Supply chain crisis: Asia rethinks 'just-in-time' strategy as pandemic upends logistics industry

Running a distribution business is a juggling act at the best of times, but when the pandemic arrived Singapore-based Yeap Medical Supplies found itself with a lot more balls in the air.

Across Asia, businesses have had to rethink how they operate and develop new strategies in the wake of the Covid-19 pandemic, as shipping bottlenecks and supply chain disruptions upended established models of doing business.

Minimising inventory costs was the order of the day pre-pandemic, with companies often relying on "just-in-time" supply chains to provide goods when they were needed instead of stockpiling them.

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But this waste-minimisation model became riskier as the new normal of lockdowns and other virus curbs took hold, causing long delays in supply networks.

Victor Yeap, managing director of Yeap Medical Supplies, said his company used to keep "a fair level of inventory as a buffer in Singapore" even before the health crisis, but has since built up its stockpiles by 20 per cent "as the lead times are longer these days ... [and] we cannot fail our customers".

Shipping delays for the disposable masks, adult diapers, hospital beds, wheelchairs and other goods the company sources from China, Southeast Asia and Europe caused uncertainty, Yeap said, and led to "an out of stock period ... only to be followed by a wave of goods arriving all at once."

Attempting to avoid such disruptions by amassing supplies is not without its downsides, however. "Stocking up affects our bottom line as we incur more costs keeping a larger inventory, and have to acquire equipment and machinery that allows us to manage the inventory better," Yeap said.

As the pandemic exposed the weaknesses of the "just-in-time" model, Asia's businesses have begun to pivot towards keeping larger inventories - lowering the probability that any one product will sell out in a strategy known as "just-in-case".

In Malaysia, this led to a surge in customers seeking short-term storage solutions at Japanese company Nippon Express' logistics warehouse in Shah Alam, which opened in March 2020 - just as the pandemic was making itself felt.

Instead of the multi-year storage contracts that would have otherwise been the norm, businesses began asking to store goods for shorter periods of six months or less amid the chaos and confusion of months-long virus lockdowns and other curbs.

Mervin Yee, executive director of Nippon Express Malaysia, said producers of "fast-moving consumer goods" were some of the hardest hit by pandemic-associated shipping delays and port shutdowns, which forced them to seek out storage for their stranded inventory.

Many clients now want to "mix-and-match" long-term and short-term storage solutions, Yee said, adding that logistic companies like his have had to adapt to this change in customer demand.

Over the past two years, global trade has been hit by a perfect storm of shipping delays, container shortages and exorbitant freight costs - jacking up prices for everyone from manufacturers and distributors to consumers.

China, the world's largest manufacturer, dominates global supply chains, as it has long been able to churn out goods more cheaply than other countries facing rising labour costs and activist trade unions.

But the globalised system of trade has come under threat recently, first from geopolitical frictions - fuelled by the US-China trade war begun under former president Donald Trump - and then the pandemic, which forced businesses and governments to rethink cross-border supply chains.

When Wuhan was locked down in January 2020, the world saw first-hand how such actions could cause international commerce to grind to a halt - heightening anxieties about over-dependence on China.

Lockdowns affecting major ports sent ripples through global shipping schedules, resulting in cascading queues of vessels waiting to unload their goods.

All over the world, shop shelves emptied of the products with which they were previously filled, from personal protective equipment to laptop computers. Delays to shipments continued as the pandemic wore on, becoming increasingly unpredictable amid fresh outbreaks fuelled by new Covid-19 variants.

Virus curbs can cause delays at every stage of the supply chain. A laptop made in China's Zhengzhou, for example, may be held up en route to a customer in New Zealand by an outbreak at the factory where it was made, the port it was shipped from or the vessel on which it was shipped.

This adds to the cost of storage, which would have to be arranged at short notice and is often more expensive when temporary and short term.

Outbreaks at ports also cause backlogs of containers waiting to be loaded onto vessels, which can result in sellers having to pay a premium to secure a spot to ship their products.

Project 44, a logistics service platform connecting shippers to carriers, said in a recent annual outlook on global supply chains that the pandemic's impact would continue to be a "toss-up", determined by the "labour available at Asian manufacturers, ports and throughout the supply chain".

"This is likely to continue to impact carriers' schedule reliability which in turn will cause a ripple effect downstream of supply chains," said Josh Brazil, vice-president of supply chain data insights for the platform.

Project44 predicts freight rates will remain high and port conditions will not return to pre-pandemic levels any time soon.

It also said blank sailings - when a vessel or carrier decides to skip a port because of congestion, a virus lockdown or similar - would continue well into the year.

Last year, ship delays from China reached as high as two weeks and there was an 86 per cent increase in blank sailings in the country. The ports of Singapore and Hong Kong also struggled. The result: empty shelves, once again, in various parts of the world and a rise in inflation.

"Transit times increased from China's leading ports to Los Angeles or Long Beach because of port congestion ... ships were either slow steaming or loitering off the coast of Mexico and other locations before arriving in US West Coast waters," Project44 said.

In its latest update on supply chains this week, Project44 said there were improvements at some ports, but the world still has "a ways to go before there is a return to 'normalcy'" as Omicron wreaked fresh havoc.

For Asia, the number of ships waiting to berth at ports has increased to an average of 16.7 a day, from 13 in December. Hong Kong posted the biggest increase to 22.5 ships from 17.5 ships over the same period.

US-based investment firm KeyBanc Capital Markets estimates the current backlog of containers will be cleared in three to five months, but said in a note that the "exact timing may vary depending on a variety of factors including labour availability domestically and in Asia".

Container shipping rates are currently around nine times what they were in June 2020, according to global forecaster Oxford Economics, and price pressures look set to remain in place for some time yet.

"Even as ports increase operating hours to ease congestion, absenteeism related to renewed increases in Covid-19 infections may scupper hopes of these pressures abating in the near term," Kiki Sondh of Oxford Economics said in a briefing last month.

"Truck drivers are also in short supply across many countries, so increasing throughput at ports simply overwhelms transport networks further inland."

Rising fuel prices - another by-product of the pandemic - have further added to supply chain woes, upending trucking routes in Asia and across the world.

In China, for example, soaring diesel prices towards the end of last year forced many self-employed truck drivers to cut back on the miles they drove to avoid making a loss. Others sought out cheaper illicit diesel on the black market.

Australia, meanwhile, was struggling to source enough AdBlue - a urea-based additive that modern diesel engines need to properly function - for its truckers. China, one of the world's largest producers of urea, curbed exports last year, citing domestic shortages - a pandemic-driven crisis caused by excessive demand arising from the country's industrial jump-start following earlier lockdowns.

A bigger blow to Australia's supply chains came in the form of the Omicron variant, however, which fuelled a huge spike in infections that led to some one in five businesses reporting labour shortages at the height of the outbreak, according to research firm IBISWorld - double the number in 2020.

Australian supermarkets struggled to keep shelves stocked and were forced to impose buying limits on certain items.

Hong Kong saw similar shortages recently, after scores of cross-border truck drivers had to enter quarantine amid a spiralling Omicron outbreak in the city - causing disruptions to its supply of fresh vegetables, as almost all of them come from mainland China.

Amid all the upheaval, the global logistics industry has been having a rethink. A survey of 800 international business groups by German online logistics marketplace Container xChange carried out in December, found that 71 per cent were looking to diversify their supply chains and hold more inventory.

"Many customers that we work with have identified 'just-in-case' as a more appropriate sourcing and inventory management model over 'just-in-time' which has failed to provide resilience and agility in these challenging times," a Container xChange spokeswoman said.

Rakesh Agarwal, who leads KPMG's supply chain practice for the Asia-Pacific region, agreed that more agile 'just-in-case' strategies had "increasingly gained importance in recent times" as the pandemic exposed supply chain vulnerabilities across a number of industries.

Businesses were not only stockpiling, he said, but looking for new suppliers in different locations and focusing on sourcing critical materials from nearby countries, a process known as "nearshoring".

Agarwal said businesses "will need to strike a balance between the 'just-in-time' lean and 'just-in-case' agile methodologies" in future.

"Organisations that are able to do so effectively will be able to manage their costs while ensuring minimum disruptions to their supply chains," he added.

Nippon Express' Yee said businesses across Asia were already exercising prudence. They are gradually tackling storage problems, he said, adding that no everyone had abandoned 'just-in-time' supply chains just yet, as the pandemic make it hard to make permanent decisions.

Another knock-on effect has been an increase in supply chain automation, as logistics providers seek to cut their reliance on a human work force vulnerable to disease outbreaks and absenteeism.

"Covid-19 has been a wake-up call to the logistics industry," said Ryan Tang, international chief executive of SingPost. Singapore's postal service was developing a smart letter box called PostPal to help sort mail, Tang said, and expanding its network of PUDO points for contactless parcel retrieval as it moves away from "traditional, manpower-intensive work processes that have been the norm".

Kelvin Leung, chief executive of global forwarding for DHL Asia-Pacific, said the German logistics company had been forced to move staff around its global network as it sought to plug labour shortages amid the pandemic.

The vulnerabilities in supply chains exposed by the global health crisis has also spurred the region's governments to take action.

Japan started offering subsidies in 2020 to businesses that agreed to relocate production outside China as it sought to encourage manufacturing independence and bolster supply-chain security. A second round of grants was announced in February last year.

In April 2021, Japan, India and Australia's trade ministers officially launched the Supply Chains Resilience Initiative, which seeks to build stronger supply chains to counter China's dominance amid escalating trade and geopolitical tensions.

This week, South Korean President Moon Jae-in said he would set aside funds for a presidential committee to oversee economic security and supply chain management to better secure essential raw materials for manufacturing in the face of supply bottlenecks.

And in Singapore, the government has set up a supply chain resilience team with the trade ministry to work with stakeholders such as supermarkets to mitigate and manage food supply disruptions, according to industry group Supply Chain Asia.

This article originally appeared on the South China Morning Post (SCMP).

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