Among the many lessons that the coronavirus disease 2019 (COVID-19) pandemic has taught is how important the global supply chains and the logistics that keep them running are to the global economy. Despite weathering the effects of the pandemic relatively well, especially in comparison to industries like travel and transportation, the logistics industry was still hit with the disruption caused by the consequent lockdowns and quarantine measures imposed by governments in an effort to contain the spread of the virus.

Global consultancy firm McKinsey & Company noted that logistics players typically rely on a wide-reaching international network to achieve scale within the highly competitive and relatively low-margin industry.

“With trade demand plunging by as much as 22% in the second quarter and significant drops continuing in the third, many road-, air-, and ocean-transport companies are reporting large declines in volumes from the same periods last year,” McKinsey wrote in an article published in January.

Such challenges, the company added, offer new opportunities for the industry to evolve, revisit business models, formulate new strategies, tap new markets, and introduce innovative new service offerings.

“The most resilient logistics players are using this difficult environment to position themselves for future growth while remaining flexible enough to respond to shifting conditions,” McKinsey wrote.

A recent study released by NTT Data on the current state of the global supply chain suggested how the best players in the industry are managing to make the most out of the crisis. The 2022 26th Annual Third-Party Logistics Study, which included data gathered earlier this year from surveys and one-on-one interviews with almost 350 companies, also highlights several ways the industry can change to limit future disruptions: by taking advantage of advancements in technology and the reshoring of production.

Smarter, faster, better supply chains

The increased use of technology has the potential to create more intelligent, more agile supply chains and relieve some of the stress in the industry. Emerging technologies such as 5G, real-time data transmission, robotics, Internet of Things and data analytics can all provide the industry with valuable insight into the status of different areas of the supply chain, all while giving logistics firms the flexibility to respond to immediate issues.

According to the study, just over half of third-party logistics managers (56%) said they feel it is moderately or critically important to provide 5G-enabled services to their clients. “5G reduces the amount of latency, so it is much more real-time, which is important because there is a large amount of data that has to travel back and forth,” Dave Bushee, senior vice-president of Information Technology for Penske Logistics, one of the main sponsors of the study, said.

Sylvie Thompson, a supply chain consultant with NTT Data Services, further added that smart factories and warehouses can increase square footage capacity and autonomous processes could address labor shortages — to an extent.

“Tech-driven productivity improvements can only help so much,” she said. “No amount of technology is going to resolve some of the capacity issues, but it will give us more agility to adjust to maintain production.”

This is not to mention innovations in last mile delivery. The final step of the journey of a product from its source to the buyer, last mile delivery typically has been both the most expensive and time-consuming part of the shipping process.

However, with the rise of crowdsourcing local services through digital platforms, retailers are exploring their low startup costs, asset-light operations, and improved customer experience to ease their last mile delivery woes. With crowdsource technology, retailers, logistics partners, and consumers have the ability to directly contract local, non-professional couriers to make faster deliveries.

The growing significance of regional and domestic supply chains

Lean, just-in-time inventory management had been the standard strategy for supply chains for years, allowing for reduced inventory levels and costs at the expense of resilience and agility. With COVID-19, however, priorities have shifted and logistics companies are now forced to reevaluate and reformulate their contingency plans and risk mitigation strategies to cope with the disruption.

Almost two-thirds of shippers in the NTT Data survey (68%) believe supply chains have become too global and must be balanced towards more regional and local/domestic ecosystems.

Several factors such as more restrictive trade policies; changes in tax implications and government regulations; increased awareness of supply chain vulnerabilities; an increased need for supply chain resilience; and new sources of raw materials and supplies all drive this global rebalancing. Regional supply chains must be resilient enough to endure unforeseen shocks without resulting in raw material shortages, delays, and increased transportation costs.

“When a global link breaks, regional links need to be self-sustainable,” Ms. Thompson pointed out. “Whether we like it or not, all supply chains are related. Until the world gets the virus under control, supply chains are going to continue to be disrupted.”

According to the study, 83% of shippers reported disruption in the supply of key materials this year compared to 49% of respondents in the 2021 survey.

Also, 83% of shippers said they plan to adjust sources of supply as a direct result of efforts to rebalance towards regional and local/domestic sources.

Furthermore, 68% said supply chains have become too global and 45% of the companies surveyed anticipate adjusting production locations over the next three years. Such adjustments will hopefully minimize the ripple effects of a single breakdown in the global supply chain.

What defines the logistics firms of the future

McKinsey, in their own studies, have pointed out that growth strategies of logistics firms that outperformed during past crises tend to focus on four directions: growing the core business, undertaking geographic expansion, undertaking value-chain expansion, and moving into adjacent industries.

“During the last economic cycle, the logistics outperformers focused primarily on two of those four: investing more deeply in their core businesses by enhancing existing competencies, improving operational efficiency, and developing technological platforms; and venturing on geographical expansion enabled by M&A (mergers and acquisitions),” McKinsey wrote.

According to McKinsey research, many of the outperformers seem to be continuing the strategic directions they set before COVID-19 hit.

“The strategic moves of the through-cycle outperformers suggest that logistics players looking to come out strong into the recovery should prioritize the core business, seek geographic expansion opportunities, and use M&A as a platform for growth. Doubling down on the core business and boosting main competencies can help companies bolster their existing competitive advantages, improve economies of scale, or expand their operational networks,” the firm concluded.

“Developing digital platforms to connect with customers can deepen client relationships and create innovation-driven growth. Companies should also explore pockets of growth within the core, focusing on customer verticals with the biggest profit pools and shifting the portfolio mix to higher-margin and higher-growth offerings. Finally, the economic downturn may present potential targets for M&A, provided the acquirer’s own balance sheet is strong enough for such investments.” — Bjorn Biel M. Beltran

RELATED ARTICLESMORE FROM AUTHOR