Supply Chains in the Time of Corona
The corona lock-down has one advantage: I finally have the time to read the stack of books on my bedside table. That includes re-reading the classic novel by Gabriel García Márquez, Love in the Time of Cholera, which is set in the late 19th century during a cholera pandemic.
No one alive has ever seen a pandemic like the one the world is experiencing today. Governments, businesses and citizens seem to be in a state of disbelief about the disruption that COVID-19 is causing. Things we have taken for granted are suddenly no longer there for us: travel, theater, a coffee with friends are all now off limits. But these are things that we notice. What about the less obvious disruptions, specifically, the shock that COVID-19 has delivered to the global, just-in-time supply chains?
The supply chain shock
Why are there so many empty shelves in our shops right now? Often, the answer is not that there aren’t enough products being produced, it’s that those products simply can’t get to retailers fast enough, so great has the shock to our just-in-time supply chains been over the last month.
Since the outbreak began in China, marine container shipping companies have cancelled more than 100 trans-Pacific sailings. This has left many containers — which North American agribusinesses would normally have used to export their produce — stuck in China. Across the West Coast of America, cold-storage facilities are stuffed with unshipped pork, chicken and beef that isn’t getting to global consumers.
To get around bottlenecks like this, many companies are starting to ship products and components by air, despite the extra cost. But Trump’s ban on Europeans traveling to the US is spoiling the party; 60% of air cargo between Europe and the US travels on passenger airplanes — and passenger planes are no longer flying. Airlines have now started to use idle passenger airplanes to transport cargo. And Jaguar Land Rover has flown in parts from China to its UK factories in suitcases! The demand for chartered cargo planes has gone up, but freight rates have risen too with 50-100% per kg. Neither these prices nor the use of cumbersome workarounds are sustainable in the long term.
Road freight is not a pretty sight either. Trucks account for three quarters of land-based freight in Europe. Germany and at least 10 other EU member states have re-introduced internal border checks in response to the crisis. Some have closed borders for people. This causes traffic jams such as the 40-km line up of trucks between Poland and Germany. Truck drivers often refuse to continue to travel because they are afraid that they won’t be able return home afterwards. Unless we address these human and structural factors impeding the free movement of goods, the measures other states have taken to increase the flow of goods — such as the suspension of highway tolls in China — won’t work in Europe. Interestingly, while road freight and port activities came nearly to a standstill in China, rail freight continued to move. There is undoubtedly a lesson in this for other markets.
Export bans on key commodities — spurred by fears that the COVID-19 disruption will cause domestic shortages — risk making things worse. Items subjected to export restrictions since the beginning of the crisis include face masks in Germany, South Korea and Kenya, rice in Vietnam, wheat flour in Kazakhstan and sunflower oil in Serbia. The potential implications of export bans or other supply-chain disruptions — in this or a subsequent crisis — are there for all to see. The US and many other countries, for instance, depend heavily on prescription drugs made in China and India.
The complex global trade in agricultural commodities leaves many nations vulnerable to any disruption in food supply chains. This is particularly true at a time like this, when logistics workers are just as likely as anyone else to fall ill or to have to stay home to look after relatives and when panic buying is already emptying shelves. Prices, especially of food, are likely to rise and shortages will occur for products that are either imported or labor-intensive. Some meat processing companies in the US are already seeing a 20-30% slowdown. Not since World War II has food self-sufficiency been so important.
For example, the UK agricultural sector only produces 50% of the food the country eats (shoo-in: Brexit will make the situation worse), while The Netherlands exports 70% of its food and is stuck with surpluses, because it can longer get the food it produces across borders to consumers in other countries. Many companies outside the agri-sector face the same challenge but in reverse, for example, medical-technology specialist Medtronic needs 1,500 unique parts from 14 different countries to manufacture a ventilator.
Winners and losers
As with every crisis, there are winners and losers. Big tech companies like Facebook, YouTube and Netflix are thriving, as are supermarkets and online retailers. Amazon recently announced that it was hiring 100,000 people across the US. Blackstone and others who invested in logistics facilities made a good bet, as the world is screaming for warehouses now. Believe it or not, drive-in theaters are also making a comeback.
Manufacturing companies with extensive supply chains on the other hand are struggling. Car sales in China fell 92% in the first half of February and auto plants have closed across the US, the UK, Europe and India. Oil companies, hit with the double whammy of coronavirus and collapsing oil prices, have immediately announced cuts in investment.
At Dutch auction sites, millions of flowers are being destroyed in response to evaporating demand. E-commerce company Coolblue recently stopped advertising and adjusted its prices for electronic, whiteware and other goods that predominantly come from China. Philips is seeing an increased demand for medical equipment but may find that its respirators from Pittsburgh destined for Europe will be confiscated for the US market. Salient detail: those respirators can only be manufactured with parts from Europe.
It is too early to tell how industry leaders will react to these developments in the long term. But we are already seeing that big changes are possible in response to the challenges thrown up by COVID-19. Mothballed US car plants are looking into whether they can start manufacturing ventilators instead. The Chinese government encouraged companies in China, including automotive companies, to produce masks, thermometers and medical robots.
Luxury fashion brands in France have switched from making perfume and clothing to hand gel and surgical masks, while Airbus flew 2 million masks to Europe from China. DSM in The Netherlands is donating 100 million vitamin pills and 130,000 liters of hand sanitizer to hospitals. Similarly, two Dutch liquor brands, De Kuyper and Bols are producing 100,000 liters of hand alcohol for hospitals. Hotels in Madrid are converted to make-shift hospitals and Best Western in the UK is considering doing the same.
Rethink your supply chain
Short-term responses aside, in times of crisis industry leaders must show that their company has a plan to deal with supply-chain vulnerability. So how can you respond? Imagine the global supply chain as a huge number of dots with numerous links between them, like a child’s dot-to-dot book.
One dot represents your company. Put a circle around it and look at all the other dots to which it is directly or indirectly connected: that is your supply chain. And because it is part of a wider system you can’t fully control it. An adverse event in one place has a knock-on effect to the rest of the system, including your company. To be better prepared, you can rethink your supply chain with three interlinked objectives: resilience, visibility and sustainability.
Let’s start with resilience. Map your supply chain, every single part of it and who does what for you? Where do your raw materials come from? Who does design and production? Where are your retailers, consumers, and end-of-life treatment and waste handlers? And don’t forget the lines between the dots; freight transportation and logistics sites! Now you can look at where you are vulnerable and take measures to reduce that vulnerability. For example, move production and stockholding closer to consumers, consolidate your suppliers rather than sub-contracting, or use 3-D printing to produce spare-parts on demand and close to your consumers.
Next comes visibility. Now you understand your supply chain better, you want to have real-time information of all flows from suppliers, internal departments and distributors. Supply Chain Media has developed a simple tool to assess visibility at a strategic, tactical and operational level.
The good news is that companies can piggy-back on rapid developments in the areas of IT, machine learning and artificial intelligence (AI). A growing number of IT companies, such as INFORM Software, combine IT with AI to restructure and optimize supply chains.
You should look beyond the established suppliers and explore what different startups are doing. A good example is Riskmethods, a supplier of supply chain risk management software. The company uses AI and automated software to detect threats in the supply network that will impact their customers. For instance, they might spot a media article about fire in a factory plant in Malaysia and then use that information to work out which companies and their customers will be affected, so that those businesses have adequate time to respond.
Diving down deeper into logistics, Flexport is a “digital freight forwarder” that uses cloud software and a data analytics platform to give customers full visibility and control of their logistics supply chain. Freight platforms that offer transportation and visibility also exist locally for road freight, such as G7 in China or Convoy in the US.
And did you know that BlueDot used AI to flag up on New Year’s Eve that a mysterious SARS-like virus had started in Wuhan and to predict which cities worldwide were most at risk?
Finally, we have sustainability. Did you notice that your company’s supply chain circle already is in line with the circular economy? United Nation’s Secretary-General António Guterres may have put climate change on the back burner for now, but it would be a mistake for companies to drop that ball altogether. Use your strategic assessment to integrate sustainability and especially climate change into your supply chain management systems for once and for all.
Make this concrete by choosing CO2 as a key indicator of supply-chain resilience and efficiency. It is an indicator that doesn’t lie; you can negotiate about price but you cannot negotiate the CO2 footprint, and that makes it a more reliable indicator on which to base decisions. And it helps you to prepare for a future where carbon is money: carbon pricing schemes already cover 20% of the global CO2 and are likely to expand. Let’s take freight transportation as an example; CO2 emissions are determined by the amount of fuel, the number of km travelled and the modes and logistics sites used as well as the number of legs and switches between them - all of which determine energy and thus cost efficiency, as well as vulnerability to disruptions. With your logistics footprint in hand, you can report to stakeholders and use the results for better business decisions and for taking action to reduce emissions.
To help you, Smart Freight Centre, working with the Global Logistics Emissions Council, has developed the GLEC Framework. This is the only globally recognized methodology for calculating emissions across a multi-modal supply chain. It is consistent with the widely used GHG Protocol and a basis for a new ISO standard. Leading multinationals, including suppliers such as DP-DHL and Maersk, as well as their customers such as HP and Dow, are using it to track emissions and collaborate through green freight programs to reduce the climate impact. Frankly, if I were a company, I would only accept suppliers of freight transportation and logistics services that can give me the carbon footprint metrics for my shipments. It’s an integral part of supply chain visibility.
President Kennedy famously said “The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger — but recognize the opportunity.” Companies may be tempted to resort to quick fixes in the hope that the coronavirus danger will be gone soon. It takes a true industry leader to realize that rethinking the supply chain now could be your opportunity.
This blog was originally posted in the Smart Freight Centre news.