UPS Longitudes | Building a More Resilient Supply Chain: Part II
Editor’s Note: This is part two in a two-part series. If you missed part one, check it out here.
The COVID-19 pandemic has impacted every part of the global supply chain — from procurement and logistics to manufacturing and warehousing.
This guide explores the far-reaching implications of this global crisis on key areas of supply chain operations, including: sourcing and procurement, manufacturing, warehousing and distribution and transportation and logistics.
It also identifies current trends and outlines strategies to support your business on the long road to economic recovery.
Yesterday we looked at sourcing and procurement, as well as manufacturing. Today we’ll examine warehousing and distribution and transportation and logistics through the prism of supply chain resilience.
A look at warehousing and distribution
To minimize working capital and reduce overall costs, many companies have been carrying just enough inventory to service the downstream channels.
For food, healthcare and other essential goods shippers, these low inventory levels could not support the demand surge during the first few weeks of March amid the partial or complete shutdown of sourcing, manufacturing and operations.
The food industry has been one of the hardest hit areas, primarily due to recent industry consolidation and operational limitations such as slowdowns and shutdowns at slaughterhouses and meat packaging facilities.
“To minimize working capital and reduce overall costs, many companies have been carrying just enough inventory to service the downstream channels.”
The pandemic has also brought about a surge in online grocery shopping and e-commerce, especially in regions with higher COVID-19 cases. In response to behavioral changes in shopping patterns, retailers adapted quickly and transitioned to omnichannel fulfillment.
For this reason, e-commerce distribution centers have been operating near or over peak levels. Here are some trends we can expect in warehousing and distribution:
- Shifting logistics and distribution policies to push greater flexibility, closer proximity to urban areas where such demand is higher and greater investment in cold storage warehouses to stock perishable goods to keep up with online grocery demand.
- Positioning inventory closer to the market where the demand variability (coefficient of variation) is low. We’ll also see an increased need to take advantage of the concept of risk pooling for products for which demand variability is high. This strategy could help balance the risks without necessitating a dramatic increase in the safety stock or inventory levels.
- Leveraging the varying waves of the pandemic across multiple regions to strategically determine inventory repositioning.
- Restructuring warehouse operations, with an emphasis on sanitization and social distancing. Larger warehouses can function as individual units and operate in silos when facing disruption or pauses for cleaning.
- Integrating warehousing function (and inventory data) with other supply chain functions to effectively serve the distribution channels. This will lead to upgrading warehouse management systems (WMS) and better management of inventory data.
- Increasing automation in warehouse picking and sorting functionalities. This will include the need for greater flexibility in designing alternative fulfillment models.
A look at transportation and logisticsp
Uncertainty brought on by U.S.-China trade tensions and BREXIT negotiations impacted global supply chain and logistics networks — now the COVID-19 has added greater complexity.
All transportation modes — including air, ocean, rail, intermodal and over the road (OTR) — have experienced varying degrees of disruptions and delays.
We saw a shortage in supply of OTR capacity in the early weeks of March, followed by a shortage in demand. Fuel prices have been falling consistently week after week since the start of the year, providing some relief to carriers who can still operate profitably.
With the declining consumption of non-essential goods and hence a weakening truckload (TL) demand, the spot TL prices for the rest of the year are likely to stay flat (with seasonal fluctuations), compared to the same periods last year (otherwise projected to inflate year over year).
“Companies must understand the risk exposure for each node in their supply chain network as they develop a recovery plan.”
Several shippers, depending on their commodities, are likely to reevaluate their routing guide and contract pricing terms, given the shifts in demand and volume in comparison to the original forecast.
As the market recovers and fuel prices fluctuate, we are likely to see a surge in the spot truckload prices — a surge initially projected to peak in Q2.
While carriers will face tests through this difficult time of low demand for trucks, shippers must also rework their transportation strategies and incorporate resiliency into their forecasting numbers.
Less-than-truckload (LTL) restrictions — which recently included a change to how long they can be held at terminal locations due to limited capacity, sanitation measures or reduced workforce — resulted in an increase in accessorial charges in a variety of areas such as invoices, receipts and paperwork.
Many shippers have started focusing on creative solutions to reduce the number of touches and lower the additional surcharges.
Small parcels have experienced a steep increase in residential deliveries, as most of the brick-and-mortar retailers closed for the pandemic.
Online retailers have been prioritizing their warehouse operations and product deliveries based on whether or not both essential and non-essential goods utilize small parcel delivery networks and last-mile delivery solutions.
As a result, there have been changes in the service standards and surcharges, leading to a more dynamic delivery network.
Therefore, shippers with moderate to high parcel volume should evaluate their rate discount structure (tied to revenue, geography or weights) and its perceived impact with reduction in volume.
Ocean container shipping
Container shipping lines are struggling due to falling demand for goods from the U.S. and Europe — even after the Chinese manufacturing market reopened. With an increase in cancelled sailings between China and the U.S. and Europe, ocean carriers are now looking into extreme cost-cutting measures.
However, when the market rebounds, companies who reserved capacity in advance will ride the surge more comfortably compared to those who delayed action.
“While carriers will face tests through this difficult time of low demand for trucks, shippers must also rework their transportation strategies and incorporate resiliency into their forecasting numbers.”
Intermodal (domestic container shipping)
While the intermodal market has already been trending downward for the past year, the pandemic has created an even more challenging environment for rail traffic and intermodal.
Per a report by the Association of American Railroads, total rail carloads in April were down by 25 percent compared to the same month last year while the intermodal loadings in April were down 17 percent year over year.
We observed a similar decline in Canada and Mexico railroads. Coal, motor vehicle parts and chemicals were the hardest hit commodities.
Global air cargo
Global air cargo capacity has also declined, having lost one-third of business compared to last year. Belly capacity at large cargo hubs is recovering due to passenger freighters and a high demand for PPE — particularly from China.
During the next several months, air cargo slots, operations, routes and flexibility will gain more importance as the industry recovers. Many shippers will evaluate their need to expedite shipping to meet demand as the market recovers.
Assessing risk through supply chain mapping
The pandemic has impacted each stage in the supply chain in one way or another, and companies will work through several of the possible future strategies outlined above to sustain and recover their operations.
In some cases, these recovery measures will be a function of immediate reaction to the current balance of supply and demand. In other cases, recovery will be more meticulously planned and strategic in nature, anticipating the market recovering in phases.
Companies should start working on a recovery plan by understanding the risk exposure for each node in their supply chain network.
“Connectivity and visibility are essential in today’s world of uncertainty and unpredictability.”
Depending on the diversity of your supply chain, you will need to assess your dependency and associated risk for each of your suppliers, manufacturers, warehouses, distribution centers, transportation carriers and your own workforce.
This risk-exposure model describes the concept of time to recover (TTR) and time to survive (TTS) for each node. TTR represents the time it would take a node to recover to full functionality after a disruption while TTS represents the maximum amount of time the system can function without performance loss during node disruption.
Mapping out your supply chain network and estimating TTR and TTS for each node will help you determine the urgency of that node, understand the hidden risk and quantify the performance impact to your revenue and profit in the case of a disruption.
Once you know where you stand, you can determine the best risk mitigation strategy such as when to ramp up capacity and when to expedite transportation to avoid performance impact.
Using simulation to model various disruption scenarios can help estimate performance impact and identify mitigation strategies to minimize the financial impact.
Mitigating risk through data sciencep
Connectivity and visibility are essential in today’s world of uncertainty and unpredictability.
Supply chain digitalization can help businesses strategize and achieve resiliency against disruptions by readily accessing valuable data during and after disruptions. This will not only mitigate risk but can also help grow revenue, profit and market share.
Data science enables you to convert big data generated by a typical supply chain into valuable insights that you can use for strategic and tactical decision making.
Artificial intelligence (AI) and machine learning can analyze and model historical data, helping your business with better forecasting, planning, prediction and process automation.
For example, AI-based solutions can help predict service failures in advance or enable your people to manage through exceptions by implementing smart, real-time solutions.
Cloud computing, the Internet of Things (IoT), blockchain, collaborative robots and 5G technology are some of the advancements that the supply chain can harness to become a true data-powered strategic asset for the business.
“Artificial intelligence and machine learning can analyze and model historical data, helping your business with better forecasting, planning, prediction and process automation.”
A checklist for creating a resilient supply chain
We’ve discussed how the COVID-19 pandemic has impacted four key areas of global supply chain operations: sourcing and procurement, manufacturing, warehousing and distribution and transportation and logistics.
This has all brought visibility to the need for more flexibility and resiliency in supply chain operations.
Here’s a checklist summarizing the recommendations we covered:
- Model the risk exposure for each of your nodes in the supply chain network to quantify the performance and financial impact.
- Focus on total landed cost instead of individual functional cost.
- Pay attention to your low-tier critical suppliers and determine alternative options in case they go out of business or experience extended disruption.
- Diversify your global manufacturers in case they are geographically concentrated, and estimate consumer demand in a post-COVID-19 world.
- Reposition your inventory effectively in varying demand and regulations.
- Restructure your supply chain to optimize flow, prioritize greater flexibility and cater to a post-COVID-19 world by growing interest in e-commerce and last-mile deliveries.
- Understand your transportation needs, the optimal mode for future scenarios and reserve your capacity in advance.
- Invest in automation, upgrade your technology and utilize data to drive intelligent decisions, using a combination of human and artificial intelligence.
Read more on UPS's thought leadership blog, Longitudes.