THE POST COVID-19 REPORT FOR SUPPLY CHAIN AND LOGISTICS ORGANIZATIONS. New supply chain realities in the post pandemic world

INTRODUCTION

The world looks very different today, and the predictions that were put forward at the start of this year have inflated.

The challenges we all have faced in the first quarter informed us that the stability is not granted and with no expectation of the most trusted organizations.

COVID-19 has reconsidered the concept of business resilience. Companies all over the world are focusing on employee well being, liquidity and cash flow, avoiding supply chain disruption, and managing risks to business continuity. The Pandemic has demonstrated the need to rethink long-established supply chain strategies and tactics. And the Pandemic is not all that has impacted the world in 2020. Trade wars, the wildfire in Australia, political turmoil, and other conflicts continue to dominate our lives. Business heads have the task of navigating a global pandemic together with the economic crisis, staggering political realities, consumer pressures on environmental concerns, and evolving digital innovation’s which are leading to disruptions.

Summing up all these challenges, supply chain and procurement will assume greater strategic importance than ever before. Upcoming changes will transform companies operating in the global supply chains. We will start hearing more of Agile, nearshore, robust, value for the customer than Lean and offshore. Companies are focusing on the value and cost provided to the customer, and the ability to align with the new environment fast will be winning the future.

GLOBAL BUSINESS AND ECONOMICS TRENDS

The global trade was already declining in 2019, according to the World trade organization (WTO). The COVID-19 situation has fastened the processes. International monetary fund (IMF) has changed its previous 3,4% growth projection into a – 3% decline due to the Pandemic.

WTO goods trade barometer

According to WTO, the volume of world merchandise trade is likely to fall precipitously in the first half of 2020 as the COVID-19 Pandemic disrupts the global economy. WTO Goods Trade Barometer released on 20 May, currently stands at 87.6, far below the baseline value of 100, suggesting a sharp contraction in world trade extending into the second quarter. This is the lowest value on record since the indicator was launched in July 2016.

The Goods Trade Barometer provides real-time information on the trajectory of world merchandise trade relative to recent trends. The current reading captures the initial phases of the COVID-19 outbreak and shows no sign of the trade decline bottoming out yet. This measure is consistent with the WTO’s trade forecast issued on 8 April 2020, which estimated that world merchandise trade could decline by between 13% and 32% in 2020, depending on the duration of the Pandemic and the effectiveness of policy responses.

 

All of the barometer’s component indices are currently well below trend. The automotive products index (79.7) was weakest of all, due to collapsing car production and sales in major economies. The sharp decline in the forward-looking export orders index (83.3) suggests that trade weakness will persist in the short-run. Decreases in the container shipping (88.5) and air freight (88.0) indices reflect weak demand for traded goods as well as supply-side constraints arising from efforts to suppress COVID-19. Only the index for electronic components (94.0) and agricultural raw materials (95.7) show signs of stability, although they too remain below trend.

 

Trade had already been slowing in 2019 before the Pandemic, weighed down by persistent trade tensions and weakening economic growth. WTO trade statistics show that the volume of world merchandise trade shrank by 0.1% in 2019, marking the first annual decline since 2009, during the global financial crisis. Trade was relatively weak in the final quarter of 2019, but this is unlikely to have been influenced by COVID-19, which was first detected very late in the year.

GDP

The COVID-19 caused tremendous consequences on world economics. According to the IMF, the global economy is projected to decrease sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis. As wen can see from the table below, the advanced economies will face abt. 6% and the Eurozone will be hit by this recession the most.

The severity of this situation will depend on the stimulus which will be provided by each country, having in mind delays and varying amounts by each state, in my opinion, economies may face even more significant decline.

And we need not forget the possible second pandemic wave, which would paralyze the economies even more.

Global oil market

The other major headache is oil prices, which fall by 60% (UPDATE 1-Goldman Sachs Still Sees Crude Prices Falling After OPEC+ Deal). The correction will impact not only the industry but also massive economies that depend on oil prices like Russia and Saudi Arabia.

The whole oil industry (Upstream, midstream, downstream) is facing significant losses. Due to demand cuts, the oil products are being held in the tanker vessels around the globe, summing up in enormous demurrage and financial costs.

Unemployment

The world has had the lowest unemployment rate for a decade. The COVID-19 caused massive layouts firstly in tourism and entertainment, brick and mortar retail, Logistics, and it’s to move to other industries. The unemployment rate in some economies is predicted to reach 25 percent. Among G20 USA and South Africa will be leading this list.

Political affairs and global supply chains

 

There was plenty of uncertainty and turmoil in the world political arena: Brexit, USA, and China’s trade war. The globalization has hit on the brakes.

Great Britain need’s to leave the Euro-zone by 31 DEC 2020. There is much doubt that the transition will work smoothly, and having in mind the COVID-19 related issues and possible second wave, in my opinion, there is a massive chance that this period will be prolonged. Otherwise, supply chains will have even more headaches, and the costs for great Britain can be very high.

The trade war with China has reached the next stage, as the world is blaming China for this Pandemic. Furthermore, during the crisis, companies in which chains are linked with China had felt supply chain paralysis, leading to stock-outs and lost sales.

Global supply chains, in the rest of the world, due to locked borders, were paralyzed as well. Companies are already looking for nearshore possibilities to lower the disruption risk and increase the robustness of they’re supply chains.

AREAS OF CHANGE IN SUPPLY CHAIN AND PROCUREMENT

1. Business Plasticity

Business planning will evolve as companies will be forced to rethink traditional supply chain concepts and performance metrics. Organizations will focus on areas which will ease the COVID-19 effects, and will let to achieve fast growth afterward, possible areas:

• Shifting from growth to cash flow optimization

The cash flow KPI’s and procurement initiatives and tactics to lower total costs will take the first places, and growth will wait for better times. Companies will reconsider their supplier contract’s terms to increase cash flow efficiency and will postpone growth initiatives and not core CAPEX and OPEX expenditures.

• Supply continuity

Today’s low-cost models: sourcing from single source and manufacturing in cheap manufacturing are being re-evaluated to avoid future supply chain disruptions.

In the near term, supply procurement organizations will increase safety stock to manage possible disruptions. A new set of suppliers will be invited to join their networks. In the medium and long run, the supply chain networks will be remodeled with the possibility to move them nearer they’re main markets, furthermore investment invisibility should be applied.

• Talent management

The pandemics have shown to us that jobs can be done from distant locations. It’s possible to save time on trips, hotels, and traveling expenditures; of course, productivity suffers, but in the long run, such model works well. Companies are expected to rethink their workforce models. Robotics and process automatization will be the leading topicks which will lead to increased productivity.

Some employee cuts will be unavoidable; nevertheless, companies need not forget long term success factors, and to avoid cutting muscle rather than fat. As I have informed earlier, companies need to think about post-COVID realities as well.

2. Working capital

 

The top priority for each company will be working capital and risk management related to possible bankruptcies.

Companies will work on improving working capital with measures like canceling unnecessary investments, extending payments, and pushing suppliers to decrease price. Moreover, organizations will try to renegotiate contracts where possible.

Value engineering should return, companies will look to any possibilities to increase ROI. Gain from strategic supplier partnerships will be drawn.

There is a considerable chance that CFC’s will look into remote job cost-saving possibilities and encourage jobs from home. Cut’s in unnecessary and costly and doubtful business trips will be cut. The business process outsourcing or shared service center possibilities will be taken for consideration by more companies.

Companies will work on their processes with the help of big data, and AI improvement areas will be identified and corrected. COO’s will be searching for waste reduction in the supply chains.

3. Supply chain networks and sourcing re-evaluation to make it more resilient

 

 

Companies will pay more attention to their supply chain resiliency. Today’s fast-moving world is shortening the product’s life cycles. Therefore, companies are very dependent on standardized manufacturing and lead times, related to LEAN six sigma practices. This Pandemic has drawn attention to the disruptions of the supply chains and the havoc, which it causes to operations. Therefore companies will re-evaluate they’re suppliers and supply networks, taking into account possibilities to manage risks. Most of the companies will look into nearshoring opportunities and will diversify their supplier count.

The supply chain disruptions eventually will draw new sourcing maps, with new players taking the lead. We will hear more about eastern Europe, Thailand, and other emerging markets, as key players in the outsourcing market. This trend is has been seen before Pandemic, as most of the companies were not satisfied with the quality and uncertainty witch was felt in China and India.

The COVID-19 crisis has drawn attention to the trustworthiness of supply partners. Organizations are going to pay more attention to monitoring and prioritizing their suppliers. Incentive-based supplier terms will find a place in the contracts.

Organizations are most likely to pay more attention to Third-party risk management, by implementing extra layers in they’re operations by:

• Creating an alternative supply base, achieving additional transparency.
• Slashing dependence on single-source suppliers; monitoring Tier 1 and Tier 2 supply chains; and buying insurance coverage for critical inputs.
• Tier 1 and Tier 2 vendors management, making sure that they have robust risk management programs and business distress plans.
• Supplier relationships and partnerships are essential as never before; companies will form those relationships if they didn’t before. Incentive-based payment methods will be applied.
• Additional supplier measurement metrics like R&D ability, flexibility, sustainability will be applied.
• Paying even more attention to compliance clauses.
• Adding new metrics when evaluating outsourcing countries: weather, climate, ability to handle risks.

4. Sustainability and compliance

 

 

 

In the past year, sustainability was the mega-trend in the supply chains providing a competitive advantage and serving as a market guard. The COVID-19 may put sustainability into second place, but in the long run, sustainability will lead the topics again. Nevertheless, there were some pressures on the sustainability issues from the politics side and China. Still, the COVID-19 pandemics once again drawback attention to sustainability issues, as men started to evaluate the surroundings and nature even more.

The compliance issues were already taking huge considerations with the companies leaders, as the world has seen huge cases summing up in significant penalties. Organizations will pay more attention to compliance as any penalties related to financial fraud form 3^rd parties would cause economic losses, which would be unbearable during a liquidity crisis. Furthermore, companies thinking about business continuity and keen competition reputation is the most important thing.

Last year introduced us to tightened sustainability and compliance regulations across the world. For instance, Maritime Organization’s low-sulfur fuel regulation (IMO 2020), the overall impact could be as much as 240 billion USD, resulting and 40 billion USD increased transportation costs (A Sea Change for the Global Shipping Industry,” Goldman Sachs, 18 June 2018). Meanwhile, the United States Environmental protection agency issued plenty of environmental laws and guidelines.

Supply chain organizations to cope with the regulations need to be more agile and proactive.  Executives will ask the supply chain and procurement organizations to focus on:

• Total cost over the product life cycle, taking into consideration all possible price increases due to sustainability policies.
• Suppliers prioritization. Companies will pay more attention to proper suppliers’ audits and more attention to sourcing processes.
• CO2 emissions savings.
• Use tools and methods to help business functions better integrate sustainability costs and benefits. It can be achieved by incorporating environmental cost considerations in supplier selection and contracts alongside price and quality criteria.

Sustainability regulations will change the economic and environmental structures that business operates. CEOs across industries will look to advocate integration of ecological and sustainability elements in their leadership initiatives, not only to reduce business risk and costs but also to create value propositions and increase brand value.

5. Digitization

 

 

Digitization was the topic of no one in the last decade. It has put some controversies as some leaders were promoting technologies implementation in they’re companies, some Led oppositely. And of course, there were a lot of cases when technologies didn’t generate the promised ROI. The pandemics have drawn us back to technologies as we have noticed that without technologies, the business is not possible at all. Moreover, companies have realized that they do work and make things easier and replace some manual work.

I will list major technologies which are doing and will make the most significant impact in today’s and post COVID world, for the supply chain and procurement organizations:

1. Big data.

The saying who owns the information will own the future is very realistic. Companies have gathered the information for decades, internet moguls, have leveraged data in the ways never before. Now it’s possible to test and check decisions, see all supply chains moves, budget them and perform what-if scenarios for the future and check if no mistakes were made in the chain. Combined with other technologies, which we talk about later in the paper, can make a huge difference and gain a competitive advantage.

2. Cloud

Cloud made it easy to connect with organizational systems from all over the world, without space limitation. It also enabled supply chain technologies availability not only for Multinationals but for SME’s as well.  This technology allowed companies to work during lockdown during COVID-19.

3. Automation

Robotics and manual and labor process automation were places of interest before the pandemics. It’s possible to automate soft processes like invoice accounting, payables, contract execution, planning, warehouse operations, all a lot of other annoying and error intense means. Pandemic’s cut labor supply for season jobs, which is crucial to us (like crop collection), there are plenty of situations where there is a vast labor shortage (for example milking the cows), robotic’s could solve such problems.

4. Artificial intelligence and predictive analytics

AI is already better than humans at most complex jobs: Law, medicine, gaming, etc. Supply chains are enormously complex structures, where decisions need to be continuously modeled to safe funds; this thing is hardly accomplishable for human brains. AI, combined with other technologies, can make an immense difference in supply chain modeling and helping to avoid disruptions in a faster manner than humans can do.

5. Internet of things.

Global supply chains leave a lot of waste (Increased CO2 emissions, unsold stock units, etc.). All supply chain organizations are trying to achieve one fundamental goal – Zero waste. Due to unpredictability and constraints, this is hardly done. The Internet of things can help companies to better plan they’re supply and sales. Combined with other technologies, it will lift S&OP to entirely new heights.

In conclusion, I would like to add Technologies implementation into supply chains, and procurement was prominent before the pandemics, and it will be valuable in the future. All five technologies combined change the supply chain enormously, and this eventually can lead to zero waste and slashed entire supply chains and procurement costs. And of course, we need not forget that technology isn’t a strategy that will automatically save funds. According to wired, 95% of technologies fail to bring the promised value. Most of the time, It’s not due to technologies providing companies, but due to buying companies. First of all, it’s essential to have well-established processes and to choose solutions which are the best fit for your company.

HOW THE PANDEMICS AND EMERGING NEW TRENDS WILL AFFECT LOGISTICS SERVICE PROVIDERS

 

 

 

The supply chain trends for logistics service providers should be as important as for the supply chain organizations. The world of procurement and supply chain changes are related not only with COVID-19 but also with political tensions (Brexit, Trade war with China), evolving technologies, and sustainability policies. Those changes provide not only turmoil but possibilities as well. There will be winners and losers.

Of course, no one knows for sure how this new situation, together with old tendencies, will evolve, but I will bring my opinions on factors that will impact logistics bellow.

Economics

At the end of this year or maybe even faster (if the second COVID-19 wave will come), we will face recession. Transportation companies are in the first lines to feel the harmful consequences. Some companies which were working with other sectors than food and e-commerce are already feeling the slashed turnover. And of course, when the recession will take place, all industries will feel the downturn.

This means that companies need to start cutting fat to increase liquidity. There is a huge red flag involved here as you can quickly reduce the muscle instead of fat. Therefore, it’s vital to overlook each process and remodel them carefully. Maybe it’s better to outsource some operations, rethink investments, and other unnecessary expenditures.

Do not try to do this alone, involve all teams, and, if possible, consultants from aside. As it’s essential not to make any mistakes here, as you already need to think about the future and model the situation after the recession, plan the future growth (which will, of course, come at a fast pace, as usual).

Sustainability

Sustainability will be the primary trend for years to come. The maritime industry was introduced with the low Sulphur act. So far, other logistics service providers like road and air weren’t added to strict laws. Still, we are already hearing from big players that they will manage; They’re subcontractors and put sustainability terms in future contracts. DSV Panalpina CEO Bjorn Andersen told to Shipping watch (shipping watch, published 03.06.2020) that they’re next contract’ will have climate change mitigation clauses. Maersk and CMA CGM have environmental goals as well.

How will they be achieved? Firstly all companies will need to have methodologies and tech for counting the emissions. Secondly, they will try to eliminate empty kilometers. Thirdly, by choosing lesser CO2 polluting delivery modes, like rail, and fourthly working with partners who have those policies, and can track and believe in it.

So this is the future headache for small or medium logistics companies, as most of them don’t have such policies and technology in place. Companies need to think about this already and walk the walk and not talk the talk about the implantation of such systems, as there may be no more business for you left.

Sustainability issues give significant possibilities for companies to start the implementation of sustainability policies into their business environments, and to brand it as a competitive advantage.

Supply chain disruptions

As we have talked before, there is a huge chance (not from the first day, of course) that companies will relocate and reconsider they’re supply chains to achieve resiliency. Shifts in supply chains always bring some havoc as the cargo’s balance is changed, and new methods are chosen.

Each logistics business I very specific; some companies will be affected; some won’t. It will depend on the industries they serve and the services they provide. For example, companies that serve the e-commerce business will flourish; even more, functions can be added like assembling orders, etc. For road transport companies that served industries that were affected the most: oil, brick, and mortar retail, will face difficulties. And in the long run, there will be a total decrease as the economy stopped growing.

Nevertheless, when companies start to form new or improve existing supply chains, maybe close some DC’s, there will be enormous possibilities to be first to serve those customers.

Logistics providers have vast possibilities, but they need to start modeling possible situations and start training they’re sales teams, to start looking for those new possibilities. And as we all know, most sales teams of logistics companies don’t have A++ sales processes at their places. Therefore sales directors will need to initiate changes.

Technologies implementation

Huge logistics companies have invested in the technologies for the past seven years. According to Deloitte, which interview logistics companies leaders, 70 percent of leaders think that new technologies implementation is a number one priority.

As we have noticed almost, all companies are increasing investment in process automation; by doing this, they are saving thousands on labor. Now ERP programs between the service provider and service buyers interact for themselves: they are issuing invoices, receiving invoices, putting them into accounting systems. The planning process is automated as well, and the transportation orders can be issued automatically based on Lead times, etc. What does it mean for your company? If you haven’t implemented such systems, there may be no business left for you, as sourcing and procurement teams may choose your competitors.

And this is a red flag for old school logistics providers, as far as I know, there are still a lot of companies which don’t invest in ERP, TMS, and WMS. This need to be done in a fast way, because the information is power, and it takes some time until such systems are correctly implemented.

Thank you for reading this report. Hopefully, it was useful for your operations.