It’s been three months already since we published our first regular roundup of supply chain and logistics news—doesn’t time fly?
Since we promised to update you regularly, we’ve collated some of the latest stories from the world of freight shipping, warehousing, logistics services, and supply chain technology, so that you can keep your finger on the pulse of the fast-changing logistics landscape.
In this, our second quarterly roundup, we’re revealing the following supply chain issues and events making news in industry media and beyond:
- The growing adoption of digital twin technology in the supply chain
- How retailers are reevaluating post-pandemic inventory strategies
- Renault’s plans for network redesign and S&OP improvement
- SMEs vs. the big boys in the battle for US warehouse space
- Australia’s continuing weather-driven supply chain problems
- Slackening demand for ocean freight and (at long last) falling rates for shippers
- Amazon’s loss of appetite for experimental projects (as sales growth slows)
Mars Attacks Cost Drivers with Digital Twins
No, it’s not the plot of the latest Science Fiction epic. Instead, it is a tale of technology triumphing over supply chain process inefficiency, which we think is a compelling enough story to match the dramatic heading.
So what’s it all about, then? Perhaps you’ve read a little about the digital twin concept in one of our past articles on supply chain technology, but we would have touched on it only briefly.
What is a Digital Twin
A digital twin is a digital clone of a real-world system or construct. It uses sensor data from the physical entity to emulate its state and to enable the modeling of future changes, improvements, risks, and weaknesses. In other words, supply chain managers can use digital twins to manipulate physical systems (virtually) without any physical consequences.
That’s what pet care and consumer foods company Mars plans to do with the digital twin technology that it will roll out across its global factory network, having used it to improve production efficiencies successfully during trials.
Trials a Success
During one of its digital twin trials, Mars reduced the rate at which package overfilling occurred. Technicians monitored real-time data from sensors on the production line using the plant’s digital twin and applied predictive analytics to assess the impact of filling-process adjustments.
That achievement, along with other successes, has persuaded decision-makers at Mars to expand the use of digital twins to its factories in China and Europe, focusing on use cases to target cost drivers and support sustainability initiatives.
Digital Twins for Inventory and Supply Planning
While digital twin technology is not new, it has only recently begun to gain ground as a supply chain tool. That may be because the once exorbitant costs of the technology have come down or because businesses are looking more than ever to digital technology to help them increase agility and responsiveness.
In any event, now that the floodgates have opened, supply chain leaders are finding an almost limitless range of uses for digital twins, including those relating to supply and demand planning. For example, home improvement retail giant Lowe’s has begun testing Nvidia’s digital twin solution, Omniverse, in two US stores belonging to the chain.
In its ambitious experiment, Lowe’s is integrating augmented reality headsets with Omniverse, enabling employees to interact visually with the stores’ digital twins and communicate in real-time with supply planners.
The company aims to use the technology to improve store and inventory planning and management and improve product availability so customers can be confident of getting what they want when they want it.
Retailers Reevaluate Inventory Plans in the Wake of Pandemic
With the worst period of the COVID-19 pandemic seemingly receding into the annals of recent history, some retailers are feeling the effects of their justifiably radical reactions to the crisis. Having invested massively in safety stock to try and beat the pandemic’s substantial supply chain disruptions, ecommerce retailers like Australia’s Kogan.com are now dealing with the fallout as demand softens.
With last year’s safety stock becoming this year’s dead stock, such companies are buckling under huge losses as they sell excessive inventory at bargain basement prices.
Indeed, Kogan.com was so affected by overstocking and other inventory miscalculations that quarter one of 2022 saw the company fall $3.5 million (AUD) into the red.
As a result, Kogan.com has briefed investors about plans to optimise inventory for a post-pandemic market, cut costs, and improve operational efficiencies.
Inventory Rationalisation at Bunnings
Meanwhile, DIY and hardware chain Bunnings also plans to reevaluate inventory and supply planning in line with a likely demand reduction for products that sold in unprecedented volumes during the height of the pandemic.
With consumers returning to more normal living—and spending more time outside the home—Bunnings recognises that it’s time for some changes. So the company will now rationalise its SKU range with more emphasis on products that are forecast to match the latest demand fluctuations and hence slim down the presence of slow-moving lines in its warehouses and stores.
Such is the picture in Australia’s retail environment. Still, no doubt retail chains around the world are similarly taking stock of the slow return to normality. As a result, many of them, while reflecting on hard lessons learned about the need for supply chain resilience, may well stand down from a reactive stockpiling status and right-size inventories for a (hopefully) less volatile period in their respective markets.
Renault Shines Spotlight on S&OP, Digital Tools, as it Eyes Network Redesign
While some retailers may see opportunities to reduce inventories as the pandemic slowly recedes, the outlook in some other industries holds less optimism. For example, like many of its competitors, car manufacturer Renault is still increasing safety stock and investment in safeguards against supply disruptions.
The auto industry is still in the grip of a disorganized ocean shipping landscape, which has improved little even if the height of the pandemic is in the rearview mirror.
Rising fuel prices and the explosion in shipping container rates are, in some cases, neutralising the cost benefits of sourcing parts from far-flung, low-cost manufacturing centres. Meanwhile, road freight networks, too, are under strain due to driver shortages, which further exacerbate supply difficulties.
A Tense Future for Renault’s Supply Chain
Speaking several months ago at a conference, Renault Group’s Global Vice-President of Supply Chain, Jean-François Salles, said that he sees the supply situation remaining challenging and filled with tension for the foreseeable future.
With current and future supply chain challenges in mind, Renault is beginning to consider how best to redesign its vast logistics network comprising 40 manufacturing plants and thousands of suppliers. A key focus of the project will be to reduce vendor footprint and seek more flexibility from those suppliers that remain in place.
However, as Salles explains, the network redesign will also require investigations into how S&OP can be enhanced to ensure greater cooperation among internal stakeholders and suppliers. That, he says, is essential to secure balanced arbitration, orientation, and allocation of parts.
Technology Integration and Human Collaboration are the Keys
In his conference comments, Salles said “Over the past few years, different crises have shown the importance of S&OP. The different functions have had to adapt themselves on a much quicker cycle. Suppliers have to give the right input for the best decisions to be made to deal with potential supply shortages but also protect profitability.”
Salles also stressed the vital role digital tools now play in sourcing, and the criticality of their wider adoption as global supply chains reach levels of complexity rendering human management impossible.
Ultimately, he believes, it will be the combination of effective S&OP and digital sourcing technology that will enable Renault to improve supply planning through greater anticipation and enhanced decision-making on global parts sourcing.
David vs. Goliath in Battle for US Warehouse Space
In our last news roundup, we reported on the growing warehouse crisis and the increasing trend of hoarding warehouse space. Three months on and things have changed but little, even as COVID-19 slowly transitions from a pandemic to an endemic status.
However, in the United States, rather than space hoarding, a more telling problem is the amount of excess stock lying unsold in warehouses, particularly those utilised by the largest retailers and manufacturers.
Consumer demand has undoubtedly tailed off in the second quarter of 2022, leaving larger companies with vast quantities of excess stock, which now ties up warehouse space to such a degree that smaller enterprises struggle either to find available space, or to afford it.
Warehouse Landlords Favour the Giants
As capacity demand increases, warehouse operators need to increase inventory storage rates, since their overheads increase with the amount of inventory they manage and with every cubic meter of space they add to the market.
However, the big corporates that rent warehouse space can afford the inflated prices, while smaller enterprises cannot, and consequently find themselves priced out of the market.
So it’s quite literally a match between David and Goliath in the US warehouse capacity battle, and currently, Goliath is crushing David. Already embattled by the disruptions of COVID-19 and more recently, the rising price of fuel and increased inflation, SMEs in the United States are now fighting for every cube of capacity available in which to store their inventory.
Unfortunately, warehouse operators aren’t doing much to support the little guy because of the current economic climate, which, as Penske Logistics’ Senior Vice President of Sales and Solutions, Andy Moses, recently said to the Wall Street Journal, “Does put pressure on warehouse operators to take a hard look at their customer base and navigate in such a way they can serve the biggest, most important and most loyal customers,”
Warehouse Shortages Not Confined to the US
While the warehouse capacity crunch appears to be most acute in the US, other countries are not immune from warehouse shortages. For instance, in the UK, where 2021 saw 11.1 million square feet of warehouse space in facilities of over 100,000 square created on a purely speculative basis, 75% of that capacity has already been snapped up, primarily due to massive ecommerce growth.
As in the US, British warehouse rents are increasing exponentially, leaving smaller businesses squeezed out by the retail giants.
To survive in the United States, the UK, and any other country where warehouse capacity is similarly overstocked, it seems many SMEs will need to think outside of the box (pun intended).
That might mean considering ways to access unconventional storage space sources, possibly placing their inventory in anything from rail cars to farmers’ barns. At the very least, they will need to adapt their supply planning to account for new challenges in inventory storage.
Australia Food Supply Chains Weather Beaten from Farm to Fork
Farmers in Australia might be glad of extra revenue gained by renting out their barns for storage this year. After all, those barns may not be required to house much in the way of harvested produce if the nation’s weather continues to stymie successful crop husbandry.
Mother Nature has not yet deemed Australia worthy of respite in a year that has already seen a nationwide shortage of lettuce and scarcities of other vegetable products.
While flooding in Victoria, Tasmania, and New South Wales threatens wheat, barley, canola, and other winter crop yields, the horrendous weather earlier in the year appears to have dealt a crippling blow to another source of revenue for farmers, and nutrition for consumers—the potato.
First, it was Lettuce; Now it’s Potatoes
With crop damages amounting to millions of dollars in loss, farmers have been warning customers for months that a genuine national potato shortage was on the cards.
And now it seems the disruption is finally affecting supermarkets and restaurants as they experience difficulty sourcing potato products which they would, in less troubled times, take for granted as high availability, fast-moving sure sellers.
Supermarkets, especially, are feeling the pain as the potato crisis trickles down the supply chain from farm to fork, or rather, to finger food on the shelf, since potato chips are the latest, and highest profile casualty of the shortage.
Has PepsiCo Had its Chips?
Although potato chip supplies have not dried up altogether, they are not gracing supermarket shelves in anything like normal quantities, a fact that one of the country’s biggest producers, PepsiCo Australia, has acknowledged. The company anticipates that it will be several months before levels on the supermarket chip shelves return to normal.
As much as the potato chip might be considered a luxury, and hence, not something that anyone should worry about in terms of shortage, it’s nonetheless symptomatic of the havoc that this year’s weather is reaping in the food and agriculture supply chain.
With the latest floods already drowning winter crops, too, no doubt other supermarket shelf spaces will start to look less abundantly filled than in previous years, when kinder weather graced our prime agricultural regions.
Ocean Freight Demand Falls Away, Rates Start to Slide
If you’ve noticed references in some of the earlier stories in this roundup to falling consumer demand, you might be wondering if it’s really the case.
Well, if excess stock in warehouses and companies’ adjustments of supply planning aren’t necessarily symptoms of slackening demand, ocean freight order volumes offer a less ambiguous picture.
Indeed, if you can excuse another pun, freight orders speak volumes about what’s happening in consumer land. And right now, those ocean freight orders are falling away.
Logistics executives serving a range of sectors report drops of up to 20% in ocean freight orders, citing uncertainty over consumer demand and—a common theme throughout this news roundup—excess inventory in warehouses.
The drop in demand is reflected in ocean freight rates too. Spot rates are currently around 30% lower than at the same time last year, and shipping lines are not hesitating to announce cancellations and port omissions to put the brakes on falling prices, especially on routes from the Asia Pacific region.
Amazon Puts the Brakes on Projects, Scales Back Warehouse Footprint
What does it mean for the rest of the retail world if times are tough for Amazon? Or does the usually unstoppable juggernaut’s slowing sales growth indicate that shoppers can now shop around more online due to the ecommerce boom? In either case, facts are facts, and Amazon’s business is not growing as it once did.
In recognition of that particular fact, while many businesses are desperate for warehouse space, Amazon has cut back on its storage capacity plans, announcing opening delays, closures, and cancellations of some 16 warehouses in the United States alone.
It has also put a freeze on corporate hiring for the rest of this year and, perhaps even more significantly, is axing several experimental programs formerly indicative of the company’s ambition.
Scout is Out, or at Least, Sidelined for a While
Most recently, Amazon announced that the testing of its autonomous doorstep delivery robot, known as Scout, is to be scaled back drastically, resulting in the redeployment of some 400 employees who worked on the project.
While a skeleton crew will continue to focus on Scout, test deliveries commenced in several US cities will not continue. The curtailment decision is partly due to less-than-positive customer feedback relating to the robotic vehicle’s performance, but is also just one among several cost-cutting steps that include the downsizing of warehouse and recruitment plans.
While Amazon’s financial performance has been exceeding expectations on Wall Street, the company nevertheless posted losses of nearly $6 billion (USD) in the first half of 2022.
Better News Next Time Maybe
As I scanned the stories above before writing this conclusion, I noticed that we didn’t find too many bright spots to highlight this time around, save that the slump in ocean freight rates should offer a glimmer of optimism for companies reliant on international shipping.
The observation reminded me of a song title, all about wishing someone better luck next time, hence my concluding heading. Let’s hope that in the next Logistics Bureau news roundup, we can snag some good news stories to distract you from the doom and gloom.
The one thing you can count on is that we will always tell it how it is, though, so remember to check back often for further news, insights, and information about supply chain matters, here on our blog.
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