Covid disrupted supply chains, which led to severe shortages, shipment delays, and price inflation. The conflict and subsequent sanctions against Russia have placed further demands on supply chains, resulting in increasing energy prices and even worries of famine.
Beyond these immediate consequences, however, the invasion of Ukraine may significantly alter global supply chains in a way that the pandemic never did.
The invasion has had a tremendous impact on the global movement of goods and services, despite the fact that its direct consequences on supply chains have been restricted. As vast areas of airspace have been closed, products being shipped by air from China to Europe or the Eastern United States must now be redirected or delivered via slower or more expensive methods. Due to the congestion of major ports in 2021, the China-Europe rail freight route through Russia was seeing a boom. However, European customers are increasingly cancelling trips on that route.
Companies have built supply chains that span the whole globe, bypassing enemy lines in the name of efficiency and profitability. With the West on one side and Russia on the other, the world may be on the verge of a new kind of supply chain Iron Curtain. Businesses won't be able to separate business and politics anymore. Regardless of China's unclear position on the invasion, the war will serve as a trigger to decrease dependence.
In 2020, 80% of businesses had moved or planned to move a portion of their supply chains.
The West’s decrease in dependence on China started before the pandemic already. A January 2020 poll of 3,000 businesses inspired by the China-U.S. trade war discovered that 80% of businesses in a range of industries had moved, or planned to move, at least a portion of their supply chains from current locations. In North America, businesses in almost half of all sectors announced plans to "reshore."
So, what can logistics companies and warehouses do to adapt to this new reality? We outline three core actions:
The lean methodology has benefited many sectors since Toyota led the way in the 1980s by reducing costs and boosting margins. However, the pandemic made the JIT model's flaws clear. "No redundancy" networks quickly disintegrated when sourcing and manufacturing were under pressure.
While it may incur additional costs, suppliers and retailers will most likely start holding more inventory, particularly those with longer supply chains. Over a third of automotive companies, according to a recent Automotive News poll, are interested in raising their inventory levels, even if doing so results in greater operational costs.
Over one-third of automotive companies is interested in raising inventory levels
This move from JIT to just-in-case (or also called Inventory Banking or Shortage Gaming) is one of the ways to increase supply chain resiliency.
A zero-sum game frequently occurs in the manufacturing supply chain. OEMs frequently bind suppliers to lengthy, rigid agreements under the justification of cost reductions throughout the course of a product's lifecycle. Tier-1 suppliers treat Tier-2s the same way; the "win-lose" strategy is downward spiralling.
Covid changed this and the war is further underlining this shift. For instance, rising freight costs, which are typically covered by suppliers, were so high that many were forced to demand price increases from their clients in order to stay in business.
However, this friction is being replaced by a more collaborative system. This spirit is likely to persist in the future – because it makes good commercial sense. Contracts for supply and freight will become more flexible, notably in terms of pricing. Lock-ins will be less prevalent and contracts will be driven more by market factors, collaborative reviews, and value-based considerations.
The logistics sector has been getting smarter for years. But according to a recent McKinsey study of global supply chain leaders, 73% of planning still takes place on spreadsheets.
60% of respondents plan to use AI tools while only 25% are currently doing so.
However, diversified sourcing, just-in-case inventory planning and flexible contracts will not work without precise forecasting and inventory planning. According to the same McKinsey survey, 60% of respondents plan to use AI tools while only 25% are currently doing so. By increasing visibility and enabling end-to-end planning, these predictive technologies create a virtual twin that will reflect and impact the physical supply chain.
However, the quality of the simulations will depend on the quality of the input data. More investments in IoT technologies in warehouses are required to achieve this. Technologies like Powerhouse AI, for example, will eliminate error-prone human intervention in maintaining, gathering and verifying important datapoints like inventory levels, inventory locations and SKU master data. This will provide the necessary high-quality data and establish a continuous feedback loop between the digital and physical supply chain or warehouse.
The secret is, ultimately, to invest in cutting-edge technology, from digital twins and analytics to control tower software and products like Powerhouse AI to help logistics companies and warehouses to become more resilient, relevant and sustainable.
As a new economic order emerges in the midst of increasing inflation, growing deglobalization, and an overheated labour market, nothing short of reinvention is necessary.