richard Wilding, global supply chains are likely to go through a two -phase transition to a post-coronavirus ‘new normal’ that will involve adjustments to freight transport flows and warehouse networks, fresh impetus towards digitalisation and automation initiatives, and moving from an era dominated by procurement for cost to an era marked by procurement for resilience.

The ‘Transition to a new normal’ white paper on post-corona supply chains suggests that industries and supply chains will not be the same post-coronavirus as they were before. While today only the outlines of the exact formation of that ‘new normal’ can be seen, industries will not immediately move into a post-corona phase and return to business as usual, the report highlights.

Interim phase
With scientists searching diligently for a vaccine against the disease and many businesses are still managing the crisis, “any iteration of normalcy is still a distant goal”, it notes. “In the meantime, an interim phase – the pre-new normal – will bridge the gap between lockdown and the new normal.”

Obviously, some industries were hit harder by the pandemic than others and thus will recover more slowly, it notes. However, the report indicates that various implications for businesses, supply chains, and supply chain leaders can be subsumed under four categories: Resilience issues; Demand-related issues; Transportation & Warehousing-related issues; and Workplace-related issues. Richard Wilding, professor of Supply Chain
Strategy at Cranfield University, commented: “As in every crisis, the strengths but also the weaknesses of the system become visible. To become better, it is important to learn from such emergency situations. In the new normal, if your supply chain is the same as the one that you had pre-coronavirus, you’re probably doing something wrong.”

Pre-new normal
On the basis of the anticipated two-phase transition to a ‘new normal’, the study notes that in a pre-new normal world, supply chains will be re-shaped to make them more resilient. “For instance, the fact that both manufacturing and warehouse locations were equally affected by regional lockdowns and varying regulations will result in more distributed manufacturing, storage, dual sourcing, re-shoring, and nearshoring
in the future,” it noted.

“Instead of focusing solely on tier 1 suppliers, supply chain leaders will have to take a closer look at tier 2 and tier 3 suppliers as well to check if they are able to keep up with the flow of goods. Furthermore, the demand will be more volatile and consumer tastes may erratically fluctuate, increasing the need for flexible and alternative transportation flows and warehouse networks.”

While online shopping will be more prevalent and direct-to-consumer sales will increase, other retail channels and industries will be disrupted, the report noted, adding: “These are just some of the facets that influence modern supply chains.”

It also highlighted that configuring post coronavirus workplaces to meet social distancing and sanitation guidelines will also affect the work styles in both warehouses and offices. “For remote working, information systems will need to be robust and capable of supporting a distributed workforce by providing access to appropriate data and systems,” it notes.

“Warehouse processes need to be adapted to the new standards, such as one-way systems, distributed picking faces, or socially distanced packing areas. Just as procuring for resilience will become an increased focus, remote working will disrupt established processes, providing fresh impetus for digitalization and automation initiatives.”

Supply chain re-assessment
Meanwhile, a separate report from DHL’s supply chain risk management platform Resilience 360 confirmed that COVID-19 was forcing shippers to profoundly re-assess their supply chains geographically, with over half intending to diversify their supplier base postpandemic – including many looking to reduce their reliance on the Far East and specifically China, while two thirds are looking to source goods more locally, and others at additional stockpiling.

The report, entitled COVID-19: The Future of Supply Chain is based on the findings of a survey from The Business Continuity Institute (BCI) and revealed that fewer than half of organisations (49.5%) reported having a plan in place that sufficiently covered them for the supply chain issues encountered during the pandemic. And the difficulties that arose as a result of not having sufficient plans in place have prompted many organisations to change their supply chain planning going forward: 53.2% plan to write a comprehensive pandemic plan, and a further 32.3% will adapt current plans to ensure they cover supply chain issues in enough depth.

Nearly three quarters of organisations (73%) encountered some or significant detrimental effect on the supply side during the pandemic, with 64.8% reporting the same on the demand side. One in five organisations, however, reported an increased demand for their products and services. IT, telecommunications and pharmaceutical organisations, for example, noticed an increased demand, whereas other organisations launched new products and services geared to catering for differing customer needs during the pandemic.

The report went on to highlight that the pandemic has caused many organisations to carry out due diligence deeper in their supply chains going forward. It confirmed that although organisations had largely carried out good levels of due diligence – such as determining suppliers’ location and obtaining business continuity plans – among their tier 1 supplier base, such due diligence started to tail off beyond tier 2.

“The pandemic caused disruptions to many organisations’ supply chains beyond tier 1: many European based manufacturers, for example, are heavily reliant on Asia for components which caused issues for many organisations’ tier 1 suppliers. As a result, nearly two-thirds of organisations plan to perform deeper due diligence going forward,” the report noted.

“Good practice suggests that such due diligence should happen pre-contract phase so organisations can be aware of any potential issues – such as over-reliance on a particular geography – before engaging a supplier.”

Technology role
The report also underlined that more organisations are using technology to help them perform the required due diligence, noting: “There has been a discernible increase in the use of technology during the pandemic to help with supply chain planning and strategy: 57.1% of organisations are using their own internal systems and spreadsheets for supply chain mapping, whilst 13.5% are using specialist tools – a notable uptick on the 22.6% recorded in the BCI Supply Chain Resilience 2019 report. Furthermore, of those who are not currently using tools, a fifth are now considering purchasing a specialist tool.”

Diversifying supplier base
The report also revealed that more than half of organisations intend to diversify their supplier base post-pandemic, with the Far East set to become the biggest casualty: 57.2% of respondents are looking to diversify their supplier base post-COVID-19 and, for many organisations, this means reducing their reliance on the Far East. Almost three in ten organisations (29.9%) will source less from the Far East, with a further 13.2% sourcing less from China.

Finally, it noted that local sourcing will become more mainstream, with two-thirds of organisations (66.2%) planning to source goods more locally post-pandemic, with a fifth (20.8%) reporting they will move a considerable number of suppliers more locally.

Although a further fifth will be engaging in more stockpiling post-pandemic, many are using local sourcing as a more cost-effective way of ensuring goods can be acquired quickly and efficiently.

Bold moves
Separately, a study by US management consulting firm McKinsey & Company indicates that the coronavirus pandemic’s “unprecedented tests” are inspiring companies to consider bold moves in rebuilding their supply chains for the future. The ‘Resetting supply chains for the next normal’ study, in which McKinsey & Company surveyed 60 senior supply chain executives in the second quarter of 2020 from across industries and geographies, noted that as businesses embark on the journey to recovery, “supply chain leaders are telling us that they have no intention of returning to the status quo ante”.

The overwhelming majority of respondents said that the crisis had revealed weaknesses in their supply chains that they’re now working to address. For example, 73% encountered problems in their supplier base, and 75% faced problems with production and distribution. In the food and consumer goods industries, 100% of respondents had experienced production and distribution problems, and 91% had problems with suppliers.

Inefficient digital technologies
Furthermore, 85% of respondents struggled with inefficient digital technologies in their supply chains. And while just over half of the executives felt that they had been able to manage supply chain planning following the abrupt introduction of remote working, 48% said the changes had slowed down decisionmaking in planning, the report found. The sample was broadly aligned on the actions they want to take in response to those challenges: about 93% of respondents said that they plan to increase the level of resilience across their supply chain, using a variety of mechanisms, including dual sourcing of raw materials, increasing their inventories of critical products and, to a lesser extent, by near-shoring, dual-sourcing, or regionalising their supply chains.

The survey also found that respondents see an urgent need to get better control over their supply chain technology, “which will likely be possible only with a skilled workforce trained to use new digital tools at speed and scale.

“Some 90% of leaders surveyed said they plan to increase the amount of digital supply chain talent within their organisations, through a combination of in-house reskilling and external hires. Just over half also expect permanent changes to their planning processes in the next normal, such as greater centralisation of planning activities, shorter planning cycles, and introducing advanced analytics techniques,” the study noted.

Budgets not the main constraint
“Intriguingly, only 11% of respondents said that budgets were a constraint on their ambitions to make these changes, suggesting that resilience requires smart investments, not just pouring money into the supply chain.”

The study underlined that in order to succeed in the “next normal,” companies will need more than “makeshift, duct-tape solutions” that address specific problems.

“The coronavirus pandemic has already exposed gaps in many existing setups, and it may also drive long-term changes in customer requirements and behaviours,” it noted. “For example, consumers who switched to on-line retail channels during the crisis, or who opted for curb-side and in-store pickup of online orders, may stick to their new behaviour well beyond the pandemic. And the desire to retain the environmental benefits that were a byproduct of reduced economic activity may lead to an increase emphasis on sustainability in future business operations.

It concluded: “We believe that leaders should take this moment not just to fix their supply chains temporarily, but to transform them Reimagining supply chains to avoid past traps and meet future needs will require a more comprehensive approach.”

Accelerating existing trend
At the start of this year, before the pandemic took hold, Bank of America (BofA) published the findings of a global survey in which it argued that supply chains for companies with a combine market capital of US$22 trillion were on the move. Highlighting the early signs of a reversal in the multi-decade trend towards globalised outsourcing, it found that many companies in North America were planning to ‘re-shore’ production, noting that although most of these planned relocations were small compared to their total production, it described the breadth of the shift was striking.

“At the time, we characterized these movements as ‘tectonic’ – slow moving, persistent with major changes to the business environment,” BofA noted. “COVID-19 has accelerated our calculus. Stepping back, global supply chains were built to maximize returns by optimizing labour cost arbitrage and lower overheads.

Fragile supply chains
“The pandemic has, however, exposed the fragility of far-flung supply chains and a fresh survey of our analysts reveals that companies in more than 80% of global sectors experienced supply chain disruptions during COVID-19.”

As a direct follow-on to these disruptions, it said three-quarters plan to enhance the scope of their pre-existing plans to re-shore production.

“While disruptions from the pandemic might have acted as a catalyst to accelerate reshoring, we believe that the underlying structural reasons are grounded in an ongoing shift to ‘stakeholder capitalism’, where corporations focus on shareholders’ interests as well as the broader community of consumers, employees and the state,” it noted. “As a case in point, a survey of BofA analysts suggests that companies in 75% of global sectors in North America and Asia Pacific and 67% in Europe are expecting to face additional scrutiny around their supply chains from governments, corporate boards and shareholders.

“While each of these stakeholders are examining the location of supply chains from very different perspectives, they are arriving at the same conclusion: namely, portions of supply chains should relocate, preferably within national borders and failing that, to countries that are deemed allies.”

Reversing trade policies
BofA highlighted that its research has also shown how the world is becoming more “government-heavy”, with heterodox policies reversing 40 years of free, global markets. “We believe that government scrutiny of supply chain locations will be primarily driven by national security considerations and note that the US has recognised China as a strategic competitor – a view articulated in National Defense Strategy documents. Similarly, the European Union in March 2019 concluded that the ‘the balance of challenges and opportunities presented by China has shifted’,” the report noted.

The BofA study noted that “this geo-political assessment is resulting in a combination of legislation, incentives as well as moral suasion to relocate supply chains from China to alternative jurisdictions”.

Although other analysts and logistics executives have pointed towards a likely partial withdrawal from manufacturing in China by many international businesses, most likely starting with more politically sensitive and security-sensitive verticals, the BofA analysis “suggests that a US$1 trillion capex cycle, spread over a five-year period, would support the shift of all foreign manufacturing in China that is not intended for consumption in China”.

US$1trn cost ‘not prohibitive’
The US bank said the outlay was “significant but not prohibitive”, arguing that the reshoring move would have beneficial effects in the long term.

BofA added: “We expect corporate management and policymakers to aggressively explore ways with which to offset the higher operating costs associated with re-shoring. We don’t expect a silver bullet, but we were struck by the universal declaration (in our survey) of intent to automate in future locations. Policymakers are also expected to help through tax breaks, low-cost loans and other subsidies with recent announcements to that effect from the US, Japan, the EU, India and Taiwan (amongst others).”

However, other logistics executives have played down the prospect of the economic crisis triggered by the coronavirus calling globalisation into question or promoting outsourcing away from China to a significant degree.

“I would very much doubt it,” commented Eric Hémar, president of France’s leading TLF logistics association and CEO one of France’s fastest-growing independent logistics groups, ID Logistics. But he said there is likely to be some shift. “We are very likely to see some re-positioning of supply chains on the part of major shippers to elsewhere in Asia or to Europe in order to reduce their dependence on China,” he noted.

While the re-emergence of a certain amount of near-sourcing would benefit surface transport-oriented logistics firms, it could have a negative impact in the longer term for air and ocean specialists, Hémar highlighted.

“But I don’t see any major changes in this respect in the years to come as the necessity to produce at low cost will be stronger than ever,” he noted. “However, there may well be some supply chain re-allocation from China to neighbouring countries.”

Greater complexity
Jens Bjørn Andersen, CEO of freight forwarding and logistics giant DSV Panalpina, believes that in the post-coronavirus world, supply chains will be more complex, e-commerce demand will accelerate, and the largest global freight forwarders will continue to increase their market share. “There’s no doubt that a lot of customers have asked themselves how can we make sure that we do not get caught out again in a situation where a country closes down and we are basically in limbo,” Andersen commented.

And he said the reactions of manufacturers to the US-China trade war tariffs offered some insight into how companies would source products in future. “We saw during the trade war between US and China that countries like Vietnam, Indonesia and Thailand benefitted, and I think that kind of trend will continue to accelerate,” he said.

But he does not expect mass onshoring or near-shoring by companies serving European and North American markets, noting: “I don’t so much believe that you will take production back home to your next-door neighbour. It’s for good reason that companies have sourced products from suppliers in Asia.

“You will simply in many cases not be competitive if the price [of production] differentiation is large. You will find a few examples of US companies dragging some production into Mexico maybe, but I don’t think it’s going to happen to a large degree.”

E-commerce factors
He also predicted the strong surge in e-commerce in recent months would continue post-coronavirus. While some have predicted e-commerce markets will be dominated by the likes of DHL, Amazon, Alibaba, UPS and FedEx, Andersen believes freight forwarders will also prosper.

“This trend will not negatively impact freight forwarders,” he added. “On the contrary, there will be a higher demand for the services that we offer our customers.

“Assuming that products still come from Asia, the (intercontinental) freight market will still be the same, with the same amount of products coming from Asia into Europe. It’s just when it hits Europe that the product and services we offer customers will need to be different, of course.

“Instead of doing high-speed freight or retail deliveries, we will do deliveries to consumers directly, which is a more interesting business proposition, a more complex product. “You make less money – we all know how cheap it is to get shoes sent to your home; you basically pay nothing for it. But still it’s a very high-volume business. This is something we are considerably strengthening now by rolling out our e-commerce platform into more and more countries.”