Closed factories, falling sales posts, and an uncertain future – that’s how the pandemic and supply chain problems in the logistics industry can be summed up. Its impact on container rates is still noticeable today. Although data cited by statista.com shows a downward trend, rates as of August 2022 are still three times higher than just a few years ago. The crisis is forcing companies and their suppliers to rethink their purchasing patterns and the way they forecast and manage logistics.
It all started with COVID-19 and the closure of both ports and factories, resulting in a slowdown in the flow of goods around the world and increased consumer demand. Corporate purchasing departments face a tough task these days. Increasingly, the daily duties of a typical purchasing manager are being complemented by additional duties related to monitoring the market and logistic situation, which can change overnight and sometimes even hour by hour.
Risk and supply disruption management
While globalization and digitalization have been the main challenges so far, in the covid-induced era, the issue of risk management came along, forcing many suppliers to rethink their production processes and the way they plan and manage logistics. The reliance of global industry on suppliers located in Asia has led to a dependence on goods produced in the Far East. Delays, rising transportation costs, and port congestion have put Asian manufacturers to the test, showing how excessive reliance on foreign production can jeopardize the entire supply chain.
Weaknesses of Just-in-Time strategy
Before the pandemic, supply chains typically focused on sourcing raw materials and components at the lowest possible cost, regardless of their point of origin, and the primary driver for most corporations was the Just-in-Time (JIT) strategy, i.e., delivery of materials just in time for demand, with the resulting low inventory and consequently low warehousing costs. After the onset of the pandemic, the JIT model is no longer appealing, and companies facing shortages began to frantically search for domestic manufacturers, who could even temporarily supply factories with production goods until supply difficulties stabilize. The problem, however, is that the said improvement is now only wishful, and there is no indication that it’s going to change significantly soon.
Economic benefits of production relocation
The average cost of container rates since the start of the pandemic on the Shanghai –Rotterdam line has increased by more than 600% at its peak in September 2021, causing further burdens for all parties involved. Although there is a clear downward trend, according to data reported by statista.com, rates in August 2022 are still 300% higher than before the pandemic.
Managers need to rethink supply chain models to better reflect the modern reality. The logical solution seems to be moving production capacity to factories closer to the customer, which would greatly improve the current situation, even at the expense of increasing the price of the final product. While such a move was impossible just a few years ago, today, due to raw material shortages in the industry and drastically rising freight costs, it doesn’t seem so abstract any longer.
An additional benefit of this solution is a significantly shorter lead time, which gives a considerable competitive advantage. Faster delivery also reduces the turnaround time for complaints about products that don’t comply with company guidelines.
Changing relationships between buyers and suppliers
Another element that contributed to the current situation was a poorly diversified supplier base. Many companies had relied solely on one or two suppliers in their purchasing strategies. This worked well before 2020 but later began to involve major risks. The current trend shows that companies now have lists of alternative and backup suppliers who can fill stock gaps when needed.
In addition, the current practice in concluding contracts has been reversed, earlier suppliers sought to extend contracts and guarantee product prices, and currently we are observing a trend in which the buyer is interested in obtaining the greatest possible price stability and predictability in the long term. This applies to both traditional sales and e-commerce.
Digital transformation as a means to ensure stability
All these steps will probably bring tangible benefits in the future, but they should also be complemented by automation and digitization, which still aren’t widespread enough in purchasing, but which Sii Poland has successfully implemented in other industries. Sii experts provide not only operational but also process support in this area. They implement changes that have a measurable impact on costs as well as on the safety and efficiency of the entire supply chain.
Operational purchasing has been or will be largely automated in the near future. These changes will also be followed by the development of industry specialists. A good buyer won’t just have to negotiate every offer but will need to observe the sales market of their own company. Meanwhile, professionals with the right qualifications and analytical skills to introduce effective purchasing strategies will be the most in demand.
Global supply chains in the post-pandemic reality
Managing the supply chain crisis requires manufacturers and vendors to make several strategic changes. This probably doesn’t mean the end of globalization, but rather a re-examination of existing supply chain structures with a decisive shift toward regional manufacturing. If we focus additionally on implementing effective digital strategies, automation, and smart human capital management, we’ll undoubtedly be able to adapt quickly to the new reality, and we’ll certainly be much better prepared for a similar situation, should it ever occur in the future.
Find out how Sii experts implement effective changes in supply chain management. Explore our services or contact us to discover the benefits for your company.