Jake Rheude, Red Stag Fulfillment
It seems the only person who could beat Jeff Bezos to becoming the world’s first trillionaire would be someone with a crystal ball that can accurately predict the supply chain for the rest of 2020. The global crisis has everyone running, as demand forecasts, production schedules, and distribution planning have all gone out the window.
The only thing certain is uncertainty, especially amid significant consumer spending changes and a 14.7 percent unemployment rate.
That said, there are some changes we can see starting to take shape in the current supply chain. They’re slowly building and evolving but have a high likelihood of coming true. So, with that in mind, let’s look at some of the more likely scenarios for Q3 and Q4.
Flattening the curve
When the pandemic struck, supply chains struggled and worked hard to catch up to demand. Now, demand has leveled off as both shipments and spending, in general, are declining. The positive outlook is that Q3 may flatten this downward curve, and Q4 could potentially give the start of an uptick in chains, according to U.S. Bank’s analysis of its Freight Payment Index.
One piece of advice for manufacturers and those in electronics procurement is to start looking at the relationships you’ll need in Q3 and Q4 if manufacturing orders return in your sector. Carrier capacity has the potential to be limited, and strengthening relationships now might be one of the best ways to protect your freight.
Diversity from necessity
Your supply chain may change dramatically from manufacturers and ocean carriers to the crews who handle your freight at ports, terminals, rail yards, and more. The reason is a state fear of new outbreaks causing further concerns.
In late May, China sequestered hundreds of thousands at home in Shulan because of the potential for an outbreak after 130 cases were reported in Jilin province. News like that is enough to bolster some calls to revive American manufacturing.
Many companies are in a holding pattern, waiting to see if their manufacturing partners can stay reopened or if they’ll be struck again with a new closure. Some larger manufacturers may are already be focusing on building visibility with Tier 1 suppliers. The ability of a supplier to shift production will be a competitive advantage. For smaller suppliers, retailers, and product sellers, efforts should currently focus on expanding supplier networks and proactive supply chain replacements.
Electronics brands are going to be stuck somewhere in the middle. Products are complex enough that shifting to a new manufacturer and parts or raw materials providers may be difficult, but it is necessary. At the same time, your suppliers may be large enough to accommodate production flexibility on their own.
Threading the needle is essential, and those most likely to succeed are ones already speaking with Tier 1 suppliers to mitigate long-term risk and Tier 2 suppliers to make up for short-term concerns.
Give outbound logistics a second look
We’re seeing supply chain planning professionals in high demand now and think that’s likely to continue throughout the year. Companies are juggling a wide range of risks and threats while trying to build out alternative sources and hammer out new agreements.
One area to consider additional planning is in outbound logistics, where options and capacity are fluctuating. During Q1 and Q2, we saw significant port congestion and varying demand spikes, harm to domestic intermodal, capacity reductions, and ongoing harm from truck driver shortages.
Source: Reuters
The industry as a whole hasn’t cleared out the early coronavirus backlog entirely, and returning to “normal” may not occur until Q4 or even 2021.
Respond to this crunch by establishing relationships early on for outbound logistics. Find new regional partners in each leg of the journey your products take. Work with local talent to determine if there are alternate routes you can take to stateside distribution centers or your final assembly locations. Price out ocean freight, larger orders, expedited air, and other options to determine different margins that might be acceptable.
Companies are going to do a lot of balance sheet work, and it’s important to know what an acceptable cost increase is now that predictive models say will help you maintain demand going forward. You may see an emphasis on shifting fixed costs to variable elements as companies try to save and protect margins amid demand changes. Supply chain conversations in Q3 and Q4 may still be about loss, so prepare yourself.
Will long-term supply chain lessons be learned?
The final consideration for Q3 forecasts and beyond is to ask ourselves how much industry supply chains may actually change and what lessons will be learned.
When thinking about the scope and scale of the Covid-19 crisis, and what it may do to projected sales this year and next, one historical corollary that comes to mind is the 2011 flooding in Thailand. That event caused hard disk prices to rise as much as 190 percent, and supply chain issues persisted for two years. Despite the flooding causing a 30 percent decrease in production, just 16 percent of impacted operations moved instead of reopening in the same location.
There is a potential for your supply chain sourcing to shift dramatically, but that feeling may be more fear than reality. The electronics space has proven itself resistant to change so that long-term changes may rest heavily on the demand side.
