SUPPLY CHAIN LOGISTICS
First the Trade War, Now Coronavirus (Keeping Your Supply Chain Moving for the Next 90 Days)
On the heels of last year’s difficult trade war, supply chains now face an additional disruption caused by the coronavirus. The virus’s impact on international supply chains is spreading beyond China and creating knock-on effects in other parts of the globe. Here’s an update on the situation overseas and what businesses can do now and over the next 90 days to manage the disruption.
Production and Demand Challenges
Plants in the most effected region in China, Hubei Province, will reopen after March 20. Manufacturing plants in other parts of China have reopened and begun to deliver export goods to the ports. However, the virus is spreading quickly across continents and now impacting other Asian manufacturing countries, such as South Korea and Japan. The quarantine in Italy may become a new challenge, especially for companies in the automotive and industrial sectors who may source components from there.
Logistics Impacts – Current Situation
Ocean carriers have cancelled a record number of vessel sailings in response to the drop-off in cargo. When coupled with vessels out of service for retrofitting, the inactive fleet has reached a massive 2.04 M TEU. Despite these capacity cuts, ships are not full, and space is available to book—if your carrier has a sailing.
The cancelled sailings created a large backlog of empty containers at the ports of Los Angeles/Long Beach waiting for vessels to evacuate them. At the same time, reduced U.S. imports mean there are not enough containers in the Midwest to handle export bookings. Ocean carriers are pushing for export rate increases to compensate for repositioning costs.
Passenger air service to and from China has been sharply curtailed, with airlines in every global region suspending or reducing flight frequency to China and now Asian and Italian points. Within Asia, Japan has imposed a 14-day quarantine on travelers arriving from Hong Kong, China and South Korea, causing Intra Asia flight cancellations. Cargo capacity remains tight because passenger flight cuts eliminate the availability of cargo space in the belly of planes. As factories reopen and importers urgently need replenishment, air cargo rates from Asia to all regions have spiked.
Actions to Take Now
Prioritize your cargo by product, supplier and customer, developing a separate strategy for critical items and for handling the return of normal volumes of cargo.
For Urgent Orders
If air freight is appropriate for the most urgent orders, explore using secondary airports and indirect routings to gain access to space. Small, frequent shipments will be easier to move than larger lots.
For a faster ocean transit time to the interior of the U.S., terminate ocean shipments on the West Coast and have your freight transloaded from containers into trailers there.
If your company also sells Asian manufactured goods in Europe, consider switching that cargo from ocean to rail. This can cut transit time by as much as ten days, while also avoiding any cross-province trucking delays.
Moving Finished Goods
Once the cargo supply returns to normal, accumulated demand may cause ocean import rates to spike right before the start of the traditional Trans-Pacific rate negotiation season. To have your company’s ocean cargo move at 2019/2020 rate levels, request a one-month extension on the current ocean contracts. Or, ask your freight forwarder to add your company on to the forwarder’s current season NAC (Named Account) contracts.
If space becomes a premium, an internet-based freight marketplace can provide guaranteed space, albeit at spot market pricing. Explore some of these new applications now in order to have a contingency plan in place. NYSHEX provides access to confirmed space on variety of ocean carriers. Another option is Twill, Maersk Line’s in-house application.
Exporters battling equipment shortages should consider sending their goods by truck to a port for transloading into empty containers.
Planning for Next Year’s Contracts
Carriers are projecting large rate increases for the 2020/2021 season. Begin carrier discussions now (while also requesting extensions of any current ocean contracts). The rate situation will be clearer once the market returns to normal. The more information you gather from carriers and the marketplace, the better your company’s negotiating position.
Prioritize service expectations and include performance requirements in your agreements. To minimize future disruptions caused by blanked sailings, have a multicarrier plan across different carrier alliances. Review the finances of all prospective vendors – last year saw a spate of trucking bankruptcies and carrier consolidations. The value of dependability will help offset the cost of rate increases.
As this is an extremely fluid situation with impacted areas changing day by day, business leaders should closely monitor the situation and adapt to new developments. By employing a broad range of logistics tactics, your company can successfully navigate this difficult and unpredictable situation. By: Lauren Pittelli (the founder and Principal of Baker Logistics Consulting Services, Inc).
BRACING FOR THE CORONAVIRUS DOWNTURN: 6 STEPS TO TAKE NOW
The complexity of global supply, coupled with “just-in-time” inventory practices and narrowing sources of supply, have created vulnerabilities for virtually all enterprises.
The coronavirus, known as COVID-19, is wreaking havoc on global supply chains woefully unprepared for the massive scale of the emerging disruption. Large corporations such as Ikea, Starbucks, Amazon, Microsoft, Google and Tesla are closing or slowing operations close to the epicenter in China. Mattel expects product delays due to factory closures, while Apple expects to ship 5%-10% fewer iPhones this quarter. The complexity of global supply, coupled with “just-in-time” inventory practices and narrowing sources of supply, have created vulnerabilities for virtually all enterprises.
Exacerbating the problem is that the spread of COVID-19 is a moving target. Although COVID-19 originated in China it is now spreading quickly across continents and is already in countries such as South Korea, Australia, Japan, Iran, and others. With China comprising 17% of the global economy the stoppage in production will have a cascading affect. Considering China’s significantly larger global footprint than during the SARS 2003 epidemic, coupled with rapid global spread of the virus and the long incubation period, any comparisons between the two epidemics are misleading. Global supply chains should prepare for the “coronavirus downturn.”
All businesses across all sectors will be affected, at least to some degree. A heavy impact is expected on the tech industry. From batteries, to ink cartridges to sponges, consumers can expect coronavirus shortages. Smartphone production, for example, is projected to decline 12% year-on-year this quarter due lack of labor and shortages of upstream components such as camera modules. Segments of the pharmaceutical industry may be impacted especially in regions such as India, which produces 20% of the world’s drug supply. The heavy impact on tourism and airline travel is already being experienced with the International Air Transport Association (IATA) estimating $ 30 B in losses for the industry. Even Facebook is canceling its Global Marketing Summit slated to take place in San Francisco citing coronavirus concerns.
Small and medium size firms will also be affected. As coronavirus spreads, small business owners who import from China are increasingly on edge. For small business owners, for example, who sell products on Amazon, prolonged factory closures threaten supply. Firms with a broader supply network will fare better, such as those sourcing from U.S., U.K., Germany, India, Israel and others. However, many small entrepreneurs rely on a narrow supply base. Running out of stock can mean losing customers as well as dropping in website ranking.
What should companies do?
All companies, large and small, need to activate their crisis management plans. Some industries will be impacted harder than others, but regardless, the impact will have cascading affects. The CDC is already making preparations for a pandemic and all enterprises need to as well, preparing for some level of imminent disruption. There are two aspects: developing an immediate response to the threat and preparation for possible larger scale disruption as the situation evolves. Here are some steps.
First, reassure everyone – from shareholders to customers – that the company is in control and has a plan, and continue to do so on a regular basis. Crisis management can have a lasting impact on a company’s reputation, profitability and operating ability. It can make or break a company. As media coverage escalates, confusion and panic set in, and various analysts and pundits continue prognostications, it is imperative for a company to be in front of the message. Continuing with a message of reassurance at a time of increasing uncertainty cannot be overstated. Effective crisis management can actually improve a firm’s reputation. The right messaging to the right media outlets is critical. See this as an opportunity.
Second, leadership needs to activate crisis management plans and procedures. These need to specify the ‘who’, ‘what,’ ‘when’ and ‘how’ of the crisis management plan. It is up to leadership to assign responsibilities and specify how ameliorative action will be taken, leading a command and control center. Chain of command needs to be clear, as well as roles, duties, and messaging.
Third, carefully segment the entire product and customer portfolio based on margins, lead times, and criticality. Not all are of equal importance or vulnerability. Create a matrix based on these two dimensions identifying customers, products, and sources of supply that are most critical and most vulnerable within each quadrant. Set priorities. Which customers get served first? Which suppliers are critical? Which components have longest lead times?
Fourth, evaluate all risks on sources of supply, production capacity, delivery, and demand. Consider all options and analyze possible outcomes. Scenario planning is an excellent tool here.
Fifth, identify segments that have easy access to substitutes and alternative sources of supply. For example, the Polish fashion retailer LPP is talking with factories in Turkey, Bangladesh and Vietnam as a backup plan if Chinese production delays continue. Also, consider slight product modifications that may allow substitution in components and where there are good sources of supply. Design engineers can be an excellent source and often slight modifications go unnoticed.
Sixth, evaluate possibility of gearing up capacity or switching production processes to more lucrative but similar lines. When the SARS epidemic broke in 2003 a Toronto based lotion manufacturer quickly switched production from lotion to hand sanitizer. Currently, Dupont has revved up production of protective suits, such as hazmat suits, at its Richmond facility. The factory is working at full capacity to meet this surge in demand. This requires just a little flexibility in operations.
The global economy is quickly moving into a crisis of a global pandemic – a “coronavirus downturn” – but this may be an opportunity for firms to actually improve their standing depending on how they handle the challenge. There is also still time for a plan if they act immediately. By: Nada R. Sanders, Ph.D.