The covid-19 pandemic which started small town in China spread quickly to over 160 countries across the globe. This created huge challenges for supply chain and logistics sectors, forcing firms to rework their sourcing and distribution strategies because of the sudden lockdown in many parts of the world. The unprecedented scale of the lockdown and the resultant disruption in production and distribution slowed down the Indian economy. Logistics is the crucial link which brings raw materials into the factory, and distributes finished goods across the country to the consumers. This article will focus on the current challenges of the logistics sector and the future trends as we come out of the pandemic. This article is based on a webinar of the same name on 28th April by SCMPro Forums.
The first signs of the Corona pandemic was evident around the time of the Chinese New Year. And the first sector to face this problem was the automotive sector. In the initial stages, most corporates felt this was a localized phenomenon. They did not expect it to become the global pandemic it turned out to be. The pandemic that is currently roiling the world economy has posed a number of challenges to global supply chains. This showed up in a number of ways. Across the country, most large firms in the essential commodities space had orders in hand, resources, and money. What they lacked was the ability to distribute products due to the absence of drivers. The first issue that logistics professionals talk about in the wake of the pandemic is the lack of drivers. A close second – more so for perishable commodity with Limited shelf life – is inventory management. To add to these problems there was a plethora of notifications sometimes in contradiction to one another. Another issue which requires close attention are the workers in the logistics space including drivers. Hindustan Coca-Cola, for example, has provided sanitizers and food to its drivers.
The Shift in Behavior
Consumer behavior has shifted in the wake of the pandemic – with a concerted move to on-line. The shift in channels because of the pandemic has upset the traditional planning in firms. E-Commerce and modern trade has emerged as a major channel, drawing customers away from other channels. Firms will have to invest in a supply chain where the order size will be small. This will put a lot of pressure on the supply chain after the lockdown.
For supply chains, the focus was on ensuring availability of raw material and the dispatch of finished goods as planned. Surprisingly, the logistic sector was affected first, when flights were cancelled. The suppliers started invoking Force Majeure clause, while customers expected their orders to be fulfilled in time. Multinational firms and firms who had a global footprint started interacting with their associates across the globe on the operational challenges. Firms gathered valuable insights through this process. This pandemic taught supply chain professionals a very valuable lesson – constantly monitor development across the globe and factor them in during supply chain planning.
This pandemic taught supply chain professionals a very valuable lesson – constantly monitor development across the globe and factor them in during supply chain planning.
Companies are using a few innovative practices to meet with the challenges of uncertain demand. Most firms have reduced their product range focusing only on the A Class Products. This will significantly improve the forecastability of these products. To lure migrant workers back to their jobs, Hindustan Coca Cola introduced an innovative COVID insurance – this is for workers who test positive to protect their income. The day they are tested positive, a sum of rupees two lakhs will be deposited into their bank account. This has extended to the distributor workforce as well. Significantly, firms are exploring the possibility of collaboration sharing their logistics capabilities. For example Hindustan Coca-Cola in sharing their Logistics with Hindustan Unilever. Unfortunately as far as collaboration goes, the evidence suggests that collaborations work when there are compulsions, but collapse once we come out of the problem.
Impact on sourcing
For the first time in living memory, the entire supply chain has come to a standstill across the globe. All modes of transport including air, sea, rail, and road came to a complete halt. With the exception of essential commodities. This is a first for all supply chain professionals. Many senior supply chain professional believe COVID19 pandemic will bring in some much necessary welcome changes. Industry professionals agree there will be a major shift in consumer buying behavior and in the way consumer makes decisions on the products and services she wishes to buy. Big challenge for supply chain professionals will be to redesign the supply chains keeping the new consumer expectations in mind.
Unfortunately as far as collaboration goes, the evidence suggests that collaborations work when there are compulsions, but collapse once we come out of the problem.
The post covid-19 world will see a realignment in the Sourcing strategies. China centric view will change. And along with it, firms will have to redraw their logistics strategies. For example, there is a skew in the goods moving into China and out of China, creating bottlenecks for Logistics. If this change is post COVID, the shipping lines will have to redraw their shipping lines. Another challenge we expect is the safety and sanitation levels of all vessels and aircraft will become more stringent leading to longer turnaround Times. This may necessitate addition of capacity by the operator. But due to the severe constraints on the balance sheet, and reduced cash flows, operators may find it difficult to augment capacity, leading to a Catch 22 situation. This means the cost of logistics will go up, the cost of doing business will go up, and the cost to the consumer will go up. Increase automation in the supply chain will see a temporary increase in supply chain cost. In the long run, performance improvements of the supply chain because of technology will bring down the overall supply chain cost.
Impact on Warehousing
Warehousing is an integral part of the logistics sector, and fortunately, it was on a strong growth path pre COVID. Number of policy initiatives like GST, reduction in corporate taxes, infrastructure status to the industry, the make in India push, and FDI into the sector has propelled growth of the sector.
However, once the Lockdown was in place, there were severe restrictions on the movement of goods. Add to it, people started moving back to their villages creating labor shortages. This was a major challenge for warehousing sector as they relied on migrant labor for their operations. Every day was a new day for the warehousing sector. You plan for something, only to realize the situation was different on the ground.
Given the extent of the lockdown and consequent effect on manufacturing, Logistic sector will see a flattened growth this year
The warehousing sector is one of the most resilient sectors of Indian economy and is likely to emerge quickest from the pandemic. Tier 2 and tier 3 towns are likely to emerge as major consumption drivers. Moreover, to improve efficiencies, firms will adopt technology in a big way, since availability of manpower will be a challenge in the near future. The migrant population which has moved back may not come back in time for factories to open.
Firms will see an increased diversification with respect to sourcing – greater attention to local sourcing leading to increased regional demand of warehousing space. Storage facilities are expected to be built closer to consumption centers – a probable shift from the present lean supply chain concept to ideal inventory levels resulting in companies re-assessing optimum inventory volumes and business continuity plans that could translate to greater demand. More companies are expected to adopt omni channel distribution model (Offline – Online). Large FMCG companies are likely to consider strategic tie ups with last mile delivery companies. Increased use of alternative transportation and distribution channels like Inland water ways, ports, ICDs and Railways. Local manufacturers (Made in India) will be preferred as imports will be highly regulated by origin and essential / non-essential categories.
However, air transport has performed successfully during the lockdown. We have transported more than thousand tons of products by air during the lockdown
Impact on Logistics
Given the extent of the lockdown and consequent effect on manufacturing, Logistic sector will see a flattened growth this year. But within the sector, companies will not have uniform growth. Organized logistics players strong balance sheet will be able to retain the customers and grow their business. Unorganized players who found a significant chunk of the Logistic sector will find it difficult to survive. After demonetization and GST, this is one of the biggest challenges for the unorganized sector. The inherent strength of the balance sheet and the adoption of digital Technologies to bring in efficiencies will help the organized sector grow at the expense of the unorganized sector. Post lockdown, customers will expect greater technology in the supply chain. Post COVID, businesses will see a sea change in the way they operate, not just in India but across the world. A few interesting Technologies that will see increasing adoption in the Indian corporate world like telecommuting for meetings, increased use of vertical Towers for monitoring operations.
The fast emerging situation in the logistics sector points to the emergence of five Ps – People – the ability to ensure people available for their jobs either at their desks or remotely is a major challenge. The second P is preparedness – most organizations were not prepared for this pandemic. Firms will need to put in place a business continuity plan going forth, if they do not have one already. The third P is price. In the current scenario firms are not worried about price but expect quick service. However, price will remain a sticking point. The fourth P is Proportion – firms that have diversified their business and have multiple verticals will have the ability to survive the pandemic. The fifth P is the place where the facilities are located. Most businesses have their distribution centers around the metros. And these are the places most affected by the corona virus. Some of the other cities like Hyderabad, where Agility has their Pharma distribution center has seen lesser disruption.
Another aspect is the rural demand which is likely to see an uptick post harvest. The rural economy will provide some relief to the businesses which have lost out on urban demand.
Air to the Rescue
This pandemic has seen a very unique development – both supply and demand has collapsed at the same time. And that too across the globe. During this pandemic, there were instances when the essential commodities had to be airlifted because of disruption to the road transport. Air transport has been considered the preserve of luxury goods transport. However, air transport has performed successfully during the lockdown. We have transported more than thousand tons of products by air during the lockdown. In fact passenger airlines converted there aircraft to carry freight during this pandemic.
The Future Direction
Firms which had high level of inventory within the supply chains where able to ensure product availability even when factories were shut. Fortunately, the government stepped in with the series of measures opening up economy for the movement of essential services. This ensured easy availability of essential commodities during the lockdown. All modes of transport – air, sea, rail and Road rose to the challenge and delivered.
Going forward, a few changes are obvious – the demand for non-essential commodities has seen a significant decline. Movement of trucks have been disrupted, and public transport has come to a standstill. Stoppage of industrial activity has led to a decline in income, leading to a reduction in consumption. Unfortunately, there is no data available by which firms can plan their future. One way out is to embrace scenario building. Another aspect is the rural demand which is likely to see an uptick post harvest. The rural economy will provide some relief to the businesses which have lost out on urban demand.
The pandemic also had some positive outcomes. The way offices and factories will work in the future will undergo a drastic change. For example, a person sitting in Chandigarh is doing customs clearance for a company, out of the JNPT port in Mumbai. Something that was not thought of as possible in the pre corona virus days. Overall, we will see the emergence of a technology driven, lean supply chain, where firms will rework their logistics strategy, and probably shift from a cost reduction perspective to a value addition perspective. Firms are today realizing the value of resilience – in their suppliers and supply chain. This will indeed be a welcome change. ♦♦♦♦♦