Logistics Management Group News Editor Jeff Berman recently spoke with Spencer Shute, Principal Consultant at Proxima, a Chicago-based strategic team of procurement specialists with more than 25 years of consultation and supply chain experience. Shute discussed the impact of the Omicron variant on logistics and supply chain operations and processes. Their conversation follows below.
Logistics Management (LM): Due to Omicron’s rapid transmission many countries are being hit simultaneously; what impact could this have on supply chains, especially with China’s zero-covid policy?
Spencer Shute: There are a lot of significant impacts, in terms of things that could happen to supply chains across the globe, but it really depends on the restrictions, or policies, in place right now. Obviously, China is one of the most-strict with its zero-covid policy right now. While it has been able to mitigate a lot of it so far, should there be an outbreak [in China], it would have a significant on the entire supply chain.
LM: In what ways specifically?
Shute: Mainly, in the form of bottlenecks, and also in the form of shipping delays we have seen earlier and over the course of the pandemic. We could see those continue. Thankfully, for now, in terms of a U.S. perspective, things have started to slow down, as they relate to our normal view of demand. While demand is still high, as noted by the delays we have seen and the backlog, we are past Q4 demand, so things are typically a little bit softer at the beginning of the year. But there is still the potential for it to impact the supply chain pretty dramatically.
LM: How does the CDC’s decision to shorten the isolation period to five days affect supply chains?
Shute: There are a lot of things that make it a double-edged sword, in that Omicron is highly transmissible, and a lot of people are getting infected right away. On the positive side, this could help ease some of those disruptions, because people are not going to be out as long. While a lot more people may be getting it, being out for five [down from 10 days] could help the already constrained labor market. In terms of additional constraints, overall, it could help ease some of the delays that could have happened if the 10-day quarantine was still in effect.
LM: Companies have learned to expect the unexpected through the pandemic and have put better risk management and supply chain practices into place; how are these holding up against Omicron?
Shute: A lot of the short-term risk management factors kid of ebbed and flowed with all of the supply chain disruptions that have happened. From a transportation standpoint, there has been modal shifting or trying to consolidate, but that has not been air-proof either, due to capacity constraints. But a lot of the risk management updates to policies that companies have done have been really hard to actually implement and realize any of those changes. A lot of those are more longer-term things that are going to happen like the changing of operations, sourcing new suppliers, potentially relocating facilities. Those kinds of things are not an overnight fix. While companies have experienced higher costs, particularly in transportation, it forces them to consider different options…and it is hard to realize what that is going to do overall long-term? The reason for that is that we have not have a “normal” supply chain in almost two years. It has been hard to see what those policies are actually going to do and how they are going to react long-term.
LM: As closures continue, what is the current state of demand and the availability of labor to produce or transport goods?
Shute: This has the potential to impact labor a lot particularly at ports and in the transportation space, just because of the transmissibility of Omicron, vaccinated or unvaccinated, it seems like there are no limitations to who is getting it at the moment. With the labor market so constrained, this does pose some of the same risks we have seen before, whether it be port bottlenecks or on the trucking side, as it relates to overall capacity. Airlines have been struggling since the holidays, and those labor issues are going to continue to trickle down…and we will see some disruption there. With things being typically a little slower in the first quarter, in terms of demand, we will still see higher than normal demand and backlog, especially in the automotive and electronics sectors. Those two sectors have not seemed to be able to catch a break and get caught up. Another thing to consider is that Chinese New Year is coming up, and that typically causes an additional surge of demand, knowing that many factories and ports there are shut down for a week. From that standpoint, it will create an urgency, and we will see how that labor translates when those products start to ship again towards mid-February.
LM: Does this current situation, in your opinion, increase, or raise, the focus on things like robotics, automation, and AI?
Shute: It really puts a renewed focus on automation across the board. Long-term, we have talked a lot about the risk management and risk mitigation of these things, and automation is going to play a very large part of that in the future. It is not something in which the switch can be flipped overnight, but it is something we can see companies putting more resources behind to start mitigating and helping that situation.
LM: When supply chains are lean and complex a single disruption in one place can impact across other supply chains, especially given the interdependencies in global trade flows. How do you view that?
Shute: We are seeing a lot of things on that front. Many manufacturers are trying to understand what that looks like, because there is a lot of global dependency right now. I don’t know if we will be able to get away from that global dependency, in terms of resources and products. I don’t think it makes sense to fully nearshore all of our resources. That seems to be a common theme right now, as to what reshoring or near shoring looks like, or trying to make things more locally, especially from a U.S. perspective, and also how realistic that is. We are not going to break up that global connection that we have established over the years. How we react to those disruptions, I think, is going to be the focus going forward and being able to multisource things more efficiently and more quickly, and also how do we make products so that they are more customizable closer to the end user. That is going to be a renewed focus and how we can mitigate that to not be so reliant on one product made at one location. I think that is something we will see going forward.
LM: Does that lead to a situation where it comes down to a conversation about the cost benefits of nearshoring compared to the heightened need for supply chain resiliency?
Shute: It does, and I would add it is akin to the just-in-time model versus the just-in-case model for how much inventory you hold. There is going to be a fine line for what works for each company, and I think you need to understand what your objectives are, what your customer base is to make those decisions. It is not a one size fits all type of solution. There are going to be different factors included in that, to the point of what does it look like to have more resiliency. If it is not reshoring or a just-time model, how quickly can you react and do you have that supplier base to react that quickly.
LM: With the pandemic here now for nearly two years, based on your work with many global shippers, what are some shipper best practices, or lessons learned, to date?
Shute: We are realizing that the partnerships and relationships you have with your suppliers (logistics and transportation service providers and carriers) are very important and how you can be transparent with them in terms of what you are seeing from a forecast and demand versus forecast standpoint and having those partnerships and relationships has been key. Making sure you are doing things efficiently and shipping products smarter is something we have been talking to our customers about and also being able to optimize networks in ways that are offsetting some of the increased costs you are seeing and not necessarily getting an overall cost reduction, or getting more for the money you are spending. A lot of shippers have realized transportation costs are not going down and may not get back down to a pre-pandemic level. My view is that rates won’t come close to touching those levels in the near-term. It is more about how do you make decisions or utilize your supply base in order to maximize that.
LM: Shifting gears to inflation, how do you view how it is impacting freight spend and shipper operations?
Shute: It has had a huge impact across the board. You have seen it in some major industry consolidations, like with the spin-off of UPS Freight. LTL has been a difficult market historically to be profitable in, and that is part of the reason we have seen those types of transactions and spin-offs over the years. But, in terms of how to mitigate inflation, a lot of manufacturers are reluctant to pass on the costs to consumers but ultimately, at some point, have to, as their supply base is going through this inflationary period as well. It is a trickle-down effect, at which some point shippers don’t have these massive margins to take a big hit. That needs to be mitigated by shipping smarter and realigning the supply base to be more resilient so shippers can reduce the overall impact.