The Operational Need For Building Resilience In Transportation And Procurement Strategies

The pandemic brought up several challenges within supply chain operations, especially for importers and manufacturers. Now is the right time to get them addressed.

A hearty welcome to the 65th 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.

The Thanksgiving and Cyber week is past us, marking yet another retail extravaganza, with online sales recorded 2.3% higher from last year. This shouldn't come as a surprise, considering retailers have been stocking up inventories heavily, anticipating a solid holiday shopping season. Amidst the scare of recession and falling freight rates, consumer demand has continued to hold up strong, with year-end retail sales displaying signs of a record season. 

Regardless, while retail activity has undoubtedly helped fill up freight capacity, industrial activity has been the primary driver of the robust transport economy, as US industrial activity, including orders, is on the rise. FRED data on unfilled manufacturers' orders have continued to climb since they dropped off the cliff in April '20. Aside from reflecting the apparent strength of US manufacturing, unfilled orders are also the result of widespread raw material shortages pervasive across the world. 

However, overroad transport rates have continued to fall — thanks to an increase in freight capacity via new assets entering the market, which have exceeded the rate of increase in capacity demand since the pandemic. That aside, there's also the influx of capacity hitherto caught up in logistics bottlenecks that get added to the market as linehaul service levels improve. 

This gradually normalizing freight ecosystem would have come to a screeching halt had the railroad union strike materialized, making last week's Congress and Senate intervention to force an agreement at the nick of time all the more crucial. This strike could have caused a cataclysmic impact on US supply chains, as railroads are the principal lifelines of agricultural and industrial activity in the country.

Then again, the retail industry wouldn't have seen much of a direct impact if there was a strike, as a significant portion of the retail stock moves on the back of trucks — especially if they are inventories needing to be stocked for the peak season. Nonetheless, the avalanche of freight volumes rising from a stalled rail network would have overflowed into the trucking market, causing truckload spot rates to spike. 

"Any significant stoppage in December would have caused a manufacturing crisis in January," argued Glenn Koepke, general manager of network collaboration at FourKites. Koepke pointed out that there's inherent slack built into the supply chain, which results in delayed impact from disruptions. While this could come in handy, it makes building and optimizing for resilience a lot harder due to a never-ending list of market variables. 

"This slack is due to individual stakeholders in the value chain building up a certain volume of inventories. Within the food industry, you usually have two weeks of inventory on hand. If suppliers across every node planned their inventory stocks similarly, we'd have a 5-6 week buffer before supply crunch hurts," said Koepke. Regardless, this does not preclude the operational impact that capital tied to undelivered orders in case of a strike could have on the company's bottom line. 

While the rail strike is safely out of the picture, this wasn't the last possible disruption to the US supply chain — the truth is, it isn't even the final workforce-related disruption feared this year. The continued functioning of the US West Coast port is a significant concern, as the International Longshore and Warehouse Union (ILWU) has been caught in a negotiation deadlock with the Pacific Maritime Association (PMA) since their contract ended this summer. 

"There's a long-term impact of ocean imports into the US via the West Coast as there have been several disruptions with issues relating to labor, pricing, and capacity. You've seen a shift towards leveraging the Panama Canal and the US East Coast ports over this year," said Koepke. 

While rail is a separate mode, a massive volume of cargo comes into LA and Long Beach, and then goes via rail to Kansas City and Chicago. Shippers looking to de-risk their supply chain will continue to route more freight to the East and not depend entirely on the West Coast, contended Koepke. 

Prolonged uncertainties push businesses to look for different avenues. This is true of the imports entering through the US West Coast that have now transitioned to the US Gulf- and East Coast, over a spree of concerns — notably vessel queues, bottlenecked inland railroad ports, and potential labor unrest. While a few reasons lining these concerns have alleviated since, the US West Coast might have a hard time capturing all the import business it lost. 

The same holds true for China. With its unexpected and severe lockdowns, China became a headache for businesses that depended entirely on the country for their procurement. Since then, there's been a trickle of companies diversifying procurement from out of the Chinese mainland and into SE Asia and the Americas.

For ages, companies tended to look past financial excesses resulting from procurement and transport operations, pursuing a "why fix it if it ain't broken" approach and letting processes stay in place. Cometh COVID-19 and supply chain optimization and resiliency have taken on new avatars, thanks to a never-before-seen disruption that was both overwhelming and enduring. 

The extreme volatility — with a sourcing crunch and hard-to-find transport capacity — was clearly not anticipated to co-occur, and businesses realized their supply chains weren't built to handle such a crisis. Pre-pandemic, company management were predisposed to view supply chain excesses as an inevitable cost center and downplayed supply chain risks. Now, there’s an improved perception of the criticality of supply chain resilience to a company's functioning. 

"The idea is to ensure supply chains are both efficient and optimized," said Alan Bebchik, the country manager for Nowports. "After over two years of chaos, the industry is now in a period of relative calm. I think this is the time for the management to regroup, take a breather, and rethink strategies to future-proof operations from such disruptions."

That said, the calm isn't perpetual. Industrial activity continues to stay up, while retail activity has remained buoyant this holiday season — contrary to mainstream projections. "Things are still moving, and trade never stops," noted Bebchik. "As an importer, it is about ensuring your transport options stay open and flexible, even while securing your procurement — be it with increasing vendors, rethinking your geographic sourcing markets, or moving operations closer home."

Considering procurement and transport operations are heavily human-driven, creating meaningful partnerships is critical to building resilience. Investing time into understanding your transport partners and vendors will drive more resilience when the market turns adverse as good partners stick around. 

On the procurement end, running lean operations is vital to ensure healthy margins considering rising operational costs and increasing interest rates, which also sets the supply chain up for a heavier impact during market volatility. This is often a paradoxical issue, as lean operations must also have a sense of redundancy built into it to ensure the company stays resilient during volatility. 

It's imperative for companies to pursue a strategy of multi-modal flexibility across transport operations and diversifying procurement. This would warrant companies to build strong operational strategies that are conveniently held loose. The idea is to never get complacent with strategies but keep options open and stay dynamic based on market forces. More on this in yet another edition of The Logistics Rundown. 

The Weekly Roundup

Supply chain disruptions and massive rate hikes in shipping throughout the pandemic forced many retailers to ditch the JIT (just-in-time) philosophy of inventory management in favor of JIC (just-in-case) overstocking. Now that supply chains have opened up, and many retailers are struggling to deal with the excess. Some select few, on the other hand, are learning to embrace the extra inventory. 

The US Department of Homeland Security has recently approved the use of an AI that will delve deep into drug supply chains, looking for weaknesses and the potential for foreign influence. With roughly a third of the population on at least one prescription medication, the DHS is looking to shorten the supply chain of prescription medications to reduce foreign dependency while protecting it from disruption.

Environmental concerns are on the rise as droughts conditions worsen throughout the world. According to the UN, droughts could affect 75% of the global population by 2050 if left unchecked. The droughts have caused serious economic damage as well, as 90% of global freight relies on waterways which have all but dried up. Countries such as Germany and China are looking at both quick fixes and long-term solutions to help keep trade flowing. 

A trucking strike in South Korea has cost the country several billion dollars in lost shipments. The 20,000 South Korean Truckers that keep the country's supply chains moving have been on strike for over two weeks now, with no resolution between the Union and government. The government has already issued a “start work” order to cement truck drivers and could target other industries in the near future. Failure to comply could result in fines, jail time, and loss of commercial driver’s licenses.

…said who?

“We still have plenty of liquidity and are in an excellent position to take advantage of the great buying environment.” 

- Scott Goldenberg, chief financial officer of TJX, while commenting on the company’s healthy inventory stock levels in the midst of the holiday season. 

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