Logistics Matters with DC VELOCITY

Guest: Chris Jones of Decartes on supply chain vulnerabilities; Five risks businesses should avoid as they bounce back; Consumers are more aware of supply chain pain points than ever before

• AGiLE Business Media • Season 2 • Episode 14

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In this episode, guest Chris Jones, executive vice president at Decartes, discusses supply chain vulnerabilities. The Covid-19 pandemic changed everything in our lives, including the way goods are delivered to us. But the pandemic also exposed weak areas of our supply chains and revealed vulnerabilities for sourcing many critical goods, such as PPE, pharmaceuticals, batteries, and electronic components. How can we assure that suppliers address these vulnerabilities as we begin to recover?

As businesses begin the process of restoring their operations to pre-pandemic levels, they need to be aware of the many threats that still loom. A recent report highlights five risks for businesses to track as they recover their operations in 2021 and beyond.

Before the onslaught of Covid-19, most consumers did not have a clue as to what was meant by "the supply chain" and how supply chains actually operated. Now, they have a greater awareness of them, mostly due to shortages they have experienced during the past year. How should manufacturers, retailers, and e-commerce providers react to both the real and perceived conceptions that consumers have about the supply chains upon which they depend?

Articles and resources mentioned in this episode:

Podcast sponsored by Honeywell Intelligrated

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David Maloney, Editorial Director, DC Velocity  00:00

How do we secure vulnerable supply chains? Five risks to look for as businesses bounce back. And consumers now understand supply chains better, including the pain points. Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week's Logistics Matters podcast.

Hi, I'm Dave Maloney. I'm the editorial director at DC Velocity. Welcome.

Logistics Matters is sponsored by Honeywell Intelligrated. From system design and simulation to integrated warehouse automation software and technologies to AS/RS shuttles and robotics, Honeywell Intelligrated end-to-end solutions address the most pressing e-commerce and labor challenges facing our industry. To learn more, visit sps.honeywell.com.

As usual, our DC Velocity senior editors Ben Ames and Victoria Kickham will be allowed to provide their insight into the top stories of this week. But to begin today, COVID-19 has not only changed almost everything in our lives for more than a year, it has also revealed many of the vulnerabilities of our supply chains, especially for certain types of products like lithium-ion batteries, pharmaceuticals, and PPE. To better explain about those vulnerabilities, and how companies can strengthen and secure their supply chains, here's Victoria with today's guest. Victoria.DC 

Victoria Kickham, Senior Editor, DC Velocity  01:31

Thank you, Dave. Our guest today is Chris Jones, executive vice president, marketing and services, for logistics technology provider Descartes. Chris is here to talk to us about supply chain vulnerabilities, particularly for lithium-ion batteries. Welcome, Chris.

Chris Jones, Executive Vice President, Marketing and Services, Descartes  01:46

Thank you, Victoria.

Victoria Kickham, Senior Editor, DC Velocity  01:48

Descartes is conducting some research on supply chain vulnerabilities, and this is in light of the recent Biden administration order to review supply chains for critical goods. What's the purpose of your research, and how is it going to help companies throughout the supply chain?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  02:04

Well, we got into this, actually, even before the Biden administration started this. We knew, for instance, certain kinds of products were having, you know, supply problems, and what we wanted to be able to do was to understand, I'll call it, what the risk was around those. So it was really kind of very good timing. And our goal with this was to be able to show people, for instance, alternate sourcing strategies; how you identify risk, in terms of the sourcing options you have; and even looking at other things like tariffs and so forth, as you do look at options to make the best decisions that you know, really help maximize your bottom line.

Victoria Kickham, Senior Editor, DC Velocity  02:49

Great. Well, the research, as I understand, deals with a few specific product categories, and as I said, initially including lithium-ion batteries. This is an increasingly important product for logistics, given growing interest in alternative technologies for powering material handling equipment, delivery vehicles, and so forth. Can you talk a little bit about how vulnerable the supply chain is for these items?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  03:12

Sure, so let's maybe go through a couple things here just to paint a picture. One is that, you know, I think everybody's saying, Victoria, that demand is definitely up, all right? But it's really spiked in the last half of 2020, so, you know, the pandemic did depress it slightly. But when you look at the value of increase—in other words, what people are getting for these batteries—it's gone up tremendously. So, just to give you just a quick example, there's been 11% increase year over year, in terms of volume. So that would be U.S. imports for lithium-ion batteries, but there's been a[n] over 30% increase in the value, or if you will, the price. So it just shows that the demand is is really spiking, and people are having to pay a premium to, you know, meet the customer requirements. What we're also seeing is that, it's interesting how the market plays out. Surprisingly, maybe for a lot of people the top exporter to the U.S. is is South Korea, so many people would have assumed that, you know, that China—which by the way does ship a huge amount, and I should qualify this: they're the top importer in value—but what's happened is that this has taken off immensely. So, their volumes, for instance, coming out of Korea are up 90%, and one of the real reasons for that [has] been the the tariffs that have been put on, so that, if you will, the the trade wars that have gone on, you know, China is right, currently, at 11% duty rates into the U.S. and South Korea is at zero. So what we're seeing is, you know, a huge shift here, but also still relatively few players, if you will, dominating this market.

Victoria Kickham, Senior Editor, DC Velocity  05:14

And what about lithium-ion forklift batteries in particular? Can you speak to how most of those are sourced and the potential for any disruption there?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  05:25

Well, yeah, there's a couple things maybe to take a look at for that area. So what we did was, we did analysis—maybe a couple things here. So, when you start thinking about batteries, there's, let's call it the import of batteries themselves, right? So, interesting, we looked at the top 20 forklift manufacturers. Now we're just talking about China and South Korea. Guess what? Germany is actually the largest provider of batteries for those folks identified, if you will, as batteries imported, but when you start looking at material, what you find is that, again, you see South Korea, you'll see other countries in there. And there's been a huge shift. And that shift has occurred, really, in the last couple of years for these particular manufacturers. So, just let—this gets to the whole dynamic of the market. So, I'll give it to you this way: In 2018, Korea was 25% of the market, all right, for these 20 manufacturers. They've gone to zero in 2020, and Germany is now over 30% of that value, all right?. And that's come in literally, in the span of two years. So we've seen a huge shift here, and I think this just points to one of the things, as I mentioned before, people are searching for, not just, you know, can I get it, but how much am I going to pay for it? As I said, you know, the value, if you will, or prices up 30% in the last year.

Victoria Kickham, Senior Editor, DC Velocity  07:09

And you're talking about batteries and the materials used to make them. Is that? Is that what you mean?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  07:13

Yes, correct. Correct. Here, so sometimes the story is not so, I'll call it, straightforward. So, think of it as you can buy batteries as a finished item, right, from someone, or you can buy the materials or components, if you will, to assemble them. So that's really kind of what I'm talking about.

Victoria Kickham, Senior Editor, DC Velocity  07:31

Thank you What other products or commodities are most vulnerable right now that you're looking at?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  07:38

Well, there's really a number of them. This actually goes back to the overall Biden edict. But we actually are a little broader than what they are. So, the semiconductors and printed circuit boards are big ones, as we all know, these days. You've seen automotive companies shut down production lines because they're not able to get chips, but also printed circuit boards, which probably didn't get as much press in that same situation. High concentrations of sourcing in, you know, out of China. So, not that just China itself should be considered an issue, but when you really look at the overall situation, there's a lot of eggs in one basket, so to speak. Pharmaceuticals, particularly vaccines, it's a big deal. Again, COVID has really driven this situation, but there's some fairly narrow sourcing that's going on there. Interesting enough, pharmaceuticals itself, we've looked at it. It's not quite in the same situation. There's a pretty diverse set of countries and manufacturers out there for us. And then maybe the last two: PPE, you know, personal protective equipment, that was such a big deal last spring. Everybody was searching for it. Businesses really were challenged to run without it. And it went from being in [a] really critical state to having pretty much leveled out. And believe it or not, the U.S. is the biggest exporter of PPE now, so it's kind of a amazing situation in how it's changed. The last one that was really on the Biden list was rare earth metals, and in this case, what we're really looking at here is, not only their source is highly concentrated, being China and Russia, but it's not so much about the volume of metals; it is really about their role in things like defense and and technology that, you know, we as a country really just don't have an infrastructure for.

Victoria Kickham, Senior Editor, DC Velocity  09:46

Is the government's action on this issue a wakeup call for businesses, or do you find that many are already kind of, really, kind of taking a look at diversifying their supply base and sourcing?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  09:57

Well, I think it's a combination. So, go back to, again, let's take China manufacturing a year ago, you know, February 2020, shipments into the U.S. were a fraction of what they were in 2019. So, all of a sudden, people were saying, you know, "Where are we going to get our goods?" Now, here's the other shocker: Many companies had I'll call it "risk mitigation strategies" that had maybe two or three or four manufacturers, but they were all in China. So they felt like they were, they had their, you know, the risk spread out. But when you couldn't ship out of China, period, then it didn't really matter. So I think that was part of it. I think what the Biden administration is doing is really kind of taking it to the next level and saying, "Hey, we may need to do this as a concerted effort." And maybe that would be my last point in this, you know, this part of the story, which is, you know, for people to put risk mitigation plans in place, it's gonna take some time. It's not a "just find somebody tomorrow," and you know, pharmaceuticals' a really good example. You have to get those manufacturers certified, so it's not a trivial task, and so in some cases, these things can take years. So, you know, there was no better time, I think, then, for them to bring it up and say, "Hey, this is something that all manufacturers"—and in particular the ones we just talked about—"should be doing."

Victoria Kickham, Senior Editor, DC Velocity  11:28

Can you recommend any sort of general or overall strategies companies can use for building supply chain resiliency? I know you were just talking about it a second ago, but sort of some general, overall guidance?

Chris Jones, Executive Vice President, Marketing and Services, Descartes  11:40

Sure, there's a, we have a, we call it a three-step process here: identify, analyze, and vet. So let me explain what those are. So on the "identify" one, you know, we're all talking, right at this point in time, about are ... largely imports into the U.S., but the U.S. is only a fraction of the global economy, right? It's the biggest player, but still a fraction. There's a lot of goods that are moving globally that never touch our shores. So, there are sources out there that many companies don't know exist, and so finding those alternate suppliers is really where people need to get going, right? Analyze is really important in  the following sense: I mentioned earlier about duty rates, you know, especially with the duties that were put on by the previous administration, and that have not been taken away by the current administration, there's significant differences out there, could be anywhere up to 25% difference, right? So, just finding a supplier somewhere else, you really need to know what that cost is going to be to actually land that product in the U.S. And then the last one is also really a function of, I'll call it today's environment, which is, as we called it, vet, which is you need to review the trading partner that you're looking at, right? The U.S. government has, you know, a significant sanctions list. So, it's important to know whether or not that company, or the owner of that company, is on that list. And that, by the way, includes even things like 50% ownership. So, you know, a lot of organizations have very complex ownership structures, and you need to dig in there, because the worst thing you can do is go through those first two steps, say, you think you found a winner and then finally find out they're owned by somebody that the U.S. government does not want you to conduct business with, right? So again, simple: identify, analyze, and vet.

Victoria Kickham, Senior Editor, DC Velocity  13:38

Thank you. Thanks for joining us today, Chris. We really appreciate it.

Chris Jones, Executive Vice President, Marketing and Services, Descartes  13:43

Well, thanks, Victoria.

Victoria Kickham, Senior Editor, DC Velocity  13:45

We've been talking to Chris Jones of Descartes. Vack to you, Dave.

David Maloney, Editorial Director, DC Velocity  13:50

Thank you, Chris, and Victoria. Now let's take a look at some of the other supply chain news from the week. Ben, we were just talking about supply chain vulnerabilities. And along a similar theme, you wrote this week about a report listing five risks to track for businesses looking to help their supply chain operations recover in 2021. Can you share more about that story?

Ben Ames, Senior News Editor, DC Velocity  14:13

That's right, Dave. We've all been watching as businesses around the world are rebounding this spring, with the rollout of widespread vaccination campaigns and the start of loosening of some pandemic restrictions. But returning to pre-2020 levels of revenue and activity isn't as easy as just throwing a switch. While retail stores and restaurants might just be able to open up their doors again and welcome those paying customers back inside, other sectors will face a much more challenging road back. We learned this week what some of their specific challenges could be, according to an annual Risk Report from Everstream Analytics. That's the newly rebranded name for the supply chain risk management firms that were previously known as Resilience 360 and Riskpulse. They're now known as Everstream Analytics together, as we said. So, one of the group's forecasts was a rise in bankruptcies among smaller and more specialized suppliers. So, that's because a lot of governments around the world eased their financial reporting requirements for businesses during the pandemic, in a bid to stave off some of the worst impacts of the economic strike. However, as we've been saying, as economies open back up again, those governments at some point are going to return to their standard regulations, and that result could be an increase in insolvencies and bankruptcies during the first half of 2021. Another item on the list is a continued rise in cyber attacks on production sites and logistics operations. Everstream says that the number of reported cyber attacks—which is, of course, lower than the full number; a lot of companies don't make it public when they've been hit—but that number of reported ones more than doubled in 2020, including threats that we've all read about in the newspapers like data breaches and ransomware. So, but those are two of the top-line threats. Yeah, well, those

David Maloney, Editorial Director, DC Velocity  16:17

Well, those are some very serious challenges. Did the report mention any steps that companies are taking to deal with those?

Ben Ames, Senior News Editor, DC Velocity  16:23

Well, they're not exactly solutions, but Everstream did cite three other trends that show ways that businesses are evolving and reacting, in reaction to some of those new realities. One is a trend toward firms moving their production of certain components to reduce supply chain risks. They might do that by changing to shorter, more localized supply chains. We've often talked about those in terms of nearshoring, or reshoring, initiatives, bringing factories and production back into a domestic geographic location. Of course, during the pandemic, a lot of businesses were stung by their over-reliance on sort of farflung global just in time supply chains. So, we might see some of that moving either closer or more domestic. Another theme is business's reaction to some of the reasons for the blockages in those just-in-time deliveries, particularly air cargo, which is incredibly constrained, as people have largely stopped flying. A lot of the air-freight capacity had been moving in the bellies of those passenger aircraft, so with those grounded, the freight capacity in some trade lanes fell by more than 50% during lockdowns. There has been a rise in dedicated freighters with no passengers, but it hasn't made up the whole difference there. So, that leads to the final trend, Number Five on Everstream's list, which was an increasing use of multimodal solutions for moving freight, because of that tight air cargo capacity; also the ongoing container shortages that we've been covering. And then of course, that ran into some particular stress during the Suez blockage. Organizations can't rely on their traditional trade lanes. So they've started to explore alternative routes for moving their inventory. That decision, interestingly, is driven less by cost concerns than it is by the need for reliability. And that can be witnessed by statistics like, I guess the number of trains connecting between China and Europe increased by more than 40% compared to 2019. So companies, some of them are moving their goods overland instead of by air or sea. It's really, looks like some big changes are around the horizon.

David Maloney, Editorial Director, DC Velocity  18:47

Yeah, that's all very interesting. I guess we'll see if companies are able to react successfully to those risks. Thanks, Ben. 

Ben Ames, Senior News Editor, DC Velocity  18:54

Of course. 

David Maloney, Editorial Director, DC Velocity  18:55

And Victoria, you wrote this week that consumers are more aware of supply chains than ever before, and they now understand some of the pain points, as well, that the industry experienced, and [that] we've been talking about today. Can you share more about your story?

Victoria Kickham, Senior Editor, DC Velocity  19:09

Yes, happy to. So, yeah, so one year into the Covid-19 pandemic and consumers are becoming much more familiar with the workings of the supply chain, and they're increasingly concerned about product shortages. Earlier this week, enterprise software firm SAP released a report. They polled 1,000 U.S. consumers earlier this year to get their perspective on the greatest supply chain pain points in light of all that's happened in the past year, and they found that more than a third said they'd lost confidence in supply chains, and that nearly half of them said they've changed their buying habits to include bulk shopping or restocking household items earlier than they did before the pandemic-induced lockdowns took hold last spring. Now, that may not seem all that surprising, but it was interesting to see some numbers put to these consumer buying changes we've been reporting on in the last year. So, it was funny, they mentioned some of the things that consumers are most frustrated about a year ago, and that was sort of the inability to find things like toilet paper at their local grocery stores. So, now it looks like that some of the changes they made in reaction to those situations are kind of becoming permanent. The survey found that 70% of consumers switched brands due to supply chain problems in the past year, and that nearly 30% of them never switched back. They also found that consumers are really concerned about a lack of supply of a lot of items this year. They're particularly concerned about food, hygienic, or personal care products, and also personal protective equipment, particularly face masks, face coverings. Another point that they mentioned was that consumers are increasingly worried about pending product shortages that we keep hearing in the logistics industry, and they found that 84% of the people they polled are concerned about the availability of electronic components, in particular. Of course, you know, those are things that are critical to producing everything from smartphones, to you know, cars and trucks. So those are some of the things that are top of mind for consumers these days, much more concerned about the supply chain.

David Maloney, Editorial Director, DC Velocity  21:20

Right. That's very interesting. So what are manufacturers, retailers, and e-commerce providers doing in response to those concerns?

Victoria Kickham, Senior Editor, DC Velocity  21:28

Yeah, so, this is very much in line with what Ben was talking about, and what we were talking about with our guest Chris, earlier. In a nutshell, they're rethinking their supply chain management and sourcing strategies. And part of that change includes finding alternate sources of supply to meet demand more quickly, and also keeping more stock of particular items on hand. We've heard a lot of talk about, you know, sort of a changing strategy from having just-in-time inventory to just-in-case inventories, when you see retailers and others sort of stockpiling more of the items they know will be in demand, just so they don't have the problems they had a year ago. The survey also pointed out that agility and end-to-end visibility across your supply chain may remain key components of any good strategy. And this simply means, you know, getting closer to your trading partners throughout the supply chain and tapping into technology tools that can improve visibility and communication. Diversifying your supply base, making sure you're sharing up-to-date information, and being connected digitally are some of the things that they mentioned. There are, of course, many technology tools and solutions that can help with all of that, and I think it's really interesting that we're just hearing a lot more about those kinds of supply chain management and visibility tools and solutions these days.

David Maloney, Editorial Director, DC Velocity  22:48

Right, and it seems to always come down to being able to see it, understand it, and then communicate it to partners properly. Thanks, Victoria.

Victoria Kickham, Senior Editor, DC Velocity  22:56

You're welcome.

David Maloney, Editorial Director, DC Velocity  22:58

We encourage listeners to go to DCVelocity.com for more on these and other supply chain stories. And also check out the podcast notes section for some direct links on the topic that we discussed today. Thanks, Ben and Victoria, for sharing highlights of the news this week. 

Ben Ames, Senior News Editor, DC Velocity  23:13

Thanks, Dave, always enjoy it.

Victoria Kickham, Senior Editor, DC Velocity  23:14

You're welcome.

David Maloney, Editorial Director, DC Velocity  23:16

Again, our thanks to Chris Jones of Descartes for being with us today. We encourage your comments on this topic and our other stories. You can email us at podcast@dcvelocity.com. We also encourage you to subscribe to Logistics Matters at your favorite podcast platform, and to give us a rating. We appreciate your feedback, and it really does help people to find us. The new episodes of Logistics Matters are uploaded each Friday. And speaking of podcasts, Logistics Matters is sponsored by Honeywell Intelligrated. Be sure to check out the Honeywell Intelligrated On The Move podcast on Apple, Spotify, or Google. All episodes of their podcast series are also posted at sps.honeywell.com/onthemovepodcasts. You can also find Honeywell Intelligrated on LinkedIn and Twitter using the hashtag "@Intelligrated." And we'll be back again next week with another edition of Logistics Matters, when we will look at advancements in artificial intelligence, so be sure to join us. Until then, please stay safe and have a great week.