Modern supply chains demand agile logistics

“Never let a good crisis go to waste.” – Winston Churchill

Just about everything that could have gone wrong has gone wrong in global supply chains over the past two years, ranging from prolonged border closings to a container ship getting stuck in the Suez Canal. The cascade of bad news has included truck driver shortages, sky-high warehouse prices, and shipping costs that nearly quadrupled at some points during the pandemic.

All this has supply chain leaders fretting about when we will get back to normal, but perhaps normal shouldn’t be the goal. In the spirit of Sir Winston’s quote, now is a good time to re-examine our assumptions about supply chains and find new ways to make them not only more resilient but also more adaptable to change. Call it an agile supply chain.

The last two years have cast a spotlight on the shortcomings of the just-in-time (JIT) inventory management practices that manufacturers, logistics providers, and retailers have pursued for the past 30 years. The goal of JIT is to time deliveries of materials to arrive at precisely the moment they are needed. It’s a laudable objective but one that presupposes the existence of reliable and predictable supply chains. As the earliest months of the pandemic dramatised, JIT practices can lead to crushing shortages when supply chains are disrupted.

Logistical bottlenecks

One link in the supply chain that deserves special attention is logistics. There are only a handful of logistics companies that can serve the entire US, and the number with global reach is even smaller. Contracts can take months to negotiate while logistics firms secure the necessary warehouse space, trucks, and drivers. Clients are then expected to sign multiyear contracts that commit them to reserve certain amounts of warehouse storage space regardless of the nature of their business. That’s a particular burden on companies in seasonal industries who may pay for months of empty space just so they have inventory on hand during busy times.

Finding warehouse space is more daunting than ever in light of record-low vacancy rates. The vacancy rate for large warehouses was just 3.4% in the first quarter of 2022 and more than one-third of buildings under construction in 2021 were pre-leased, according to CBRE Inc. Even if companies can secure space, the shortage of 80,000 truck drivers may make it impossible to get goods when they need them.

The pandemic has also created some systemic changes in both buying practices and customer expectations. Deprived of vacations and restaurants during lockdowns, consumers poured money into furniture, electronics, exercise gear, cookware, and home improvements. Much of this was bought online as evidenced by the $4.9 trillion in retail e-commerce spending in 2021, a figure that’s expected to grow more than 50% over the next four years.

Amazon has reset buyer expectations with its promise of nearly everything delivered within a day. This puts pressure on any retailer that isn’t Amazon: deliver items quickly despite unpredictable inventories and logistics.

Beyond resilience

The disruptions caused by COVID have sparked a lot of talk about supply chain resilience. Manufacturers and retailers are buying protection by doubling up on suppliers, sourcing closer to home, and even investing in their own logistics networks. This comes at the expense of higher costs that are contributing to the highest US inflation rate in 40 years.

Achieving supply chain resilience shouldn’t mean sacrificing the virtues of just-in-time inventory. The focus should not be solely on making supply chains more resilient, but also more agile. Gartner has noted that, in the wake of COVID, 89% of supply chain professionals plan to invest in making their supply chains more agile in the next couple of years, which holds the potential to create self-healing supply chains with logistics networks that are as adaptable as the businesses that use them.

McKinsey defines agile organisations as those that embrace uncertainty while allocating resources flexibly and swiftly to where they are needed most. Rigid, fixed logistics networks, multi-year contracts, and long decision cycles are the enemies of agility. These organisations are best served by logistics providers who can provide the needed storage and fulfilment programmes in a matter of weeks, with locations around the country, technology-enabled system integrations, and contract terms measured in months instead of years.

Making supply chains more resilient doesn’t go far enough. The goal shouldn’t be to return to normal but to build new agility into the supply chain and to drive logistics partners to do the same. The faster, more responsive organisations that result will respond to volatility more effectively while better managing costs and pivoting to meet changing customer expectations. Let's not let a good crisis go to waste. If you have a need for more resilient supply chains, contact us today!