It has been over a year since we reported the pandemic was wreaking havoc across the world’s supply lines. How have companies coped so far?
When the pandemic broke out last year, supply chains, already stretched by superpower trade tensions, took a beating as borders closed just as demand for food, medical supplies and online purchases surged. Twenty months on, what lessons have the world learnt? How have companies adapted to the changes in supply and demand dynamics? And what are the results?
For years, the standard of supply chain management was the “just in time” or JIT model. Explained simply, if a particular product was needed in 20 days, the order will be placed so that the product will arrive in almost exactly 20 days.
This allowed companies to keep their inventory costs down as there was little need to get services like warehousing to store the goods. Raw materials could go immediately onto the factory floor and finished products can be shipped out to markets immediately.
But the ongoing pandemic has pushed the model to the brink of obsolescence. Everywhere around the world, makers of masks to semiconductors to vaccines to cars are singing a different tune. “Supply chain resilience” is now the new buzzword for supply chain professionals.
Anne Petterd, head of international commercial and trade for Asia Pacific at Baker McKenzie, tells The Edge Singapore in an interview that businesses are pulling out all the stops to solve their supply chain woes. “Supply chains were more of ‘if it’s going okay, we don’t really need to focus on it’ issue, [now] it is a whole business issue.”
The fragility of global supply chains can be seen in the ongoing shortage of semiconductors. Due to a shortage of chips, Bloomberg reported in March that carmakers are expected to miss out on US$61 billion ($82.5 billion) of sales this year alone. In May, Volkswagen halted output at a plant in Mexico while Audi will reportedly put 10,000 workers on part-time working. Asian carmakers were similarly affected. In June, Nissan and Suzuki said they would have to idle some of their plants.
The shortages are also spilling over into other sectors. Eagerly awaited flagship products such as Samsung Electronics’ new Galaxy Note smartphone have been delayed while stocks of Sony’s Playstation 5 remain low despite having been launched last November.
Freights and flights
In 2020, the supply crunch was a matter of products and items being unable to be manufactured fast enough to match demand. This year, the shortage of shipping containers seems to be a new constraint in the supply chain, says Petterd.
As ports around the world locked down to contain the spread of Covid-19, there were empty containers stuck in understaffed or congested ports. This means fewer containers arriving at their destinations, and in turn, fewer containers available to make the return trip, causing massive knock-on delays.
As a result, goods started to pile up at port terminals, which means a longer freight time as they have to wait to be loaded onto increasingly scarce empty containers. When companies vie for more space within this constrained supply of containers, rates naturally shot up. The squeeze has been compounded by lower operating efficiency as port workers suffer from infections or stringent virus control measures led indirectly to serious backlogs and congestion.
According to a Bloomberg report on Sept 12, it now costs US$14,287 to haul one of these 40-foot steel boxes from China to Europe. That’s up more than 500% compared to a year earlier.
Shipping by air is not the most sensible alternative but even so, air freight rates have surged as well. Cargo used to be also carried in the hold of passenger flights and when airlines cut back flights, available capacity dropped as well. Of course, aeroplanes also have a much smaller capacity than ships.
DHL noted in its Airfreight State of the Industry report in September that air freight rates were 77% higher in July than the 2019 baseline and 18% more than the 2020 baseline.
As manufacturers continue to replenish stocks by tapping air freight, rates are expected to remain high due to “huge demand growth against limited capacity.” With the year-end peak season coming, DHL expects demand to be pushed even higher.
The pandemic is not the only factor. Trade tensions between the US and China as well as a surge in protectionism among states have driven companies to consider abandoning the idea of supply lines stretching around the world in favour of a shorter and closer supply chain.
Increasing resiliency
In response to the problem, “supply chain resiliency” has become a mantra this year. Logistics experts, business leaders and academics have called on companies to strengthen their supply chains so as not to see a repeat of 2020.
Last year, William Fung, group director of supply chain manager Li and Fung, said at the DBS Asian Insights Conference that “the idea of a single source, even though it might be the most efficient and most cost-effective, may not be the most responsible or resilient in terms of supply chains”.
Some companies have heeded this call and shifted their supply chains by investing in facilities closer to their customers. One of them is manufacturer Sunningdale Tech, which for years have maintained a strategy of producing in low-cost countries and then shipping to developed countries.
With both the pandemic and trade war bearing down, customers are now demanding that manufacturers like Sunningdale make what they need in their “backyard” so as not to have them shipped halfway around the world. “We need you to be there with us. But if you say you can’t do this, then we need to look for alternatives. The option of remaining at status quo is not possible,” said chairman Koh Boon Hwee during a dialogue with shareholders.
As such, the idea of “near-shoring”, or the localisation of supply chains is one of the ideas that have been mooted to enhance supply chain resilience. An example of this is semiconductor giant Intel announcing it will spend US$20 billion to build two major factories in the US.
In April, a Baker Mckenzie report entitled State of Play — Supply Chains and Trade Realignment observes that 62% of business leaders surveyed have already redirected investments toward jurisdictions with lower barriers to entry — and of these, 24% say such diverted investments have already been substantive.
A third of business leaders (34%) are rethinking their investment strategies completely, emphasising a focus on domestic markets rather than those offshore.
Supply chain financing
The effect of disrupted financial chains is being felt by suppliers too. In the supply chain universe, suppliers will usually extend a credit duration to the buyer for them to pay for the goods supplied after they have been delivered and an invoice issued.
However, if goods are delayed due to a supply chain crunch, payment is also delayed. That leaves them in the unenviable position of having neither the goods to sell nor having any income.
Furthermore, as a huge portion of these suppliers can be SMEs that are subcontractors or contractors to major corporations, they are not as financially resilient and if a delay in payment happens across multiple customers, that could mean the difference between the supplier surviving and going under.
In Singapore, commercial finance services provider IFS Capital has partnered with payment solution provider PrimeRevenue to offer differentiated supply chain financing solutions to SMEs in Southeast Asia (See chart 2).
Simply put, the solution will see a buyer will upload all its approved invoices to PrimeRevenue’s platform, and should the supplier need capital immediately, they will be able to sell the invoice to IFS which will disburse the invoice value to the supplier in a matter of days, minus the interest charged. If not, the buyer will pay the invoice to the supplier when it matures.
In an interview with The Edge Singapore, Zeng Renchun, CEO of IFS Capital’s Singapore office, says these programmes help SMEs by not only shortening their cash conversion cycles but also “ensures the sustainability of the SMEs to be able to continuously operate.” That’s to say suppliers can stay afloat and pay their bills, instead of having to fold and leave the customer without a supply source.
But what can IFS offer that the banks, with their giant SME credit teams, cannot? Zeng says the first differentiator is time to market, which is the time needed for SMEs to get their financing done.
He explains that as IFS Capital operates on a smaller scale as compared to banks, it is more nimble and able to operate a leaner credit approval chain. This means they can make quicker decisions.
“SMEs and mid-corps who reach out for financing support are typically in need of this financing urgently for working capital requirements or their investment for growth … we are also less subjected to drag created by legacy processes, practices and infrastructure that may have been built over decades, which is difficult for large organisations.”
Furthermore, SMEs are less likely to be established, both in terms of track record and financial strength, as such, they may not be able to access financing if they went directly to financial institutions. IFS says that surveys have shown that around 40%–50% of trade finance applications by micro, small and medium enterprises (MSMEs) are rejected by financial institutions.
Zeng acknowledges this but says these are exactly the type of companies that requires the most financial support.
IFS can offer these solutions because it actively manages its risk by working closely with Enterprise Singapore on a risk co-share scheme that is designed to support SMEs during the pandemic.
The company also manages their risk by “structuring our product offering carefully, in terms of factoring. We also obtain extra visibility in terms of the trade flow, which adds additional comfort for us to be able to support the SME community responsibly, and also sustainably for their business operations.”
This not only benefits the supplier but the buyer as well. Suppliers who know they can access financing when they need it can extend more generous credit terms to their buyers as well, strengthening the relationship between the two parties.
Logistics and warehousing companies
Despite the uncertain outlook for companies all around, it is expected some companies out there are better positioned to take advantage of the supply crunch — like warehousing and logistics companies.
However, Petterd says, “Those that can do it smarter and navigate all the issues at the moment will be ahead. It’s not a matter of whether or not it is a hot business sector. It’s also about who’s doing it smarter.”
Examples include firms that have invested in digitalising their supply chain management system and using the data to gain more visibility of their operations. In short, businesses that come out ahead will be the ones “who know where the assets that run their operations are located and use that to move swiftly or adapt as things change”.
In Singapore, warehousing and logistics firm GKE Corp is one such winner. In FY2021 ended May 31, it reported a 146% y-o-y growth in net profit and a 10.9% y-o-y increase in revenue to $118.98 million, mainly attributed to optimal utilisation of its warehouse with better rental rates and increase in trucking volume.
In an interview with The Edge Singapore, CEO Neo Cheow Hui reveals that business has been booming for the company so much so that his warehouses are running at “optimal capacity”.
This was largely due to the company winning a contract from a government logistics provider to store a “strategic stockpile” of medical personal protective equipment (PPE). In an earlier interview a year ago, Neo revealed that the costs of storing this PPE stockpile alone came up to $200,000 a month.
With his warehouses running at full capacity, Neo is looking for ways to cater to growing demand. The company is “in discussions” to acquire another warehouse to expand its capacity. He elaborates that the company is currently “viewing some spots and there are one or two that we have gone into deeper discussions.”
Neo reveals that the new warehouse will be used for chemical and cold-chain storage which command higher margins. However, the choice of site will depend on whether the authorities will approve the sale and, more importantly, the redevelopment of the site.
Recently, some of its warehouses had also received the licence to handle what is classified as “dangerous goods” (DG). Neo also explains that the DG storage sector is “incredibly difficult” for competitors to muscle in as the barrier to entry is very high. This enhances GKE’s attractiveness to customers who need storage facilities for such products.
GKE CFO Lawrence Chua also adds that regulations for DG storage are also tightened whenever there is an accident in the space — like the port explosion in Lebanon in August 2020 which claimed over 200 lives and caused over US$15 billion in property damage.
Neo also notes that with increasing awareness of environmental and safety concerns, customers now demand higher standards of accountability, raising barriers higher. “But as long as we set it up correctly, the business is going to scale greater heights.”
Although his business is doing well now given the pandemic, doesn’t Neo fear that once it passes, JIT supply lines will be back in favour, lowering storage utilisation levels?
Neo does not think so. “I think a lot of customers have learnt their lesson from this pandemic. I believe it will take a while for the concept of JIT to win back favour. What I feel is that people will always have to stock up some buffer, no matter what.” He points to the PPE stockpile, saying that even with over 80% of the Singapore population vaccinated, the volume of the stockpile has not gone down.
Petterd agrees. Moving forward, she says there will be different buying models. Not everything will revert to the JIT model and not everything can be stockpiled, like perishables. Businesses will have to be educated on these different buying models and plan for them accordingly.
Petterd says questions businesses need to ask themselves include how long it would take to stock up and how long it would take for new stock to come in. More importantly, are they critical components that could bring the entire supply chain to a halt if they become unavailable?
“If it’s something I need urgently, I may need to look for a closer supplier or I may need to pay more to get it airfreighted compared to previously when I had it shipped,” Petterd says.
“If it’s something that I don’t need urgently, I need to think how far ahead do I need to purchase or do I need some capacity on stock? You will also need to ask yourself why it is not urgent. Is it because I can manufacture that item in three or six months?”
For now, companies are urgently trying to find alternative supply chains and rewrite their operating procedures to deliver what customers expect on time. It is only a question of time they get it right — time that it is not on their side.
From left: GKE Corp CEO Neo Cheow Hui, Baker McKenzie Head of International Commerical and Trade for Asia Pacific Anne Petterd, and IFS Captial Singapore Office CEO Zeng Renchun
