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For as long as I can remember, those working in supply chains have largely been focused on chipping away at operating costs. Even as just-in-time manufacturing has made businesses more vulnerable to delays in the supply chain, businesses have placed an unrelenting pressure on logistics teams to make savings.
Single-sourcing, consolidated carrier networks, tighter inventory management and limited contingency planning have all contributed to hidden costs in terms of risk exposure.
Almost overnight, everything changed as the crisis revealed the shortcomings of this approach. Those that were most exposed have seen disruption ripple through their supply chain and impact profit margins, revenues and customer retention. Meanwhile those companies that coped best were those that had embraced risk management planning. According to Capgemini, two-thirds of organisations now see the need for a significant shift in their supply chain strategies post-Covid.
The Association for Supply Chain Management (ASCM) found that supply chain executives now regard resilience – the capacity to persist, adapt or transform in the face of change – as their top priority.
The pandemic is, after all, just the latest in a series of disruptions, with changes in the environment and in the global economy driving the frequency and magnitude of shocks. Averaging across industries, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years according to McKinsey.
Much of the discussion around resilience centres around near-shoring or on-shoring. Having a combination of near-shore and offshore suppliers for each component businesses can eliminate single points of failure. Another option is to develop regional supply chains that source and distribute products within a region, but that can also build redundancy, so that if one region is disrupted, suppliers from other regions can step up.
However, the highly interconnected nature of supply chains can limit the economic case for making large-scale changes in their physical location. And while some businesses are able to move production, others are not – resource-intensive supply chains such as mining, agriculture and energy, for example, are constrained by the location of natural resources.
Having backup inventory can also help minimise the impact of disrupted supplies. It is, of course, prudent to carry contingency safety stocks, especially for low-volume parts that could impact the availability of high-value products or features. Businesses are increasingly building reserves so they are better placed to absorb shocks as well as meet major spikes in customer demand.
But for many the crisis has highlighted the lack of visibility in the supply chain. The fragmented nature of the industry and poor transparency of data makes it extremely difficult to spot problems early and respond effectively in a crisis. Without real-time visibility of the situation at ports or the status of cargo, businesses simply aren’t able to assess the impact of an event or make quick decisions.
The reliance on manual processes also leaves companies searching through contracts and spreadsheets to piece together the information they need. Even for those businesses spending very sizeable sums on transport, data on the performance of supply lanes or historical carrier spend may not be readily available – making it harder to call in favours or negotiate on costs. Running tenders for problematic lanes, weighing the cost of alternative supply routes or diversifying the carrier network can also be painfully slow tasks.
The irony is that there is a huge amount of data out there that could be used to improve visibility, it just hasn’t been shared or utilised effectively. The high level of fragmentation and lack of standardisation, in everything from shipment sizes to IT systems, haven’t helped either. We are now seeing a much more collaborative spirit emerging as businesses recognise the role of data in helping to identify potential threats and improve decision making.
We can now expect a shift to more proactive supply chain management, with transparency, real-time visibility and sophisticated forecasting capabilities becoming core operational processes. Research by Capgemini found that improving crisis-preparedness using simulations is a key focus area for organisations. As many as 84% of organisations view this as a priority post-Covid compared with 62% before the crisis.
Whether helping businesses to manage volatility in freight rates, maintain supply of key parts or pivot into other product categories entirely, digital tools and online-enabled processes – supported by modern technologies such as big data analytics and AI – promise to be enormously impactful.
Indeed, the most forward-thinking companies see resilience as an opportunity to gain competitive advantage. By spotting problems before others, by being prepared for a broad variety of scenarios and by putting in place the tools and processes they need to respond quickly and intelligently, they can turn a crisis into an opportunity and build market share.
While the pandemic has wreaked havoc on logistics, there has never been a more exciting time to work in the industry.
This is guest post by Christian Wilhelm (pictured), founder and CEO at Shipsta