Since the financial crisis of 2008, international logistics has endured a steady and increasingly disruptive pace of change. Photo credit: Shutterstock.com.
COVID-19 could not have come at a worse time for international logistics. Not because ocean carriers finally figured out how to eliminate sailings and prop up rates despite plummeting volumes. Nor because virtually all passenger plane belly “freight” capacity left the market, sending air freight rates and transport costs into the stratosphere.
Those developments have been costly, but the real weaknesses that COVID-19 exposed in supply chains is more troubling for the long term. There has been a hollowing out of knowledge, experience, and relationships among companies and their logistics teams, and a shift toward a procurement mindset focused only on cutting costs. Those developments only exacerbate the already brutal pressure of operating in a COVID-19 environment longer than anyone could have imagined. How can companies adjust their operations to what will be a vastly different environment going forward?
In international logistics, the seeds of the present disruptive moment were planted several years ago. Since the financial crisis of 2008, international logistics has endured a steady and increasingly disruptive pace of change. The rapid rise of e-commence and lightning-fast emergence of new brands and fast fashion has changed the expectations for the consumer.
Meanwhile, there has been a steady and perhaps inevitable decline of some of America’s most iconic brands, particularly in the retail space. Finally, the introduction of the section 301 tariff increases on China has consistently kept most of American industry on edge, and shippers remain in a state of both financial and truly revolutionary pressure.
News reports that surfaced as the pandemic spread in February and March were a “black swan” warning sign to the C-suite, particularly those with global operations. They quickly needed to focus on their international logistics capabilities. During the first few days of the COVID-19 crisis, there were stories that “supply chains are crumbling” and “where are the masks and ventilators?” Thoughts such as those are not isolated; they show the widespread ignorance on how global sourcing and supply chains really operate. Unfortunately, there is too often little appreciation or understanding for the material and process infrastructure which makes up the “plumbing” of your supply chain.
As a result, we are seeing a repeat of a familiar history where companies often are forced to learn and invest in critical capabilities when they are “at the brink” instead of making the necessary investments to be prepared in advance for managing “normalcy.” Regrettably, the C-suite focus in too many businesses on the effectiveness of their supply chains usually only occurs in times of crisis. When these events occur, logistics professionals are asked to step into the breach to answer for poor performance and lack of technology and data to answer the blizzard of questions. The results are typically underwhelming.
Getting this right is not easy and requires management to address fundamental questions. Among them is striking the right balance between outsourcing logistics functions versus building excellence internally. Partnering with a third-party logistics provider (3PL) or fourth-party logistics provider (4PL) to manage operations activities can be an essential element of a supply chain strategy. However, it is particularly important to strike the right balance of cost, service, and risk management and accountability to execute that strategy. In making these decisions, it is imperative that internal decision-makers and the outsourced vendors have a strong foundation of the building blocks mentioned above. Without that intimate knowledge of the process, stakeholders are left with “you just don’t know what you don’t know,” internally and externally.
Has COVID-19 exposed weaknesses in your supply chain and are you prepared to make the necessary investments in the people, platforms, and processes required for when the next “black swan” event interrupts our lives and businesses? History shows that companies often learn and invest in critical capabilities when they are “at the brink” instead of making the necessary investments to be prepared for managing “normalcy.”
The following are the three critical areas we are focused on.
Insource vs. outsource and striking the right balance
A critical component of supply chain excellence is striking the right balance between outsourcing logistics functions versus building excellence internally. Partnering with a 3PL or 4PL service provider to manage your operational activities is an essential element of a supply chain strategy. However, it is particularly important to strike the right balance of cost, service, risk management, and accountability to execute that strategy.
In making these decisions, it is imperative that internal decision-makers and the outsourced vendors have a strong operational capability, but also a deep knowledge in your company’s operational requirements. They must be “onboard” to the objectives of the business in order to be successful. Without that intimate operational knowledge — “the plumbing” — of the end-to-end process, stakeholders on both sides will not be able to meet their commitments.
Human capital
Human capital in logistics provides today’s leading companies an incredible edge over their competitors. Great logistics leaders just make it happen, but very few people understand how that occurs. Your company’s logistics team is your competitive advantage. The knowledge of how to execute a strong logistics strategy cannot reside solely in third-party suppliers who are externally located. In addition to developing the talent to succeed, we need to teach our next logistics leaders how to sell their value internally.
Their ability to develop and implement innovative logistics and supply chain strategies is essential to the future of your business. If they do not know how to sell that disruptive innovation, how can we expect them to succeed in convincing leadership of what is required? What we have witnessed over the past 10+ years is the gradual “hollowing out” of the logistics talent across many companies, which has left them vulnerable. It will take several generations to build it back to a competitive edge again.
Procurement excellence
Procurement excellence and service-level performance must go together. Many companies have moved the strategic decisions on a supplier selection to a procurement “strategy” optimized to deliver a short-term cost benefit. What works for commodity categories does not always apply to more intangible areas such as transportation and logistics services. Procurement strategies too often put critical nodes of your supply chain at risk.
The positive “quick win” earnings before interest and taxes (EBIT) impact of a reduction in operating costs is too often confronted with the fast-moving marketplace and an increasingly disruptive global economy. When a pandemic such as COVID-19 strikes or another black swan event such as a volcanic eruption in Iceland takes place, companies are left to scramble for capacity to move their products and ensure their supply chain does not collapse. Nobody goes to the procurement department for a logistics strategy as the reduction in price can be far outweighed by the cost of a solid strategy that considers all the links and nodes in the supply chain.
