COVID is Creating the Supply Chain of the Future

 

FleetOwner --- How carriers adapt and use the supply chain to their advantage could decide the winners and losers of the post-COVID-19 transportation world, according to Lee A. Clair, the managing partner of Transportation and Logistics Advisors.

“As we look going forward, wherever you are today in your supply chain — big companies, small company, sophisticated, unsophisticated — you're probably not well-positioned for the future because things keep moving more today than ever before,” Clair said during a recent Stifel Capital Markets conference call on supply chain opportunities. “Because even if you did a good job of planning for your future, disruption of this whole COVID scenario is making for a different future than what you would have planned pre-COVID.”

The pandemic severely disrupted supply chains in 2020 as consumers and businesses rapidly changed behaviors in March and April. As the U.S. slowly emerges from the initial stages of the pandemic, things are changing again, Clair said. But the pandemic was just one problem for carriers to deal with this year.

The pandemic hit the U.S. market as importers were still grappling with Trump Administration-imposed tariffs, which Clair said many businesses tried to beat by ordering products early, which created other supply chain kinks. “It’s not only COVID — there are other changes happening that are making this one of the most disruptive times ever in the supply chain.”

These supply chain disruptions have led to lots of import-sourcing problems, Clair noted. These problems include production interruptions, rising transportation rates, difficulty sourcing parts and raw materials, closed factories, and increased demands on e-commerce. 

“Your supplier may not have a problem but their supplier or their supplier’s supplier might, and that starts interrupting what's coming in your direction,” Clair explained. “The other piece that’s happening is as those sourcing legs — both import and domestic — are being impacted. The truck lines and transportation networks are networks built around flows. Once you start changing flows, you lose productivity out of the carriers as well. Their availability and pricing and service levels start going in the wrong direction.”

Those are among the bigger inbound problems in the supply chain, according to Clair. The other big supply chain change in the COVID era is on the outbound side — specifically e-commerce. With fewer office employees working in central locations, smaller shipments of office products are being delivered to more individual homes. This new outbound flow is also changing retail brick-and-mortar stores, which are doing more e-commerce and home delivery since the pandemic began. 

All of these products being delivered to homes is creating “very disruptive, totally different modes, order quantities, fulfillment point service levels,” Clair said, adding that brick-and-mortar stores are not optimal for the e-commerce world. And while businesses can create near-immediate gratification delivery for consumers, it doesn’t come cheaply. Express and next-day delivery can increase a business’s transportation costs by tenfold, he said.

Disruption can create opportunities

These COVID-led supply chain stresses are setting up long-term repercussions. It’s not just the pandemic, Clair noted, but the tariffs are creating shifts to domestic production and companies are looking for broader supplier bases. “There are a lot of companies that have been single-sourcing,” Clair said. “With all the disruption happening, the push now is towards having multiple suppliers of most key components.”

The other big change is e-commerce, where the cost per pound, per mile can be 10 times more for last-mile delivery than larger-volume shipments, which means fulfillment centers need to be as close as possible to the customer, Clair added. 

“These changes probably are going to keep going long-term,” he said. “We’ve had a big, disruptive hit to the system. The supply chains are broken.”

Large carriers with sophisticated supply chain organizations, advanced technologies, and large data systems are well-positioned to deal with these changes, Clair said. But mid-sized shippers lacking these sophistications could see the biggest negative impact from the pandemic supply chain kinks. 

While the larger shippers can use their sophisticated supply chains as competitive weapons, Clair said, most mid-size companies have not made previous investments in the technology to benefit from their own supply chains. For example, large carriers can charge more for faster delivery, while the mid-sized shippers tend to have limited service options. 

Along with the growth of more expensive e-commerce deliveries, hurdles facing mid-sized shippers in 2020 include more supply chain shifts such as increasing warehousing and transportation costs. There are also U.S. population shifts to deal with as more people are moving out of once populous northern states such as New York and Illinois to Sun Belt states. Clair said this is evident in shifting populations out of old, large metro areas: New York City and Chicago are losing residents as areas around Nashville and Austin are growing. 

But there is good news for mid-sized transportation companies, Clair said. Many big barriers that made it difficult and expensive for mid-sized companies to have a world-class supply chain are coming down, he said. Those crumbling barriers include declining costs of logistics technology, software as a service, API integration and other third-party options. “The capabilities of what’s available today is radically better at dramatically lower costs,” Clair noted. 

These are creating new capabilities for smaller shippers who can take advantage of e-commerce supply chains. “There are lots of new services and new ways to serve your customers that you can do today that just weren’t available two or three years ago,” Clair said. “And the other piece that keeps growing is that the management and analytical skills are available today, more and more, through 3PLs and various flavors of 3PLs.”

Those companies that improve their supply chains will create internal and external value, Clair explained. A lot of value — for both the company and the customer — can come with improved cash flow thanks to reduced transportation costs, lower warehouse and operations costs, along with lower inventory levels. 

These changes, based on improved supply chains, can create higher earnings before interest, taxes, depreciation and amortization (EBITDA) in the near- and long-term. More earnings can give companies more opportunities to create new services and products to better serve their customers. 

“The piece I cannot emphasize enough in this new world is beyond lowest total delivered cost,” Clair explained. “How can we create new service and product options that add value and better serve customers and making the supply chain part of that? Then dovetailing it into our marketing and commercial capability so that we can actually gain revenue as well.”