Supply chain flexibility is strategically critical for retailers, brands, and logistics service providers and its influence permeates the rest of what's happening in logistics.
Key Takeaways
- Companies that successfully navigated the pandemic were 2.5 times more likely to report pre-existing, advanced-analytics capabilities in their supply chains
- Providers, like Link Logistics, are adding 30 million square feet of warehousing space to meet demand, signaling more capacity may be online this year
- Inventory levels, which increased to 61.6 on the Logistics Managers Index during the holidays, will continue climbing as brands and retailers build safety stock
Manufacturing shutdowns in China at the start of the pandemic were the first ripples in what would later become a supply chain dislocation storm. The initial disruption threw the supply chain into disarray and highlighted the issues embedded in inflexibility.
For decades, all links in the supply chain operated around fixed, capital-intensive nodes to bring goods to consumers. This model functioned as intended, barring no disruptive events shook the delicate ecosystem; however, the pandemic has been a continual series of disruptions.
The eCommerce boom, manufacturing challenges, demand imbalances, and labor issues forced all parts of the supply chain to rethink strategies. And now, the remedy to the problem is clear—leverage flexibility to shorten the length of the supply chain.
Brands and retailers can reduce failures like stockouts and fulfillment issues through logistics flexibility, which allows them to react effectively to continually shifting demand and consumption patterns, now staples of modern commerce.
"They're (businesses) realizing, right now, they're losing business because they're kind of stuck with a very long, very efficient—but very inflexible—supply chain."
What is supply chain flexibility? #
Supply chain flexibility is an increasingly noteworthy term tossed around in the industry, sometimes without ample context. It’s a fairly broad concept, but in its simplest, it refers to the strategic shortening of the supply chain, increasing the diversity of suppliers, building larger safety stock levels, and offering optionality to consumers. A flexible supply chain allows for accelerated growth by enabling more dynamic product launches, optimized fulfillment solutions, and effective retail partnerships.
A flexible logistics model is asset-light. It typically comes without term-length agreements, square footage restrictions, or location constraints. It improves omnichannel operations by extending the reach of eCommerce fulfillment networks, providing rapid retail replenishment, and responding to supply chain disruptions and shifting market dynamics.
The pandemic highlighted the importance of these concepts and acted as an accelerant to bring flexibility to mainstream attention quicker than once thought.
Ellen Kullman, former Dupont CEO and current director at Goldman Sachs and Dell Technologies, commented on the need for supply chain flexibility.
"They're (businesses) realizing, right now, they're losing business because they're kind of stuck with a very long, very efficient—but very inflexible—supply chain," Kullman said.
Building flexibility is not limited to a firm or vertical. It’s part of every facet of the supply chain and could shape the trends coming this year. Understanding what flexibility means is critical to predicting what supply chain trends are influencing the market.
Supply chain trends influencing shippers, retailers, and service providers #
Many thought 2021 would bring resolution to the supply chain problems of 2020. However, some of the pandemic’s first-year challenges worsened, particularly in the ports and domestic logistics capacity. Issues were so prevalent the media made supply chain a hot topic, as it made its way to late-night talk shows and even musical acts.
The novel attention to the global movement of goods leaves many wondering what else 2022 will bring. The following macro-trends will likely continue to play out, affecting shippers, retailers, and warehouse operators in the process.
Forward-thinking organizations differentiate through flexible logistics strategies
Supply chain tech offers new solutions to old challenges
More supply chain disruption is on the horizon
Forward-thinking organizations differentiate through flexible logistics strategies #
The supply chain is no longer an afterthought for shippers and retailers. Both must create effective logistics strategies to meet the modern consumer's expectations and enable growth.
eCommerce exploded in the past two years, and its prevalence as a purchasing channel shows no signs of slowing down. In the last 18 months, eCommerce grew the same amount in 10 weeks as it did in the previous 10 years. And eCommerce surged 11% from November 1 through December 24, accounting for roughly 21% of all holiday sales in 2021.
As it continues its emergence as a significant purchasing channel, consumer expectations are increasing in tandem. Shoppers expect products on their doorsteps faster than ever. Eighty-five percent of surveyed consumers state they will shop elsewhere for quicker shipping options. Moreover, 62% of shoppers make repeated buying decisions based on a retailer’s shipping speed. And as many as 57% of shoppers increase the amount of money they spend with Amazon because of Prime One-Day and Same-Day delivery.
Heightened consumer expectations leave retailers and brands racing to deliver at an ever-increasing pace. Consumers have proven they will find retailers and brands that have product on hand and can get it to their customers quickly.
But fast delivery comes at a price. eCommerce is logistics-intensive, and costs to store and ship goods continue to increase year-over-year (YoY). From 2020 to 2021, transportation rates rose by 23%.
Likewise, warehousing costs drastically increased. According to the Logistics Managers Index, supply chain prices reached an all-time high in November of 2021, up 14% in YoY comparisons. Despite double-digit price increases over the past year, supply chain professionals expect rates to climb again.
To compete with the challenges of the eCommerce marketplace and increasing input costs in 2022, shippers and retailers will rethink their supply chain strategies, adding flexibility where possible.
Expect companies to reconfigure logistics networks to move inventory closer to demand centers. This flexible solution to finding demand and relocating fulfillment to meet it reduces shipping times and stockouts and mitigates rising logistics costs. Supply chain flexibility also allows organizations to react more quickly to seasonal changes in demand and offset the challenges of peak hedging capital expenditure in times of uncertainty without forgoing necessary scaling initiatives.
"The success of an organization's planning was strongly linked to its use of modern digital tools, especially advanced analytics."
Supply chain tech offers new solutions to old challenges #
Supply chain technology and automation have been widely discussed topics for some time. However, as it did elsewhere, Covid thrust their importance to the forefront, highlighting their criticality in enhancing flexibility initiatives, and illuminating otherwise unseen parts of an operation.
There is a continual emphasis on visibility, control, flexibility, and efficiency in the industry and the solution to those challenges often lives in the practical use of cutting-edge technology.
The term “technology” can conjure grandiose images of automated fulfillment centers and drone delivery systems. But the application of technology is often more subtle and doesn't need to be on the far-end of the robotic spectrum to impact shippers and LSPs significantly.
Basic implementation of scripted Excel files or WMS scanning barcodes makes a difference in an operation's visibility and efficiency. In comparison, more advanced deployments like IoT-based Pick-to-Light Systems or full-robotic warehouses can drastically increase efficiency but are more capital intensive.
The key to unlocking the full power of a supply chain operation lies in suitable decision-making about tech. Choosing which technological implementation is correct for a brand, retailer, or LSP depends on their capabilities, ability to allocate capital expenditure, and business needs. Although the proper mix of automation and human touch may be firm-dependent, what is clear is the need for movement toward supply chain tech implementation.
In a McKinsey survey of supply chain professionals across industries, leaders stressed the importance of utilizing advanced sector technology:
"The success of an organization's planning was strongly linked to its use of modern digital tools, especially advanced analytics. Compared with organizations that reported problems, successful companies were 2.5 times more likely to report pre existing advanced-analytics capabilities. Of the companies that had difficulties managing their supply chains during the crisis, 71% say they are ramping up their use of advanced analytics."
Supply chain leaders in every sector are implementing the industry-agnostic benefits of advanced tech and data-synthesis capabilities. The report goes on to state, more than 50% of respondents in every industry (outside the healthcare sector) implemented additional analytics approaches during the past 12 months."
That number will grow in 2022 as organizations implement learnings from the pandemic-era. Brands’ and retailers’ ability to integrate some form of technological advancement into their supply chain practices will define their ability to react to marketplace changes and leverage flexibility’s benefits. Additionally, LSPs struggling to meet labor demands and compensate for rising wages, issues throughout 2021, can solve input challenges by investing in technology solutions. Expect to see a greater investment in supply chain technology suites in the coming year.
"This is likely to continue to strain on supply chain capacity well into the new year, and possibly through to 2023."
More supply chain disruption is on the horizon #
Despite two years of perpetual disruption, 2022 doesn't promise to be quieter. As demand and supply head toward righting equilibrium, more upheaval awaits.
No one can say for sure when the supply chain logjam, apparent in heavily congested port locations, will return to pre-pandemic conditions. It may continue to be a topic still dominating media attention, especially during H1 of 2022.
But, the efforts to remediate conditions throughout the domestic logistics marketplace could create different forms of disruption for parts of the supply chain. Some analysts foresee a bullwhip effect on the horizon.
Link Logistics, a Blackrock-owned provider, is spending $5 billion to build 30 million square feet of new warehousing space. This investment suggests a burgeoning trend that could manifest in H2 of 2022. LSPs and retailers, with the means, will continue to pour funds into infrastructure investments as the need for warehousing space is high.
CBRE Group Inc. estimates that for every $1 billion increase in online sales, the country needs an additional 1 million square feet of warehouse space. As eCommerce sales continue to grow, firms will add space.
This resource allocation will buoy available warehousing capacity and allow shippers to more easily find available fulfillment solutions. But in the back half of 2022, this newfound supply could outstrip demand as spending trends downward from its rapid growth amid fresh economic and inflationary concerns.
Analysts at Goldman Sachs predict GDP will grow 3.8% on a full-year basis in 2022, down from the 4.2% clip it initially cited. Additionally, Bank of America economist Michelle Meyer sees 2022 similarly, predicting growth but significantly slower than previous pandemic-laden years.
"While 2021 was a story of excess demand and a dearth of supply, we think 2022 will be one of rebalancing, albeit only gradually," Meyer wrote.
The latest Logistics Managers' Index (LMI) also suggests a coming bullwhip. Typically, inventory levels drop in response to holiday shopping as shippers and retailers clear out merchandise intended for shoppers. However, during 2021's final month, inventories rose to 61.6 in the LMI, an increase compared to a year earlier when the reading was at 56.8. It's also well above the 42.3 figure recorded in December 2019. These metrics represent a genuine concern that companies now have excess inventory.
"Some supply chains may now be carrying too much inventory—potentially a result of firms choosing the lesser of two evils and stocking up to avoid potential missed holiday sales." This could foreshadow a coming bullwhip effect in which supply chains over-ordered to avoid shortages and are now dealing with the burden of having too much inventory," the LMI report stated.
It also indicates that supply chain professionals expect inventory levels will grow as port congestion eases and logistics conditions normalize. Respondents were asked to predict inventory levels one year from now, their average value was 81.7, a significant increase from previous predictions.
"The month's report indicates that supply chains are now dealing with the aftermath of this herculean effort," the LMI said. "This is likely to continue to strain on supply chain capacity well into the new year, and possibly through to 2023."
While these trends could have downward pressure on rates for shippers, LSPs still bitten by labor challenges and rising inflation could continue passing higher warehousing costs to customers. Brands will have an easier time locating capacity but may see no break in rates, thus furthering the need for flexibility supply chain strategies.
Conclusion #
While analysts don't have a crystal ball, evidence suggests that supply chain disruptions are here to stay even as the pandemic wanes. Whether it is widespread dislocating events or changing consumption patterns and behaviors, businesses can respond with technology and supply chain flexibility. A lot is uncertain for 2022, but one thing is clear. Tech-enabled flexibility remains at the core of supply chain decision-making.
