Supply Chain Trends

Over the last two weeks, we participated in three supply chain summits, conferences and/or annual meetings (with a west coast bent), and so we thought we’d pass on the key highlights and action items most relevant to our clients and colleagues. We gained a 360 perspective from ports, ocean freight, class I railroads, truckers, distributors, and manufacturers. What’s the bottom line? Chaos and resilience for the global logistics industry (with droplets of opportunity); opportunity for the manufacturing industry, technology, and talent.

Chaos in the Global Logistics Industry with Long-Term Potential

It was clear that the global logistics leaders are concerned. They have two key items boxing them into a corner.

• Tariffs: As we have discussed in our Tariff Playbook, tariffs are causing an upheaval in Southern California as the ports are largely dependent on deliveries from China (70-80%), and the supporting goods movement sector (trains, trucks, ocean, etc.) are seeing a 30% decline from the ports coming down the pike as sailings are cancelled. To give it a scope, 20,000 trucks support the ports. Freight originating from other countries remain intact, but they are small volumes in comparison. Freight from Mexico (rail, trucks) remain intact as well. However, the reason Southern California is impacted heavily is that 1 in 9 jobs can be tied to the ports.
• Competitiveness: As supply chains evolve (transition to regional supply chains, move from China to India (i.e.. Apple)), the goods movement sector will evolve as well. More freight will go directly to the East Coast, negatively impacting the Southern California ports unless they can gain a competitive advantage. Freight is frequently re-routed due to supply chain disruptions (i.e.. Panama Canal drought that caused a decrease in capacity, fear of port strikes) and geopolitical risks (i.e.. Houthi rebels attacking ships in the Suez Canal). Assuming the oceans are clear, companies will go to the “better” port (lower cost, available capacity, quick turnaround, truck and rail availability). Because of the overload of regulations in California, the logistics systems struggle. This will have to be resolved.

With that said, East Coast global logistics players will have an opportunity as supply chains evolve. However, they will not gain significant volume unless they are competitive. Distributors are impacted depending on location, regulations, and competitiveness as well. They have more advantages in the current environment than the ports as companies think about flexibility and resiliency, and because California remains a hot consumer market.

On the other hand, the logistics industry is gaining huge investment and focus with President Trump’s executive order to revitalize maritime power. The order focuses on building shipbuilding capacity, ability to support repairs, and the supporting port industries. To learn more about this topic, refer to our upcoming Supply Chain Byte. In essence, it will invest in the appropriate industrial capacity, talent and technology to support competitiveness in the global logistics industry and will be a boom for not only that industry but also supporting sectors in the longer term.

Opportunity in the Manufacturing Industry

Although some manufacturers will have negative impacts from the tariffs if dependent on China, the majority will have opportunity. Companies are reevaluating their end-to-end supply chain due to the pandemic, heightened geopolitical and supply chain risks, the tariffs and the changing competitive landscape. Although executives started talking about reshoring and investing in additional manufacturing capabilities in the U.S. after COVID, the current environment is pushing them to take action.

Companies originally moved to China for low labor costs. However, according to the Reshoring Institute, the lowest-cost labor market is no longer China; instead, India, Vietnam and Mexico take the title. In addition, products can be redesigned for automation, making labor costs of minor importance in most situations. Advanced technologies are making long dead U.S. manufacturers such as foundries competitive again, let alone industries supporting the production of items such as medical devices.

Thus, reshoring manufacturing and expanding manufacturing capabilities will gain significant momentum as companies look to take advantage of the consumer base in the U.S., mitigate the impact of tariffs, and the likely potential for lower taxes and a friendlier regulatory environment. In fact, over $5 trillion dollars of investments has been announced, with new investment announcements occurring on a daily or weekly basis. According to the National Association of Manufacturers, for every $1 invested in manufacturing, $2.67 is added to the economy (with supporting industries and trades). The proactive companies are expanding capacities and capabilities in preparation for a manufacturing resurgence.

Be ahead of changing circumstances and opportunities for growth by proactively rolling out and utilizing a SIOP (Sales Inventory Operations Planning) process. SIOP will provide predictive sales forecasts and customer opportunities, enabling your manufacturing operations and end-to-end supply chains to resiliently and efficiently reconfigure, adjust/ expand capabilities and secure appropriate capacities while maximizing profitability and cash flow. To learn about the best practice processes in rolling out SIOP, refer to our book, SIOP: Creating Predictable Revenue & EBITDA Growth.

Technology: Game Changer in the Next Decade

The U.S. developed the technologies behind China’s manufacturing success; however, they did not continue to improve upon them and utilize them. In listening to the developers of these technologies, they could not get regulatory support within a rational timeframe and cost to proceed. Thus, they went elsewhere. In addition, companies went to China in the search of low-cost labor. However, if you look at the full picture, historically, the developers of technology are in the U.S. That’s the good news. The bad news is that by letting technologies go, you aren’t keeping up with the latest advancements, learning the best ways to process and manufacture what’s required, and create momentum on the technology forefront.

Technology is the key to economic success. New technologies can obsolete current “advanced” technologies instantaneously. That’s quite dramatic. For example, with the advent of artificial intelligence, energy needs are exploding. Continuous improvement will not suffice. China is planning to go from 3 terawatts to 9 terawatts while the U.S. has plans to go from 1 to 2. As the saying goes, that dog won’t hunt! On the other hand, there are potential technologies that will flip this equation on its head. The most successful companies will be pursuing the technologies appropriate to their industry and to give them a competitive edge.

Advanced technologies will also enable continuous improvement in providing customer value and improved margins (efficiencies, waste, productivity, etc.). Whether it is utilizing a modern ERP system with advanced capabilities, rolling out artificial intelligence capabilities (predictive analytics, sales forecasts, advanced planning) or adding robots and other technologies (AR/VR), innovating and leading with technologies is of paramount importance. Technologies will be vital in driving manufacturing, supply chain and logistics success.

Talent: Don’t Leave Home Without It

Although technology will drive the successes of the next decade, there will not be technology without talent. The skills gap has been continuing to widen in the last decade as skilled resources retire and the needs escalate. Manufacturing and supply chain leaders must prepare for the future, embrace continuous learning, and utilize creative approaches to build and supplement talent. Refer to our article, “Future Success Relies on Manufacturing & Supply Chain Talent” for strategies for success.

Do not delay. If you have strong talent, ensure you retain your key people. In our experience in working with clients for twenty years, the most successful look for talent inside their organization and uncover hidden talent. In addition, you must build talent. It is no longer sufficient to hire talent as needed. You must invest in talent, train and educate, and provide mentors and opportunities for growth. Last but not least, you must also be on the lookout for top talent. When everyone else panics and has layoffs, bring on a key resource. You might find that it is the best investment you could ever make!

If you are interested in reading more on this topic:
Resilience in Supply Chain of Paramount Importance