This week’s episode of the Freightvine podcast covers the ever-topical coronavius (COVID-19) and the uncertainty it’s creating throughout global supply chains. Joining host Chris Caplice is Yossi Sheffi, MIT professor and Chris’ boss at the MIT Center for Transportation & Logistics.
To begin with, let’s understand how the COVID-19 outbreak differs from previous supply chain disruptions. First, the range of uncertainty is far more of an issue when compared to recent pandemics (SARS, avian [bird] flu) and past natural disasters (Fukushima tsunami, Thailand floods). The accuracy of the number of reported cases by the agencies of the affected countries (China, Indonesia, Russia, and several Africa nations) is a cause for concern.
The resulting lack of confidence is an important factor. Reliable case numbers can help temper uncertainty in an already chaotic environment.
The range of uncertainty is far more of an issue when compared to recent pandemics or natural disasters. The accuracy of the number of reported cases is a cause for concern.”
Second, this pandemic is impacting both supply and demand. On the supply side, factories face labor shortages, a double-whammy for Chinese-based factories already experiencing headwinds from the Lunar New Year holiday. Factories are also facing input (parts) shortages. Closed ports mean parts aren’t shipping out of China. Conversely, parts aren’t flying into China because cargo operators (UPS, FedEx) and passenger flights – who deliver supplies in the cargo hold – are suspending operations. On the demand side, consumers (Chinese consumers, specifically) aren’t buying as many products. Apple, for example, is hamstrung on the supply side (Foxconn can’t produce without labor or parts) and getting choked on the demand side with many consumers are sick or otherwise discouraged by the current situation from buying products.
Shortages and depressed demand are important because they create increasing levels of vulnerability. The risk multiplies for each supplier along the supply chain, ultimately culminating in the bullwhip effect.
The bullwhip effect is a two-fold process that can leave a nasty sting, much like an actual bullwhip. It begins when stunted demand causes manufacturers to cancel orders. It continues with the suppliers to those manufacturers, in turn, cutting orders from their suppliers to avoid excess inventory. This daisy-chain effect ultimately suffocates the lowest supplier in the supply chain, often resulting in bankruptcy. When manufacturers notice demand picking back up, that’s when the first sting of the bullwhip occurs. Out of fear of having their suppliers rationalize order fulfillment, manufacturers hedge their bets and order more than they would under normal operating conditions.
This effect, and the subsequent irrational behavior, expose manufacturers’ lack of understanding of the extent of their supply chain’s reliance on second, third, and fourth-tier suppliers.
What does all this mean for supply chains and logistics networks today and in the near term? How can manufacturers shield themselves from falling prey to these catastrophes in the future?
Container freight volumes, naturally, are expected to be down until a few months after the virus crests (the date of which is unknown), so one can expect softness in drayage and over-the-road rates. The second sting from the bullwhip will occur when container freight volume recovers and arrives at the ports, likely causing unprecedented congestion and subsequent delays.
As evidenced by recent history, these health crises and natural disasters seem to happen every few years. Although it’s not the best idea to “fix the roof while it’s raining,” organizations should take this time to evaluate – or reevaluate – the state of their crisis management plans. These reviews should include the effectiveness of an organization’s “command center” and the agreed-upon triage process for manufacturing products and fulfilling customer demand. Evaluating inventory policies and payment terms as a mechanism to preserve cash on the balance sheet is also advisable.
This episode recap was written by Reid Johnson, Product Manager, FMIC.
Market Update & Forecast: 27 February 2020
Dry Van
Active contract rates were flat, while spot rates went down by 5%. Replacement rates were down 1%.
Temp-Control
Active contract rates decreased 1%; spot rates went down by 5%, and replacement rates were down 1.5%.
Intermodal
Active contract rates were flat. Spot rates went down by 1%. Replacement rates were down 2.5%.
The main takeaway is that the market is back at the status quo. Insurance premiums are giving carriers heartburn, especially the smaller carriers, which could put upward pressure on rates. And of course, the coronavirus will keep creating uncertainty in demand.
