As COVID-19’s death rate in the U.S. continues to decline gradually, businesses are reopening their doors as states slowly start to relax their lockdowns. But with the threat of the pandemic still looming ominously, some companies are seeking to reshape and insulate their core processes. These efforts will likely be targeted at making sure another breakout would not pose an immediate threat to companies’ sourcing, manufacturing processes and customer base.
“The issue with COVID-19 is less related to manufacturing, but more about the movement of goods globally,” said Chris Jones, executive vice president at Descartes, a logistics technology company. “For instance, supply networks in and out of China are impacted. Air capacity was severely diminished for a while because a tremendous amount of air freight would move in the belly of commercial planes that were not flying.”
This caused competition for space on commercial air freighters, and for that system to be overtaxed. However, with airlines converting aircraft to freighters and/or using passenger craft exclusively for freight, there has been a steady rise in capacity. However, demand has dipped over the last two weeks, which has resulted in falling air freight rates.
On the consumption end, there has been a definitive shift in the way end consumers buy products. With lockdowns persisting for several weeks and non-essential stores shut down, consumers shifted online, and e-commerce companies witnessed their businesses spike over the last few months.
“The issues with global logistics will not be winding down soon, and when they do, there will be permanent structural changes. Home deliveries will continue, maybe not at today’s pace, but there will be people who are buying online now that didn’t buy before or didn’t buy as much. And they won’t necessarily go back to their previous methods of buying,” said Jones.
He explained that his interactions with retailers showed him that a significant portion of them were looking for alternative sourcing options. And while sourcing, it is also essential to vet the suppliers, especially in the wake of the pandemic. For companies that were supplying stores and malls, it is critical to pivot their businesses to be more consumer-facing by creating e-commerce channels. Companies can ramp up their capability via pop-up e-commerce warehouses that can be scaled based on demand.
In the longer term, retail companies will have to look at diversifying their sourcing. “This has been a real slap in the face to many companies’ sourcing strategies. Businesses may have several manufacturers, but if all of them are in China, they will lose all their supply if China shuts down,” said Jones. “The shift from China was already underway, thanks to the added tariffs situation between the U.S. and China.”
This has led to a remarkable change in sourcing patterns, especially for inexpensive manufactured goods. For instance, the Vietnamese supply of furniture to the U.S. has gone up by 30% in the last two years, as companies moved manufacturing from China to other Southeast Asian countries.
“For now, an incredible amount of essential materials and medicines are sourced solely out of China. I think governments will start to decide on incentivizing companies to produce them on a more regional basis. But for things like furniture, production will move from one low-cost country to the other, but won’t necessarily come back home,” said Jones.