The Supply Chain Crisis' Impact on Inventory and Sourcing
Welcome to the 62nd edition of The LogTech Letter, a weekly look at the impact technology is having on the world of global and domestic logistics. Last edition, I compared painting the Golden Gate Bridge to the process of buying technology in logistics. This week, I’m taking a peek at how shippers are working their way around this supply chain crisis through inventory strategy.
As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.
For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at eric.johnson@ihsmarkit.com or on Twitter at @LogTechEric.
Okay, first things first, sorry for the delay in last week’s newsletter. Sometimes the clock just runs out before you get the ball into the end zone. My good friend James Baker hit the nail on the head.
Second things second, I’m not a supply chain expert as much as an observer and analyst of the logistics component of supply chains, so take this week’s newsletter with a big grain of salt. That said, it’s an important topic and one worth exploring, even if it exposes my paucity of experience actually managing the movement of goods across continents. So here goes.
A few conversations with a range of consumer goods shippers last week had me thinking about two elements of supply chains changing in the face of the current environment: sourcing and inventory. The two are interrelated in so much as without having a solid sourcing strategy there is no inventory to build, hold and sell through. But they are also distinct functions and so let’s explore them separately, with a bigger focus on the inventory side.
Sourcing first…what are shippers thinking of right now in light of the congestion crippling US import gateways? Well, they’re thinking of expanding away from single source (whether it be supplier or transportation provider) whenever possible. Part of that comes from an expansion of their business. A small direct-to-consumer shipper with one type of product might set up their supply chain to use a single factory in Asia and a single global forwarder. That setup is designed to maximize simplicity, but it necessarily comes at the expense of flexibility. As their business grows (new markets, new SKUs) the supply chain inexorably gets more complicated. In this way, moving away from single source is a big step, akin to going from having one kid to two. It’s not a linear expansion of complexity, but an exponential one.
And yet, these times necessitate such additions of complexity. Having a single point of failure is not really an option in a market where external forces take a lot of decisions out of the hands of shippers.
Inventory strategy is the other area where mindsets are changing. As total transit costs – the costs to land a shipment, start to finish – skyrocket, it changes the math on how much inventory can be carried at any given time. Lean is de-prioritized, and forward inventory is prioritized. If it costs eight times more to transport a container to its final destination, including origin, ocean, terminal, and transload or intermodal, and the time to move that container doubles, a shipper needs to account for more inventory in its system. Whether that’s a problem depends on the philosophy of the company: are stockouts a bigger problem than carrying extra inventory on the balance sheet? Does a manufacturer need to keep a supplier happy (with regular purchase orders) and a retailer happy (with full shelves), or is the CFO grumpy when inventory carrying costs get too high?
In the current market, shippers have to play a game of chicken, chancing that floating inventory on the water and not in a warehouse (we used to call it free warehousing, but at current container rates, it’s hard to call it free) make up for the extra burden of inventory. With rates and product prices rising, it likely does. And port volumes, stoked in a big way by inventory replenishment atop low inventory-to-sales readings, suggest it absolutely is.
We’ve gotten this far and not even mentioned technology. Obviously, technology plays a massive role in both of these areas, especially as sourcing complexity grows and as inventory carrying costs need to be compared against freight rates and lead times. The head of the class is either using systems to underpin these processes, or will be using the current environment as a catalyst to invest.
Here’s a roundup of pieces on JOC.com the past week from my colleagues and myself (note: there is a paywall):
Another unicorn emerges on the logistics scene, this time a freight broker helping to carve out a mode between full truckload and less-than-truckload. Flock Freight has gotten a massive round, led by SoftBank, one that values the company at $1.3 billion.
French visibility provider Wakeo has nabbed its own $11 million funding round, a further sign that investors don’t think project44 and FourKites have achieved escape velocity from the rest of the pack quite yet.
I’m obsessed with container allocation management, and this week forwarding software provider Magaya jumped into this important fray with a new tool for its 3PL customers.
Drayage capacity problems are a major constraint on North American supply chains, all the more reason why Kuehne + Nagel tapped Blume Global to help it unify multiple intermodal processes within a single platform.
DP World is building an asset and technology network around its terminal operating network that places it in the same orbit as shipping lines doing likewise, like Maersk and CMA CGM. The broad goal is to funnel volume through its terminals, but also to more directly interact with cargo owners. Roles are shifting in global logistics.
FourKites is using its ocean capabilities – some built in-house as it was breaking away from former partner Ocean Insights and some gained through its acquisition of Haven earlier this year – to help customers predict detention and demurrage charges.
And here are some recent discussions, reports, and analysis I found interesting:
Kevin O’Meara with a great blog on a range of timely topics here, including 24/7 port operations.
Nice recap of supply chain entanglements by an early stage fund here.
Shipper emissions commitments are great, but it’s hard work meeting those commitments, as Carl Lauron of BuyCo notes here.
Nice open source resource on SaaS metrics here.
The best tweet out there succinctly summarizing why we’re in the mess we’re in:
Some upcoming events I’ll be involved in:
I’m joining a webcast today at noon ET with Wakeo CEO Julien Cote to discuss a range of visibility-related topics, including deriving value from technology in a range of different market conditions.
Speaking with Jose Montoya for his CoffeeBreak Logistics livestream at 1 pm ET/10 am PT Thursday. Lots to discuss – this will be fun.
I’m moderating a JOC webinar at 2 pm Thursday on visibility with Erin O’Leary of the Janel Group, Gregg Mau of Crocs, and Jeffrey Cronkshaw of Lancia Consult. Register here to catch this. Given the state of the market right now, and the number of discussions I’m having around global, multimodal visibility, this should be a great one!
As always, don’t forget to subscribe to LogTech Live, my monthly show on the Let’s Talk Supply Chain network. I’ll be announcing our Nov. 5 guest later this week.
Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or IHS Markit, and any opinions are mine only.