First Person: Effects of the Global Pandemic on Company Supply Chains
In light of the global pandemic and subsequent rise in e-commerce, companies are re-examining their supply chains, inventories, and necessary warehouse/distribution space.
Jensen: For certain, most companies are closely examining the options available to them to avoid future supply chain interruptions. Part of the challenge of making a decision on a future sourcing direction is that this story isn’t over. As the pandemic progresses, every week, sometimes every day, brings new information to light regarding risks associated with both the supply available for companies to transact business, as well as the fluctuations in the demand associated with their specific product offerings. It is very safe to say that at present, just about every company is examining their options, but the jury is still out on what strategies they will pursue.
AD: Will companies be using multiple sources or taking other measures to mitigate risk?
Jensen: Evaluating multiple sources is absolutely a strategy companies are entertaining in their process of identifying strategies available to them to mitigate risk. If the pandemic has shown us anything, particularly in the early stages of the global pandemic when China was the country most severely affected, it is that any supply chain that sources from a single geographic area is exposed to a disruption in that area, no matter where it is. This must be measured against any cost inefficiencies experienced by spreading volume out across multiple sources of supply.
AD: Should companies beef up their inventories so as not to be caught short if another crisis or second wave of the virus takes hold?
Jensen: First let’s exclude companies that supply products necessary to combat a pandemic or natural disaster and the like. These companies, or the organizations to which they sell, would be increasing inventories (and managing expiry dates on time-sensitive inventory) to ensure healthcare workers always have the PPE they might need. This is not so much an inventory management approach, but more a stockpile management requirement.
For inventories that are NOT critical to life safety in the face of a pandemic or similar disaster, any added inventory should be viewed as an insurance policy. Is the extra cost of inventory worth the possible sales shortfall or as protection against market share loss? Will the inventory “age” gracefully — is it staple product that does not expire or “go out of fashion”? While many of our clients are asking these questions, none have purposefully moved to increase their days of supply in their on-hand inventories yet.
AD: With more consumers shopping online, how should companies adjust their inventories/supply chains?
Jensen: This is very dependent on the nature of any brick-and-mortar channel a company may (or may not) already support.
Clearly an e-commerce-only supply chain will need to increase its inventory as appropriate to maintain its in-stock position in the face of rising order demand. If that demand is high enough (and there is confidence the volumes will remain high enough to justify such a decision after the pandemic is brought under control), then consideration should be given to adding facilities within the supplier’s network to increase responsiveness and reduce outbound freight costs.
If a multi-channel supply chain (brick-and-mortar and e-commerce) cannot move product through its stores but is experiencing a surge in e-commerce volume, it may not need to adjust its inventory at all. The location of that inventory, should it not be able to effectively service e-commerce order profiles from its brick-and-mortar distribution replenishment centers, may need to be adjusted. If centers can be repurposed to allow for e-commerce shipping from as close to the consumer as possible, then companies can reap the benefit of increased responsiveness and reduced freight costs.
AD: How will warehouse/distribution space be impacted by these new supply chain strategies?
Jensen: Space demand is, as you would expect, up compared to expectations in light of a more than 30 percent drop in recent GDP numbers. Sales that were formally satisfied through retail space transactions are now executed online and require industrial real estate assets to house the operations needed to satisfy the growing direct-to-consumer demand. Ironically, some of the demand for additional space came from shuttered retailers without a significant e-commerce channel that needed space to house increasing inventory levels for goods that were en route to them when the retail stores where shuttered in March and April.
AD: What last-mile delivery strategies are companies employing?
Jensen: There are several they are pursuing dependent upon their particular channel and the customer demands associated with it, as well as their logistics infrastructure and how quickly they might modify it.
Grocery retailers are a singular example of utilizing existing store infrastructure to satisfy increased direct-to-consumer last-mile delivery needs. They are using their Point of Sale (POS) locations to assemble grocery orders from online shoppers and then providing curbside pick-up or home delivery to those customers. Home delivery is generally achieved using a third-party delivery service.
Other organizations drive their entire solution for last-mile delivery to a third party (other than UPS, FedEx or USPS.) Even Amazon has employed “Amazon” vans for last-mile delivery that are merely contractors, not Amazon employees or fleet drivers, to achieve the last-mile delivery in the landscape of increased demand.
Other organizations have opportunistically taken advantage of real estate assets that have become attractively priced in light of the different supply chain pressures associated with the pandemic. Dark stores, retail POS locations that have shuttered and are available to serve as micro-fulfillment centers or last-mile cross-dock centers, are utilized to allow for responsiveness to last-mile demands. Shuttered grocery or big-box stores or similar locations with conventional docks available for inbound and outbound activity are prime candidates for this type of supply chain appropriation. Still others are building out their fulfillment center when they are certain the increased demand currently being experienced will not ebb too significantly as the pandemic comes under control.
AD: Has the current healthcare crisis prompted distributors to increase their automation processes?
Jensen: It is difficult to increase the automated processes in a facility within a few months. It may seem hard to believe, but if you mark the significant impact period of the pandemic in the U.S. as having started in early March, we are only five months in. Automated systems can assist in ensuring associates remain a desired distance away from each other, but the evaluation, design, manufacture, and implementation of the appropriate automated or mechanized system easily can require nine months to more than a year.
Many companies are evaluating such applications, but the difficulty of that evaluation process is exacerbated by the sudden atypical rise in e-commerce volumes. Once the pandemic is brought under control and things return to something closer to pre-pandemic reality, what will the e-commerce volumes be? As mentioned, that is a relative unknown. There is a large spread of e-commerce volumes post-pandemic, and the justification for investment in automation or mechanization is largely driven by volume (which drives the amount of labor needed in an operation). This moving target of intermediate to longer-term volumes makes it difficult to properly and confidently evaluate the best investment with an appropriate return in facility automation right now. What is right for “now” may not be right for next year.
AD: Is there anything else you would like to add?
Jensen: The pandemic has been a type of time machine for e-commerce sales, catapulting us 10 years into the future, if only for a brief period. All businesses should learn from the challenges they are facing and develop solid, fiscally prudent, and customer-sensitive long-term plans to address the inevitably increasing e-commerce channel in order to secure and establish their competitive advantage. We have seen what the future will be like. And while in some ways the future is now, there is also no excuse not to prepare for it.
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