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Building A Strong Strategy That’s Loosely Held: Addressing Resilience In Procurement Operations
The supply debacle in the early days of the pandemic has pushed companies to reinforce their supply chains, even as they contend with increased volatility in consumer demand.
A hearty welcome to the 62nd edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
While the pandemic has certainly been testing times for procurement teams across the US, the first whiff of trouble came a couple of years prior, when trade tensions broke out between the US and China. It was '18, and procurement operations in the far East, which had worked quite well for Western businesses for decades, were showing signs of faltering for the first time.
Well-oiled supplier relationships had led too many procurement teams to put most of their eggs in one basket, resulting in chaos as the US and China raised tariffs on major exports in a war of atrophy. Just when tensions seemed to be cooling off, the pandemic struck. Xi Jinping's 'zero-COVID' lockdown policies and their impact on Chinese manufacturing and logistics networks became a definite concern, pushing companies to seriously consider reshoring and near-shoring options to build resilience into procurement operations.
"The pandemic accelerated this switch from just-in-time lean supply chains to just-in-case robust supply chains. One of the levers businesses look at to create robustness is reshoring or near-shoring a part of their operations," said Heather Mueller, the chief marketing & product officer at freight tech firm Breakthrough.
The post-pandemic environment is far from encouraging, with the geo-political storm rising from the Russia-Ukraine conflict ending up polarizing the world further. When different macroeconomic market forces converge to constrict the ease of doing business globally, companies are forced to contend with robustness as a must-have operational necessity.
When different macroeconomic market forces converge to constrict the ease of doing business globally, companies are forced to contend with robustness as a must-have operational necessity.
"One of the things we tell our clients looking to reinforce operations is to make sure they understand what they're optimizing for," said Mueller. "Because it's hard to weigh trade-offs unless you know what variable you're trying to maximize. Metrics like cost and speed of procurement, carbon footprint, and the social impact of my supply chain are crucial as they define a good customer experience — and good experiences lead to better sales numbers."
Nonetheless, migrating out of existing relationships to vendors from a different geographic market, all the while ensuring current operations continue without hiccups, isn't easy. Mueller pointed out that the challenge is that companies do not understand their supply chains to the extent they would like.
"Companies don't have enough data on their supply chains. How, then, will they understand what's available to them? How do they rely on decisions that can't be backed by trusted data? And how would they know if they're considering the right partners?" questioned Muller.
While these are external issues to sort out within an organization, the management also finds it challenging to ensure the right stakeholders within the company are at the table to weigh the pros and cons of such a transition.
"While deciding on procurement strategy, if you leave out one of the key partners out of the equation — like inventory management, warehouse management, transportation management — you'd end up with unintended consequences through the end-to-end supply chain. This is a real logistical challenge for organizations that haven't looked at cross-functional strategic integration holistically."
Traditionally, organizations have put their entire transportation network out to an RFP annually or at specific time intervals. Mueller pointed out that sticking to a time cadence in planning transportation networks will no longer work post-pandemic, as demand-supply equations are too volatile to be strategized well in advance.
Sticking to a time cadence in planning transportation networks will no longer work post-pandemic, as demand-supply equations are too volatile to be strategized well in advance.
"If there's anything we learned from the pandemic, it is that you can go in with the best-laid plans for an entire calendar year and know that those will not hold true. If shippers aren't able to respond to these changes, or don't read their freight contracts properly, a lot of their freight lands on the spot market," she said. "And from a cost perspective, the spot market sub-optimizes that outcome, especially when capacity is tight."
That said, spurning RFPs is not the answer either. RFPs bring about a sense of balance within transportation planning, and if shipper-carrier relationships have been thoroughly built and prices are fair as compared to the market, there will be little to gain by throwing them out of the window. To not ruffle feathers and to stay optimized, Mueller suggests looking at data to understand where the suboptimal outcomes lie and improve capacity sourcing efforts in those specific lanes.
"If shippers witness their freight contracts failing frequently, it's because carriers can make more money elsewhere or their asset isn't where they expected it to be. Either of those is a bad outcome for carriers. With transparent data, shippers can decide whether to have a conversation with their carriers to save the relationship with a price adjustment or build conviction to terminate non-performing contracts."
Mueller contended that transitioning procurement operations needs the management to build "a strong strategy that's loosely held." She explained that while there certainly needs to be a foundational strategy from a shipper's perspective, they need to constantly think of what they need to deliver to create maximum impact on the bottomline.
While there certainly needs to be a foundational strategy from a shipper's perspective, they need to constantly think of what they need to deliver to create maximum impact on the bottomline.
"The original plan to deliver might change a bunch of times through the year as our environment and consumer expectations are evolving faster than ever. The key is to pivot to those changes and still deliver your TrueNorth goal. It's about consuming reliable data fast enough to make adjustments."
Then again, consuming reliable data fast enough is easier said than done. Data reliability is an issue as industry data today is rarely without bias. And often, companies aren't aware of their bias. The industry is also known for its siloed operations, inhibiting data sharing.
"There's also data latency that needs to be taken into account. Data in the industry today is not comprehensive enough for companies to understand how a decision on one end of the supply chain will impact the other end," said Mueller. "The key to unlocking operational agility is ultimately about identifying datasets and having the practice of ingesting, interpreting, and acting on that data for the benefit of your organization."
The Weekly Roundup
A growing shortage of diesel fuel has been a rising concern in the American trucking industry. While an increase in transportation costs may not directly affect the average consumer, a growing number of other shortages very well may. With the Thanksgiving holiday a few weeks away, the US will have to manage shortages of turkey and butter and even some medications.
There are good signs that supply chain congestion is beginning to ease. However, it is unlikely that the global supply chain will ever truly return to “normal.” Perhaps one of the biggest shortages is the lack of workers to manage the supply chain. As the US reshores more businesses, finding the appropriate staffing is growing more difficult.
An impending railroad strike could derail the steel industry. Two of the 12 American rail unions are rejecting negotiations meaning a rail strike is still possible. Currently, roughly 52% of bulk commodities, such as coal, iron, steel, and wood, all travel via rail. The union is giving the rail companies until November 19 to renegotiate.
The turkey shortage could leave consumers spending more for their Thanksgiving feast this year. According to a news report from Wells Fargo, the average cost of a turkey is up 23% from 2021. In addition to a virulent strain of avian flu, poor weather conditions have affected crop growth and other food production. which will also help rack up the grocery bill.
“We are expecting a muted peak season this year. Spot opportunities have declined significantly, and we have been pivoting towards making more commitments through the bid season to reduce our exposure in the spot market.”
- Adam Miller, chief financial officer at Knight-Swift Transportation, commenting on the softening trucking market during the usual peak season.
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