Reconfiguring global logistics to absorb macro shocks
In the wake of the pandemic, companies are radically changing their attitudes to supply chain management.
Covid-19 has reignited corporate appetites to improve supply chains. Over the last year, buyers have sought greater inventory buffers and insulated supply networks to enhance protections against future disruption as they recognise that the current pandemic won’t be the last macroscale shock to global trade.
Research conducted in 2020 for DP World’s Trade in Transition report found that 83% of senior logistics executives are in the process of reconfiguring their supply chains by switching or adding new suppliers, using different logistics providers; and/or changing production or purchasing locations.
Taking a further look at current affairs in the industry, it is clear that the preference for just-in-time delivery – aligning the arrival of raw materials with the needs of production schedules – has been replaced by a “just-in-case” strategy. This method, developed to help tackle supply chain shocks, typically requires producers to hold a higher inventory of finished products, as well as holding higher inventory of its own key inputs.
Supply chain shocks
Shocks to supply chains are frequent. According to estimates calculated by McKinsey & Company, companies experience a shock that results in inactivity for a month every 3.7 years. As such, all sectors must be mindful that the next disruptive event is rarely very far away. The recent blockage of the Suez Canal and the ever-present existence of geopolitical tensions illustrate this.
Data from our Trade in Transition report clearly shows that companies are investing to reconfigure their supply chains. While Covid-19 might have been the trigger for these programmes, there are signs that this is not a temporary change, but a structural alteration to supply chain management.
Of those companies polled in 2020, 32% of executives said they would use revenue from the first half of 2020 to restructure their supply networks. This involved taking on new suppliers, engaging with different organisations, and switching locations to improve the production or purchasing outlook. Reconfiguration requires more than an increased budgetary allocation to risk management however, so businesses are increasingly seeking to shorten their supply chains too.
Having realised the risks from excessive dependence on a concentrated source of supply, new efforts from companies to diversify are clear. However, for effective geographic diversification, they must ensure that they put digital at the centre of their approach.
For example, through the compilation of shared data, it is now possible to create additional “virtual” capacity through embracing regional warehouse collaboration, which maximises storage without hard wiring in higher fixed costs.
Visibility is also a key benefit of digital transformation and DP World is making huge strides with the Digital Freight Alliance and platforms such as SeaRates. Increased visibility helps manufacturers manage procurement while suppliers can track real-time updates on order backlogs for more accurate inventory organisation. Real-time updates also better equip logistics vendors to manage cargo batches, consignments, and delivery statuses.
DP World’s platforms provide cargo owners with the best rates for transporting goods and allow customers to transport cargo anywhere in the world at the click of a mouse. By engaging digital assets, firms can counteract the volatility of incoming macro shocks while ensuring “just-in-case” operations are optimally carried out.