This is the critical link to successfully reopening the US economy
by Joel Dreyfuss, CNBC.com
The following is a post that originally appeared on CNBC.com. You can read the original post here.
The successful relaunch of the U.S. economy after the coronavirus shutdown will depend on how effectively companies treat the ills of the global supply chain. The pandemic exposed the weak links in a distribution system that was normally hidden from public scrutiny. Instead, the disruption of the global supply chain made headlines: the lack of masks and ventilators for health-care workers and patients, the shutdown of meat-processing plants in the Midwest as the virus ravaged the workforce, the shortages of toilet paper and hand gel caused by consumer hoarding.
The impact of the disruption runs deep. An April survey by the Institute of Supply Management reported that 95% of U.S. companies expected their supply chains to be disrupted by the coronavirus and that almost half expected to reduce their revenue targets by an average of 22%.
“Supply chains have become highly sophisticated and vital to the competitiveness of many companies,” said consulting firm Deloitte in a recent report. “But their interlinked, global nature also makes them increasingly vulnerable to a range of risks, with more potential points of failure and less margin of error for absorbing delays and disruptions.”
Deloitte said the disruption has the potential to be a “black swan event,” an unexpected occurrence that triggers positive change. The consulting firm said the crisis was an opportunity for companies to address the vulnerabilities in their supply chains: the extreme dependence on China for components as well as finished products; the lack of transparency about sources; the perils of low-inventory just-in-time manufacturing when supply is no longer reliable; and the risks of dependence on a single vendor for key components or products.
It’s not just supply that has plunged. Companies have seen a sharp drop — and unexpected shift — in demand as millions of workers lost their jobs and confinement halted normal activities. For companies trying to maintain their supply chains, the sudden blow to the economy — nearly 33 million unemployed in the U.S. — has complicated the task. Consider the experience for some of the clients of Genpact, a digital transformation consulting practice based in New York.
- A trucking company saw the disappearance of its usually lucrative business of delivering wedding tents in May and June because of confinement and social distancing rules.
- A paper manufacturer faced a sudden drop in demand for aloe vera–scented tissues. Customers seemed to only want plain tissues. Explanation: They were buying tissues as a substitute for toilet paper.
- A pharmaceutical company’s usually brisk springtime sales of allergy medicine sank to nearly zero because people were confined to their homes.
Among its short term-solutions, Genpact recommended that clients reduce the variety of products they offer to simplify their supply lines. “The more SKUs you have, the more stressed the system,” said Katie Stein, chief strategy officer for Genpact. She has seen her firm’s consumer goods clients reduce the number of products offered by an average of 40%. Another measure Genpact recommended to retailers was to put aside complex rules controlling delivery schedules to allow trucks to go directly to stores, bypassing intermediary warehouses.
Digitizing the supply chain
But the consensus among experts is that long-term solutions include bringing more technology to the supply chain. “This will accelerate the digitization of the supply chain,” said Stein. “There is a far greater appreciation of the speed the supply chain has been impacted and the need to respond in the moment.”
Artificial intelligence is increasingly playing a role in managing the supply chain, says Stein. One complaint is that AI systems depend on established patterns and can’t handle extraordinary circumstances like the coronavirus crisis. Stein says building traceability into these systems allows humans to see how the AI is making decisions and thus modify the outcome.
To enable companies to more clearly understand how they are sourcing products, several new start-ups are offering to map out a client’s supply chain so that managers are alerted about risks and possible disruptions. The start-ups include Elementum, Llamasoft and Resilinc. All provide software applications that track steps in a supply chain, flag disruptions, analyze alternative sources and measure the impact of delays.
While dependence on China triggered the soul-searching about dependence, the discussion soon broadened to other sources in Asia and Europe, said Phil Levy, chief economist for Flexport, a freight forwarding star-tup focused on ocean and air transport. “The question became a lot more subtle and led to some discussion that maybe the global supply chain is a bad idea.”
As a result of the coronavirus disruption, there have been renewed conversations about “onshoring,” bringing some manufacturing back to the U.S. A recent survey of 1,000 North American manufacturers and suppliers by Thomas, a product sourcing and supplier network, found that 64% of companies are “likely to extremely likely” to bring sourcing/production back to North America after this outbreak.
“The Covid-19 crisis has been a strong wake-up call for many companies, as it has exposed the need to diversify their supply chains, production and distribution systems,” said Tony Uphoff, president and CEO of Thomas. “As a result, many organizations will seek out new domestic sources of supply, a trend which will reshape global manufacturing for years to come.”
Onshoring back to America
Industries that generate high margins like pharmaceuticals and information technology and those with established domestic demand like food and agriculture are most likely to bring production home. Because of the higher cost of manufacturing in the U.S., more robotics is likely to be introduced, said Hitendra Chaturvedi, a supply chain expert at Arizona State University. His assertion is supported by the Thomas survey. As a result of the Covid-19 outbreak, 20% of manufacturing companies reported they already had industrial automation systems in place, and an additional 23% said that they were considering adding or expanding industrial automation.
And it’s not just manufacturing. Fetch Robotics, a maker of autonomous robots for warehouse automation in San Jose, California, reported a 64% increase in in queries since the Covid-19 pandemic emerged. Walmart is working with Bossa Nova Robotics , a Carnegie Mellon University spinoff, to design a shelf-scanning robot for its stores and warehouses. It scans shelves with a high-resolution camera and reports out-of-stock items to humans for reordering. These examples demonstrate the movement toward robotics in this new economic age.
Chaturvedi said some companies, including Virgin Media and Australian communications company Telstra are bringing call centers back from places like India, the Philippines and the Caribbean because of concerns about employees not being able to get to work in a crisis. He said the companies are installing chatbots driven by AI that can handle 90% of customer support calls. “They’re becoming that good.”
Economic Darwinism
Chaturvedi warned that efforts to strengthen the supply chain will widen the gap between large and small businesses. Most of the measures proposed — diversifying sources and manufacturing to other countries, automation, larger inventories, more complete risk analysis — “are great ideas for large companies,” he said. “For SMEs they’re going to cost money.”
To some small companies, the disruptions caused by the pandemic can be an existential threat. When its supply chain was disrupted, WellPath, a 20-employee maker of nutritional supplements in New York, feared running out of product on Amazon and Walmart online sites.
“It’s like a death knell,” said founder and CEO Colin Darretta, referring to Amazon’s practice of demoting or removing vendors who run out of stock. Darretta’s problem: getting herbal ingredients like ashwagandha, rhodiola rosea and bacopa monnieri. He was able to find substitute suppliers but conceded that the logistics crunch has made him turn toward larger providers. He’s also building more redundancy into his supply chain. “We’re institutionalizing having three suppliers for every product.”
The last link in the supply chain has already benefited from an injection of technology in the past decade. Start-ups like Convoy and Loadsmart have simplified the process of matching a cargo load with a truck, much like Uber matched drivers and passengers, while Flexport has focused on international air and sea routes. Alan Tait, purchasing director for Columbia Distributing, a West Coast beverage distributor with 3,500 employees, said the sudden shutdown of sporting events, bars and restaurants in March required considerable reorganization of his company’s resources.
He has used Convoy’s technology to efficiently place loads on available trucks in the three-state region (Washington, Oregon, northern California) his company serves.
A willingness to adjust may be most important characteristic of supply chains in a future that is still unclear. “Many companies are still trying to respond to a sudden shift in the economy and recalibrate their expectations for the coming year,” said Aaron Terrazas, the director of economic research at Convoy. Ricardo Salgado, founder and CEO of Loadsmart, says the disruption confirmed the benefits of technology as customers scrambled to ship cargo. “For our clients who were completely digitized — the servers were doing the work for them.”
And it’s not just companies. Matthew Velazquez, a trucker based in Tennessee basked in the new appreciation of his role in the supply chain. “The camaraderie I’ve seen is absolutely incredible,” he said. Katie Stein believes consumer behavior has changed as well, further affecting the supply chain. For example, she says some of the sharpest drops in sales have occurred in affordable luxury goods and nonessential consumer products. “It’s been an emotional shock.”
