One word sums up 2020 for the logistics industry. PANDEMIC. Or, if you prefer, Covid-19.
The pandemic, a once-in-a-century event, shook the logistics industry to its foundations.
Covid-19 exposed weaknesses with reckless abandon. Neither governments, the logistics industry, nor individual businesses were ready for the unprecedented disruptions.
This once-in-a-century event caught the entire industry by surprise. To put the effects into perspective, we need only look at survey results from Adelante, Blue Jay Solutions and CSCMP (Jun 2020).
According to the survey, 75% of supply chain professionals plan to make changes to their supply chains based on lessons learned. That’s a startling statistic for an industry that routinely deals with change.
As we look back on what happened in 2020, we will see that many of the adverse effects were already evident. Others were lying buried beneath the surface.
In this post, we will review 11 ways the pandemic disrupted the supply chain industry. Understanding these events will help us grasp how they will shape logistics in 2021.
But that’s a topic of another blog post in which we’ll preview what to expect in 2021.
With that, let’s review how the pandemic upended the logistics industry.
Covid-19’s Negative Impacts
1) Employee Health & Safety. When Covid-19 reared its ugly head, one of the first things everyone grappled with was employee health and safety. The scale, scope, and severity of the pandemic made itself felt worldwide in short order.
Almost immediately, businesses began taking precautionary measures to keep their workforces healthy and safe. They implemented social distancing from office settings to the shop floor.
Workers needed time to adapt to what seemed unnatural and draconian measures. As time when on, employees on the frontlines, adapted and became a model of resilience.
Nonetheless, health and safety will remain a top priority for the foreseeable future.
2) Unemployment. Almost overnight, starting with China, governments shutdown their societies. Business shut down, and trade came to a halt. That resulted in an immediate and dramatic rise in unemployment.
At its peak, unemployment in the United States reached 14.7% in April 2020. This exceeded the unemployment rate experienced during the Great Recession. Equally shocking was how fast unemployment rose.
Unemployment rose higher during the first three months of COVID-19 than it did in two years of the Great Recession. Unemployment dramatically increased by more than 14 million. It rose from 6.2 million in February to 20.5 million in May 2020 (Pew Research Center).
The sharp and massive rise in unemployment was unparalleled. It became clear unemployment further strained supply chains’ ability to cope with Covid-19.
3)Blank Sailings. As economies shut down one after another, that led to a ripple effect of cancelled sailings. Cancellations came wave after wave by large and small container lines alike.
Container lines blanked sailings out of necessity to shore up rates. As container lines had to deal with excess capacity, blanketing sailings was the logical method. Again, these cancellations spread over time with worldwide effects.
Most troubling is that blank sailings will likely continue into 2021 and beyond. You can expect blank sailings to shape the New Normal.
Another byproduct of blanked sailings is increased demurrage and detention. That, too, was a prior existing issue. As shippers blanked sailings, empty containers remained at U.S. ports awaiting return to China. This led to excessive congestion.
We also saw delays in loaded containers. Contributing to this backlog was the reduction of work shifts at ports. Many ports introduced reduced shifts with little or no notice. This led to increased demurrage and detention charges.
It is clear wholesale blank sailings had an adverse effect on port operations. While the worst appears to be behind us, volatility remains, nonetheless. And that will provide an impetus for coming to grips with this knotty issue in 2021.
4) Port Congestion. Covid-19 also disrupted import and export. Port congestion proved to be a thorn in the side of every supply chain stakeholder. Like some of these other issues, port congestion was not new. As expected, the smooth flow of cargo through ports became problematic during Covid-19.
Ports had fewer workers to handle cargo, and many ports limited operations. Also, many retailers delayed picking up their cargo due to their own worker shortages. Many retailers also shut down their warehouses further adding to port congestion.
This issue became a prominent issue during Covid-19. That said, it won’t be easy to resolve and will likely dominate the foreseeable future.
5) Supply Chain Concentration. As Covid-19 dragged on, its effects became more noticeable. A major weakness of global supply chains was the concentration of sourcing in China. This proved critical as China shut down its manufacturing facilities.
When manufacturing shut down in China it had a ripple effect. That led to unprecedented inventory shortages, sparing no industry sector. We saw shortages in autos, electronics, consumer goods, pharmaceuticals, and medical supplies, to name a few.
In hindsight, these dramatic effects were not inevitable.
Businesses could have avoided these negative effects. One way to do that was with diversification of sourcing. That is, diversifying sources among many countries would have alleviated the related shortages. In any case, for various reasons, business did just the opposite.
At the macro level, lack of diversification led to a supply-induced recession. At the micro level, it had a detrimental effect on company sales. Unsurprisingly, large firms sustained these supply shortages better than small- and mid-sized firms.
In fact, some small- and mid-size firms declared bankruptcy. And even some large companies weren’t spared. Here’s a partial list of companies that a declared bankruptcy during Covid-19: Pier1 Imports, Modell’s Sporting Goods, Nieman Marcus, J.C. Penny GNC Holdings, Lucky Brand, Brooks Brothers, J. Crew, and Steinmart.
These bankruptcies also hit consumers (at the end of the supply chain) hard.
6) Inventory Shortages. One of the most obvious impacts of the pandemic was manifested by wholesale inventory shortages. We saw shortages of food items, cleaning supplies, and personal protective equipment.
Critical medical supplies were also in severe shortage. Supply and demand were grossly out of sync. The “whiplash” effect was in full display. Supply chains weren’t up to the task of matching supply and demand. Making matters worse, a hyperbolic press manufactured many of the issues.
As time went by, many businesses adapted to the New Normal. Driven by a sense of urgency, businesses applied lessons learned at a rapid pace. But making these adjustments were costly. Businesses re-sized inventories. Many streamlined business processes. And many workers worked overtime to meet unprecedented demand for critical items.
By taking expedient measures under duress, many supply chains began to rebound. But a return to business as usual was still out of reach.
7) Spot Rates. Covid-19’s impacts affected different sectors of the economy in different ways. Spot rates experienced highs and lows that fluctuated according to demand.
For example, consumer goods enjoyed rising demand. So spot rates for transporting consumer goods were high. Pent-up demand continued to put pressure on keeping spot rates high. But freight rates for industrial and manufacturing tell a different story.
According to FTR Transportation Intelligence, freight rates for industrial production and durable goods dropped 8% and 6%, respectively. The data show the rebound in industrial goods lagged that of consumer goods.
Spot rates are higher now because capacity remains tight, as all the drivers have yet to go back to work. Also, Covid-19 restrictions in some states resulted in a 40% decline in the issue of driver’s licenses. Retirements also affected driver availability, which also affected spot rates.
Until the mass distribution of a vaccine in 2021 occurs, wild fluctuations of spot rates will continue. Rising demand will further exacerbate capacity constraints caused by rising demand. Hence, you can expect upward pressure on prices.
8) eCommerce Overwhelm. Although the pandemic had deleterious effects, eCommerce prospered and grew. We saw consumers move in droves to online shopping, as businesses closed their stores.
On the surface, we may see that as a good thing. Yet, the expansion of eCommerce came with growing pains. The rapid move to online shopping was so great it overwhelmed the eCommerce channel. Even Amazon, which pioneered two-day shipping and then one-day shipping, couldn’t keep up with the demand.
Other businesses, not as prepared as Amazon, found it even tougher to keep up with demand. On the whole, eCommerce grew dramatically but overwhelmed supply chains. That further strained supply chains’ ability to cope.
9) Long-term Forecasting. When Covid-19 hit, consumers panicked. So, they made a run on what they deemed to be critical supplies. As a result, we saw empty store shelves. Shortages resulted in toilet paper, cleaning supplies, and face masks, to name a few. As demand skyrocketed, companies couldn’t keep supplies on the shelves.
Most of this was irrational. Thus, it was difficult if not impossible to forecast. Accustomed to steady-state operations, many supply chains couldn’t adapt to this volatility. Rather, companies built supply chains on long-term forecasts. Doing so tended to smooth out outlier events – until Covid-19 struck. Covid-19 broke the mold.
These forecasts were no match for the extreme disruption that resulted. Even companies with highly-regarded supply chains, like Amazon and Walmart, weren’t prepared.
10) Lack of Infrastructure Investment. Another adverse effect of the pandemic was the inadequacy of infrastructure funding. As employment dropped and widespread disruption took hold, infrastructure investment took a bigger hit.
Covid-19 further affected revenue shortfalls by state and local governments. That in itself had a ripple effect. For one, employment suffered as federal, state, and local governments delayed infrastructure projects. And implementation of social distancing further slowed down funded projects.
Also, with the economy partially shutdown, governments collected fewer road and highway tolls. Reduced tax collection adversely affected current as well as future construction projects.
Fortunately, the government acted and provided some relief with the C.A.R.E.S Act. The passage of the C.A.R.E.S Act abated some of the effects, but only for the short run. As a result, infrastructure will loom large in 2021.
11) Continuity of Operations Planning (COOP) and Risk Management. The lack of preparedness manifested itself in record disruptions, dislocations, and delays. That indicated businesses gave COOP planning short shrift.
It also highlighted the importance of supply chain risk management. In particular, it revealed the lack of integration with suppliers at lower level tiers. Tier-2 and Tier-3 and lower-level tiers did not have the necessary integration to withstand the pandemic’s effects. Coordination and collaboration below Tier-1 were severely lacking.
Covid-19 forced closer engagement with lower level suppliers. That had the unintended yet favorable effect of enabling supply chains to rebound. As a result, COOP planning and risk management are two areas that will shape the New Normal.
The pandemic shone a spotlight on supply chains. Before the pandemic, supply chain management was unfamiliar to the general public.
Now, everyone knows what supply chain management is. More important, the public understands the importance of supply chain management.
That said, the pandemic resulted in widespread disruptions, dislocations, and delays. The effects were unprecedented in their scope, scale, and speed. They ushered in a new way of thinking about supply chains. That thinking has translated into what we now call the New Normal.
That in a nutshell sums up 2020.
The New Normal will shape next generation supply chains. Rigid rules and standards are out-of-date. Rigidity imposed by long planning cycles will give way to responsive supply chains.
Resilience will become a supply chain imperative. Agility and flexibility will underpin tomorrow’s supply chains.
As a 3PL provider, American Global Logistics can help you meet the future’s challenges. We can help you transition and adapt to the New Normal without wrenching changes.
If you’re resetting your supply chain to recover from weaknesses exposed by Covid-19, we can help you. Contact American Global Logistics now to start transforming your supply chain.
We can help you with current operations as well as with once-in-a-lifetime events.