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  First Thoughts

    Dan Gilmore


    Supply Chain Digest


Oct. 16, 2020

The Pandemic and the Supply Chain: The End of the Beginning?

As Infection Rates Soar, How will Supply Chains Change from the Virus?


One of my favorite quotes is from Winston Churchill, who after the British routed Rommel's forces at Alamein, driving German troops out of Egypt in World War II, said "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

I am not even sure we've even reached the end of the beginning when it comes to the Corona virus. There was certainly a lot of bad and scary news on the virus front this week. That includes:

US Coronavirus infections jumped by almost 17% over the past week as the number of new cases increased in 38 states and Washington, DC, according to data from Axios.

Gilmore Says....

American Eagle is hardly the only one thinking this way, as safety adds to cost reduction and reducing labor challenges in making DC robots very attractive.

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That means the US is headed solidly in the wrong direction, at a dangerous time, as many public health predict the fall and winter season will see infection rates soar again, perhaps to levels exceeding last spring. The hope was the pandemic would be under control before then, but that is not going to happen.

The US in fact saw an average of 51,000 new cases per day over the past week, and 59,000 Oct. 15th, near the peak in July of 62,000 in one day.

The problem is not only in the US. This week, new cases of coronavirus infections in Germany soared to 6,638 on Wednesday, reaching a daily level not seen since the start of the pandemic, prompting new rules regarding gatherings and face masks.,

With UK infection cases also soaring, London will move to "high" alert status from "medium" at midnight on Friday The "very high" alert level forbids socializing, forces pubs and bars to close and prohibits travel outside the area.

I will admit I am surprised the US economy did not tank more than it did from the pandemic. Yes, Q2 GDP dropped a record 32.1% in the quarter, more than three times the old record of about 10% in the 1950s.

But for many, it didn't feel that way. After a significant but rapid drop, the stock market has mostly been up strongly since then. White collar layoffs have been surprisingly low, even as other jobs, such as those held by millions of US restaurant worker, have been eliminated, with little prospects for laid off workers finding something new, short of at an Amazon fulfillment center.

"Seven months into the pandemic, small business owners don't know how much longer they can hold on" a news headline on CNBC said this week.

Then this from a recent article from NJ "Tenants, unable to pay rent because they have lost their jobs or fallen ill with the virus, are accumulating thousands of dollars in unpaid rent that may eventually lead to their eviction" when the bans on evictions end someday. In turn, "Landlords, deprived of income for months but unable to evict nonpaying tenants, are struggling to pay mortgages and property-tax bills."

Despite some positive signs and likely another big round of stimulus spending, I feel there is another economic shoe still to drop.

As I have written in previous columns, I am thinking all the time about the trickle down impacts of the behavior and economic changes we are seeing. So in an example I've used before, stay at home workers means empty office buildings, which means no customers for lunch and coffee spots.

Office cleaning and janitorial workers I assume have been let go in large numbers. With no driving to work every day, cars need fewer oil changes, less frequent buying of new tires and repairs, and eventually falling demand for new cars as well.

Here's another one. Movie theater chains are shutting down and appear on the verge of extinction. Besides the layoff of theater employees, I assume popcorn and Skittle sales are down big too for vendors of those products.

And with no venues (and infection concerns of its own), the movie industry is shutting down substantially, meaning literally a cast of thousands - from actors to make-up people - are now without work too.

There are many other examples. The deep 2009 recession wasn't at all like this in terms of wiping out whole sectors, maybe forever.

So maybe none of that matters and we have strong recovery. That's what the stock market is betting. We'll see.

So turning at last to supply chain, 6+ months into the pandemic, here are what I see as the top supply chain impacts.

Focus on "Resilience": There have been numerous articles on the new imperative for supply chain resilience, in the face of wild swings in supply and demand from the pandemic. The key question: will company's really change behaviors, which might include the often tough task of mapping a multi-tiered supply chain, moving at least some production to other regions, duel sourcing, etc.?

Such resilience often comes at a cost. Will companies really follow through on investments in resilience, which largely didn't happen after the 2011 Japanese tsunami caused similar calls for resilience?

eCommerce Dominance: Obviously, ecommerce and Amazon were megatrends far before the pandemic. Now it's simply gone on steroids.

Year over year growth in ecommerce sales had been running around 14-15% for many years - what most would consider a robust rate. Now, a report from real estate firm CBRE this week predicts an incredible 40% rise in November and December on-line retail sales.

We are in a whole new era. Consumer goods companies selling through department stores and mall retailers have almost no choice but to go direct to consumer, with Nike's Consumer Direct Acceleration initiative leading the way. At the recent CSCMP virtual conference, Target supply chain VP Arthur Valdez floated the idea of a "logistic hub" that would locally consolidate on-line orders for many vendors and orchestrate precision last mile fulfillment or pick-up for consumers - the new retail store.

I, Robot: As with ecommerce, the virus is simply accelerating the existing trend of robotics, notably in distribution.

"During non-Covid times, if demand grew by 50% I would go hire 300 more people," Shekar Natarajan, senior vice president of global inventory and supply chain logistics for American Eagle said in an interview after deploying 26 piece-picking robots. Natarajan added that "It's really tough because you're also trying to make sure you're keeping the associates safe. You cannot actually bring in 1,000 to 2,000 untrained people into the distribution facility and maintain safe working conditions."

American Eagle is hardly the only one thinking this way, as safety adds to cost reduction and reducing labor challenges in making DC robots very attractive.

Changing Relationships with Consultants: Supply chains use lots of consultants. Many are finding now those consultants really don't need to be on-site quite so much or at all, which has the benefit of eliminating often high travel costs, while improving the consultant's lifestyle.

On the other hand, with so many still working from home, it is challenging to really get consultants fully engaged in some cases. I don't know exactly it will play out, but I suspect the model for using consultants will be very different 5 years from now than it was pre-pandemic.

All these and many more are going to make the world a very different place - we may not have even reached the end of the beginning.

Any reaction to Gilmore's thoughts on the virus and supply chain? Let us know your thoughts at the Feedback button or section below.

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