While most North American consumers and those abroad don’t notice any significant difference in their ability to purchase products and receive packages from suppliers, the situation is much more strenuous than it might appear. The logistics capacity crisis was going on for several years prior to the COVID-19 pandemic. Today, the situation has become even more complicated.
Simply put, the logistics capacity crisis was a direct result of the Great Recession of 2008, which led to over 18% of the entire American freight capacity being removed from the roads. Other significant factors have since exacerbated the problem, such as more stringent government regulations, fleet deterioration, licensed truck driver shortages, and more.
Due to these circumstances, many companies have taken several steps to ensure that they fulfill orders and maintain high customer satisfaction levels. Businesses that are successful in doing so despite logistics constraints typically enact the following measures and practices:
- Develop a Crisis Management Plan – When these plans are tried and tested, companies are far better positioned to cope with many global supply chain interruptions.
- Double Sourcing – Whether it’s multiple transportations and logistics companies, manufacturers, carriers, etc., today’s global supply chains need redundancy to react to any unforeseen interruptions quickly.
- Improved Communications – Like with any relationship, personal or professional, continued dialogue is critical in building and maintaining trust. This allows them to identify and remedy any pain points or friction within the supply chain; businesses need to have seamless communications with their transportation and logistics partners.
- Negotiating Rates – By negotiating their rates before a crisis even begins, the supplier will ensure that their cargo will not be bumped by the likes of Amazon or other eRetail giants.
While some companies in North America may be too late to create contingency plans to mitigate the capacity crisis during the COVID-19 pandemic, they should still commit to planning how to solve their existing and future issues. While it’s true that many companies can mobilize reasonably quickly and set up various crisis management mechanisms, they, nevertheless, tend to focus on the short-term. But how can their supply chain leaders also prepare for the mid-term and long-term while building resilience for the here and now?
Supply Chain Transparency
Building transparency within a multi-tier, global supply chain starts by uncovering the critical components that make up the firm’s operations. By working with production and operations teams, companies will be able to review their component catalogs and bills of materials to identify which items are sourced from high-risk areas and/or have a lack of readily-available substitutes.
Once these components have been identified, businesses should assess the risk of interruption from tier 2 suppliers and beyond. They should be asking their tier 1 partners about their suppliers and creating information-sharing agreements to help determine lead times and inventory levels to be able to act as early warning systems for any interruptions.
Companies should look to identify alternative suppliers in advance in situations where there is a risk of stoppage or a significant slowdown in the production line, or increase operational costs. They should also look for qualified candidates that are outside of potentially affected regions. Whenever they do this, businesses should consider the local COVID-19 policies and regulations, which can also create the need for different supplier options.
If finding alternative suppliers is not an option, organizations should look to work with their affected tier 1 partners in an attempt to address the existing risk together. Understanding and identifying the specific issues that exist in the multi-tier supply chain will be easier if companies and their tier 1 partners work together under full transparency.
Determine All Available Inventory
Many companies don’t know how much inventory they have across their entire value chain. Evaluating it in its entirety will help a great deal in their capacity planning. Categories of stock to be included in the evaluation should include the following:
- Finished Goods – all inventory held in the warehouse.
- Blocked Inventory – everything held for testing, quality control, and sales.
- Spare Parts – For example, this inventory can be reused for new product production.
- Parts and Items With Quality Issues or Low-Grade Ratings – These should be quantified to determine if any reworking efforts will solve the existing quality issues or if remanufacturing with used stock will help address the supply issues.
- Parts and Components Still in Transit – These should also be considered and evaluated to determine what needs to be done to expedite their arrival. This is particularly true for those that are stuck in customs or in quarantined areas.
What is the Actual Customer Demand?
A crisis, such as the COVID-19 pandemic, will likely increase or decrease the customer demand for different products. This makes estimating the final demand much harder to determine. Nevertheless, businesses should ask if the demand signals they receive from their immediate customers reflect the underlying issues and uncertainties. Demand-planning teams need to use advanced analytical tools to uncover reliable demand signals to determine future supply and capacity strategies.
In addition, market insights, direct-to-customer communication channels, as well as internal and external databases, can be extremely useful in assessing the current demand. If data sources are limited, direct communication with customers can cover some of the gaps. That said, demand forecasting needs a strict process capable of navigating the constantly-evolving and uncertain business environment, particularly in the event of a crisis. To prepare for these types of events, while also keeping in mind the logistics capacity crisis, companies need to follow these steps:
- Put together a demand-forecasting strategy capable of defining both the granularity and timeframe of the forecast.
- Use advanced analytics tools to generate realistic demand forecasts.
- Integrate market intelligence into product demand forecasting.
- Make sure that your forecasting systems are dynamic to ensure you can react quickly in the face of inaccuracies.
Optimizing Distribution and Production Capacity
Once the steps mentioned above are implemented, businesses should optimize their production and distribution capacity. Scenario analysis can be used to identify and test out different capacity and production scenarios to understand their operational and financial implications. When it comes to production optimization during the COVID-19 pandemic, employee safety is a must. This means engaging with crisis-communication teams that will educate them on the existing infection risks as well as the protection options they have.
The next step will be to conduct scenario capacity planning in the event of a prolonged lockdown. It should assess the impact of a lockdown based on the available capacity, including the inventory already in the systems. To determine how to use the available capacity, the sales and operations planning process should determine which products offer the highest strategic value. Wherever possible, an end-to-end sales and operations planning platform can better match supply chain and production planning with the expected demand.
Securing Logistics Capacity
During crises such as the global logistics capacity crunch, truck driver shortages, and the COVID-19 pandemic, organizations need to understand the current and future logistics capacity by different modes such as trucks and trains, air, or sea. The same thing applies to prioritizing the logistics needs in a required capacity, as well as the time-sensitivity of product delivery. Particularly because of the freight capacity crisis, businesses need to prebook their logistics capacity in order to minimize exposure to any potential cost increases, particularly during high-volume shopping seasons. Working together with trusted logistics partners is an excellent way to gain priority and increase capacity on more favorable terms than going it alone.
Companies will need to rely heavily on real-time visibility to optimize their fleet management and contingency plans under any rapidly-evolving circumstances. However, this visibility will depend on tracking freight transportation’s on-time status in transit and monitoring broader changes such as any border closings or airport congestion. In order to do this, firms must have access to modern software solutions such as transportation management systems (TMS) and warehouse management systems (WMS). By maintaining an agile approach to logistics and supply chain management, organizations will be better positioned to adapt to any situational or environmental changes.
Building Future Resilience
Once the supply chain’s immediate risks have been identified, businesses need realistic contingency plans. This starts by putting together a supply chain risk function in charge of assessing risk while continually updating risk-impact estimates and remediation strategies. Over time, stronger supplier collaboration will also help reinforce the whole supplier ecosystem for more resilience.
In addition, digitizing supply chain management with transportation management systems and other software solutions will also improve speed, flexibility, and accuracy. Likewise, having the supply chain completely digitized will also help companies in anticipating risks, saving time, achieving greater visibility, reducing costs, as well as more coordination across the supply chain.
Lastly, when they do come out of the capacity crunch, companies will need to take a comprehensive look across their entire supply chain and look for any vulnerabilities.
If you need to stay on top of all the logistics market updates while optimizing and managing your supply chain and global logistics capacity, Logistics Titans is here to help. Contact us today and enhance your software solutions and supply chain execution!