Two well-known C-level logistics executives addressed myriad supply chain and logistics issues, with a look at both the present and what could be in store for the future in the keynote session at the “Groundbreakers 2022: Future Ready. The Supply Chain 2.0” conference hosted by San Francisco-based real estate investment trust company Prologis this week.
The session, which featured Prologis Co-founder and CEO Hamid Moghadam and Dave Clark, Co-CEO of San Francisco-based freight forwarding and customs brokerage services provider Flexport, began with the executives taking a look at what they viewed as the key trends and themes within the supply chain.
Flexport’s Clark explained that there is patience in the supply chain’s recovery at this point.
“It has been a long couple of years for the supply chain, with lots of delays and every issue imaginable, it seems like over the last 24-to-36 months,” he said. “But when you look at what is happening with the freight markets, costs are starting to plummet as capacity is freeing up, there are also still some shortages. As you look to the middle of 2023, you will see much of the supply chain start to normalize.”
Prologis’s Moghadam observed that a lot of the constraints on the pipes that are connecting different areas of the world are being relieved, with the caveat that there are going to be two constraints that will continue.
“One is labor. There is a real shortage of labor and that raises havoc with the supply chain,” he said. “And the second thing is a place to put all of the inventory, because people are carrying more inventory to be able to deal with the [supply chain] resilience issue, and we are running out of places to put it.”
Moghadam said given the spotlight the pandemic put on the supply chain that it is likely that people will ever stop talking about the supply chain, as it is top of mind for most executives, and agreeing with Clark on the mid-2023 timeframe, for a return to supply chain normalcy, with the hope that supply chain issues will not be as acute as they are at the moment.
Looking at the current outlook, Clark put the current state of the supply chain into perspective.
“Everyone in the supply chain knows that the supply chain always has problems,” he said. “If you work in supply chain, every day is some new challenge. It has just been extraordinary and blown up in an unprecedented way in the last few years.”
Globalization: The intersection of the manufacturing abroad with looking at near shoring options received a fair amount of attention during the session.
Moghadam noted that while there is a lot of talk about globalization, when taking a look at where things are manufactured, many companies are focusing less solely on China and are opting for a “China plus One”-type of approach, in leveraging another manufacturing facility in a different Asia-based locale, where their products are being manufactured. Or, they are manufacturing in Mexico. But we [U.S. companies] don’t have as much capacity as we would like to, in order to do more manufacturing here.”
From Clark’s perspective, he stated that globalization is one of the greatest things that has happened to humanity, explaining that the invention of the shipping container, coupled with the movement of goods globally, has brought more people out of poverty than anything in history, as well as serving as a key enabler of global peace.
“The interconnectivity of countries and economies puts deterrents in place that greater than simple political deterrents,” said Clark. “I do see globalization continuing. I think there is a moment where there is a lot of a sense of fear due to a lack of availability and all of the challenges in the supply chain, but as soon as that passes, that memory is typically very short and things go back to: what is the lowest cost? highest quality? fastest path forward for delivery? I think globalization is going to be a part of that for the foreseeable future.”
Taking that a step further, Moghadam said that without globalization, the current levels of record-high inflation would be even higher.
Supply Chain 2.0: When asked how they picture Supply Chain 2.0 and what they view as the types of opportunities for transforming supply chain architecture, Flexport’s Clark said that digitization is a big part of that, which is also connected to automation.
“You are going to see a tremendous flows, not just on automation…but also on things like automation in the form of robotics in ports and in facilities and manufacturing,” he said. “That automation is going to be a huge key for supply chains in the future. And then there is consolidation. There are so many people moving things around the world that are not able to fill a full container or are unable to achieve container maximization. If ships and containers run not full, that is incredibly bad for the environment, in terms of how much fuel is wasted in transporting air rather than the product. I think that is a place where technology companies can bring together freight to help consolidate and take energy out of the system.”
As for how to effectively apply automation to inventory management, given that over the course of the pandemic it was common for people to have too much of a certain item and not enough of another, Clark tied it to the need for agility and predictability.
“Predictability allows you to be more planful for how much inventory you need,” he said. “Speed allows you to take inventory out. Imagine if you could take two days of working capital out of the world’s inventory? If you could take every store, every good and every material and make two days less of it…that is trillions of dollars, [and] the amount of carbon you would prevent from being released is enormous as well.”
Economic trends: With consumer spending and demand levels moderating in recent months, the panelists addressed how that, in turn, impacts supply chain and logistics operations.
Moghadam made the case for how everybody is trying to take slack out of the supply chain because of the capital efficiency that comes with that.
“But that is really hard to do when Shanghai shuts down for three months or we have a pandemic that totally changes demand patterns with people sitting at home consuming a lot more products and doing fewer experiences and spending their money on goods—which need to be transported but nothing is being made at the other end of the pipeline,” he said. “So, you have his dichotomy of efficiency of capital and the environmental impact and then you have the reality of getting stuff to people where and when they need it. There are only two answers: one is more technology and information and visibility, and the other is carrying more inventory in different spots along the chain.”
The last 20 years have been about the efficiency side, he said but starting about two-to-three years ago, people started realizing they had squeezed inventories too tight and are losing sales.
That is notable, according to Moghadam, because losing a unit of sales more than wipes out 10 units of efficiency.
“I think the world is going to go to carrying more inventory—we figure about by 10%—to deal with all of these disruptions,” he said. “The disruptions can happen on the demand side, like with Covid, or they can happen on the supply side. You can get a container ship sideways in the Suez Canal for a week and things then don’t work in the way that engineers had planned them.”
And with talk of a pending recession, or perhaps the distinct possibility that the economy is already in one, Moghadam cited clarity and communication as being imperative for companies to navigate the related challenges.
The top Prologis executive estimated that around one-third of people working at Prologis and Flexport have yet to see a true recession, as things have been heading straight up overall. companies have not seen a recession; it has been straight up.
“This recession will be different,” he said. “I don’t know of too many where we went into one with a sub-4% employment rate. I think the probability and depth of a recession, unless the Fed really gets out of control, is going to be a lot more muted than some of the downturns we have previously seen. You have to be decisive and very transparent with your people and tell them the truth and then tell them and what you are planning to do about it and how to make lemonade out of the lemons you are being handed. People focus too much on cost cutting and adjusting the size of their business while losing sight of how you are going to compete when you come out of it on the other end. Because the foundation you build during the downtime is exactly what is going to propel you in the good times.”