Building a More Resilient Supply Chain: How to Improve Operations in 4 Key Areas
Every part of the global supply chain — from procurement and logistics to manufacturing and warehousing — has been impacted by the COVID-19 pandemic.
This guide explores the broad 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.
Table of Contents
- The Rise of Globalization (and How It Made Supply Chains Vulnerable)
- What Happened and What’s Next in 4 Key Areas of Supply Chain Operations:
- Mitigating Risk through Data Science
- Assessing Risk through Supply Chain Mapping
- Checklist for Creating a More Resilient Supply Chain
About the Author
Amit Prasad, VP of Supply Chain & Data Science at Coyote Logistics, has spent the past decade living and breathing supply chain data. From running Coyote network analyses to consultative services for some of our largest global shippers, he has applied his MIT Supply Chain Management background to helping advance the industry through smarter applications of data science.
Originally published on LinkedIn on June 3rd, this guide reflects the research, analysis and recommendations of the author.
View all Coyote Logistics COVID-19 resources here.
The Rise of Globalization (and How It Made Supply Chains Vulnerable)
Since the late 1980s, global operations and supply chains have become increasingly prominent — driven by market forces, cost-cutting efforts, and various economic and political factors.
While globalization has many advantages for shippers (namely increased sales and profits), outsourcing and offshoring also create more geographically diverse supply chains. These longer, more complex supply chains increase risk and the potential for disruption if not managed effectively1.
Just a few months into the COVID-19 pandemic, the global shortages of essential items and slowdowns in manufacturing have exposed just how vulnerable many global supply chains are.
Longer, more complex supply chains increase risk and the potential for disruption if not managed effectively.
According to an April 2020 survey from the Institute for Supply Management (ISM), 95% of organizations reported COVID-19-related supply chain disruptions, and almost half (47%) are reducing their revenue targets (by 22% on average).
Over past several years, many companies have focused on driving cost efficiency through lean global supply chain principles.
Their key strategies — such as consolidating production to low-cost regions where skilled labor is cheap and minimizing working capital by holding lower level of inventories — have, unfortunately, neglected the necessary risk assessment.
This has resulted in concentrated hubs of sourcing and production in specific countries. For example, Bangladesh is a key producer of apparel goods, India for generic medicines, Taiwan and Vietnam for various labor-intensive skilled manufacturing, and of course China has become the default factory of the world.
Over the past 30 years, China’s share of world’s GDP has increased tenfold. In the past 15 years, China’s imports and exports have both doubled.
These dramatic increases signify the extent to which a disruption in China could drastically impact the global supply chain; we’ve seen it play out during the rapid spread of COVID-19, which originated in China.
What Happened and What’s Next in 4 Key Areas of Supply Chain Operations
The COVID-19 pandemic has not only disrupted the sourcing of raw materials from China, but also various upstream and downstream facets across nearly every global supply chain.
We’ll assess how it has exposed weaknesses in some global strategies across four key areas, as well as outline trends and potential recovery solutions that seek to mitigate further risk.
- Sourcing & Procurement
- Warehousing & Distribution
- Transportation & Logistics
1. Sourcing & Procurement
The focus on cost efficiency has driven many companies to procure raw materials from the cheapest possible suppliers. Though these suppliers are often located far from the company’s own facilities, there is often not anything that includes resiliency in the contract terms.
That will likely start to change. Let’s look at three sourcing and procurement issues we’ve seen over the past few months, and examine how companies will likely seek to fix them going forward.
Problem: The lack of diversification in sourcing strategies has led to this global supply chain crisis.
Recovery Strategy: One of the questions that often comes to mind is, “Will this pandemic drive several companies to contemplate moving away from Globalization?” While this is unlikely, many companies will now re-evaluate the risk of putting all their eggs in one basket.
In other words, they might seek a balance between local and global procurement, and some may try to pull the sourcing or manufacturing closer to their home base. All this implies that there will be an interest in diversification of sourcing strategies.
Problem: Procurement has traditionally been measured by cost savings, without taking the flow of revenue into account.
Recovery Strategy: As companies work through their risk mitigation strategies, we may start to see a shift in focus towards revenue flow and its return on investment, which has been difficult to articulate or establish in the past.
Problem: In the past, there has been a lack of visibility for lower-tier suppliers, and therefore, a lack of importance assigned to them.
Recovery Strategy: For several years, companies have primarily focused on top-tier suppliers when it comes to their risk management principles. Since the pandemic began, many companies have realized how critical their lower-tier suppliers are to the overall supply chain.
These companies now recognize the importance of managing the data and information of their lower-tier suppliers, mapping their supplier network (and their supplier’s supplier), as well as running various scenario analysis to assess risk and mitigation strategies.
This exercise, while time and resource-intensive, will help mitigate much of the risk brought on by future disruptions.
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As previously stated, many companies have deployed lean manufacturing principles as well as outsourced their manufacturing to low cost regions. These two trends have exposed many supply chains to much more overall risk, which has been realized with COVID-19 disruption.
According to the March survey of the National Association of Manufacturers (NAM), 53.1% of manufacturers anticipated a change in their operations, 78.3% anticipated a financial impact and 35.5% were facing supply chain disruptions due to COVID-19.
In the automotive industry, Fiat Chrysler Automobiles announced that it was temporarily halting production at a car factory in Serbia because it could not get parts from China. Their decision was followed by a similar announcement by Hyundai in Korea.
Beyond sourcing issues, the reduction in economic activity, plummeting demand and new operational constraints that reduce manufacturing efficiency (e.g. social distancing at a facility) have combined to make it even tougher for manufacturers.
Per the Federal Reserve statistical release in April, total industrial production fell by 5.4% in March (an annual rate of 7.1% in Q1 of 2020), while manufacturing output dropped by 6.3%, mainly due to decline registered by motor vehicles and parts. The index for durable manufacturing fell 9.1% while the index for non-durables fell 3.2%.
Source: Board of Governors of the Federal Reserve System
While companies strive to recover from this crisis, their success largely depends on the strength of government support, their own financial reserves, and the efforts and strategies in place to manage their workforce and operations during this slowdown.
Here are some manufacturing trends we expect to see on an ongoing basis in response to disruptions brought on by COVID-19:
- Increased focus on the safety and flexibility of the workforce
- Shift towards workforce automation, which may result in staff reduction
- Manufacturers will pay more attention to their lower-tier suppliers for raw materials
- Diversification and alternative sourcing solutions for raw materials
- Companies that have outsourced their manufacturing to economically fragile countries may re-evaluate their contracts.
- The sudden decline in demand for durable goods may shift the relationship companies have with local manufacturers in countries like Bangladesh and Vietnam, due to their financial vulnerability in a post-pandemic world.
3. Warehousing & Distribution
In order 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 while the sourcing, manufacturing and operations were partially or completely shut down.
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.
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 have been forced to adapt quickly and transition to an 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 be divided into smaller independent functional units that can operate in silos when one or more is affected, or paused 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.
Companies must understand the risk exposure for each node in their supply chain network as they develop a recovery plan.
4. Transportation & Logistics
Uncertainty brought on by US-China trade tensions and BREXIT negotiations impacted global supply chain and logistics networks — now the COVID-19 has added further 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 (which were otherwise projected to inflate year over year).
Several shippers, depending on their commodities, are likely to re-evaluate 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 be tested 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 have changed, leading to a more dynamic delivery network.
Therefore, shippers with moderate to high parcel volume should evaluate their rate discount structure (which is 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 US and Europe, even after the Chinese manufacturing market reopened. With an increase in cancelled sailings between China and US/Europe, ocean carriers are now looking into extreme cost cutting measures.
However, when the market rebounds, we will observe that the companies who reserved capacity in advance will ride the surge more comfortably, compared to those whose reactions were delayed.
Intermodal (Domestic Container Shipping)
While the intermodal market has already been trending downwards for the past year, the pandemic has created an even more challenging environment for rail traffic and intermodal.
Per the latest report by Association of American Railroads, total rail carloads in April were down by 25.2% compared to the same month last year, while the intermodal loadings in April were down 17.2% year-over-year.
We observed a similar decline in Canada and Mexico railroads. Coal, motor vehicle parts and chemicals were the worst hit commodities.
Global Air Cargo
Global air cargo capacity has also been impacted, having lost a 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.
Over 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.
Digitizing your supply chain will help you achieve resiliency by mitigating risk and helping to grow your revenue, profit and market share.
Assessing Risk Through Supply Chain Mapping
As discussed earlier, each stage in the supply chain has been impacted by the pandemic in one way or another and companies will be working 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.
Depending on how diversified your supply chain is, 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.
Start working on a recovery plan by understanding the risk exposure for each node in your network.
The risk-exposure model2 by Simchi-Levi et al (2015) describes the concept of time to recover (TTR) and time to survive (TTS) that can be modeled 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 if a node is disrupted.
Mapping out your supply chain network and estimating TTR and TTS for each node will help your 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, when to expedite transportation to avoid performance impact, etc.
For example, if TTRi > TTSi for a given supplier node(i) in your network, that implies your plant will be shut down unless you have an alternative supplier as a backup.
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 Science
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, internet of things (IOT), Block Chain, 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.
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 lower-tier critical suppliers and determine alternative options in case they go out of business or are disrupted for a long time.
- 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.
Need Help Building a More Resilient Supply Chain?
Whether you need instant access to flexible capacity solutions, logistics experts to bring you data intelligence, or a fully outsourced supply chain operation, we can help.
With a massive, centralized carrier network, a comprehensive portfolio of multi-modal solutions, and proprietary technology, Coyote has the resources to help you build a more resilient network.
- David Simchi Levi, Philip Kaminsky, and Edith Simchi Levi. Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies. Irwin McGrawHill, 2009
- Simchi-levi, David & Schmidt, William & Wei, Yehua & Zhang, Peter & Combs, Keith & Ge, Yao & Gusikhin, Oleg & Sanders, Michael & Zhang, Don. (2015). Identifying Risks and Mitigating Disruptions in the Automotive Supply Chain. Interfaces. 45. 375-390. 10.1287/inte.2015.0804.