From the very beginning, the coronavirus (COVID-19) pandemic had a massive impact on how we live, including how people and stores get goods. The immediate (short-term) impacts were widespread and obvious – empty grocery store shelves, no toilet paper, and hand sanitizer in short supply. We know now that this was only the beginning as the world begins to realize new, additional layers of disruption starting to unfold. Consumers, shippers, businesses, and other stakeholders within both global and regional supply chains are trying to adapt in order to meet the new demands they face throughout global infrastructure networks and relevant supply chains.
How, when, and where will COVID-19 continue to impact supply chains? What will happen in the near future is hard enough to predict, let alone what will happen in a post-COVID-19 world. Supply chain networks are interwoven, complex, and responsible for moving an immense variety and volume of goods (both domestic and international), making it difficult to predict. We also do not know which types of supply and demand could grow problematic within the global supply chain due to the opacity of our new normal. Could products from overseas that are essential to domestic manufacturing stop reaching our shores? How many people will turn to eCommerce when shopping for essential and non-essential goods? We cannot have control over a variable such as changing consumer behavior in times of a global pandemic.
The New Normal for Logistics Leaders
The supply of goods has become a burning issue for companies around the world as so many supply chains were impacted or ground to a complete halt as a result of the pandemic. From food to surgical masks, unforeseen supply shortages and surpluses have uncovered many vulnerabilities in how both raw materials and finished products are sourced, stored, and how they are distributed. The rapid progression of the pandemic has forced logistics leaders to strategize and implement a more resilient, robust, and agile system that can readily pivot in the face of disruptions.
Logistics providers and transportation leaders are doing everything they can right now to ensure that the next global calamity will not upend their supply chains. COVID-19 is not the first nor will it be the last major disruptor to global supply chains in our lifetimes. There was the 2003 SARS epidemic, and the 2011 tsunami in Japan that kept the car industry staggering for months. In Thailand, the flooding of 2011 affected the supply chains of many technology manufacturers that were dependent on hard disks. Major global disasters reveal weaknesses and dependencies that may otherwise go unnoticed or may have seemed harmless.
The Impact of COVID-19 on Supply Chain and Logistics Industry Market
According to expert columnists from PRNewswire, the global logistics market size is expected to grow after the COVID-19 crisis. By 2021, It is expected to top $3.215 billion (from its current $2.734 billion) at a year-over-year growth rate of 17.6%. Growing demand and distribution of PPE, creating supply chain stabilization task forces to fight the coronavirus crisis, and increased focus on maintaining the supply of essential goods will be the major drivers of this growth. The pandemic also created very specific market restraining factors and labor shortages when it came to the shortage of COVID-19 testing kits.
The industries that face the biggest challenges as a result of the pandemic include healthcare and fast-moving consumer goods (FMCG). Fast-moving consumer goods are mostly impacted by fear of scarcity, both real and/or assumed as consumers make anxiety-driven “stock-up” purchases. Sufficient supplies of food are ensured because the agricultural industry has been exempted from most of the COVID-19 restrictions. There’s been an increasing demand in e-groceries – grocery delivery services and large supermarket chains (e.g., Walmart) have hit an all-time high with their app download in the U.S. By mode of transport, roadways are the most crucial segment for the supply chain and logistics market right now because they are relatively less affected by the virus-related restrictions when compared to waterways and airways.
The pandemic and the lockdown have proven that trucking is critical to keeping the supply chain running. Still, the road transport industry is facing challenges regarding the health and safety of available truck drivers which is compounded by a pre-existing driver shortage. The world is relying on transportation leaders and road transport for the continued supply of essential products.
How the Logistics Sector Is Adapting to the New Normal Amid the Pandemic
Though it’s not that easy to predict the reality of the post-coronavirus period, our world certainly won’t be the same ever again. Logistics providers are forced to adapt their supply chain strategies and management in the face of the global pandemic. Problems including adaptability, innovation, the need to restructure resources (financial, technological, and human), and social distancing will drive the changes that create the new normal. This is where digitization proves to be of huge value-creating importance for different types of companies. Established work cultures and delivery modalities will be redefined, and IT-enabled responsiveness to consumer requests will become a stronger KPI for measuring efficiency.
The following are most likely to be the key outcomes for the supply chain and logistics industry.
- IT/technological innovations as key drivers
Thanks to innovative tech solutions and digital tools used in logistics, companies can increase end-to-end visibility and transparency to get a seamless flow of information between their customers and logistics service providers. When it comes to providing contactless, real-time, and flexible solutions to customers – the role of IT will be indispensable and pivotal. Once considered to be major tech disruptors, technological innovations, ranging from data collection driven by AI, to remote payment processing and mobile payments, are already considered key enablers (and will be adopted widely in the future). The case for increased investments in technology, such as the widespread deployment of robots in warehouses, delivery drones, self-delivery vehicles, and IoT will grow stronger.
- Cargo surge
The coronavirus lockdown has limited pick-up activities, which is why warehouses and port terminals are full. During the last few months, we’ve read about ships in ports that can’t move forward as they wait for port workers to come back to work and unload them. Enormous cargo backlogs from the origin are a sign of a future cargo surge.
Companies with the cargo capacity to handle cargo surges will gain a significant competitive advantage over others. Third-party logistics (3PL) providers will be on the lookout for strategic partnerships in order to shore areas of limited capacity. At the same time, that will create more problems for smaller industry players. Companies that can deliver enormous volumes quickly and devise more effective transportation arrangements for urgent cargos will become dominant players. The marginal companies will be either pushed out of the market completely or will make do with their smaller market shares.
- Network reevaluation
Many enterprises were forced to change and expand their distribution, as well as their source of supply. That affected their entire warehousing and logistics network – from the movement of shipments to methods of storage. For example, if a U.S.-based company moved its operations from China to India, it needed to switch to shipping to East Coast ports (via the Suez Canal) instead of West Coast ports. Subsequently, that will have an enormous impact on the location of their infrastructure and distribution centers.
Next, questions around inventory have been raised because companies had to reevaluate how much stock they held and how they were distributed to their customers. One of the lessons we learned from the current global crisis is that additional inventories of the most critical products must be maintained. We need to create regionalized stocks of essential materials, components, and/or finished products in alternative distribution locations. In the case of a catastrophe or other emergency event, you can continue to satisfy consumer demands by pulling stock from your alternate location. As you do this, the demand for fulfillment centers, last-mile delivery, and manufacturing facilities will increase, further changing the industrial landscape.
- Flexible working arrangement
Remote work from home is not a new concept, and HR experts have analyzed the limitations and benefits of flexible working for many years now. The lockdown and self-isolation during the coronavirus outbreak have shown that working from home or other remote locations can be as productive as being present in the office during work hours. More robust remote work policies may become the new normal as organizations transform their IT systems and support to align with the needs of remote employees.
- Higher inventories
Companies with low inventory levels and stretched supply chains were hit especially hard during the crisis. In the future, many of them will likely choose to maintain higher inventory levels, especially for essential goods such as pharmaceuticals. Companies with better liquidity ratios and less stretched supply chains are considered more resilient and more sustainable, even if that resilience requires more spending. Large enterprises may even use this as an opportunity to buy up their smaller rivals at bargain prices. Many industries are expected to undergo consolidation, which will ultimately put more power into the hands of fewer companies. We can also expect more consolidation to occur in the supply chain and logistics industry, leading to fewer airlines and freight forwarders. Just as higher liquidity and inventory will mean higher consumer prices, fewer organizations with more power will lead to decreased efficiencies and, eventually, to higher prices.
- Increased diversification
As organizations focus on adapting their supply chain strategies to be better prepared for the next disruption, diversification will be crucial.
- Diversification of distribution
As mentioned above, trucking is the most common method of transport – it accounts for the movement of 80% of the world’s goods today. So, we can expect diversification of distribution with more reliance on intermodal and/or rail shipping to reduce the dependence on trucking. Since transportation capacity is being squeezed due to the pandemic, trucking costs have jumped to three times the market average. To mitigate the risk of rising freight capacity rates or tightened trucking capacity, more American companies will invest in locations that are close to intermodal rail terminals. If they currently use only one port for imports, they will look to find several more. For example, all of the products Walmart imports from China used to come into the LA/Long Beach port. Now, they use four ports because being dependent on one port poses too much risk.
- Diversification of sources
International companies must diversify both their sources of supply and manufacturing and, if possible, create a localized or regionalized network to serve consumer demand. This means relying less on China (the country accounted for about 30% of global manufacturing) to other markets, such as India, Vietnam, and Mexico. Some companies have moved to avoid higher trade-war-related tariffs, and as for the Chinese government, they are searching for ways to redirect their financial support to tech production, which is of higher value.
To avoid another situation of national or global emergency, more countries will focus their efforts on creating a domestic supply chain independence. In the U.S., the outbreak has unveiled serious issues related to securing medical and drug supplies – 70% of tighter-fitting respirators and 95% of surgical masks are made overseas.
Multinational enterprises are likely to regionalize their operations to reduce the risks associated with having a central point of manufacturing. Mercedes used to build its vehicles only in Germany, but now it manufactures them in different markets. Louis Vuitton, the French fashion house, opened a manufacturing facility in Texas in 2019.
- Importance of air cargo
Once considered to be too big to fail, inefficient airlines will have survived the coronavirus crisis because they were nationalized (at least partly), while some healthier airlines were not. Overall, there will be less total capacity, as well as less business travel, because the majority of the workforce will have become accustomed to working from home. The demand and air freight rates will be higher if volume decline (due to localized sourcing) is offset by a larger decline in the number of passenger flights.
Governmental debt, localized sourcing, higher liquidity, and inventories have raised prices of goods. This will eventually lead to a higher cost of capital and higher inflation. The cost of carrying expensive goods for longer periods will increase if interest rates are increased. Eventually, higher interest rates will favor air cargo because of the financial cost of inventory. During these times of crisis, the importance of air cargo and freighters has never been clearer, and it will remain so in the future.
- A sharp turn to eCommerce
Nielsen, a market research company, has identified 6 consumer behavior thresholds closely tied to the coronavirus pandemic and their results on the market.
- Proactive health-minded buying (health and wellness products)
- Reactive health buying (hand sanitizers and protective gear)
- Stockpiling household essentials and groceries (pantry preparation)
- Quarantine preparation (fewer store visits and experiencing shortages in stores)
- Restricted living (limited online buying and making fewer shopping trips)
- A new normal (permanently altered supply chain and return to daily routines)
Millennials and Gen Zers are long-time online shoppers, but amid the COVID-19 pandemic, there’s been more Gen Xers and Boomers online, purchasing groceries and other essential items. These consumers have converted to online shopping for convenience, and we may witness the accelerated decline of brick-and-mortar retail, which will drive air cargo growth.
Furthermore, companies will invest more in automation and technology because pandemic planning will become the norm. Supply chain digitization will help them to improve the flexibility, speed, and accuracy of their logistics management.
But before companies can move on to build digitized and more resilient supply chains, they will have to recover. If the sales across all sectors move towards eCommerce, warehouse automation will be in demand more than ever before.
- Less travel
The travel industry has and continues to take particularly brutal blows during the coronavirus crisis. Remote work and video-conferencing are also here to stay with office work and face-to-face meetings expected to occur less frequently than before the COVID-19 outbreak. Not all jobs can be performed remotely, but there will definitely be less business travel (both by plane and car).
Occasional physical meetings are necessary for company unity and the reassurance they can provide in case of any disruptions. The increase in remote work will translate into a decreased use of cars and its subsequent impact on the automotive industry. In Europe, the automotive industry accounts for 10% of the economy, which means it will have a strong, negative impact on global economies. This trend was actually already underway (to an extent) because of the growth in the production of electric vehicles. Typically, electric vehicles require fewer parts than conventional cars with combustion engines.
Consumer behavior has changed on a global level. The spread of coronavirus has been accompanied by a lot of contradictory information and uncertainty. The information, recommendations, and advice were coming from multiple sources, and people instinctively began to “over-prepare.” Besides the uncertainty, there was also the crowd mentality – when people see others buying up the shelves and see a scarcity of essential products, they then proceed to stock up. Nobody wants to be left without resources.
Economic and infrastructure development leaders, as well as policymakers, have to track patterns in consumer behavior closely. Unlike hospitality industries, it is likely that logistics and trade will see a mix of hiring sprees, layoffs, and everything in between. To manage such uncertainty of what the near future brings, logistics and supply chain leaders should use their policy toolkit – from job placement services to unemployment benefits. Fortunately for the logistics industry, social distancing will not unplug people’s need to eat and consume. What we can’t do is lose sight of everyone that helps get those products to the market, or miss opportunities to help them – and our economy.