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We Are In Trouble. Raise the Red Flag. Be Proactive.

Yesterday, I attended a wake for a friend and former colleague. For the first time in eighteen months, I hugged people outside my inner circle. Hesitant and mentally programmed with COVID-19 precautions, I tried the elbow bump and shuddered as I extended my arms to feel the warmth of long-held friends. I must admit that it felt soooooo good. I so want the pandemic to be over.

The day before I traveled to Boston, I spoke to a client. He asked a simple question, “Where will companies be spending money post-pandemic?”  I told him, “It is too early to tell; we are still in the middle of trying to figure out where we are. The pandemic is not over.” I could tell that he was frustrated with me. People want good news. I fear that we need to take action now to avoid major future disruptions.

The Supply Chain Leader In The Middle Of The Pandemic

I loved the summary in the Economist article published on July 3, 2021, The Long Goodbye to COVID 19.  While I was able to hug friends again at the wake and I will host my Supply Chain Insights Global Summit in September, the supply chain leader is only ½ way through the COVID-19 response.

Today’s supply chains assume that logistics is readily available. The rude awakening is that Supply Chain Leaders have no ability to manage logistics as a constraint. Historically, the focus is price. Our logistics systems are inadequate for what we are going to experience in the coming months.

Few companies are good shippers. Only 9% of Global Multinationals design supply chain flows. My goal in this article is to raise a red flag to ensure that we do not fall asleep at the switch in managing global supply chains through the balance of this pandemic.

Making the Argument

The Economist article tracks a normalcy index by region. In July, world normalcy is 66%. China is at 74%, the United States tracks at 73%, Australia at 70%, and India at 42%.  The world is still volatile. Since April, Malaysia’s normalcy value has fallen from 55% to 27%. The impact of the Indian crisis on software development schedules is pervasive in my conversations.

Figure 1. Shifts in Normalcy by Country as Tracked by the Economist

Normalcy is also influenced by factors unrelated to the pandemic. In general, Asian countries have been less normal than you would expect. Counterintuitively, behaviour has changed more in places with robust civil liberties than in otherwise similar but less free countries. This would make sense if people in such places are unusually likely to trust their leaders, or if they feel more invested in fellow citizens’ well-being. And richer countries, where lots of people can work from home, are more abnormal than poorer ones.

Economist July 3, 2021

Current state:

  • Vaccinations Drive Normalcy. 187 countries have mass-vaccination programs underway. Globally, 39.3% of the world’s population aged 12 and over have received one dose of a covid-19 vaccine. 
  • The Real Costs Are Yet to Come. Very roughly, rich-country governments paid out 90 cents for every dollar of lost output. The realization of the cost to state and local governments is just beginning. Budgets will tighten with less funding on supply chain infrastructure.
  • Logistics Infrastructure Issues. In Los Angeles, due to the trade deficit between the United States and China, 3.5 containers are received from China for every container shipped. Global Chinese imports soared 61% in the first two months of 2021, and will become worse for the holiday period. The container inbalance is growing with no central tracking and allocation program. Containers are being “rolled” month by month in Asia due to the lack of available containers. 70% of global supply chain shipments are by sea, 18% move by road transport, 9% go by rail, 2% by inland waterways and less than 0.25% by air. Labor shortages abound for road freight. We can no longer assume the availability of global logistics.
  • Price Increases. The Freight Rates for a 40 foot container from China to the west coast of the United States is quadruple the price of a year ago.
  • Political Unrest. As vaccines and treatments become more plentiful in rich countries, so will anger at seeing people in poor ones die for want of supplies. That will cause friction between rich countries and the rest of the world. In Africa, where 38% of food is imported, the issues in global shipping will compound the unrest.

The Harsh Reality

The supply chain leader is struggling with increased cost and delayed on-time deliveries in ocean freight. Why does this matter? As shown in Figures 2 and 3, the global logistics infrastructure is unreliable and increasing in price. The issues result in late arrivals and customer service issues. Consumer goods manufacturers will pay 60-70% more in retail deductions, and the retail sector will struggle to source for the holidays. Delays will worsen in the build-up of inventory for the holiday period.

Figure 2. Impact of Global Shipping on On-time Deliveries

Figure 3. The Baltic Index: Comparison In Price

The Biden report on supply chain readiness primarily focuses on symptoms, not root causes. Expect the news cycles to spin in the wrong cycles. Listening will lull leaders to sleep, but now is the time for leaders to be proactive.

What To Do?

Recognize that the pandemic is far from over. If you are in the United States or Europe shaking hands and giving hugs, and going back to the office, don’t fool yourself. The pandemic is not over. Prepare for the long haul. Here are five steps to take.

  1. Recognize Logistics as A Constraint. Be a Good Shipper. The practices of lane bidding and enterprise freight optimization are over. Redesign to orchestrate transportation market-to-market. Improve the speed of payments. Collaborate with ocean shippers. Forecast logistics and hold yourself accountable. Abandon payable practices that are more than thirty days or risk not having your freight picked up.
  2. Focus Outside-in. Redesign planning solutions to use market data and drive bi-directional orchestration. What does this mean?
    • Build Planning Master Data Systems. Record actual shipment leadtimes into a central repository and use the statistics from transit, loading and unloading times to feed planning systems. The parameters are variable and will change based on the market. This is a good area to focus the data scientists hungry to showcase their skills.
    • Use Market Signals. Connect to shipper networks to track inbound shipments more accurately. Tie the signals to manufacturing–the management of outsourced manufacturing and factory scheduling systems–to ensure schedule adherence. Measure inbound delivery accuracy. For most it is an area of opportunity.
    • Collaborate with Major Shippers. Use market signals to forecast shipments by lane and by mode. Forecast with the goal in mind and hold yourself accountable to Forecast Value Added (FVA) by lane and major carrier. Transportation forecasting is very different than traditional demand planning.
  3. Design Supply Chain Flows. Actively use supply chain network design technologies to design buffer strategies (form and function of inventory), and alternate sourcing, manufacturing and transportation strategies. Orchestrate the design flows cross-functionally across source, make and delivery in Sales and Operations Planning and the execution of the S&OP plan. Form cross-functional teams to actively orchestrate based on market signals. Form a modeling team and consider doing this weekly using a digital twin.
  4. Plan for Price Escalation. Focus on managing margin not cost. In these unprecedented times, be careful not to shift demand and increase supply chain variability. Take charge of demand shaping programs–price, trade promotion, advertising, and new product launch– to measure effectiveness in this world of increased variability with reduced reliability. The business issues cannot be managed as a “logistics functional issue.”
  5. Plan Globally and Execute Locally. Now more than ever, focus on the path to normalcy and the impact on product profiles by region. Don’t let the return to normalcy that you are experiencing personally cloud your judgement in managing the global supply chain. Be proactive and use market data to sense regionally, and drive better outcomes. In most cases, this means that you will have to augment traditional systems with better analytics.

Conclusion

I fear that the worse is ahead of us to manage. The port issues will worsen, and the impact of the pandemic on local governments is just beginning. Traditional risk management approaches are not the answer, and historic supply chain planning approaches are inadequate.

I welcome your thoughts. We will engage in this discussion at the Supply Chain Insights Global Summit.

Preparing for the Supply Chain Insights Global Summit

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The Supply Chain Insights Global Summit is happening on September 7th-9th in Franklin, TN.

We are taking the risk that everyone can get COVID shots to enable an in-person event in September. We will also have a virtual feed hosted by Supply Chain Now for those unable to travel. The goal of the conference is to Imagine the Supply Chain of 2030. We expect 100 attendees to attend in-person and 1000 to join us virtually around the world. We design each experience for extreme networking.

If you have a story you would like to share at the conference; please drop me an email at lora.cecere@supplychaininsights.com. Mark your calendars to join us to think differently and Imagine the Supply Chain of the Future.

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