The global supply chain is fragile. Initially, the effects of the coronavirus halted manufacturing in China, what some consider as “the world’s factory.” Soon after, the decline in large purchases led to layoffs further up the supply chain. Academics say it’s a vicious cycle in which negative supply shocks may cause less demand
All the while, more purchases are happening online, and the shift to ecommerce isn’t going away. Total volumes in domestic networks, according to UPS, has remained in line with peak holiday traffic. Residential deliveries have spiked while commercial deliveries have fallen. It’s logical to expect a bit of moderation as businesses reopen. But the underlying trend toward online commerce remains.
It’s why we recently gathered the experts from UPS, Deloitte, 6 River Systems, and Shopify to divulge their industry insights and best practices to help you adapt your supply chain as global economies reopen. If you missed it, watch the recording of our webinar.
Below is a condensed version of the webinar if you’d prefer: It offers the latest trends, best practices, and insights you can use to adapt your supply chain and logistics strategy.
- Key takeaways for supply chains
- Key takeaways for logistics
- Key takeaways for commerce infrastructure
What we’ve learned about the supply chain
The global pandemic, according to Jim Kilpatrick, Deloitte’s Global Supply Chain & Network Operations Leader, has exposed global supply chains as much more vulnerable than many had realized. These vulnerabilities are especially acute for businesses with a high dependence on China to fulfill their need for raw materials or finished products.
Kilpatrick says years of focusing at minimizing costs in the supply chain or reducing inventory has reduced the flexibility needed to absorb disruptions. Put differently, many organizations are overly reliant on just-in-time inventory from single-source suppliers and not fully aware of the vulnerability of their supply chain relationships to global shocks.
Even though businesses had an early warning as the coronavirus initially swept China, Kilpatrick contends most organizations in the U.S. did not react quickly enough.
“The traditional linear supply chain model is transforming into digital supply networks (DSNs),” Kilpatrick says. “Where functional silos are broken down and organizations become connected to their complete supply network to enable end-to-end visibility, collaboration, agility, and optimization.”
Adapting to shifting consumer trends
- Focus on demand signals: Tracking demand as the world reopens can help you forecast the rebound’s cadence. Essentials and staples are still in high demand. These types of signals inform inventory positions and increase the likelihood of quickly turning what’s initially in demand.
- Ecommerce acceleration threatens profitability: People are afraid to shop in brick-and-mortar stores as 40% surveyed recently say they feel it’s not safe even with social distancing. Digital is now influencing the path to purchase in new sectors like groceries and essentials (e.g. toilet paper). Therefore, inventory must be allocated specifically to online channels. Even in a crisis, consumers are conditioned to expect free, two-day delivery, seven days a week. This creates profitability challenges, especially for brick-and-mortar retailers moving online when stores have to account for the new fulfillment costs.
- Economic fear drives price sensitivity: What started as a health crisis is evolving into an economic crisis as millions are out of work or concerned about losing their jobs. Discretionary purchases like fashion and seasonal items are being deferred. Remote work has created an increased demand for home office supplies. But price sensitivity combined with expectations for home delivery, contactless in-store experiences, and an emphasis on hygiene is pressuring margins. Brands with purpose are doubling down on their missions as consumers look to reward good actors like those donating PPE to frontline healthcare workers.
- Understand your importance to suppliers: SMBs must know how important they are to their suppliers when inventory becomes scarce. Are you a top customer? Is your supplier capable and willing to serve you? This determines the likelihood of your purchase orders being filled when manufacturing capacity is constrained. If you’ve answered no to both those questions, consider adding alternative manufacturing capacity to ensure supply.
- Get the full picture on your supplier: Gauging the health of your immediate supplier isn’t enough. You must have a line of sight into those that supply your supplier. Only after you understand the upstream supply chain components on which your supplier relies can you make informed decisions on what and how much to order.
- Streamline SKU portfolios: The manufacturers that supply your main supplier may be constrained due to worker illness or government mandates. Rather than building inventory ahead of the next crisis, narrow orders to SKUs that sell well online. You don’t need to order inventory in every shape, size, and color and store it in retail locations that are closed.
“The normal of the future won’t be the normal of several months ago,” Kilpatrick says. “Planning now, even under uncertainty as the crisis continues to unfold, will result in more precise and considered actions, and a stronger bounce back.”
What we’ve learned about logistics
Businesses are reopening, but the pandemic isn’t over. In fact, a resurgence could cause us all to take two steps back. “We may dip in and out of this pandemic for sometime to come,” says Sean Flaherty, VP Retail & Ecommerce, at UPS.
Use this slide to forecast what’s likely to happen next in the event the countries you sell into experience renewed outbreaks and shut down again:
Flaherty says China is cautiously reopening and manufacturing is slowly returning but consumer spending is lagging, creating logistical imbalances and significant impacts on freight capacity and pricing.
What you should expect for freight and travel
- Supply and demand is becoming more balanced as China reopens and demand in Europe and the U.S. contracts.
- Expect air freight pricing to remain high until passenger traffic rebounds and belly capacity increases. With passenger flights cancelled, the cargo often transported in the bellies of passenger planes has nowhere to go. Since February, much of that volume has moved to freighters or aircraft designed to transport goods in bulk.
- The Global Business Travel Association suggests business travel will resume in the third quarter followed by intercontinental passenger travel, according to the International Air Transport Association, in the fourth quarter.
- While fuel costs are at historic lows and are providing a tailwind, ocean freight costs could creep up as demand for ship (and ship container) capacity increases as an alternative way to store oil at sea so it can be sold later when prices rise.
Resilient supply chains are flexible supply chains. Instead of sole sourcing supply and becoming beholden to a single supplier, Flaherty says flexible supply chains with multiple sources of supply offer organizations optionality. While sole sourcing reduces costs and leverages economies of scale, it also makes supply chains less flexible, especially during crises:
- You’ll incur higher costs sourcing supply from multiple manufacturers, but accounting for these costs in your pricing will help during strong economic times when it may be tempting to sole source and cut costs
- Having manufacturing supply in multiple locations is especially can insulate you from border closures and increases in freight costs
- If you’re in a commoditized market and compete on price, be sure you know exactly how much additional cost you can incur and still maintain healthy margins
What we’ve learned about commerce infrastructure
Infrastructure goes beyond the physical warehouses, scanners, and printers needed to fulfill orders. Jerome Dubois, VP, 6 River Systems also wants organizations to consider digital (data and networks) and human infrastructure.
Two shifts: COVID-19’s impact on infrastructure
- Shift #1: Order profile changes: The supply chain was historically built around moving pallets of product to big box stores. Ecommerce requires smaller order profiles. As demand shifted online, businesses all around the world quickly realized that fulfillment infrastructure had not ramped up quickly enough to keep up with demand. Dubois recommends investing in multiple, smaller inventory runs that are located closer to the consumer.
- Shift #2: Labor constraint impacts service levels: With labor already in short supply and volumes spiking, Dubois says businesses are finding it difficult to keep their fulfillment promises. In some instances, two-day shipping became two-week shipping. Dubois recommends introducing technology and automation into the supply chain to increase the efficiency and productivity of the existing labor force. Store replenishment networks must be converted to direct-to-consumer (DTC) fulfillment networks.
The in-store experience has, and will continue to, change to include contact-free amenities. Retailers must equip their businesses to capitalize on the shift to ecommerce. Dubois offers a slide illustrating what retailers need to succeed online:
Identify the systems necessary to source, track, and manage inventory. Organizations must be able to manage vendors and see when inventory is received and ready to sell online so fulfillment promises can be kept.
You must have the capability to accurately forecast demand. Last-mile delivery must be factored into your pricing strategy so you understand the average order value (AOV) necessary to offer appropriate (free) shipping thresholds to maintain healthy margins. Determine who is responsible (you or a third party) for fulfillment, including return logistics. Ensure you (or a third party) enable fulfillment options like curbside pickup or click and collect
Owning customer data means managing it to yield actionable insight. Do you build or buy this technology? Besides cost, consider that as you scale, your tech stack will need to grow and evolve with you.
To hear morel from some of the brightest minds in logistics, watch the recording of the best practices for supply chain and logistics management above.
This article originally appeared in the Shopify Plus blog and has been published here with permission.