Your Logistics Function Is One Pandemic Away From Collapse

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That title may be somewhat dramatic, but let’s consider the evidence. First, we need to set the scene: Cases of COVID-19 were initially reported in December 2019 in the Chinese city of Wuhan. By the end of January 2020, the outbreak was declared a “public health emergency of international concern” by the World Health Organization. Fast forward six weeks to March 11 and COVID-19 has become a full-blown pandemic.

In that same period, country after country implemented varying degrees of lockdown. Almost immediately, demand for air travel ceased and naturally airline after airline responded by canceling flights. By April, belly capacity — which accounts for most of the space for international air cargo — shrank by nearly 50%, according to the International Air Transport Association (IATA). Many companies were woefully unprepared for capacity shortages and extreme spikes in airfreight rates. The impact to ocean freight capacity was less dramatic but almost as equally disruptive as shipping lines implemented blank sailings and removed entire vessels from weekly sailing rotations. This resulted in equipment being in the wrong place and shippers having to pay very high repositioning surcharges just to access empty containers.

Even for the most mature logistics functions, the effects caused by the disruption, brought on by the pandemic, resulted in logistics leaders questioning their levels of preparedness and contingency planning. One customer stated to me that given logistics is in a perpetual state of disruption, their company and the industry in general should have seen it coming and been better able to respond. I am not convinced that anyone saw this pandemic coming. However, I do agree that logistics, as a component of a company’s supply chain, is often the first responder to disruptive events whether the causes are environmental, geopolitical or economic.

This pandemic has been, in a lot of cases, a rude awakening for companies that have become somewhat complacent to disruption. That applies equally to shippers and third-party logistics (3PL) providers. Adopting the 6s of logistics continuity is a simple and effective way for companies to disruption-proof their logistics functions.

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Some of this is common sense but often needs reiterating to logistics leaders who have lost sight of the basics. In this blog, I am going to cover three of the Cs shown in the diagram: Capacity, Cost and Collaboration. Let’s start with Capacity. Capacity remains one of the most challenging aspects of logistics planning. Outside of a pandemic, very few logistics functions formally plan for their capacity requirements because they expect an endless supply of capacity to be readily available at a moment’s notice. Maybe that was the case decades ago, but it is not the reality of today’s logistics industry. Companies must plan for their capacity requirements in a worst-case and best-case scenario. They must also engage their carriers and service providers in that capacity planning process and stop doing it in isolation. Capacity is becoming a finite resource. How much access you get to this finite resource is driven by the second of my three Cs, which is Cost.

The cost of logistics is probably the most scrutinized and yet variable aspect of logistics. Logistics leaders are continuously seeking ways to reduce the cost of logistics, however, and too often their first port of call is to seek out or renegotiate lower pricing offers from their third-party service providers. Benchmarking prices to ensure value for money from service providers is an important aspect of good cost management. However, continuously cycling through annual tenders that often do not deliver cost savings are increasingly becoming fruitless exercises. There are other and more effective mechanisms to benchmark prices. In fact, more enlightened logistics leaders incorporate a benchmark mechanism in their 3PL outsourcing agreements. This delivers the price comparison and benchmarking they need for the services provided by the 3PL without having to incur the time, effort and expense associated with the soon-to-be-consigned-to-history annual tender.

My final C for this blog is Collaboration. Let me start by saying to all logistics leaders reading this blog that your 3PL is not your enemy. Too often I find the relationship between a 3PL and its logistics customer to be very adversarial in nature. There remains a sense of mistrust based on opposing outcomes. This needs to change and if there is a positive consequence of the COVID-19 pandemic, it is in the emergence of greater collaboration between companies and their 3PL service providers. Increased collaboration in resource and information sharing has been refreshing to behold. Logistics leaders have turned to their 3PLs and adopted them as true partners to support and guide them in their response to the disruption caused by the pandemic. I really hope this continues.

David Gonzalez
VP Analyst
Gartner Supply Chain
[email protected]

 

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