#manufacturing

Covid-19, Force Majeure and Impact to Global Supply Chains

/ irrosca / Leave a comment

On a previous supply chain minute I focused on a topic I’ve discussed on the show before which is force majeure as a direct impact of Covid-19. This is something I highlighted earlier in February on the show, as I believe it will have long lasting effects across industries so let’s dive deeper into what it means and what’s happening globally with force majeure declarations.

Force majeure- what is this? The general contracting language for this clause reads something like this: Neither party shall be liable to the other for failure or delay in the performance of its obligations under this Contract to the extent that this is caused by matters beyond the reasonable control of the party affected, which in short means if either party cannot meet their contractual responsibilities due to extenuating circumstances force majeure can be declared without any penalties.

Force majeure is a clause that generally protects the organizations in case they cannot conduct business according to the pre-agreed terms due to an unforeseen event out of their control. What this means for individuals is that if we purchased a service, such as an airline tickets or hotel stay, and due to any situation covered by force majeure the business could not provide the service, consumers cannot hold the business legally responsible if this is invoked. In this situation, consumers may have other options like taking a credit for later use, and hope this is an isolated, one-time event. For international businesses, however, the situation is different.

force picThis brings to mind an earlier instance when force majeure declarations were widespread, during the 2014-2015 International Longshore and Warehouse Union (ILWU) strikes affecting 29 US ports and impacting global trade. The negotiations between ILWU and the Pacific Maritime Association lasted many months leading to port closures, chassis shortages, container ships stranded at distant anchorages, and racking up tens of thousands of dollars a day in contractual demurrage and detention charges. After months of turmoil global organizations impacted resorted to invoking the force majeure clauses within their contracts.

At the time I was working with a global manufacturer and distributor of home textiles with printed licensed graphics such as NBA, NFL, NHL and Disney. Some may recall, the port strike did not conclude until after the holiday retail season in the spring of 2015, and once things got “back to normal” our company was stuck with hundreds of containers full of holiday merchandise, as many other retail distributors. In our case the product was Frozen themed home textiles stuck in shipping containers at ports across the West Coast. This inventory was slated for holiday sets in large retail stores, but given the port delays the good were released months later. Raw material suppliers, manufacturers, carriers, and freight partners had declared force majeure so there was nowhere to turn as holding costs for obsolete inventory continued to grow. During that time the situation was somewhat isolated, now we are looking at a far greater number of organizations who may resort to force majeure declarations.

When organizations declare force majeure, ripples are felt throughout the entire supply chain. The current pandemic has pushed global organizations to invoke force majeure clauses- let’s see what’s impacting global supply chains?

  1. DHL Global Forwarding– has declared force majeure first for it’s Europe- Asia trade routes, however later in March this was extended globally. With this declaration DHL has reserved the right to make changes to all or a part of its air and ocean services.
  2. Ceva Logistics has put forth a declaration stating that under current circumstances any previously agreed rates and charges can change, and additional surcharges can be applied through invoking their force majeure clause.
  3. Royal Enfield one of the oldest motorcycle manufacturers globally has been impacted, announcing that their force majeure clause may extend beyond the 21 day lockdown that India has declared.
  4. The Chinese government issues force majeure certificates to over 1,600 organizations with specific focus in the gas and oil, textile, mining and machinery industries. Below is a breakdown of the allocated certificates by sector.

China

  1. India has become the center for force majeure declarations after the country announced a 14 day quarantine on all goods coming from China or any other impacted nation; these delays are specifically impacting the energy sector and the country’s imports of liquid natural gas.
  2. Sports- will a force majeure clause determine if the NBA is required to pay the players for a season that has not been played and the current decision to postpone.
  3. Global trends show force majeure are more prevalent in emerging markets and with significant impact to the energy sector– this can have long lasting effects on local supply chains and bottom of value chain contributors.
  4. The mining sector has seen a high number of organizations declare force majeure impacting mining operations as well as suppliers who are unable to make deliveries of product already ordered.

 

Some force majeure clauses specifically exclude pandemics and global health crises, others will explicitly include these- when was the last time you checked this contract clause? Will this lead us to think differently when negotiating supplier and vendor contracts in the future?

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People Will Keep The Lights On- Warehouse Management of Tomorrow

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Robots, algorithms, automated answering machines, self driving cars and unmanned drones….Are organizations moving closer to the lights out supply chain? Not. Most organizations have learned that keeping a close pulse on their customer’s market trends and utilizing this valuable information to make supply chain decisions can improve the brand growth and ROI. There are certainly technology solutions aiming for a lights out outcome, and market leaders, like Amazon, increasingly investing in automation and testing new solutions; however even from Amazon the prospect of a lights out fulfillment network in decades away.

Supply chain is the new competitive weapon of the business. As consumer closely scrutinize every business decision of their favorite brands, the supply chain ability to be accurate, timely and deliver goods as promised has become more important than ever. Progressive organizations are leveraging their supply chain and creating competitive advantage by building stronger partnerships with their main suppliers, diving deep into last mile delivery solutions, and incorporating the voice of the customer in forecasting and supply planning.

1.      Build Strong Partnerships with Key Suppliers

Companies cannot guarantee the integrity of their supply chain or quality of their product being far removed from sourcing and manufacturing processes. The growing expectation of accountability from consumers is pushing companies to become more engaged within their supply chain, build closer relationships with original equipment manufacturers and raw materials providers. Millennials prefer to make procurement deals directly with manufacturers- cutting out distributors. This process helps ensure tight quality controls, improve direct from factory cost savings; it also impacts margins and health of distributors who have thrived in this space. A research study conducted by UPS shows that millennials prefer researching companies online using tech channels that may be less familiar to older buyers. This trend has seen a 20% increase in the past two years and is expected to continue growing over the next 3-5 years, potentially eliminating a percentage of middle market distributors.

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As companies shape stronger partnerships in their supply chain and become more informed about their provider’s operations, new opportunities for data sharing, process improvement and collective costs savings will emerge. Currently, supply chain professionals struggle with the types and integrity of data available within and outside of the enterprise. Lack of accurate data sharing and collaborative analysis causes demand forecasting, supply and inventory bullwhip problems.  Accurately predicting and communicating demand trends across the entire supply chain will help businesses negotiate year-over-year price reductions in the order of 3%-5%. These are a direct result of setting shared goals with suppliers’ brands trust over time.

Successful organizations need to be connected to their partners to ensure real time sensing of risk, changes in demand, or updates to orders. In supply chain, as in business at large, success is 100% dependent on strong partnerships, the sustained consolidation of the marine shipping industry over the past five years is a clear indication that together we are stronger.  Will we start to notice more vertical integration of organizations across varying industries?

2.      Dive Deep into The Last Mile

This is the #1 opportunity for the supply chain to interact with the customer, and oftentimes one of the most impactful times in the customer delight process of any purchase. The last mile offers unique opportunities for optimization, and cost savings with a focus on guaranteeing customer happiness and brand loyalty. Many traditional, and online only retailers focus on improving the last mile service with real time order updates, which include reverse logistics, and sometimes even. Consumers expect products to arrive on time and not damaged, with continuous visibility into the delivery status. Some organizations, such as Amazon have gone so far as to ensure the package is pleasant for the consumer to open, while maintaining packaging costs low with their SIOC (ship in own container) program.

Over the past few years, as ecommerce growth has increased, leading companies invested pointedly into research and development for autonomous vehicles to help last mile delivery processes. Other service providers are expanding partnerships outside of the traditional shipping industry to continue improving services and transit times to consumes. For example, FedEx is increasing its partnership with Dollar General (8,000 locations) and Walmart (500 locations); the company is also investing in additional store fronts to continue servicing their most important customer sector, ecommerce SMBs. According to FedEx CMO “the FedEx Office retail locations bring in some of our most profitable small and medium business because [of] the experience they get when they are shipping…and they want the peace of mind of proper packaging.” This illustrates an understanding FedEx of just how important success in the last mile is for all involved.

Last mile delivery is most impactful for the food industry, there are numerous opportunities to learn from innovations in this space. Whether prepared or online grocery, organizations providing these services to consumers must be even more vigilant of last mile services.

3.      Listen to the Voice of the Customer

Traditional supply chain solutions were designed to solve problems within the walls of the organization. Globalization forces all businesses, including SMLBs to think globally. Most realize that success with continued growth fully depends on outside factors, some out of our immediate control but some which can be influenced. Analyzing existing or historical data only teams do not get full visibility of their customer trends. This approach delivers sub-optimal supply and demand forecasting models and leads to making decisions on based fragmented information.

Supply chain teams require real time point of sale data, consumer online sentiment, alongside partner driven forecast to assemble the monthly demand and supply planning. To successfully utilize the information organizations must diagnose customer behavior to prescribe the right market segmentation. Customers are getting closer to the supply chain- this is especially noticeable for higher end brands and items, where customers have immediate and direct impact on the well being of the organization, but this is increasingly truer even in highly commoditized consumer goods organizations.

Tracking the brand, the consumers who interact with it, and translating this data into intelligent information that can help drive precise winning decisions. Supply chain needs to work with the data and truly know the customer. Who drives the business? E-commerce companies such as Amazon have huge amounts of customer data that can be used to target specific people and convince them to buy certain things. With mobile apps and loyalty programs, chains such as McDonald’s, Burger King, and Starbucks are attempting to similarly track customers, adjusting options to convince them to spend more. Supply chain teams need to be in the know of all these push/ pull strategies and collaborate cross-functionally to truly understand consumer trends.

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So, are we heading towards an era of lights-out supply chain management? No! Supply chains, as most consumer dependent businesses, rely on people to run them successfully. People to build the right supplier partnerships, people who can strengthen the connection between a brand and customer when the product is delivered, and people who can reach into the hearts of consumers and understand what drives them.  Lights Out? People in the Supply Chain of Tomorrow.

This article first appeared on https://www.letstalksupplychain.com/blog/- make sure to visit Let’s Talk Supply Chain website for the latest #supplychain discussions, videos, articles and podcasts.

Logistics and Supply Chain E-Planning: Last Mile Delivery Strategy

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Last mile delivery services can mean different things to organizations depending on the key revenue driving marketplaces. In some organizations last mile can be US domestic only, for some it could expand across all of Americas and others it can cover a global marketplace. This article focuses on steps organizations can take to resolve last mile delivery challenges in North America with current service providers constantly competing and changing their service levels.

  1. How To Manage Conflicting Priorities For Different Business Units?

 Business units within organizations have metrics tied to either cost or revenue, while all teams are working towards the company’s common goal. Generally, for most retailers, and consumer goods companies these common goals revolve around providing customers with the best service, while growing the company’s market share at the lowest cost. As such, when e-commerce expansion the impact of last mile delivery costs become significant in strategic decisions such as: inventory optimization at different location and site optimization through a well-developed distribution and logistics network. Supply chain leaders must really understand where their inventory is located and how this empowers the business to interact better with customers. Offering ground delivery services with 5 business days in transit is not optima- the customer is waiting longer for the product and the company is paying more for ground or expedited delivery.

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These factors can meaningfully impact the costs of last mile delivery and the service levels delivered to end consumers- both of which are important attributes.1. How Do

2. Last Mile Delivery Costs Affect Sales And Growth?

 When a business has a clear consumer- centric strategy around increasing its e-commerce footprint, the first question that needs to be clarified is around shipping costs. Will these be covered by the business or passed on to the customer?

According to leading e-commerce fulfillment service Flexe, shipping fees are the number 1 reason for cart abandonment in the US.

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Some questions to ask prior to forming a strategy include: will free shipping apply to all orders, all zip codes, even international? Is there an order minimum- will this encourage customers to add more items to their cart, or will it cause more cart abandonment? Is the shipping service level the determining factor for consumer shipping costs?

From the UPS “2017 UPS Pulse of the Online Shopper” report:

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  • 74% of consumers said options for free shipping were the most important part of checking out online
  • 94% of shoppers have taken action to qualify for free shipping

 

 

 

3. Supply Chain Factors To Consider For A New Strategy?

There are numerous factors to consider when reviewing the company’s logistics network and last mile delivery, cost should not be the only input. Is the company’s goal to lower the time in transit to the end consumer? If so- then the best solution for the logistics network might be a multi-node location which both optimizes last mile delivery costs and time in transit, however this does not come without challenges on the inbound side. Depending on where the company’s products are manufactures, assembled and where they enter the American market some of the below considerations are of utmost importance:

  1. Production consolidation
  2. Order frequency
  3. Inbound/ Outbound transportation costs
  4. Risk of damage
  5. Number of touches and varying labor costs
  6. Holding costs
  7. Customer service

Improving last mile delivery metrics is a balancing act with competing goals across internal business units. A deep data dive into marketplace information and a stable logistics partner are crucial to successful change. The below diagram was presented by Expeditors Logistics and I have always found it to be a very useful visual for this ongoing balance:

44. Long Term Vision

Understand where the company’s current consumer base and forecast for future growth. Given current market trends and the impact of e-commerce organizations should consider supply chain planning- location and inventory optimization- as e-planning and account for all available and real time inputs such as click, views, product reviews to help predict future demand and trends. Leaders in future markets will be the companies who can see, interpret, and act on data the most efficiently on a global scale.

Supply chain and operations changes are costly, risky and take a long time to implement. Organizations must understand and have a clear vision for future marketplace development prior to adjusting for last mile delivery improvements and supply chain flexibility.

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Using current sales data and partnering with a leading service provider who can assist in conducting a thorough supply chain gravity analysis can help ensure that the company’s long term operational strategy will support the organization’s growth and expansion goals.

5. Immediate actions

Key drivers of success are data and technology. Organizations might supply a different product to consumers but at the core of success lies the ability to gather all pertinent data and translate the story it is telling. First and foremost, organizations should invest in the right technology to get as close to the information generated by end consumers as possible, then consider the above outlined goals.