PANDEMIC EXPOSED SUPPLY CHAIN WEAKNESS

From a supply chain view, has and is the story about container line performance, not costs?

Shipping is a derivative of inventory movement. The past 2+ years exposed a weakness in that supply chains are designed and operate based on costs. 

It continues as the excess inventory showed. New E2E supply chains designed on performance and adaptability are needed. It drives out inefficiency that increases costs and prices. 

The new supply chain drives changes in shipping. 

There is no moving back to pre-Covid "normal". Continuous disruption is part of the new and moving normal with geopolitical, climate change, and labor. The new supply chain reality.

IMHO

CFOs, Purchase Orders, Inventory, Supply Chains, and the Recession

 

From the pandemic to now and a pending recession. From no inventory to excess inventory—and trying to balance demand and supply. Plus, throw in inflation. And so it went. It is about your upstream supply chain.

Your challenge is to adapt to the coming recession and your spending reduction to deal with it. And add the chance of more disruption. There are the usual suspects here—the same old.  But think bigger on what to do. There are limits to what you can gain from cost reductions with people and pushing for lower purchasing prices and transportation rates.

Emphasize your upstream supply chain—where the supply of supply chains begins. It is the critical, largest, biggest cost, and most complex part of your company and touches more parts of it than any other function. There are opportunities with inventory and process. If you want with.

Procurement and transportation/logistics (whether separate or included with the product buy) are your biggest spend. All that inventory and bringing it in and the capital expenditure. Your international buy is often the bigger slice than the domestic purchase.

Start with whether you have made changes upstream in the past two years, why you did, what they are, and how well things worked out.  Note that the pandemic did not create weaknesses in the end-to-end supply chain. It exposed them. Just as it highlighted that the upstream supply chain is critical and strategic. Remember, the last two years, both directly, and indirectly, have been the upstream segment of your business. And that area is vital for your building resilience.

STEPS:

·       Analyze how much capital you have invested in inventory—your spend. How much money do you have tied up in buffer inventory to cover time and inefficiencies?

·       Think of your inventory-related purchase and cash flow.

·       Assess your inventory as to turns/days of and percent of revenue. What is your ROI?

·       Focus that your supply chain, even your business, begins upstream at Mile Zero and your purchase order.

·       Remember that if you struggle here, you cannot fix it downstream. It is too late.

·       Consider your supply chain is in a time of continuous disruption. Normal is a moving target and time can be your enemy.

·       Go beyond costs. Think how you do the process, total time, and technology.

·       Recognize the inefficiencies that impact your inventory. 

·       Ask yourself. How efficient you are you? How much handling and multiple handling of documents and information are there among all the parties? How easily and well do you prepare and see your purchase orders and what is happening with them?  Now think what it means to your inventory and inventory buffer.

·       Move from Excel to digital—a key to gaining resilience, ESG, transparency for manufacturing and retail/sales, and procurement and transportation efficiency. This is more of a requirement for you than an option.

 

PURPOSE:

ü  Draw on lessons learned from the last two years and improve your operations and technology.

ü  Put your focus where your spend is.

ü  Streamline your purchase order process.

ü  Move to a digital platform.

ü  Gain procurement process efficiency.

ü  Provide visibility.

BENEFIT:

1)    ompress time from PO placement to PO delivery. 

      Mitigate purchase order time variance.

2)     Reduce capital tied up with inventory. Remember interest rates.

3)     Increase inventory turns/reduce days of inventory.

4)     Improve your inventory capital investment ROI.

 

SPOT CONTAINER RATES --Some Thoughts on Curious & Curiouser--

There have been many stories, tweets, and posts about spot rates. Tracking them. Citing them. Citing them to predict a peak season import apocalypse.

First, some context. Context is what is missing in the spot rates stories. The rates are treated as if in a vacuum and are linear with little explanation and drill down of what drives them.

There are no problems getting empty containers and that can reduce pressure on spot rates.  

China exports were strong in July.

1)    What is the significance of these rates? How much volume moves under them? Maersk, one of the largest container lines, has over 70% of its volume locked up in contracts. That puts container shipping under spot rates, as a minor activity for them.

2)    There are two sets of shippers—forwarders and Beneficial Cargo Owners (BCOs). Does one group move more volume now using spot rates? This can reflect selling rates to get business or using contracts to get service to move products for supply chains.

3)    Some of the rate usage reflects how carriers see forwarders taking the rates they “gave” them and selling against them with end customers.  Also, some carriers have a different view of forwarders as customers. They like them.

4)    A note. Pre-Covid, market rates were often below contracts. So playing the spot game was considered a wise approach. Much volume moved with market pricing.

5)    The last two years have been highlighted by high rates and high carrier profits. This contrasts with pre-pandemic when rates were low, and carriers had little or no profits.

 The focus is the upstream/inbound supply chain—where the supply of supply chains begins. It is where suppliers and their suppliers are. Tiers of them. This is the where of the containers whose freight charge is spot or contract rate.

We have had 2+ years of supply chain and logistics continuous disruption. The pandemic. China lockdowns. Domestic issues with chassis and container transportation. Contract negotiations with West Coast dockworkers. Union dissatisfaction at ports in Europe. These have resulted in congestion and chaos worldwide at ports.

 

With disruptions ongoing—throw the Russia sanctions for its invasion of Ukraine and China, Taiwan, and the Taiwan Strait, how long disruptions will continue and, in turn, how long it will take to clear the port congestion are unknown.

 

These impact ship turnaround and the financial impact for highly capitalized container lines, vessel utilization, and, in turn, spot rates.

 

What does all this mean? There is a segment of shippers who want the carriers to renegotiate their contracts because of spot rates.  Why should the lines do it? Why should they give up their power?

 

Some of the renegotiate view reflects that shippers had the negotiating strength for so long. Many do not like the shift. And back when they had that power, container lines did lower contract rates. Implicit here is whether service contracts are really contracts. Take or pay. Or if they have been soft time volume agreements?

 

There are also questions on whether lines will cancel/blank sailings to control capacity and, in turn, prices. This applies to both shippers who want to buy cheap rates and those who want service for supply chains. Blank sailings are not new. Container lines used them pre-Covid--whether it was a reaction or part of a strategy to take control of their fortunes. 

Those who prioritize service know that not every container, not every product in a container is important. Their need for service reliability and speed varies with SKU, product category, demand, seasonality, and other reasons. Think of it as ABC services for ABC inventories And prices should reflect the differing services--and their value.  This would be a change in pricing for varying services. This is more than charging based on port pairs. The validity of this that the last two years validated the strategic and critical importance of supply chain management.

 

So there is more to watch in 2022 and 2023 as to how prices will look. And against a background of other disruptions, such as climate change, and potential lessening of globalization with reshore, nearshore, onshore, friendly-shoring, and supplier diversification. Each of these can mean supply chain redesign and realignment. In turn, this drives what carriers will do.

     All of this means forecasting prices have higher risks. There are so many unknowns and events at           play that the past may not be a strong predictor of the future. Remember too, after decades of cheap         rates and what they meant? McKinsey said the industry lost $100bil over 20 years. Will and why             should container lines give up their newfound power?

WHAT IS NEXT FOR SUPPLY CHAINS? --Realigning Supply Chains--

Depending on where you are in the world, you have experienced China-US trade issues, the global pandemic, and Russia's attacking Ukraine. Manufacturers, retailers, and wholesalers/distributors are dealing with high ocean rates, delivery delays, and sourcing changes that have impacted inventory/product availability, procurement, and more. Also, behind much of the freight rates and operations issues is high demand that created volumes exceeding the capacity of logistics providers to handle it.

Recognition has arisen that we are in a time of continuous supply chain disruption. Add in climate change, geopolitical concerns, and other issues that can affect business continuity.

The awareness that supply chains are strategic and critical has firms asking themselves how they can build resilience or risk mitigation. There are different approaches to doing this. One is to reduce the products they carry, SKU rationalization. Another is to carry more inventory, even overstock. Given all the items a firm may carry, this may challenge warehouse capacity, throughput, and inventory turns, sometimes called inventory rich and cash poor.

Another way is moving closer to end markets where customers are. This means discussions about potential procurement, sourcing, manufacturing, and supply chain changes and shifts. This has become the reshore question

Companies are asking themselves about what they make and/or buy and where it should be done.  The challenges that companies have experienced go against traditional risk aversion with change.

Some talk in terms of deglobalization as a way of building resilience. It is labeled as reshore, onshore, nearshore, and same shore.  It raises the question whether decades of low-cost products will be undone by two years of supply chain disruptions?  Also, will a firm's changes will be an all-or-nothing? Or is there a hybrid path? 

No matter, what we are talking about is not shifts.  No matter the terminology, it is realigning supply chains. This includes sourcing, production, procurement, and end-to-end supply chain management.

The above sets the stage for what comes next—what to do and how to do it.  There are two parts to a realignment project:

Step 1. Call it Phase 0. This is what you are thinking as to reshoring. Do you want to move it onshore, nearshore, or stay same shore? There are points to consider which can vary by industry, market sector, or type of business—manufacturing, retail, wholesaler/distributor. These can include:

·       How critical your products are. This showed early in the pandemic with PPE, personal protective equipment.  Much of these items were made in Asia which had shutdowns. That had serious implications.

·       How valuable your products are. There are costs to making changes. Generating a return on investment, or ROI, reflects the value of what you want to shift. In turn, this dynamic has a different standing with low-value items.

·       A classic battle. Somewhere in all this will be the labor vs capital issue. The labor reflects wages, training, education, supply of employees, and related topics. Where do you put your money? Capital ties to manufacturing and to building resilience through technology as compared to engaging people.

·       The length of your end-to-end supply chain. The shorter it is, the easier it may be to adjust to events. Length is also a factor in the nonlinear, complex supply chain.

Step 1.5. There may be less complicated options. These involve your suppliers.

Diversify. This can be defined as a type of reshore. Look at your suppliers and transport/logistics providers, especially the ones that are very important.  Can you reduce your use and dependence on them? That can mean you pay higher prices by reducing your volume commitments. But it will also spread your risk and improve resilience.

Relationships. A takeaway from the last two years is to create supplier relationships that go beyond price and traditional buyer-seller connections. This can be easier said than done. But continuous supply chain disruptions have shown the need for it.

Step 2.  This is your analysis or assessment. It presents an opportunity to see and understand your end-to-end supply chain—its size and complexity.

You are looking at a range of options—no changes, moving production or sourcing away from certain countries, moving it closer to home, or transferring it to the home country. This also means looking across your product spectrum. It requires a strong analysis of what is required to make sound decisions.

Your work should include:

·       Recognize upstream.  The recurring challenges with the past two+ years have been primarily upstream or the inbound supply chain. That is where suppliers are and where the supply of supply chains begins.  To add to the problem, the upstream is often organizationally bifurcated as to procurement and transportation/logistics.  

For too many, supply chain management is viewed and defined as and by its transportation/logistics elements and not by upstream/downstream or other relevant designations. The two parts are also managed in separate groups in a company.  And the performance of both is often measured by costs.  

·       Say suppliers, suppliers, suppliers.  Detail what you buy from suppliers. What do you see?  What do you not see?

Supply chains have been limited by Straight Line Thinking Syndrome, aka, that supply chains are linear. Think of it as railroad tracks or the modern Flat Earth Society. Something that is an urban myth; it has never existed. 

You see many suppliers for your products, parts, assemblies, and components. Think of your bills of material. One of yours may look like this:

But there is more.

Drill deeper. 

It does not stop there.  Your suppliers have suppliers. And so on.

There is a network of suppliers with interconnectivity. What you have are tiers and layers of suppliers. The granularity of your inbound supply chain. If you are a baseball fan, think of it as seeing a triple play.

All the parts and the movements. Understanding this will prevent you from missing parts at locations that you are moving from.  That can undermine the project.

Tier suppliers as to priority. And layers of who they are, what they make, where they are, and who their suppliers are.

Defining and seeing the supply depth is something that blockchain and supply chain visibility can miss. You cannot with your realignment.

Map your complete supplier network. This enables you to see the size and complexity of your nonlinear supply chain. It also presents a view of what you must understand and assess.

Prioritize Products. Companies can have many products and parts made outside of their home country.  So what do you move? 

Not all your products, like your suppliers, are the same.  You should prioritize your items for the assessment and changes you may make.  Moving everything at once can mean cost and operations chaos which can negatively affect your business.

Even more, you may decide that you do not want to move every product or part. As with inventory, there are A, B, and C items whether based on sales, profit margins, supplier alternatives, or other criteria.  This is important to your project.

Crunch the Numbers.

This is where everything leads. What does supply chain realignment mean to your product costs and margins? 

Landed cost is the best cost to use. This is your buy price from suppliers, shipping, customs, port, insurance, and related costs. An even better number is the landed cost delivered. You should have the data to do the analyses.

Two notes. Presently, you likely have contracts with suppliers and transportation carriers. Changes may mean using non-contract prices and rates for the study. To some extent, it creates apples and oranges. Be careful.

Also, understand the quantity and quality of suppliers and transportation/logistics services and providers. This is important to product availability and the movement of your goods along the end-to-end supply chain.

Odds and Ends.

·       Are similar products or parts moving from alternate ports? Do some research. There may be import data on your products.  This is good for understanding if others are sourcing from wherever there is located. 

·       Time—you need to recognize it to do a thorough study. You need it to implement supply chain realignment. Remember, where we are took decades to happen. Changes and all the inherent details are not overnight adjustments. Ask yourself if your realignment is dislocate or relocate. The answer brings different challenges.

Conclusion. What does the future hold for your supply chain, procurement, and supply chain management?  Will it be framed around reshore, onshore, nearshore, or same shore? Will it be about globalization, regionalization, or global regionalization?

If you are considering supply chain realignment, you have two choices. Just do it. Call it a knee-jerk reaction. Or do a thorough analysis. Choose the latter to gain an understanding of your supply chain, minimize risks, and improve any implementation.