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Pandemic Forces Companies to Re-Imagine Supply Chains

Posted on March 3, 2021

Increased logistics costs.  Re-shoring pressures.  Shipping slowdowns.  Semiconductor chip shortages.  Warehouses at capacity.

Supply chain challenges are dominating the news and affecting companies’ bottom lines.  AIM sat down recently with Mike Meyran, Boston Port Director, Massport and Nada Sanders, Distinguished Professor of Supply Chain Management at Northeastern University, to talk about how employers can re-imagine their supply chains.

Many experts agree that lean manufacturing has become too lean and complex, making it difficult for companies to match supply and demand.  Firms will need to carry more inventory, particularly critical items and those that require long lead times.  Companies should dynamically monitor demand and pursue the option of moving some production or sourcing closer to home.

Carrying fewer SKUs is another trend.  Knowing what is happening all along your supply chain—upstream and downstream—is vitally important.

Re-shoring—bringing production and sourcing back to the U.S. – will occur, though on a limited scale that will vary by industry.  Major supply chain adjustments take a long time and require thoughtful planning.

Some companies have moved away from heavy dependence on China and pursued other options in that region.  However, no Southeast Asian countries can match China’s port, road and rail infrastructure and vast manufacturing capacity.  Rather than moving fully away from China, companies are pursuing a “China plus one” or “China plus 3 or 4” strategy and doing business with multiple countries including Vietnam, Malaysia and Thailand.  Relying less on one geographic area reduces risk.

Consumer consumption shifts are well underway.  Successful companies are pivoting to answer consumer demand.

In the last year, U.S. buyers have increased their purchases of home goods, furniture, fitness equipment, personal/health care products and wine and spirits.  One trampoline distributor reports that his company sold more trampolines in the first two months of COVID than in the previous five years.  Demand for automobiles has remained steady, which is good news for the Port of Boston which imports thousands of Subarus annually.

Shipping trends are changing.  Most heavy products and equipment still move by water because of cost.  Ship load capacity is currently close to 100 percent, a trend expected to extend into summer. There are continuing backlogs at many large ports.  (The Port of Boston may be an attractive alternative to larger ports for some importers/exporters.)

More cargo is now moving by air, in airplane bellies and cabins.  Airlines are eager to make up for the lack of business and leisure passengers by adjusting loads to include more cargo.  In fact, about one-third of airline revenue in 2020 can be attributed to cargo versus passengers, an increase of 150 percent from previous years when cargo represented only 13 percent of airline revenue.

The acceleration of e-commerce has changed distribution models.  The increase in on-line sales coupled with customer expectations of quick delivery has resulted in higher costs (it’s more expensive to ship one pair of shoes to a customer at home than a pallet of shoes to a distribution center or retail store) and the need to carry inventory in a different way.

Business intelligence – a combination of human expertise and AI models – is vital for corporate planning. Historical data is helpful but not the only source of information given how rapidly supply and demand are changing.  Humans are needed to distill, interpret and synthesize data.

The Biden Administration has issued an Executive Order requesting a review of supply chain security, with a focus on semiconductors, high-capacity batteries, critical minerals and pharmaceuticals.  Invocation of the Defense Production Act is under consideration.  There will likely be incentives for companies to produce, in the U.S., items critical for U.S. economic and national security.  An economic boom may be coming as the country emerges from COVID. Companies should prepare for a different future, remain flexible, and be open to opportunities.