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Covid turbulence still strain overextended supply chains

Keep the wheels turning: Will Butler-Adams of Brompton Bicycles has resorted to airfreight delivery of parts © Charlie Bibby/Financial Times

Limited supply of a small, innovative metal tube made in Taiwan, priced at just a few pounds, has threatened to bring the factory of London-based Brompton Bicycle to a halt.

“It’s amazing — the smallest thing could trip you up,” says Will Butler-Adams, managing director of the company, which has resorted to flying in parts to keep production lines going.

And the bicycle maker’s problems underscore the widely experienced chaos that the pandemic has wreaked on complex, globalised supply chains. Rising costs, delayed deliveries and economic uncertainty have pushed companies towards an extensive overhaul of their suppliers, with ramifications for the logistics industry.

In response to shocks ranging from clogged up ports to semiconductor shortages, manufacturers and retailers are looking to boost stockholding, increase supplier numbers, diversify their geographical footprints and substitute parts.

“Supply chains are having to reshape themselves to focus on resilience, flexibility and robustness,” says Richard Wilding, professor of supply chain strategy at the UK’s Cranfield School of Management.

The pandemic has transformed logistics from an aspect of procurement into a competitive advantage driving success for certain companies, says Lars Jensen, an analyst of container shipping and chief executive at consultancy Vespucci Maritime. Footwear maker Crocs, for one, has benefited from how the simple design of its rubber clogs allows it to shift production around the world.

“All companies compete on a range of parameters,” Jensen says. “One thing they have not been competing on for the last decade has been logistics. The companies good at logistics now have a competitive advantage.”

A boom in online shopping during Covid lockdowns has only amplified the importance of logistics, since the delivery of goods to many consumers’ doors is far more complex than delivering goods to a warehouse for distribution in bulk to stores.

Wilding says supply chains have been going through “birth pangs” as they try to modernise and catch up with the pandemic-induced leap in demand for logistics networks.

Consumers increasingly turned to online shopping during the pandemic © SOPA Images/LightRocket via Gett

“Supermarkets said ‘people don’t want to come to our stores’ so did a massive online offering,” he notes. “What they used was their existing infrastructure and processes to deliver that. The problem is that is incredibly inefficient.”

As multinationals reconfigure their distribution networks, Kamala Raman, an analyst at consultancy Gartner, says the logistics industry — sprawling across everything from third-party contractors to shipping, rail and haulage firms — has opportunities to expand its services beyond merely moving goods “from A to B”.

For larger groups, such as DHL Supply Chain and DB Schenker, this can include adding analytics, visibility tools and network design, says Raman — almost making them competitors to management consultancies. Logistics groups’ abilities to secure manpower against a backdrop of widespread labour shortages is also an increasing pull for outsourcing work to them, she adds.

Larger companies such as DHL have used analytics to better ensure delivery during the pandemic © Bloomberg

“Logistics players, contract manufacturers and large service delivery companies stand in a position to pool the risk [of investment in resilience] across a number of their customers, to offer some capabilities for a better price than they can get alone,” she says.

But Raman warns of a downside to relying on logistics contractors, which many discovered during the pandemic: “You are at the mercy of somebody else’s prioritisation list.”

For that reason, Steve Feniger, a veteran at sourcing goods from Asia and operating partner at US private equity firm Blackford Capital, says his main advice to companies is “become a better customer of your factories and freight forwarders”. He is telling his portfolio companies, such as Aqua Leisure — which makes swimming accessories including 12m goggles a year at 45 factories globally — to provide longer demand forecasts and to ensure suppliers and logistics groups get a fair slice of the profits.

In most cases, the recent supply chain disruptions can be traced back to decisions to close factories at the start of lockdowns early last year, based on a false expectation of cratering demand.

But many believe the groundwork for these crises had already been laid by the decades-long focus on driving logistic costs down.

“Over the past 30 years, supply chains have been globalised with a combination of low-cost freight, simpler trade barriers and a focus on cost reduction,” says Emile Naus, partner at consultancy BearingPoint. This led them to become “longer, more fragmented and more fragile than ever before,” he points out.

US corporate spending on transport was more than double that on inventory holdings in 2020; the two had been equivalent in 1980. According to the UN Conference on Trade and Development, the reason is simply that moving goods has become so cheap.

Jan Hoffmann, chief of trade logistics at the UN agency, expects shipping costs, which have rocketed during the pandemic, to stay elevated for some years.

This is because environmental legislation will cause ships to go slower and, therefore, constrict capacity. Together with the pandemic supply snags, that would likely reshape trade flows, Hoffmann adds. “Manufacturers and retailers want to diversify and have a little less deep supply chain,” he says. “But it will still be cheaper to get cargo moved from China to the EU than Lagos to Europe.”

Some argue that some of the forecast changes are over-egged. Jensen says that additional stockholding will fade as the pandemic recedes.

“Over time, these buffers will disappear,” he argues. “A buffer is a nice word for overcapacity” — a development important to future demand for warehousing run by the likes of Seko or GXO Logistics.

Doug Sheppard, operations director at Parvalux, a British maker of geared motors used in robots and stairlifts, agrees, saying the company initially needed extra stock to ensure continuity but “we’re at an unsustainable level”.

Even so, many say that supply chains are becoming more regional by sourcing more goods closer to consumers in order to reduce the future risk of freight bottlenecks and long lead times, as well as emissions.

Lynn Torrel, chief procurement and supply chain officer at Flex, one of the world’s largest electronics contract manufacturers, says many companies “are looking at what parts of their supply chain and manufacturing they can move closer to their end customer”.

The assembly of final goods is often easier to relocate but parts manufacturing and raw materials can be harder.

“The average product consumers buy has components that have come from 10 different countries — I don’t see that fundamentally changing,” says Jeremy Nixon, chief executive of Ocean Network Express, one of the world’s largest container shipping companies.

However, Parag Khanna, managing partner of advisory FutureMap, says that a psychological shift has taken place to diversify the geographical production of some vital parts such as semiconductors.

“This time is different because of the geopolitics,” he says. “There’s a genuine strategic momentum to regionalise access to critical components.”

Even though the advantage of holding a global digital platform to track and verify cargo will only grow, he says: “The logistics industry is going to have to think less global and more regional”.

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